diff --git a/parsed_sections/legal_matters/2000/BRKRP_bruker_legal_matters.txt b/parsed_sections/legal_matters/2000/BRKRP_bruker_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..001f66b9818224396db5c1c4193740bb551dccbb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/BRKRP_bruker_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for Bruker Daltonics by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston, Massachusetts. Richard M. Stein, a stockholder of Hutchins, Wheeler & Dittmar, holds options to purchase 3,000 shares of the common stock of Bruker Daltonics and will purchase up to $25,000 worth of shares of common stock in this offering. Mr. Stein is also a Director and the Secretary of Bruker Daltonics. Certain legal matters in connection with the offering will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000034616_farmland_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000034616_farmland_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2074b3ad49e0d05c07b4d8a5a2a2a01f103c9ee2
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000034616_farmland_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Robert B. Terry, Vice President and General Counsel of Farmland, has given an opinion upon the legality of the Offered Debt Securities.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000095047_deer_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000095047_deer_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ad57b0eecd2b8ecd5fc936e997093f1296b82269
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000095047_deer_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered hereby will be passed upon for us by Foley, Hoag & Eliot LLP, Boston, Massachusetts. Legal matters will be passed upon for the underwriters by Nutter, McClennen & Fish, LLP, Boston Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000311046_opticare_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000311046_opticare_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3511c3ab8801c4e86f92ec18ee0ebd2cebde83c8
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000311046_opticare_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered by us will be passed upon for us by Kane Kessler, P.C., in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000712511_proxim_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000712511_proxim_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..655634990f0a5f461861053bc86da06abe6e8384
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000712511_proxim_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Mirick, O'Connell, DeMallie & Lougee, LLP, Worcester, Massachusetts. Partners and associates in the firm own an aggregate of 18,250 shares of common stock and have options to purchase an additional 8,625 shares of common stock. The execution and delivery of the underwriting agreement for this offering will be passed upon for the underwriters by Foley, Hoag & Eliot LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000736260_hancock_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000736260_hancock_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8a6b137a8b32d2d70f8481c9c07cac55781f03a0
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000736260_hancock_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock offered hereby will be passed upon for John Hancock Financial Services, Inc. by Debevoise & Plimpton, New York, New York. The underwriters have been represented by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000750199_epl-oil_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000750199_epl-oil_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fb941f770610014fa73cb07925c85d7a1feb4573
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000750199_epl-oil_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common shares offered in this offering will be passed upon for us by Cahill Gordon & Reindel, New York, New York. Baker Botts L.L.P. will act as counsel for the underwriters. Baker Botts L.L.P. acted as counsel to Evercore Capital Partners L.P. in connection with its investment of $60.0 million in the company in November 1999.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000793971_sound_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000793971_sound_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..30ecbdf9ccb60bfec1ffb26842013cad506bc1af
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000793971_sound_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Greenberg Traurig, P.A., Miami, Florida, will deliver an opinion to the effect that the shares of common stock being offered in this offering are validly issued, fully paid and non-assessable. Some legal matters related to this offering will be passed upon for the underwriters by Morgan, Lewis & Bockius LLP, Miami, Florida.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000797662_american_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000797662_american_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b910e85c04bc06d4ed6c928f75676762e4afe123
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000797662_american_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The firm of John B. Lowy, P.C., 645 Fifth Ave., Suite 403, New York, New York 10022, Special Securities Counsel to the Company, has rendered an opinion regarding the validity of the securities offered hereby. The attorneys employed by John B. Lowy, P.C. beneficially own xx Shares of Common Stock of the Company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000840254_greystone_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000840254_greystone_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5da71f23c7de3535c83b4378419a071d1b813278
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000840254_greystone_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities stock offered hereby is being passed upon for us by Resch Polster Alpert & Berger LLP, Los Angeles, California. In December 1999 members of the firm were issued warrants to purchase 200,000 shares of common stock at an exercise price of $7.80 per share.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000851697_autolend_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000851697_autolend_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..76e8b70e40b60d9456019622e33ca24e4cb49b9e
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000851697_autolend_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The law firm of Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., Albuquerque, New Mexico, will pass upon the validity of the issuance of the common stock offered hereby.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000859074_isky-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000859074_isky-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0eaf680219c11aa822c36cf0b6c6302bd1091249
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000859074_isky-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for iSKY by Piper Marbury Rudnick & Wolfe LLP, Washington, D.C. Certain legal matters relating to this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000865753_burst-com_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000865753_burst-com_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8004fe12574c5b71b03ef7928eacda9278e208af
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000865753_burst-com_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered will be passed for the selling stockholders by Bay Venture Counsel LLP, Oakland, California. Bay Venture Counsel, LLP and certain of its attorneys are offering by this prospectus an aggregate of 40,000 shares of our common stock and 48,438 shares issuable on exercise of warrants. See "Selling Stockholders."
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000874689_integrated_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000874689_integrated_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..52723331a767851853a179514d860773080ca924
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000874689_integrated_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Pepper Hamilton LLP, Philadelphia, Pennsylvania, and certain other matters will be passed upon for us by Kirkland & Ellis (a partnership that includes professional corporations), New York, New York. Some partners of Kirkland & Ellis are partners in Randolph Street Partners, which owns 272,626 shares of common stock. Some legal matters in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Kirkland & Ellis and Skadden, Arps, Slate, Meagher & Flom LLP have, from time to time, represented, and may continue to represent, some of the underwriters in connection with various legal matters and Bain Capital and some of their affiliates (including our company) in connection with legal matters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000876188_cardiac_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000876188_cardiac_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..871889e529121d69935de079197890e7b995fbae
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000876188_cardiac_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby will be passed upon for us by Breslow & Walker, LLP, New York, New York. BWM Investments, an affiliate of Breslow & Walker, LLP, owns 2,188 shares of common stock and warrants to purchase 262,500 of common stock. The re-sale of the shares underlying the warrants is covered by this prospectus. Howard Breslow, a member of Breslow & Walker, LLP, owns 875 shares of common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000904977_transtexas_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000904977_transtexas_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..12d9aa01c30734d558c46bc783d582ef84035f72
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000904977_transtexas_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby has been passed upon for us by Gardere & Wynne, L.L.P., 3000 Thanksgiving Tower, Dallas, Texas 75201.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000907562_dyax-corp_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000907562_dyax-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..55d6fc420d7d8ef332998ca163d89c0c70b08442
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000907562_dyax-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Palmer & Dodge LLP, Boston, Massachusetts, will pass upon the validity of the common stock offered by this prospectus for us. Nathaniel S. Gardiner, Esq., a partner of Palmer & Dodge LLP, is our corporate secretary. Debevoise & Plimpton, New York, New York, will pass upon certain legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000909353_lsc-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000909353_lsc-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3d89c3db884f81ea3eed3b38f4cf8bb80ffe04a8
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000909353_lsc-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota. Thomas A. Letscher and the spouse of Richard G. Lareau beneficially own 2,000 and 16,086 shares, respectively, of our common stock. Messrs. Letscher and Lareau are partners in Oppenheimer Wolff & Donnelly LLP. Certain legal matters relating to this offering will be passed upon for the underwriters by Messerli & Kramer P.A., Minneapolis, Minnesota.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000911369_centaur_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000911369_centaur_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9357b775c389059af798fc80915e06ef639d7793
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000911369_centaur_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Fenwick & West LLP, Palo Alto, California will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Shearman & Sterling, Frankfurt, Germany will pass upon specified legal matters in connection with this offering for the manager. An investment partnership comprised of certain partners of Fenwick & West LLP owns 50,000 shares of common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000930095_eden_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000930095_eden_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..098afe8b48c80499301f4e119f3873d618ee6d53
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000930095_eden_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed on for EDEN by Perkins Coie LLP, Seattle, Washington. Certain legal matters will be passed on for the underwriters by Brown & Wood LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000930553_ista_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000930553_ista_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..80d19529103ad30aeb50d482c848b4e6bd7fd907
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000930553_ista_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California, is acting as counsel for the underwriters in connection with various legal matters relating to this offering. As of June 30, 2000, investment partnerships and a member of Wilson Sonsini Goodrich & Rosati beneficially owned an aggregate of 30,895 shares of our Series A preferred stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000930764_industrial_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000930764_industrial_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1bfac72c3256c805356157e5d77264204bc588ff
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000930764_industrial_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Taylor and Associates, Inc., Attorneys and Counselors at Law, Salt Lake City, Utah, counsel to the Company, will render an opinion that the Common Stock being offered hereby, has been fully paid and nonassessable under the corporate laws of the state of Utah.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000933955_amedia_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000933955_amedia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8c35bfb40dfffd4e3ac03f55c38154f87b402ecb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000933955_amedia_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the securities offered by this prospectus will be passed upon for us by Wolf, Block, Schorr and Solis-Cohen LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000947397_evergreen_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000947397_evergreen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bd134a62a654ee9edfa1211efa9c694c4346e8a8
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000947397_evergreen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock to be issued in this offering will be passed upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Goodwin, Procter & Hoar LLP, Boston, Massachusetts, represented the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0000948599_hob_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0000948599_hob_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d564ec0cda0163b416cf652a1474aed65b550abc
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0000948599_hob_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for HOB Entertainment, Inc. by Latham & Watkins, Los Angeles, California. Certain legal matters relating to the offering of common stock will be passed upon for the underwriters by Simpson Thacher & Bartlett, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001001193_transmeta_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001001193_transmeta_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d42918fe4c4f971b8508a28b1107a3d83608d8dd
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001001193_transmeta_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the common stock that we are selling in this offering. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, will pass upon legal matters for the underwriters. An investment partnership affiliated with Fenwick & West LLP holds a total of 101,764 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001004874_net_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001004874_net_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ba8b28e0933df126b9ec01a295599150ebb5b136
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001004874_net_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered in this prospectus will be passed upon for us by Foley, Hoag & Eliot LLP, Boston, Massachusetts. Legal matters will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001005002_connected_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001005002_connected_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a9fc4b07d4b56aac7d7bab374eb5b7e0a8cbede7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001005002_connected_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered under this prospectus will be passed upon for us by Brown, Rudnick, Freed & Gesmer, Boston, Massachusetts. Certain legal matters with respect to our patents and proprietary rights described in this prospectus will be passed upon by Weingarten, Schurgin, Gagnebin & Hayes LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the underwriters by Palmer & Dodge LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001006614_onyx_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001006614_onyx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fb89b3330f576f7bdbdaae8ad289b2cb952a3e29
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001006614_onyx_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the notes will be passed upon for us by Andrews & Kurth L.L.P., Dallas, Texas, and for the underwriters by Leonard, Street and Deinard Professional Association.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001010116_applied_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001010116_applied_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..195cafb13ded687fc615a7475ef1edefd9c472f5
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001010116_applied_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Brobeck, Phleger & Harrison LLP, Austin, Texas and for the underwriters by Davis Polk & Wardwell, New York, New York. Mr. Gordian, a partner at Brobeck, Phleger & Harrison LLP, was recently appointed as one of our directors and in connection with such appointment, was granted an option to purchase 19,635 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001010775_mirant_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001010775_mirant_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..73e86612d908c2448df55f9dc9808bab36338321
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001010775_mirant_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed on for us by Troutman Sanders LLP, Atlanta, Georgia and for the underwriters by Shearman & Sterling, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001013705_security_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001013705_security_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a79b8a81cd36e0a112a4879de70cbb0f266a1d7a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001013705_security_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Arendt & Medernach will pass on various legal matters relating to the validity of the securities being registered. In addition, the description of income tax consequences contained in this prospectus under "Taxation" is based on, to the extent that it constitutes matters of law or legal conclusions, the opinion of either Mayer, Brown & Platt, PricewaterhouseCoopers SARL (Luxembourg) or PricewaterhouseCoopers (United Kingdom), as applicable, each special tax counsel to us. Arendt & Medernach, Mayer, Brown & Platt, PricewaterhouseCoopers SARL (Luxembourg) and PricewaterhouseCoopers (United Kingdom) have in the past represented SC-U.S. Realty, some of the selling holders or their respective affiliates.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001014222_synchronic_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001014222_synchronic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1dc56a43d63e997a0b6f3744054b22540c430b20
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001014222_synchronic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the underwriters by Goodwin, Procter & Hoar LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001018035_juno_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001018035_juno_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f4598ae84314c1c77532d83e385bdb7a7032d057
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001018035_juno_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for Juno by Brobeck, Phleger & Harrison LLP, New York, New York. Certain partners of Brobeck, Phleger & Harrison LLP own an aggregate of 2,300 shares of our common stock. Legal matters in connection with the offering will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001022225_oplink_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001022225_oplink_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fe7d448c0e7788d13695ddcbd17a48553f591c29
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001022225_oplink_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Latham & Watkins, Los Angeles, California. Cooley Godward LLP holds an option to purchase 150,000 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001022509_tumbleweed_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001022509_tumbleweed_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c8f19e551f849ed882a1c7215b861080844b5d87
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001022509_tumbleweed_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California. Two attorneys at Skadden, Arps beneficially own a total of approximately 40,244 shares of the common stock, of which approximately 39,146 shares are owned by Gregory C. Smith, brother of Jeffrey C. Smith, the President, Chief Executive Officer and Chairman of the Board of Directors of Tumbleweed. Selected legal matters in connection with this offering will be passed on for the underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001022781_mindleader_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001022781_mindleader_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2ba579d165b3ec9c61a577e45f3348165e10ebb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001022781_mindleader_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares offered hereby will be passed upon for MindLeaders.com by Vorys, Sater, Seymour and Pease LLP, Columbus, Ohio. Certain legal matters in connection with this offering will be passed upon for the underwriters by Weil, Gotshal & Manges LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001024572_pwg_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001024572_pwg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..38d1353d2ddeb3cb4db53d2017357be559a12bed
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001024572_pwg_legal_matters.txt
@@ -0,0 +1 @@
+-------------------------------------------------------------------------------- ERISA Matters A fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), should consider the fiduciary standards of ERISA in the context of the plan's particular circumstances before authorizing an investment in debt securities. Among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the plan. Section 406 of ERISA and Section 4975 of the Code prohibit an employee benefit plan, as well as individual retirement accounts and Keogh plans subject to Section 4975 of the Code, from engaging in certain transactions involving "plan assets" with persons who are "parties in interest" under ERISA or "disqualified persons" under the Code with respect to the plan. A violation of these "prohibited transaction" rules may result in excise tax or other liabilities under ERISA and Section 4975 of the Code for such persons, unless exemptive relief is available under an applicable statutory or administrative exemption. Therefore, a fiduciary of an employee benefit plan should also consider whether an investment in debt securities might constitute or give rise to a prohibited transaction under ERISA and the Internal Revenue Code. Employee benefit plans which are governmental plans (as defined in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA), and foreign plans (as described in Section 4(b)(4) of ERISA) generally are not subject to the requirements of ERISA or Section 4975 of the Code. UBS AG, UBS Americas, Paine Webber Group Inc., PaineWebber International and other affiliates of UBS Americas may each be considered a party in interest or disqualified person with respect to many employee benefit plans. This could be the case, for example, if one of these companies is a service provider to a plan. Special caution should be exercised, therefore, before debt securities are purchased by an employee benefit plan. In particular, the fiduciary of the plan should consider whether exemptive relief is available under an applicable administrative exemption. The Department of Labor has issued five prohibited transaction class exemptions that could apply to exempt the purchase, sale and holding of debt securities from the prohibited transaction provisions of ERISA and the Code. Those class exemptions are Prohibited Transaction Exemption 96-23 (for transactions determined by in-house asset managers), Prohibited Transaction Exemption 95-60 (for certain transactions involving insurance company general accounts), Prohibited Transaction Exemption 91-38 (for certain transactions involving bank investment funds), Prohibited Transaction Exemption 90-1 (for certain transactions involving insurance company separate accounts), and Prohibited Transaction Exemption 84-14 (for certain transactions determined by independent qualified asset managers). Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing debt securities on behalf of or with "plan assets" of any employee benefit plan consult with their counsel regarding the consequences under ERISA and the Code of the acquisition of debt securities and the availability of exemptive relief under Prohibited Transaction Exemption 96-23, 95-60, 91-38, 90-1 or 84-14. --------------------------------------------------------------------------------
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001025456_golden_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001025456_golden_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..df83f8a4ed60d7239510816b57ba59015f14bfc6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001025456_golden_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock and the notes offered hereby will be passed upon for Golden Books and Golden Books Publishing by Proskauer Rose LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001027915_health_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001027915_health_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..288ed35e1110ecf4dcd9acd4d57154943fd850c2
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001027915_health_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the common stock offered by this prospectus has been passed upon for us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain health care regulatory matters will be passed upon for us by Baker, Donelson, Bearman & Caldwell PC, Jackson, Mississippi.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001028065_orapharma_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001028065_orapharma_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f6809b94a5b6d2958df20b54522d71d9f7a99a9d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001028065_orapharma_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for OraPharma by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York. The statements in this prospectus under the sections "Risk Factors--If we or the parties from which we license our technology fail to secure or enforce the patents and other intellectual property rights underlying MPTS, our core technology or our other product candidates, we may be unable to compete effectively"; "Risk Factors--We may face significant expense and liability if our technologies, product candidates, methods or processes are found to infringe on the intellectual property rights of others, or if we allege others infringe our intellectual property rights"; and "Business--Technology, Licenses and Patents" have been reviewed and approved by Arnall, Golden & Gregory, LLP, Atlanta, Georgia, our patent counsel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001029129_quality_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001029129_quality_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bca4c0d101ac0a3759282ee181bd08b84ab8d625
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001029129_quality_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Bryan Cave LLP, Phoenix, Arizona, will pass upon the validity of the issuance of our common stock and certain other legal matters related to this offering. Cravath, Swaine Moore, New York, New York, will pass upon certain legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001029201_signal_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001029201_signal_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c596bc95a43cde0ab5eab7c73a0be27266cfcfb9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001029201_signal_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Cooley Godward LLP, San Diego, California, will pass upon the validity of the common stock offered by this prospectus for us. Brobeck, Phleger & Harrison LLP, San Diego, California, will pass upon legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001040853_pharsight_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001040853_pharsight_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..441100157fd8183282fa1ecd6768ed0a7bea9de5
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001040853_pharsight_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California and for the underwriters by Sullivan & Cromwell, Los Angeles, California. As of the date of this prospectus, GC&H Investments, an investment partnership composed of current and former partners and associates of Cooley Godward LLP, owns 21,174 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001042282_silverstre_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001042282_silverstre_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..62dd89d020775ac55dd6a784ade4c4f11bc8937d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001042282_silverstre_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001043561_improvenet_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001043561_improvenet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..da0ba3463391e3c9d7a01e9348077db90f0c05d2
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001043561_improvenet_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Cooley Godward LLP, Palo Alto, California will pass upon the validity of the shares of common stock offered by this prospectus. As of the date of this prospectus, members and associates of Cooley Godward LLP beneficially own an aggregate of 21,600 shares of common stock through an investment partnership. Fenwick & West LLP, Palo Alto, California will pass upon the validity of the shares of common stock offered by this prospectus for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001043604_juniper_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001043604_juniper_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c1ba9fea8def2276ce101fcfce40d763008a4378
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001043604_juniper_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the convertible notes, and the underlying common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Brobeck Phleger & Harrison LLP, San Francisco, California. As of September 29, 1999, WS Investment Company 96A and WS Investment Co. 96B, each an investment partnership composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to certain current individual members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of 159,374 shares of our common stock. Since that time the shares held by those partnerships have been distributed to the individual partners and some of the shares have been sold in open market transactions.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001046501_buca-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001046501_buca-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d243d2d8e6a88575845600257aad7abd06da4e17
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001046501_buca-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus and other legal matters will be passed upon for us by Faegre & Benson LLP, Minneapolis, Minnesota. The validity of the shares of common stock offered by this prospectus will be passed upon for the underwriters by Dorsey & Whitney LLP, Minneapolis, Minnesota.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001047499_nexprise_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001047499_nexprise_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a59e56fd6aeabef1f3f105e97c8255c4e035f817
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001047499_nexprise_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Davis Polk & Wardwell, Menlo Park, California. The underwriters are represented by Fenwick & West LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001047643_worldpages_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001047643_worldpages_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4884673fed4f68ee651b0d0a5c85e8e8fb2418c3
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001047643_worldpages_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of WorldPages common stock offered hereby has been passed upon for WorldPages by Blackwell Sanders Peper Martin LLP, counsel to WorldPages.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001049210_verenium_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001049210_verenium_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..76432409e6904f2bf8aaa8b4a63898c1c417e34c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001049210_verenium_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Cooley Godward llp, San Diego, California will pass on the validity of the shares of common stock offered by this prospectus for us and certain other legal matters. Upon the completion of this offering, attorneys with Cooley Godward llp, through an investment partnership, will beneficially own a total of 12,252 shares of our common stock. Brobeck, Phleger & Harrison LLP, San Diego, California will pass on legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001050250_triton_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001050250_triton_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..90daec3205905ec5a0568ed0da56ca591131217d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001050250_triton_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Legal matters will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP. As of the date of this prospectus, investment partnerships composed of members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to current and former individual members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of 65,213 shares of Triton Network Systems, Inc. preferred and common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001050808_vitria_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001050808_vitria_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d214c322aaf24a6764ee073970960b08d0317446
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001050808_vitria_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of this prospectus, partners and associates of Cooley Godward LLP own an aggregate of approximately 24,874 shares of common stock through an investment partnership and attorneys own approximately 52,846 shares of common stock directly. The underwriters have been represented by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001051521_athersys_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001051521_athersys_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2ab1fa19e1444073ff1a314b1357602f75a9bc38
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001051521_athersys_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Jones, Day, Reavis & Pogue will pass upon the validity of the issuance of the shares being sold in this offering and other legal matters relating to this offering. Willkie Farr & Gallagher will act as counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001051736_corechange_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001051736_corechange_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4d434bfe05398ad0586071f5a7c53039f5f69a3c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001051736_corechange_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Selected legal matters with respect to the validity of the shares offered in this offering will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Selected legal matters with respect to this offering will be passed upon for the underwriters by Gibson, Dunn & Crutcher LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001052245_etoys-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001052245_etoys-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b90e8dc187809cf2bd57f5d62867e0f6a1d74683
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001052245_etoys-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the securities being offered hereby will be passed upon for eToys by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001052246_repeater_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001052246_repeater_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..27e4d5208e4d9872ae11c3078fbe74ee364b3f82
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001052246_repeater_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock related to this offering will be passed upon for us by Cooley Godward LLP, Palo Alto, California and legal matters relating to the common stock in this offering will be passed upon for the underwriters by Shearman & Sterling, New York, New York. An investment partnership of Cooley Godward attorneys and specialists beneficially own an aggregate of 17,850 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001052837_abgenix_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001052837_abgenix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f4c43ce8396f5404dccd41dd01d902fcec3a5c19
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001052837_abgenix_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS O'Melveny & Myers LLP, San Francisco, California will pass upon legal matters for us regarding the validity of the securities intended to be sold pursuant to this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001053384_genomic_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001053384_genomic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..072192a6c09c2118d42dbb0a781cda2ec098859c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001053384_genomic_legal_matters.txt
@@ -0,0 +1 @@
+Net loss (1,991 ) (7,786 ) (11,142 ) (2,023 ) (3,894 ) Non-cash common stock warrant charge (3,861 ) (2,297 ) Deemed dividend upon issuance of Series P preferred stock (8,000 ) Net loss attributable to common stockholders $(1,991 ) $(7,786 ) $(15,003 ) $(2,023 ) $(14,191 ) Net income (loss) per share, basic and diluted: Loss per share before extraordinary items $(6.93 ) $(2.71 ) $(3.75 ) $(0.69 ) $(0.83 ) Income (loss) per share from extraordinary items 2.67 (0.31 ) Loss per share from non-cash common stock warrant charge (1.30 ) (0.67 ) Loss per share from deemed dividend (2.33 ) Net loss per share attributable to common stockholders $(4.27 ) $(2.71 ) $(5.04 ) $(0.69 ) $(4.14 ) Total debt 33,296 43,296 43,296 Common stock warrants 9,738 Other long term liabilities 98 98 Weighted average common shares 467 2,876 2,974 2,926 3,429 Pro forma net loss per share, basic and diluted (unaudited) (1) $(1.06 ) $(0.86 ) Shares used in computing pro forma net loss per share, basic and diluted (unaudited)(1) 14,206 16,424 Supplemental pro forma net loss attributable to common stockholders (unaudited)(2) $(12,827 ) $(12,635 ) Supplemental pro forma net loss per share, basic and diluted (unaudited)(2) $(0.87 ) $(0.73 ) Shares used in computing supplemental pro forma net loss per share, basic and diluted (unaudited)(2) 14,674 17,363 (1) For the year ended December 31, 1999, reflects conversion of Series B, C, D and M preferred stock into 10,533,942 shares of common stock and exercise of 1,553,500 common stock warrants, appropriately weighted from their dates of issuance in April 1999 and October 1999. For the three months ended March 31, 2000, reflects conversion of Series B, C, D, M and P preferred stock into 11,803,783 shares of common stock (Series P preferred stock has been appropriately weighted from the date of issuance of January 26, 2000) and exercise of 1,553,500 common stock warrants. (2) Reflects the pro forma net loss and net loss per share that would have resulted if a portion of the proceeds from this offering had been used to repay the subordinated debt on the dates it was issued assuming an initial public offering price of $11 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. In computing the supplemental amounts, pro forma amounts described in (1) above were adjusted to exclude interest and discount amortization on debt of approximately $2,176,000 for the year ended December 31, 1999, and $1,556,000 for the three months ended March 31, 2000. The weighted average number of shares outstanding were correspondingly increased to reflect the additional shares that would have been issued to repay the debt. The supplemental pro forma net loss per share for the year ended December 31, 1999 will decrease to $(0.86) if the offering price is $8 per share and will increase to $(0.88) if the offering price is between $12-$18 per share. The supplemental pro forma net loss per share for the three months ended March 31, 2000 will decrease to $(0.72) if the offering price is $10 per share and will increase to $(0.74) if the offering price is between $14-$19 per share. In the pro forma column below, we have adjusted the actual balance sheet data to give effect to: (1) the automatic exercise of 1,553,500 warrants into shares of callable common stock, (2) the cancellation of 1,071,500 of the 2,625,000 warrants issued in connection with the business loan agreements in April and October 1999, so long as this offering is completed on or before April 23, 2001 and (3) $10,000,000 of additional borrowings under our amended line-of-credit agreement. In the pro forma as adjusted column below, we have adjusted the pro forma balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of 7,000,000 shares of callable common stock assuming an initial public offering price of $11.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. As of March 31, 2000 Consolidated balance sheet data (unaudited) Pro Forma (In thousands) Actual Pro Forma As Adjusted Table of Contents Risk factors You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. 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 callable common stock could decline, and you could lose all or part of your investment. RISKS RELATED TO OUR BUSINESS We have a history of losses and anticipate future losses and negative cash flow, and we may never become profitable. We incurred net losses of $2.0 million for the fiscal year ended December 31, 1997, $7.8 million for the fiscal year ended December 31, 1998, $11.1 million for the fiscal year ended December 31, 1999, and $3.9 million for the three months ended March 31, 2000. As of December 31, 1999, we had an accumulated deficit of $9.4 million. We expect to continue to experience significant operating losses as we increase our expenses in order to continue our research and development efforts, further develop our manufacturing capabilities and expand our marketing and sales force. As a result, we need to generate significant revenues to achieve and maintain profitability. Although our revenues have grown in recent quarters, we may not sustain this growth and we may never become profitable. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis. We may need additional capital to support our operations, which may be unavailable or costly. Based on our current plans, we believe that our existing cash, cash equivalents and short-term investments, together with the net proceeds of this offering, will be sufficient to fund our operating expenses, debt obligations and capital requirements, on both a short-term and long-term, greater than 12 months, basis. However, we may need to raise additional capital to fund our research and development programs, to scale up manufacturing activities, to expand our sales and marketing capabilities and to fund unforeseen expenses. Future collaborations may require us to commit substantial capital. Many factors, some of which are beyond our control, will determine when and how much funds we will need, and we may need funds sooner than currently anticipated. Even if we have sufficient funds for our operating plans, we may choose to raise additional capital due to market conditions or strategic considerations. Our systems and products may fail to maintain or achieve sufficient market acceptance, which would impair our ability to generate sales revenue. The commercial success of our systems and products depends upon continued and expanding market acceptance of our biochip and proteomic systems and products by pharmaceutical and biotechnology companies, academic research centers and government-funded research laboratories. Market acceptance depends on many factors, including researchers belief that our systems are an attractive alternative to current technologies for the acquisition, analysis and management of genomic and proteomic information. These potential customers may be reluctant to accept newer technologies which may require learning new techniques and procedures and abandoning or modifying current methodologies with which they are comfortable and familiar. Table of Contents Risk factors The relatively high price of our systems may deter potential customers from buying our systems. Our GeneTAC Biochip System is typically sold for $225,000 and our Investigator Proteomic System is typically sold for $300,000. The costs of our products and systems may deter potential customers from buying our products. We may be required by competitive forces or for other reasons to discount the price of our systems or products to generate sales. Furthermore, our failure to place sufficient quantities of our systems will have a material adverse effect on our ability to sell consumables. Market acceptance of our systems and products and potential products could be adversely affected by limited funding available for capital acquisitions by our customers, as well as internal obstacles to customer approvals for purchases of our products. Because of these and other factors, we may not be able to maintain or achieve sufficient market acceptance to become profitable. Our products will require additional development to remain competitive, which we may be unable to achieve in a timely and cost effective manner. While we have sold our products and services commercially, our currently available biochip and proteomic systems may require design and functional modifications as scientific procedures and methods change. As scientific knowledge advances, we anticipate a need for new instrumentation, software and consumable products. Any future products will require significant development, investment and testing. We may need to undertake costly and time-consuming efforts to achieve these objectives. We cannot assure you that we will successfully design, develop, manufacture, market or sell any future products in a timely and cost-effective manner, if at all, or that we will be able to sustain or increase sales revenue from our current systems and products. Concentration of customers may limit our market and our ability to achieve sales growth. We expect that our customers will be concentrated in a limited number of pharmaceutical and biotechnology companies, academic research centers and government-funded research laboratories that can afford our systems. Forty-five percent of our current revenue is from sales to pharmaceutical and biotechnology companies. As a result, our financial performance may depend on large orders from a limited number of customers, and the loss of, or reduction in, purchase orders from our customers will impair our sales. If consolidation trends in the pharmaceutical and biotechnology industries continue, the number of our current and potential customers could decrease. If this occurs, our large customers may seek reductions in the prices of our products and services based on volume purchases. If we fail to achieve and maintain the high manufacturing standards that our products require, or if we are unable to develop additional manufacturing capacity, our commercial opportunity will be reduced or eliminated. Our biochip and proteomic systems and related products require careful calibration and precise, high-quality manufacturing. If we fail to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, design defects or component failures, we could experience product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that will impair our sales. Despite our high manufacturing standards, we cannot completely eliminate the risk of errors, defects or failures. If we are unable to manufacture the components of our GeneTAC Biochip System or Investigator Proteomic System on a timely basis at acceptable quality and cost and in commercial quantities, or if we experience unanticipated technological problems or delays in production, our commercial opportunity will be reduced or eliminated. Table of Contents Risk factors The sales cycle for our systems is lengthy and we may spend significant time on sales opportunities with no assurance of success. The sales cycle for our systems is typically between three and six months. We often must make sales presentations to various departments within a single customer, including research and development personnel and key management. In addition, we may be required to negotiate agreements containing terms unique to each customer. We may expend substantial funds and management effort with no assurance that we will successfully sell our systems, products or services to the customer. We depend on third-party suppliers, and any failure to obtain product components from these suppliers in a timely manner will interfere with our ability to produce our products. The lasers, filters and optics used in our GeneTAC Biochip Analyzers and the fluid transport mechanism used in our GeneTAC Hybridization Station are supplied by a limited group of suppliers. These products accounted for approximately 10% of our 1999 revenue. If we are unable to obtain these parts from our suppliers, we may be unable to secure an alternative supplier within a reasonable time period, or on commercially reasonable terms, if at all. Our reliance on outside vendors generally, and a sole or a limited group of suppliers in particular, could also result in reduced control over quality, pricing and time of receipt of materials and components. Any reduction, delay or termination of government research funding could reduce, or cause timing fluctuations in, our sales. In 1999, 55% of our sales were made to researchers, universities, government laboratories and private foundations whose funding is dependent upon grants from government agencies like the US National Institutes of Health and similar domestic and international agencies. Although the level of research funding has increased during the past several years, these increases may not continue or research funding may be reduced. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Also, government proposals aiming to reduce or eliminate budget deficits have sometimes included reduced allocations or delays or terminations of funding to the National Institutes of Health and other government agencies that fund research and development activities. A reduction in government funding for the National Institutes of Health or other government research agencies could result in lower sales or cause fluctuations in our sales and operating results. If we fail to expand our international presence or our distribution arrangement with PerkinElmer is unsuccessful, we may lose potential revenues. We have an agreement with PerkinElmer for the exclusive marketing, distribution and servicing of our products outside the United States, Japan and the United Kingdom through January 1, 2002. In 1999, markets outside the United States, Japan and the United Kingdom represented 16% of our total sales. If PerkinElmer does not perform as well as the distributors that it displaced or otherwise fails to implement a successful marketing plan, we may incur increased costs and personnel requirements. Table of Contents Risk factors The risks associated with maintaining international operations and could adversely affect our ability to increase or sustain international sales. The sale of our products internationally involves a number of risks not typically present in domestic sales, including: - difficulties in staffing and managing foreign operations; - costs and risks of deploying systems in foreign countries; - changes in regulatory requirements; - licenses, tariffs and other trade barriers; - limited protection of intellectual property rights; - the burden of complying with a wide variety of complex foreign laws and treaties; - potentially adverse tax consequences; and - political and economic instability. Our international operations also will be subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high-technology products. Tariffs or restrictions upon the importation or exportation of our products may be implemented by the United States or other countries which will adversely affect our ability to sustain or increase our international sales. We are subject to foreign currency fluctuations which may affect our operating results. A significant portion of our business historically has been conducted in currencies other than the U.S. dollar, which is our reporting currency. Our agreement with PerkinElmer requires payment in U.S. currency. As a result, only our business in the United Kingdom and Japan will continue to be conducted in foreign currencies. The United Kingdom and Japan represented 28% of our total sales in 1999 and may continue to represent a large portion of our total sales. Currency fluctuations among the U.S. dollar and the currencies in which we do business have caused and will continue to cause foreign currency transaction gains and losses in the period incurred. For example, our foreign currency transaction loss in 1998 was $11,034 and our foreign currency transaction gain in 1999 was $112,952. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the variability of currency exposures and the potential volatility of currency exchange rates. We may choose to engage in foreign exchange hedging transactions to manage our foreign currency exposure, but our strategies may not adequately protect our operating results from the effects of exchange rate fluctuations and may expose our business to additional risk and loss. Our failure to attract and retain skilled scientists, technicians and other key personnel could affect our ability to develop and manufacture our products and provide our services. As of December 31, 1999 we employed 108 people. Our ability to adequately service our customers depends, in large part, on our ability to hire and retain scientists and technicians with the skills necessary to keep pace with continuing changes in genomic and proteomic research. We believe that there is a shortage of, and significant competition for, scientists and technicians with the skills and experience in biochemistry, Table of Contents Risk factors chemistry and engineering necessary to perform the services we require. We compete with the research departments of pharmaceutical companies, biotechnology companies, contract research companies and research and academic institutions for new personnel. We cannot assure you that we will be successful in attracting, retaining or motivating our scientific and technical personnel. Moreover, the hiring of additional personnel in product development, manufacturing and sales and marketing will increase burdens on our management, operational and financial resources. We generally do not enter into employment agreements requiring these employees to continue in our employment for any period of time. Any failure on our part to hire, train and retain sufficient qualified personnel would seriously damage our business. We face risks associated with acquisitions that will harm our business if we do not adequately address them. We have acquired complementary technologies, product lines and personnel from several companies. This growth has placed, and may continue to place, a significant strain on our management and operation. Our ability to manage our growth effectively will depend on our ability to continue to implement and improve our operational, management information and financial control systems and to expand, train and manage our workforce. We expect to continue from time to time to review potential acquisition candidates in the ordinary course of our business. Acquisition candidates may not be available on terms and conditions acceptable to us. These potential acquisitions will involve numerous risks, including: - difficulties and expenses incurred in connection with the completion of these acquisitions; - the subsequent assimilation of the operations, personnel and services or products of the acquired companies; - the loss of momentum in research and product development activities; - the difficulty of operating new businesses; - the diversion of management s attention from other business concerns; and - the potential loss of key employees of the acquired company. Acquisitions of foreign companies may also involve the additional risks of assimilating differences in business practices and overcoming language and cultural barriers. RISKS RELATED TO OUR INDUSTRY We and our customers are subject to significant technological uncertainty which could result in reduced acceptance and demand for our products. Our products, and the research for which they are predominately used, involve several new and complex technologies. The instrumentation and software that comprise our systems have only recently been used in commercial applications. Scientists and technicians using our products require new technical skills and training and may experience difficulties with our products. As our products continue to be used, it is possible that previously unrecognized defects will emerge. Further, in order for us to address new applications for our products, we may have to add features and design new software. If we are unable to Table of Contents Risk factors validate or achieve the improvements in our products necessary for their continued successful commercialization, the demand for our products will suffer. The outcomes of research based on technologies using our products are subject to the risks of failure inherent in the development of new technologies. These risks include the possibility that: - any products based on these technologies are ineffective, unreliable or unsafe, or otherwise fail; - producers will be unable to manufacture the products on a large scale or market the products economically; - proprietary rights of third parties will preclude the marketing of the products; and - third parties will market equivalent or superior products. The failure of research and development activities using our products to result in commercially viable products could reduce the demand for our products. We face intense competition which could result in reduced acceptance and demand for our products. While we are a leading provider of biochip and proteomic systems, the gene expression and proteomic research markets are intensely competitive, highly fragmented and rapidly changing. We compete with many companies in the United States and abroad that are engaged in the development and production of products that analyze genomic and proteomic information. Currently, our principal competition comes from established companies and organizations providing products that use existing technologies which perform many of the same functions for which we market our systems. These products include a variety of established assays and tests, including gel-based technologies. Future competition in the genomic and proteomic research fields will likely come from existing competitors as well as other companies seeking to develop new technologies for analyzing genomic and proteomic information. In addition, pharmaceutical and biotechnology companies have significant needs for genomic and proteomic information and may choose to develop or acquire competing technologies to meet these needs. If we are unable to compete effectively, there will be reduced acceptance of and demand for our products. Many of our competitors have greater financial, technical, research, marketing, sales, distribution, service and other resources than we do. Moreover, our competitors may have greater name recognition and more extensive customer bases than we do, and they may offer discounts as a competitive tactic. In addition, several development-stage companies are currently producing or developing products that compete with or will compete with our products. Our competitors may develop or market technologies or products that are more effective or commercially attractive than our current or future products, or that may render our technologies and products obsolete. We may be involved in lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights, which would reduce our ability to compete in the market. Our success will depend on our ability to obtain and protect patents on our technology and to protect our trade secrets. Our issued and future patents may not afford meaningful protection for our technology and products. Others may challenge our patents and, as a result, our patents could be narrowed, invalidated or Table of Contents Risk factors unenforceable. In addition, our current and future patent applications may not result in the issuance of patents in the United States or foreign countries. Competitors may develop products similar to ours that do not conflict with our patents. They may have filed applications or obtained patents or proprietary rights competitive with or similar to ours. In order to protect or enforce our patent rights, we may initiate patent litigation which would be expensive, take significant time and divert management s attention from other business concerns. The patent position of biotechnology firms generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents. In addition, there is a substantial backlog of biotechnology patent applications at the U.S. Patent and Trademark Office, and the approval or rejection of patent applications may take several years. The rights we rely upon to protect the intellectual property underlying our products may not be adequate, which could enable third parties to use our technology, reducing our ability to compete in the market. We rely on trade secret protection for some of our confidential and proprietary information for which we have not sought patent protection. We believe that we have developed proprietary technology and processes relating to numerous aspects of our biochip and proteomic systems. We have taken measures to protect our proprietary technologies and processes and continue to explore ways to enhance these protections. We require our employees, consultants and advisors to execute confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection against improper use or disclosure of confidential information. Further, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our success depends on our ability to operate without infringing or misappropriating the proprietary rights of others. We cannot be certain that U.S. or foreign patents or patent applications of other companies do not exist or will not issue that would materially and adversely affect our ability to commercialize our products. We may be sued for infringing or misappropriating the patent or other intellectual property rights of others. Intellectual property litigation is costly, even if we prevail. In addition, litigation is time consuming and could divert management attention and resources away from our business. If we do not prevail in any litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license requiring royalty payments. Any required license may not be available to us on acceptable terms, or at all. In addition, some licenses may be non-exclusive, and therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent which we infringe, we may be unable to sell some of our products. Ethical concerns surrounding the use of genomic information and misunderstanding of the nature of our business could frustrate our ability to develop and sell our existing products and new products. Genetic screening of humans is used to determine individual predisposition to medical conditions. Genetic screening has raised ethical issues regarding the confidentiality and appropriate uses of the resulting information. Government authorities may regulate or prohibit the use of genetic screening to determine genetic predispositions to medical conditions. Additionally, the public may disfavor and reject the use of genetic screening. Table of Contents Risk factors Genomic and proteomic research is used to determine the role of genes and proteins in living organisms. Our products are designed and used for genomic and proteomic research and drug discovery and cannot be used for genetic screening without significant modification. However, it is possible that government authorities and the public may fail to distinguish between the genetic screening of humans and genomic and proteomic research. If this occurs, our products and the processes for which our products are used may be subjected to government regulations intended to affect genetic screening. Further, if the public fails to distinguish between the two fields, it may pressure our customers to discontinue the research and development initiatives for which our products are used. We may not have adequate insurance, and if we are subject to product liability claims, we may experience reduced demand for our products or be required to pay damages that exceed our insurance limitations. Product liability claims asserted against us, regardless of their merit or potential outcome, may adversely effect our reputation, result in reduced demand for our products and make it more difficult for us to expand our business. Also, we cannot assure you that our current insurance policies will adequately protect us or that we can or will maintain our insurance policies on commercially acceptable terms, or at all. RISKS RELATED TO THIS OFFERING Call features for publicly traded stock are unusual, and the call feature of our stock may affect market price and liquidity. As contemplated in our investment agreement with PerkinElmer, for a period of two years commencing on October 23, 2000 and until October 21, 2002, PerkinElmer has the right to cause us to require the holders of our callable common stock to sell their shares to us. This call right is set forth in our certificate of incorporation, as amended and related governance agreement and is described in the Description of Securities. Rights to cause publicly traded shares to be redeemed are not typical, and there is insufficient precedent for us to predict all of the implications of PerkinElmer s right to cause us to repurchase our callable common stock. It is possible that PerkinElmer s right will adversely affect the market price and the liquidity of our callable common stock. The expiration of the call feature of our callable common stock may cause the market price to decline. The repurchase right with respect to our callable common stock requires payment of a premium over the market price if the call is exercised. We cannot predict how the market price and liquidity of our callable common stock will be affected when PerkinElmer s option expires. For instance, PerkinElmer s failure to exercise its right could cause the market price for our callable common stock to decrease substantially. The callable feature of our stock may harm your ability to engage in tax and financial planning. We may require you to sell your shares of callable common stock to us, regardless of whether you want to or if it is convenient for you. This requirement will remain in place until PerkinElmer s call right expires. Because of market movements and depending on the price that you paid for your shares, it is possible that the repurchase price at any given time will be less than what you paid for your shares. The call feature of our callable stock may make it difficult for you to engage in financial or tax planning because you will be unable to retain your shares if the call is exercised. Table of Contents Risk factors There may not be an active, liquid trading market for our callable common stock which may affect your ability to quickly sell your shares. An active trading market for our callable common stock may not develop following this offering. If there is not an active trading market, due to PerkinElmer s call option or for any other reason, you may not be able to sell your shares quickly or at market price if trading in our stock is not active. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters based upon a number of factors. The initial public offering price may not be indicative of prices that will prevail in the trading market. Market volatility may adversely affect the market price of our callable common stock. The trading price of our callable common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: - actual or anticipated variations in quarterly operating results; - announcements of technological innovations by us or our competitors; - new products or services introduced or announced by us or our competitors; - changes in financial estimates by securities analysts; - conditions or trends in the biotechnology, pharmaceutical and genomic and proteomic industries; - announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; - additions or departures of key personnel; - sales of our callable common stock or other securities; and - the market s perception of the purchase option for our callable common stock. In addition, the stock market in general, and the Nasdaq National Market 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. Further, there has been particular volatility in the market prices of securities of biotechnology and life sciences companies. The Nasdaq Biotech Index, a capitalization-weighted index designed to measure the performance of all Nasdaq stocks in the biotechnology sector, shows a price volatility of 83.381% for the 30 days ended March 29, 2000, 51.748% for the 180 days ended March 29, 2000 and 43.076% for the 360 days ended March 29, 2000. These broad market and industry factors may seriously harm the market price of our callable common stock, regardless of our operating performance. Declines in the value of our callable common stock could impair our ability to raise additional capital to fund the commercialization of our products. 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. This litigation, if instituted against us, could result in substantial costs and a diversion of management s attention and resources. Table of Contents Risk factors Concentration of ownership of our callable common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions. Upon completion of this offering, our executive officers, directors and beneficial owners of 5% or more of our callable common stock and their affiliates will, in the aggregate, beneficially own approximately 47% of our outstanding callable common stock. As a result, these persons, acting together, will have the ability to determine the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, acting together, will have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our callable common stock by: - delaying, deferring or preventing a change in control of our company; - impeding a merger, consolidation, takeover or other business combination involving our company; or - discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. See Principal stockholders for additional information on concentration of ownership of our callable common stock. 16,976,944, or approximately 70.8%, of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our callable common stock to drop significantly, regardless of our business performance. After this offering we will have outstanding 22,718,888 shares of callable common stock and 1,269,841 shares of common stock. This includes the 7,000,000 shares of callable common stock we are selling in this offering, all of which may be resold in the public market immediately, except for up to 350,000 shares purchased by participants in the reserved shares program that may be subject to agreements with the underwriters prohibiting the resale of these shares into the public market for a period of 180 days after the date of this prospectus. The remaining 15,718,888 shares of callable common stock and 1,269,841 shares of common stock become available for resale in the public market as shown in the chart below. Number of shares/ % of total outstanding Date of availability for resale into public market 11,785/0.05% Immediately after the date of this prospectus 14,364,666/59.9% 180 days after the date of this prospectus, subject in some cases, to volume limitations under Rule 144 2,612,278/10.9% At various times after 180 days from the date of this prospectus As restrictions on resale end, the market price of our callable common stock could drop significantly if the holders of restricted shares sell them or are perceived by the market as intending to sell them. For a more detailed description, see Shares eligible for future sale. Table of Contents Risk factors Anti-takeover provisions in our charter documents and under Delaware law, and PerkinElmer s right to cause us to require the holders of our callable common stock to sell their shares to us, could make it difficult for a third party to acquire us. The anti-takeover provisions in our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us without the approval of our board of directors. Additionally, PerkinElmer has the right to require the holders of our callable common stock to sell their shares to us at a premium over market price or to match any third party offer that our board of directors is prepared to accept. PerkinElmer s rights may discourage offers from third parties or may lower the price third parties may offer. Furthermore, our board has the authority to accept third party offers that may be less than the premium price PerkinElmer might otherwise be required to pay under our agreement, which PerkinElmer then has the right to match. As a result, we cannot assure you that the price you may receive upon the redemption of your shares will represent a favorable return on your investment. As a result of these provisions in our charter documents and Delaware law and our agreement with PerkinElmer, we could delay, deter or prevent a takeover attempt or third party acquisition that our stockholders consider to be in their best interests, including a takeover attempt that results in a premium over the market price. See Description of securities for more information on these anti-takeover provisions. Forward-looking information This prospectus may contain forward-looking statements. When used in this prospectus, the words anticipate, believe, estimate, plan, will, may, intend and expect and similar expressions identify forward-looking statements. Although we believe that the plans, intentions and expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied, by any forward-looking statements contained in this prospectus. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this prospectus, including under the heading Risk factors. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. We are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Table of Contents Use of proceeds We estimate that the net proceeds from the sale of the 7,000,000 shares of callable common stock that we are selling in this offering will be approximately $70.4 million, or approximately $81.2 million if the underwriter s over-allotment option is exercised in full, based on an assumed initial public offering price of $11.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to increase our working capital, create a public market for our callable common stock, facilitate our future access to the public capital markets and increase our visibility in our marketplace. We will use the net proceeds of this offering for general corporate purposes, including hiring additional sales and customer support personnel, expansion of our facilities, continued development and manufacturing of existing products, research and development of additional products, patent prosecution expenses and working capital. We also may use a portion of the net proceeds for the acquisition of, or investment in, complementary companies, technologies or assets. However, we are not a party to any agreements or commitments and have no understandings with respect to any acquisitions. We cannot at this time assign any particular amount to specific use. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our research and development, acquisition and marketing activities, the need to hire new employees and the amount of cash generated or used by our operations. The amounts and timing of our actual expenditures depend on several factors, including future sales growth, the progress of our product development efforts our success in pursuing acquisitions, if any, and the amount of cash generated or used by our operations. Dividend policy We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Table of Contents Capitalization The following table shows our capitalization as of March 31, 2000: - On an actual basis; and - On a pro forma basis to give effect to: the automatic conversion of 6,901,219 shares of preferred stock into 10,533,942 shares of our callable common stock upon the completion of this offering and listing of our shares on the Nasdaq National Market System; the automatic exercise of 1,553,500 warrants into shares of callable common stock upon the completion of this offering and listing of our shares on the Nasdaq National Market System; the cancellation of 1,071,500 of the 2,625,000 warrants issued in connection with the business loan agreements in April and October 1999, so long as this offering is completed on or before April 23, 2001; the automatic conversion of 1,269,841 shares of series P preferred stock into 1,269,841 shares of common stock upon the completion of this offering and listing of our shares on the Nasdaq National Market System; and $10,000,000 of additional borrowings under our amended line-of-credit agreement. - On a pro forma as adjusted basis to give effect to: the receipt of the estimated net proceeds from this sale of 7,000,000 shares of stock offered by this prospectus at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Table of Contents Capitalization Pro Forma (In thousands and unaudited) Actual Pro Forma As Adjusted Lines of credit $21,800 $31,800 $31,800 Current portion of long term debt 686 686 686 Long term debt, less current portion 1,004 1,004 1,004 Subordinated debt 9,806 9,806 9,806 Total long-term obligations 43,132 43,394 43,394 Total stockholders equity (deficit) (8,026 ) 1,712 72,122 Total capitalization $35,106 $45,106 $115,516 (1) Includes 1,269,841 shares of common stock issued and outstanding on a pro forma and pro forma as adjusted basis (no actual shares issued and outstanding) that are not callable. The table above excludes: - 1,426,505 shares of callable common stock issuable upon the exercise of options outstanding as of March 31, 2000 at a weighted average exercise price of $1.18 per share; - 125,000 shares of callable common stock issuable upon the exercise of warrants outstanding as of March 31, 2000 at the exercise price of $6.00 per share; and - 1,071,453 additional shares of callable common stock available for future grant as of March 31, 2000 under our 1994 and 1998 employee stock option plans and non-employee director and consultant stock option plan and an additional 1,000,000 shares of callable common stock made available for future grant under our employee stock purchase plan. To the extent that these options or warrants are exercised, there will be further dilution to new investors. Please see Management-Employee benefit plans for further information regarding our stock option plans and stock purchase plan. Table of Contents Dilution Our historical net tangible book value as of March 31, 2000 was ($8.0) million, or ($2.21) per share, based on 3,631,446 common shares outstanding as of March 31, 2000. Our pro forma net tangible book value as of March 31, 2000 was $1.7 million, or 10 cents per share, based on the pro forma number of shares outstanding as of March 31, 2000 of 16,988,729, calculated after giving effect to: - the automatic conversion of 6,901,219 shares of preferred stock into 10,533,942 shares of our callable common stock upon the completion of this offering; - the automatic exercise of 1,553,500 warrants into shares of callable common stock upon the completion of this offering and listing of our shares on the Nasdaq National Market System; - the cancellation of 1,071,500 of the 2,625,000 warrants issued in connection with the business loan agreements in April and October 1999, so long as this offering is completed on or before April 23, 2001; and - the automatic conversion of 1,269,841 shares of series P preferred stock into 1,269,841 shares of common stock upon the completion of this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our callable common stock in this offering and the net tangible book value per share of our callable common stock immediately afterwards, after giving effect to: - the sale of 7,000,000 shares in this offering. This represents an immediate increase in pro forma net tangible book value of $2.91 per share to existing stockholders and an immediate dilution in pro forma tangible book value of $7.99 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share $11.00 Historical net tangible book value per share as of March 31, 2000 $(2.21 ) Increase attributable to conversion of preferred stock and exercise of warrants subsequent to March 31, 2000 $2.31 Pro forma net tangible book value per share as of March 31, 2000 $0.10 Increase attributable to the offering $2.91 Net tangible book value per share after the offering $3.01 Dilution per share to new investors $7.99 Table of Contents Dilution The following table summarizes, on a pro forma basis as of March 31, 2000, after giving effect to this offering, the total number of shares of callable common stock purchased from us and the total consideration and the average price per share paid by existing stockholders and by new investors: Shares Purchased Total Consideration Average Price Number Percent Amount Percent Per Share Existing stockholders 16,988,729 70.8% $ 27,707,871 26.5% $ 1.63 New investors 7,000,000 29.2% $ 77,000,000 73.5% $ 11.00 Total 23,988,729 $ 104,707,871 Except as otherwise indicated, the tables and calculation above assume no exercise of outstanding options or warrants. At March 31, 2000, there were: - 1,426,505 shares of callable common stock issuable upon the exercise of options outstanding as of March 31, 2000 at a weighted average exercise price of $1.18 per share; - 125,000 shares of callable common stock issuable upon the exercise of warrants outstanding as of March 31, 2000 at the exercise price of $6.00 per share; and - 1,071,453 additional shares of callable common stock available for future grant as of March 31, 2000 under our 1994 and 1998 employee stock option plans and non-employee consultant and director stock option plan and an additional 1,000,000 shares made available for future grant under our employee stock purchase plan. To the extent that these options or warrants are exercised, there will be further dilution to new investors. If 1,426,505 shares of callable common stock are issued upon the exercise of options and 125,000 shares are issued upon the exercise of warrants, the dilution to new investors will be 9 cents per share. If these 1,551,505 shares are issued, they will represent 6.1% of our total number of shares of callable common stock and common stock outstanding. Please see Management-Employee benefit plans for further information regarding our stock option plans and stock purchase plan. If the underwriters exercise their over-allotment option in full, the following will occur: - the number of shares of our callable common stock and common stock held by existing stockholders will decrease to approximately 67.8% of the total number of shares of our callable common stock and common stock outstanding after this offering; - the number of shares of our callable common stock held by new public investors will increase to 8,050,000, or approximately 32.2% of the total number of shares of our callable common stock outstanding after this offering; and - an increase in pro forma net tangible book value of $3.34 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $7.66 per share to new investors. Table of Contents (unaudited) Revenue $3,637 $3,257 $2,164 $5,507 $12,092 $2,436 $3,995 Cost of revenue 1,361 1,311 1,063 3,266 6,990 1,263 2,004 Gross profit 2,276 1,946 1,101 2,241 5,102 1,173 1,991 Total operating expenses 2,972 3,142 4,718 10,066 13,920 3,043 3,745 Loss from operations (696 ) (1,196 ) (3,617 ) (7,825 ) (8,818 ) (1,870 ) (1,754 ) Loss before extraordinary items (812 ) (1,600 ) (3,236 ) (7,786 ) (11,142 ) (2,023 ) (2,844 ) Extraordinary items 1,245 (1,050 ) Net loss (812 ) (1,600 ) (1,991 ) (7,786 ) (11,142 ) (2,023 ) (3,894 ) Non-cash common stock warrant charge (3,861 ) (2,297 ) Deemed dividend upon issuance of Series P preferred stock (8,000 ) Net loss attributable to common stockholders $(812 ) $(1,600 ) $(1,991 ) $(7,786 ) $(15,003 ) $(2,023 ) $(14,191 ) Net income (loss) per share, basic and diluted: Loss per share before extraordinary items $(0.27 ) $(0.53 ) $(6.93 ) $(2.71 ) $(3.75 ) $(0.69 ) $(0.83 ) Income (loss) per share from extraordinary items 2.67 (0.31 ) Loss per share from non-cash common stock warrant charge (1.30 ) (0.67 ) Loss per share from deemed dividend (2.33 ) Net loss per share attributable to common stockholders $(0.27 ) $(0.53 ) $(4.27 ) $(2.71 ) $(5.04 ) $(0.69 ) $(4.14 ) Cash Flows from Financing Activities: Proceeds from issuance of subordinated debt and common stock warrants 9,500,000 440,000 Borrowings under sale-leaseback transactions 523,488 1,140,247 428,112 Proceeds from issuance of callable common stock 5,483 8,627 682 10,008 Net borrowings (repayments) under lines of credit (423,811 ) 1,482,454 (170,136 ) (67,192 ) 20,001,272 Repayment of long-term debt (400,000 ) (143,797 ) (538,065 ) (88,396 ) (170,336 ) Proceeds from issuance of preferred stock 7,673,490 7,232,799 7,483,464 Proceeds from issuance of long-term debt 130,000 Other financing activities (75,208 ) Weighted average common shares 3,000 3,022 467 2,876 2,974 2,926 3,429 Pro forma net loss per share, basic and diluted (unaudited) (1) $(1.06 ) $(0.86 ) Shares used in computing pro forma net loss per share, basic and diluted (unaudited)(1) 14,206 16,424 Supplemental pro forma net loss attributable to common stockholders (unaudited)(2) $(12,827 ) $(12,635 ) Supplemental pro forma net loss per share, basic and diluted (unaudited)(2) $(0.87 ) $(0.73 ) Shares used in computing supplemental pro forma net loss per share, basic and diluted (unaudited)(2) 14,674 17,363 Table of Contents Selected consolidated financial data (unaudited) Cash and repurchase agreements $287 $219 $5,089 $2,880 $1,328 $26,792 Working capital 697 (1,030 ) 4,825 2,115 2,051 8,254 Total assets 3,241 2,615 8,579 11,694 13,858 40,470 Total debt 2,586 3,425 901 2,819 11,190 33,296 Common stock warrants 7,441 9,738 Total stockholders equity (deficit) 41 (1,556 ) 5,912 5,485 (9,381 ) (8,026 ) Table of Contents Management s discussion and analysis of financial condition and results of operations The following discussion provides an analysis of our financial condition and results of operations, and should be read in conjunction with the Consolidated Financial Statements and related Notes included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, including those set forth under Risk factors and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements. We design, develop, manufacture, market and sell genomic and proteomic instruments, software, consumables and services. Unlike many other life sciences companies in the gene expression and proteomic markets, we offer integrated systems with demonstrated market acceptance. Our biochip and proteomic products and systems enable researchers to perform complex, high-volume experiments at lower costs and in less time than with traditional techniques. Our customers use our integrated and automated systems to produce biochips, maintain DNA libraries, quantify gene expression levels and isolate, identify and characterize proteins, thereby facilitating more rapid and less expensive drug discovery. We have sold our products in over 30 countries to pharmaceutical and biotechnology companies, government agencies, universities and private research institutions, including Parke-Davis, Merck, diaDexus, Biogen, RIKEN Genome Science Center (Japan) and Ludwig Institute for Cancer Research. We sell primarily through our dedicated direct sales organizations located in the United States and the United Kingdom and through our sales office in Japan that manages a network of local distributors. In December 1999, we entered into a sales, marketing and distribution agreement with PerkinElmer. To permit PerkinElmer to notify and train its international personnel, the distribution activities became active on January 1, 2000. This agreement grants PerkinElmer the exclusive right and responsibility to engage in sales, marketing, distribution and field-service activities with respect to our products and services in markets other than the United States, United Kingdom and Japan. We currently have four production facilities. Robotic and fluid handling systems manufacturing occurs in our Huntingdon, England facility, imaging systems manufacturing and engineering occurs in our Lansing, Michigan facility, application software and biochip production occurs in our Ann Arbor, Michigan facility, and reagents and consumables production occurs in our Chelmsford, Massachusetts facility. Ann Arbor also serves as our corporate headquarters. To complement our internal product development, we have on-going activities in business development. As part of these activities we actively seek to acquire, license or invest in technologies that expand and enhance our genomic and proteomic systems and services. To date, we have completed several acquisitions of product lines and technologies including: - In June 1997, we acquired, for a combination of cash and common stock, substantially all the assets of BioPhotonics Corporation. This acquisition provided us with imaging technology. - In December 1997, we issued common stock and cash in exchange for 100% of the outstanding shares of PBA Technology, Ltd., a developer and manufacturer of robotic systems located in Cambridgeshire, England. The acquisition has been accounted for under the purchase method of accounting. In connection with the acquisition, we recorded a charge to operations in 1997 of $389,000, associated with the write- off of in-process research and development acquired in the transaction that had not reached technological feasibility. Table of Contents Management s discussion and analysis - In April 1998, we acquired laser scanning imaging assets and a field-service business from Insight Biomedical Imaging, Inc., in exchange for cash. - In April 1998, we entered into a collaboration with HD Technologies, Limited. Under this agreement, HD Technologies is designing and developing a mass spectrometer for us based upon HD Technologies proprietary technology. We own all of the intellectual property developed in connection with this product. - In October 1998, we acquired for a combination of cash and securities the 2-D gel electrophoresis and proteomic business of ESA, Inc. Our revenue has increased by 155% in 1998, 120% in 1999 and 64% in the three months ended March 31, 2000, over the three months ended March 31, 1999. The increase in revenues is due to several factors, including the commercial introduction, launch and sale of our biochip and proteomic systems and instruments, increased usage of consumables and expansion of our direct sales and marketing efforts. To continue this trend in revenue growth, we will have to successfully expand our direct sales to new customers in the United States, the United Kingdom and Japan, and our sales in other markets through the marketing arrangement with PerkinElmer. We expect to generate increasing levels of recurring revenue from the sales of consumables to new and existing customers. However, we do not have sufficient history with sales of these products to reliably predict trends. We also provide contract research services, training and support on a fee-for-service basis. Our expenses have consisted primarily of costs incurred in research and development, manufacturing scale-up, business development and general and administrative costs associated with our operations. We have expensed one-time charges in connection with the write-off of acquired in-process research and development, goodwill and other intangibles and unamortized software development costs. We expect our research and development expenses to increase as we continue to develop new products and enhance our existing products. Our selling expenses will increase as we expand the commercialization of our current products and launch new products. Expansion of our facilities and the additional obligations of a public reporting entity will also add to our expenses. Our current product and service revenue is not sufficient for us to become profitable. To become profitable, we will need to increase revenue. We have a limited history of operations, and we anticipate that our quarterly results will fluctuate for the foreseeable future due to several factors, including market acceptance of current and new products, the introduction of new products by our competitors, the success of our research and development projects and the timing of significant orders. Our limited operating history makes it difficult or impossible to accurately predict future operations. RESULTS OF OPERATIONS Three months ended March 31, 2000 and 1999 Revenue Revenue increased $1.6 million, or 64%, to $4.0 million in the first three months of 2000 from $2.4 million in the first three months of 1999. This increase in revenue was due primarily to increased unit sales of our biochip and proteomic systems which increased $1.8 million to $3.3 million. Sales of our biochip systems increased $1.0 million, or 86% to $2.2 million in the first three months of 2000 compared to $1.2 million in the first three months of 1999 primarily from sales of our GeneTAC Biochip System, GeneTAC Hybridization Station and Biochip Analyzers. Product sales of our proteomic systems increased $814,000, or 223% to $1.1 million in the first three months of 2000 compared to $252,000 in the first three months of 1999 from sales of our Investigator Proteomic System. Increased sales of these products Table of Contents Management s discussion and analysis offset the $326,000 revenue decline associated with our products for documenting and analyzing one dimensional separations of DNA and proteins, which were discontinued in 1999 in all markets except Japan. The remainder of our revenue was attributable to services and consumables associated with our biochip and proteomic product lines. Revenue increased $573,000 to $4.0 million in the first three months of 2000 from $3.4 million in the last three months of 1999 due primarily to a $443,000 increase in sales of our Investigator Proteomic System. Cost of revenue Cost of revenue increased $741,000, or 59%, to $2.0 million in the first three months of 2000 from $1.3 million in the first three months of 1999. This increase was due primarily to $621,000 in increased cost of materials attributable to increased instrumentation sales. The remainder of the increase in cost of revenue was attributable to increased spending on product support, employees and facilities. As our production volumes increase as anticipated revenues rise, we expect cost of revenue as a percentage of total revenue to decline from greater efficiencies in direct labor and production overhead due to spreading costs over an increased number of units, better utilization of production facilities and increased experience of our production personnel. Selling, general and administrative expenses Selling, general and administrative expenses increased $737,000, or 39%, to $2.6 million in the first three months of 2000 from $1.9 million in the first three months of 1999. Of this increase, $414,000 was attributable to salaries, sales commissions and other employee related costs due primarily to the addition of approximately 7 sales, marketing and administrative personnel and increased sales. The remainder of the increase was for promotional activities. Spending will continue to grow as we expand our direct sales force and field service support capabilities, and increase marketing and advertising and pay increased sales commissions on higher levels of sales. General and administrative expenses are expected to increase due to added personnel and related expenses to support our expected growth and the cost of being a public company. Research and development expenses Research and development expenses were $1.1 million in the first three months of 2000 compared to $1.2 million in the first three months of 1999. Research and development spending was flat in 2000 compared to 1999 due primarily to the $129,000 decline in our usage of outside engineering consultants, offset by $114,000 increase in salaries and other employee related costs. Interest income Interest income increased $72,000 in the first three months of 2000 to $96,000 from $24,000 in the first three months of 1999. Interest income increased due to higher average balances of cash and cash equivalents in 2000. Table of Contents Management s discussion and analysis Interest expense Interest expense increased $1.6 million to $1.7 million in the first three months of 2000 from $87,000 in the first three months of 1999. This increase was due primarily to $6 million of subordinated notes with warrants issued April 1999 and $3.5 million of subordinated notes with warrants issued October 1999. Interest expense also increased as a result of the increase in borrowings under our commercial bank borrowing facility. Interest expense in the first three months of 2000 includes amortization expense of approximately $1.3 million related to the discount recorded on the subordinated notes. The discount was being amortized over the period from the date of issuance to April 2000. The amortization period of the discount was treated as shorter than the contractual life of the subordinated notes as the notes contained a provision that they automatically mature upon closing of an initial public offering (originally expected to be April 2000) and were expected to be repaid with a portion of the offering proceeds. However, in March and April 2000, the Company and the subordinated debt holders amended the note agreements to change the acceleration of the maturity date from the closing date of the initial public offering to the earlier to occur of a date one year from the closing of an initial public offering or the date on which the Company s cash and cash equivalents fall below $50 million. We retained the right to prepay these notes at any time. We accounted for the amendment to the subordinated notes as an extinguishment of debt and recorded an extraordinary loss of approximately $1,050,000 in March 2000. The extraordinary loss represents the difference between the carrying value of the original subordinated notes less the related unamortized debt issuance costs at March 24, 2000 and the estimated fair value of the new subordinated notes. The effective interest rate was 53.0% and 154.1% for the subordinated notes issued in April 1999 and October 1999, respectively, calculated based on an expected maturity date of April 2000. The effective interest rate on the new subordinated notes is 8.75%. Other income Other income, net of other expense, was $475,000 in the first three months of 2000. This increase was primarily due to the gain on sale of our 30% ownership interest in HD Technologies. Benefit from income taxes For the first three months of 2000 and 1999 we incurred net operating losses and consequently we did not pay any federal income taxes. Years ended December 31, 1999 and 1998 Revenue Revenue increased $6.6 million, or 120%, to $12.1 million in 1999 from $5.5 million in 1998. This increase in revenue was due primarily to $5.4 million from sales of biochip and proteomic systems launched in 1999. New product sales consisted of $3.7 million from our GeneTAC Biochip System, GeneTAC Hybridization Station and Biochip Analyzers and $1.7 million from our Investigator Proteomic System which was first shipped in June 1999. We also sold more Flexys(R) Robotic Workstations in 1999 compared to 1998, with unit sales increasing from 19 to 40. Increased sales of this product offset the revenue loss associated with our products for documenting and analyzing one dimensional separations of DNA and proteins, which were discontinued in all markets except Japan. The remainder of our 1999 revenues were attributable to services and consumables. Table of Contents Management s discussion and analysis Cost of revenue Cost of revenue increased $3.7 million, or 114%, to $7.0 million in 1999 from $3.3 million in 1998. This increase was primarily attributable to increased instrumentation sales and increased spending on product support, employees and facilities. In 1999, cost of revenue reflected added costs associated with the initial manufacturing set up and first production runs for the individual components of our biochip and proteomic systems. In response to the increase in the number of products offered and volume of products manufactured, we moved our United Kingdom operations into a new facility which more than doubled the prior facility space. As a result of infrastructure improvements, our cost of revenue grew at approximately the same rate as our revenues. Selling, general and administrative expenses Selling, general and administrative expenses increased $2.3 million, or 36%, to $8.7 million in 1999 from $6.4 million in 1998. Of this increase, $1.2 million was attributable to salaries and other employee related costs. The remainder of this increase was for promotional activities, professional services and sales commissions. Research and development expenses Research and development expenses grew $1.5 million, or 44%, to $4.8 million in 1999 from $3.4 million in 1998. This increase was primarily attributable to increased spending of $651,000 on the design and development of our new products in 1999 and $604,000 of salary and related employee expenses resulting primarily from hiring approximately nine engineers and scientists. Acquisition related and other unusual charges In 1999, we recorded a charge of $438,000 for the write-off of goodwill originating from the acquisition of certain assets of Insight Biomedical Imaging. The primary purpose of the acquisition was to acquire Insight s expertise in laser-based imaging technology. The assets acquired are used to produce laser scanning microscope systems used by life science researchers for generating 3-dimensional images of research samples. This write-off of goodwill was due to our strategic decision to no longer market, sell and provide technical support for the 3-dimensional imaging products produced by Insight. The last customer maintenance agreement ended in September 1999. Since that time no further revenue from these products has been realized. For the year ended December 31, 1998, we recorded a charge to operations of $340,000 for the write-off of in-process research and development in connection with the acquisition of the 2-D gel electrophoresis and proteomic business of ESA, Inc. Interest expense Interest expense increased $2.4 million to $2.5 million in 1999 from $122,000 in 1998. This increase was due primarily to $6.0 million of subordinated notes with warrants issued in April 1999 and $3.5 million of subordinated notes with warrants issued in October 1999. Interest expense also increased as a result of the increase in borrowings under our fixed asset lease line agreement and our commercial bank borrowing facilities. Table of Contents Management s discussion and analysis In 1999, interest expense includes amortization expense of approximately $1,606,000 related to the discount recorded on the subordinated notes. The discount was being amortized over the period from the date of issuance to April 2000. The amortization period of the discount was treated as shorter than the contractual life of the subordinated notes as the notes contained a provision that they automatically mature upon the closing of an initial public offering (originally expected to be April 2000) and were expected to be repaid with a portion of the offering proceeds. Interest income Interest income decreased $126,000 to $111,000 in 1999 from $237,000 in 1998. Interest income decreased due to lower average cash and cash equivalents balances in 1999. Benefit from income taxes We incurred net operating losses in 1999 and 1998, and, consequently, we did not pay any federal income taxes. At December 31, 1999, we have available net operating loss carryforwards of approximately $16.3 million which can be utilized to offset future taxable income. These net operating loss carryforwards expire between 2010 and 2019. Additionally, utilization of approximately $1,900,000 of the net operating loss carryforwards are limited under Section 382 of the Internal Revenue Code due to ownership changes, as defined by Section 382, that occurred in 1997. These and other deferred income tax assets are fully reserved by a valuation allowance due to historical operating losses. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, valuation allowances in amounts equal to the deferred tax assets have been established to reflect these uncertainties. See Note 10 of Notes to Consolidated Financial Statements. Years ended December 31, 1998 and 1997 Revenue Revenue increased $3.3 million, or 155%, to $5.5 million in 1998 from $2.2 million in 1997. Revenue growth was due primarily to $2.3 million in increased sales of our recently acquired Flexys(R) Robotic Workstation product line. The remainder of the 1998 sales were attributable to our products for documenting and analyzing one-dimensional separations of DNA and proteins, services and consumables. Cost of revenue Cost of revenue increased $2.2 million, or 207%, to $3.3 million in 1998 from $1.1 million in 1997. The increase resulted primarily from our strategic decision to shift our product line from stand-alone software to genomic and proteomic systems, which we believe offer greater growth potential. Higher material costs of $1.5 million and labor and facilities costs of $700,000 for producing our instruments compared to stand-alone software products resulted in an increase in our cost of revenue from 49% in 1997 to 59% in 1998. Selling, general and administrative expenses Selling, general and administrative expenses increased $4.2 million, or 190%, to $6.4 million in 1998 from $2.2 million in 1997. This increase was due primarily to the addition of approximately 43 sales, marketing Table of Contents Management s discussion and analysis and administrative personnel through hiring and acquisitions and $504,000 in increased spending on promotional activities. Research and development Research and development expenses increased $2.4 million, or 256%, to $3.4 million in 1998 from $942,000 in 1997. This increase was due primarily to employee salaries and related costs as a result of adding approximately 16 engineering and software development personnel through hiring and acquisitions, and $723,000 in increased expenditures on design and development of new products. Acquisition related and other unusual charges In 1998 we recorded an unusual charge to operations of $340,000 as a result of a write-off of in-process research and development acquired from ESA, Inc. In 1997, acquisition related and other unusual charges totaled $1.6 million, consisting of $1.2 million in unusual charges related to B.I. System Corporation and a $389,000 write-off of in-process research and development acquired from PBA Technologies, Ltd. The underlying business reasons for the charges and their respective computations are as follows: B.I. System Corporation In 1997, we merged with B.I. System Corporation, our predecessor company. We wrote off $1.2 million in unusual charges for that year related to B.I. Systems. The write-offs consisted of a $861,000 write down of goodwill and intangible assets and a $328,000 write-off of unamortized capitalized software development costs. As a result of a change in our business strategy from developing and licensing products for documenting and analyzing one-dimensional separations of DNA and proteins to manufacturing and selling biochip and proteomic systems, the assets we acquired no longer had any remaining useful life. ESA, Inc. In October 1998, we acquired the Electrophoresis Division of ESA, Inc., including in-process research and development. The in-process research and development consisted of new proteomic technologies for an automated gel processor and IPG (immobilized pH gradients) running device, a first dimension alternative in the 2-D electrophoresis process. At the time of acquisition, the gel processor was 85% complete and the IPG running device was 22% complete. The projects had not yet reached technical feasibility and had no alternative future uses. We anticipated that it would take 4-6 months and approximately $150,000 to complete the projects. Completion would entail planning, designing, coding, prototyping and testing activities. The risks affecting completion included changing software platforms, technical infeasibility, competing technologies which could render the development obsolete and project management problems. After an in-depth assessment, we allocated $340,000 to these projects representing the estimated fair market value based on risk-adjusted cash flows. These costs were expensed as of the acquisition date. Our management was primarily responsible for the fair market value determination. The value was determined by estimating the cost to develop the technology into commercially viable products and the resulting net cash flows. The cash flows were then discounted to present value. For purposes of computing the fair market value, aggregate revenues for the products were estimated to grow at a compounded annual growth rate of approximately 34% from 1999 through 2002. Revenue projections were based on estimates of relevant market size and growth factors, expected trends in Table of Contents Management s discussion and analysis technology, and the nature and timing of new product introductions. The estimated revenues were expected to peak within three years from acquisition and then decline sharply as other new products and technologies entered the market. Net cash flows were estimated based on discussions with management regarding estimates of costs of sales, operating expenses, income taxes and anticipated profit margin improvements. Due to purchasing power increases and general economies of scale, estimated operating expenses as a percentage of revenue were expected to decrease after the acquisition. The discount rate for determining the present value of net cash flows was based on the estimated cost of capital. Due to the nature of the forecast and the risks associated with project growth and profitability, a discount rate of 35% was deemed appropriate for in-process projects and 30% for existing products and technologies. The discount rate reflected the risks and uncertainties associated with the projects and technology. Finally, with respect to the acquired in-process technology, the calculations of value were adjusted to reflect the value creation efforts of ESA prior to the close of the acquisition. In doing so, consideration was given to each major project s stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs incurred and projected cost of completion. Subsequent to the acquisition, we continued with the research and development projects and completed the development. The development resulted in the creation of our Investigator Gel Processor. The performance of the project did not differ significantly from our projections at the time of acquisition. PBA Technology On December 31, 1997, we acquired the outstanding stock of PBA Technology, Ltd. including in-process research and development. The in-process research and development centered around a next generation Flexys robot platform, including new head technology to increase speed and accuracy, new instrumentation to support the next generation robots and heads, and developing new control software for increased speed, reliability and reduced picking errors. At the time of acquisition, the project was 30% complete. We anticipated that it would take 8-12 months and we have spent $250,000 to complete the projects since the acquisition. The projects had not yet reached technical feasibility and had no alternative future uses. The risks affecting completion included changing software platforms, technical infeasibility, competing technologies which could render the development obsolete and project management problems. After an in-depth assessment, we allocated $389,000 to these projects representing the estimated fair market value based on risk-adjusted cash flows. These costs were expensed as of the acquisition date. Our management was primarily responsible for the fair market value determination. The value was determined by estimating the cost to develop the technology into commercially viable products and the resulting net cash flows. The cash flows were then discounted to present value. Estimated net cash inflows from the acquired in-process PBA technology were projected to commence in 1998, peak in 2001 and decline steadily thereafter. The fair market value of the technology was determined by estimating the contribution of the purchased in-process technology to the development of commercially viable products and estimating the resulting cash flows from the expected product sales. In arriving at cash flows, a contributory charge was applied for the use of working capital, fixed assets, developed technology and other intangibles. The resulting cash flows were discounted to their present value using a discount rate of 25%. The discount rate was based on an analysis of PBA s weighted cost of capital and venture capital rates given the risk of the value added assets. There were no material anticipated changes from historical pricing, margins and expense trends. Since the PBA acquisition, we have continued with the research and development projects. The project was subsequently completed with changes in scope to accommodate new technology and software platforms. The projected performance of the research and development projects has not differed significantly from the projections that the company made at the time of acquisition. Table of Contents Management s discussion and analysis Interest expense Interest expense decreased $62,000 to $122,000 in 1998 from $184,000 in 1997. The decrease was due primarily to reduced borrowing balances during 1998 as compared to 1997. Interest income Interest income was $237,000 in 1998 as compared to no interest income in 1997. This increase in interest income was due to greater average cash and cash equivalent balances during 1998. Benefit from income taxes We incurred net operating losses in fiscal 1997 and 1998 and consequently did not pay any federal income taxes. LIQUIDITY AND CAPITAL RESOURCES From January 1997 through March 31, 2000 we have funded our operations, capital equipment requirements and acquisitions primarily through $23.5 million of private equity, $9.5 million in subordinated promissory notes with warrants, $3.0 million from fixed asset lease line financing and $22.3 million from bank borrowings. In addition, in April 1997, we recapitalized the majority of our outstanding debt and all outstanding shares of Series A preferred stock. This recapitalization was necessary to permit new management to increase investor interest in the company, provide flexibility for future financing and to reduce the financial burden of accrued interest. See Note 11 of Notes to Consolidated Financial Statements. At March 31, 2000 our cash and cash equivalents totaled $26.8 million compared to $1.2 million at March 31, 1999. As of March 31, 2000 we had approximately $1.0 million available under a fixed asset lease line of credit. In January 2000, we received $8.0 million in gross proceeds from the sale of preferred stock to PerkinElmer. Also in January 2000, we received approximately $600,000 in cash from the sale of our 30% ownership interest in HD Technologies. We retain all product and intellectual property rights to the mass spectrometer developed for us by HD Technologies. Cash used in operations for the three months ended March 31, 2000 was $2.1 million compared with $1.9 million for the same period in 1999. Our net loss of $3.9 million in the first three months 2000 included non-cash charges of $1.3 million for amortization of discount on subordinated notes with warrants, $1.1 million for extraordinary loss on extinguishment of debt, $407,000 gain on sale of investment in HD Technologies, and $370,000 for depreciation and amortization expense. The use of cash in operating activities in the first three months was also due to increases of $625,000 in accounts receivable and $727,000 in inventories to accommodate increased sales. The use of cash in operating activities was partially offset by $893,000 increase in accrued liabilities and accounts payable due primarily to professional service fees attributed to the PerkinElmer and HD Technologies transactions and increases in cost of revenue and total operating expenses. Our investing activities for the three months ended March 31, 2000 provided cash of $367,000 compared with usage of $453,000 for the same period in 1999. Cash provided by investing activities was a result of receiving approximately $600,000 in cash from the sale of our 30% ownership interest in HD Technologies. Cash used in 1999 was attributable to $437,000 for capital expenditures which consisted mainly of purchases of computers, laboratory equipment and leasehold improvements related to expansion Table of Contents Management s discussion and analysis of our laboratories. Our capital equipment additions in 1999 were primarily financed with our fixed asset lease line of credit. We expect to continue to purchase equipment to support our expanding operations. We also may use a portion of the net proceeds for acquisition of, or investment in, complementary companies, technologies or assets. Cash provided by financing activities for the three months ended March 31, 2000 was $27.3 million compared to $713,000 for the same period in 1999. Financing activities included borrowings of $20.0 million under our amended primary bank line-of-credit agreement and the receipt of $7.4 million in net proceeds from the sale of preferred stock in January 2000. In March and April 2000, we amended our primary bank line-of-credit agreement to provide for borrowings of up to $32 million through July 2001. As of May 4, 2000, we had drawn down $31.8 million under this line of credit. The additional cash from this loan, together with the proceeds from this offering, will be used for general corporate purposes, including hiring additional sales and customer support personnel, expansion of our facilities, manufacturing of our existing products, research and development of additional products, patent prosecution expenses and working capital. We also may use a portion of the proceeds for acquisition of, or investment in, complementary companies, technologies or assets. The line of credit is expected to provide us with the added capital we believe is necessary to complete these objectives. The addition of borrowings to our capital structure is expected to increase our interest costs. Working capital increased $6.2 million to $8.3 million at March 31, 2000 from $2.1 million at December 31, 1999. The increase was primarily due to cash proceeds received from the sale of preferred stock to PerkinElmer and sale of our 30% ownership interest in HD Technologies, increases in accounts receivable of $625,000 and inventory of $727,000 due to the Company s growth in revenue and operations, partially offset by increases in accrued liabilities. As of March 31, 2000, we had an aggregate of $11.5 million in future obligations of principle payments under capital leases, subordinated notes and other long-term debt, of which $686,000 is to be paid within the next twelve months. The business loan agreements of April 1999 and October 1999 have been amended to provide that we will not be required to repay the subordinated notes until the earlier of one year after this offering or on the date that we have less that $50.0 million of cash and cash equivalents. Our current capital plan calls for capital between $120-$150 million. We decided to increase our line of credit and extend the repayment date of our April and October 1999 business loan agreements to provide us with more flexibility to achieve our capital goals. In addition, the Nasdaq National Market System requires that we have at least $100 million of assets at the time of listing. As one objective of this offering is to create a public market for our stock and to facilitate future access to public capital markets, we believe the Nasdaq National Market listing will further these goals. Additional business reasons for pursuing the Nasdaq National Market listing are contained in the terms of our outstanding warrants and preferred stock. The cancellation of warrants upon a liquidity event and the conversion of our preferred stock into callable common stock depend in part on the Nasdaq National Market listing. We believe our existing cash and cash equivalents, together with the net proceeds of this offering, will be sufficient to fund our operating expenses, debt obligations and capital requirements on both a short-term and long-term, greater than 12 months, basis. However, we may need to raise additional capital to fund our research and development programs, to scale up manufacturing activities, to expand our sales and marketing capabilities or to fund unforeseeable expenses. Even if we have sufficient funds for our operating plans, we may choose to raise additional capital due to market conditions or strategic considerations. We may seek funding through public or private equity offerings, debt financing or additional collaborations. We cannot assure you that additional financing will be available on favorable terms, if at all. Table of Contents Management s discussion and analysis Year 2000 compliance To date, we have not experienced any significant Year 2000 issues. Year 2000 issues are referred to in this context as problems associated with software and computer systems use of two digits to define the year and the inability of computer systems to process dates occurring in the Year 2000 and beyond. Although we have not experienced any significant Year 2000 issues relating to our internally developed programs and systems, or systems provided to us by others, these systems could experience Year 2000 problems at any time during the Year 2000 and beyond. These problems could disrupt our business and require us to incur significant, unanticipated expenses to remedy them. We cannot assure you that third parties on which our services depend will not encounter Year 2000 issues. We made a Year 2000 assessment to evaluate the impact of the Year 2000 on our products and operating systems. This assessment included the initiation of formal communications with significant suppliers and customers to determine the extent to which our systems were vulnerable to third party failures to remedy their own Year 2000 issues. We cannot assure you that the systems of other companies that our systems rely on will be timely converted and will not have an adverse effect on our systems. We performed a comprehensive review of all internally used financial and administrative systems as well as internally developed products sold to customers. We installed new internal financial and administrative systems, computer and information systems equipment in 1998 and 1999. The software imbedded within our products has been developed and upgraded over the last few years. Consequently, we do not expect the future costs of addressing the Year 2000 issue to be material. However, we cannot assure you that governmental agencies, utility companies, third-party service providers and others outside our control will be Year 2000 compliant and not encounter Year 2000 issues. The failure by these entities to be Year 2000 compliant could result in a systemic failure beyond our control, including, for example, a prolonged telecommunications or electrical failure, which could have a material adverse effect on our business. Therefore, future expenses relating to Year 2000 issues may be higher than anticipated, and therefore could have a material adverse effect on our business, results of operations and financial condition. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rates The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To minimize this risk, we maintain our cash and cash equivalents in money market funds. The average duration of all our investments in 1999 was less than 90 days. Due to the short term nature of these investments, a 10% movement in market interest rates would not have a significant impact on the total value of our portfolio as of December 31, 1999. Foreign currency rate fluctuations The local currency for our subsidiary in the United Kingdom is the British pound sterling and the local currency for our subsidiary in Japan is the Japanese yen. We have converted the British pound sterling and the Japanese yen to the U.S. dollar using the exchange rate in effect at the balance sheet date and have used the average exchange rate for the period for income statement items. The effects of conversion are recorded as a separate component of stockholders equity. Our agreement with PerkinElmer requires payment in U.S. currency. As a result, only business in the United Kingdom and Japan by our subsidiaries will continue to be conducted in foreign currencies. Exchange gains and losses are recorded using the actual exchange differences on the date of the transaction. We have not taken any action to reduce our exposure to changes in foreign currency exchange rates, such as options or futures contracts, with respect to transactions with our foreign subsidiaries or customers. The net tangible liabilities of our British subsidiary, without respect to long term debt, were approximately $(2,900,000) at December 31, 1999. A hypothetical 10% increase in Table of Contents Management s discussion and analysis the value of the British pound sterling relative to the U.S. dollar would result in an unrealized foreign exchange translation loss of approximately $300,000. The net tangible assets of our Japanese subsidiary were approximately $222,000 at December 31, 1999. A hypothetical 10% decrease in the value of the Japanese yen relative to the U.S. dollar would result in an unrealized foreign exchange translation loss of approximately $22,000. Additionally, a portion of our long-term debt is denominated in British pound sterling. If the British pound sterling increases in value relative to the U.S. dollar before repayment, we will have to pay more cash to retire the debt. A hypothetical 10% increase in the value of the British pound sterling relative to the U.S. dollar would result in an unrealized foreign currency transaction loss of approximately $27,000. Inflation We do not believe that inflation has had a material impact on our business or operating results during the periods presented. Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective for our fiscal year 2001. This statement changes the previous accounting definition of derivative, which focused on freestanding contracts such as options and forwards, including futures and swaps, expanding it to include embedded derivatives and many commodity contracts. Under the statement, every derivative is recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. We do not anticipate that the adoption of SFAS No. 133 will have a material impact on our operating results or financial condition. We currently do not engage in hedging activities. See Note 2 of Notes to Financial Statements. Table of Contents Business OVERVIEW We design, develop, manufacture, market and sell genomic and proteomic instrumentation, software, consumables and services. Unlike many other life sciences companies in the gene expression and proteomic markets, we offer integrated systems with demonstrated market acceptance. Our biochip and proteomic products and systems enable researchers to perform complex, high-volume experiments at lower costs and in less time than with traditional techniques. Our customers use our integrated and automated systems to produce biochips, maintain DNA libraries, quantify gene expression levels and isolate, identify and characterize proteins, thereby facilitating more rapid and less expensive drug discovery. Since 1997, we have sold our products to more than 100 pharmaceutical and biotechnology companies, government agencies, universities and private research institutions, including Parke-Davis, Merck, diaDexus, Biogen, RIKEN Genome Science Center (Japan) and Ludwig Institute for Cancer Research. OUR HISTORY B.I. Systems Corporation, our predecessor, was established in 1994 to acquire a gel electrophoresis imaging and analysis product line from Millipore Corporation used to document and analyze one-dimensional separation of DNA and proteins. Typical customers included academic life science research laboratories, pharmaceutical companies and government laboratories. After the acquisition, B.I. Systems focused on low priced software for gel electrophoresis analysis. This strategy of selling software without any instrumentation proved unsuccessful. In 1997, a new management team redirected our efforts to the growing genomic and proteomic markets. In December 1997, we changed our name to Genomic Solutions to better reflect our new goals and objectives. In 1998, we made a strategic decision to shift our product line from stand-alone software to genomic and proteomic systems which we believe offer greater growth potential. In accordance with our new strategic direction, we acquired PBA Technology, Ltd., a genomic robotics company and began offering our Flexys Robotic Workstation in January 1998. The Flexys accounted for the majority of our sales in 1998. In April 1998, we acquired imaging systems technology from Insight Biomedical Imaging, Inc. and a 30% equity interest in HD Technologies, a Manchester, England-based developer and manufacturer of mass spectrometry systems. Later that year, we signed an agreement with AbiMed GmbH for the supply of key components of our ProGest Digestion Station and gained distribution rights to Spotfire s visualization and data analysis software for the genomic and proteomic markets. In October 1998, we acquired a 2-D gel electrophoresis and proteomic services business from ESA, Inc. During early 1999, we launched the instruments, software and reagents comprising the GeneTAC Biochip System and in mid-1999, we launched the Investigator Proteomic System. INDUSTRY BACKGROUND Traditional Drug Discovery Processes and the Transition to Genomics and Proteomics Traditional drug discovery requires the screening of thousands of compounds for biological activity. The process is expensive, labor-intensive and often imprecise. Despite expenditures of billions of dollars annually for drug discovery, only a small fraction of the thousands of compounds screened are developed into commercial drugs. To compete successfully in the global market and maintain desired growth rates, pharmaceutical and biotechnology companies seek to develop significantly higher numbers of drug compounds per year. To do so, they must utilize more productive drug discovery methods. Pharmaceutical and biotechnology companies recently have realized the potential of genomics and proteomics to improve the productivity of the drug discovery process. Genomic research is the study of genes, or specific segments of DNA molecules, each of which consists of repeating sequences of four nucleotide bases. The sequence of the nucleotide bases in all the genes of an organism, referred to as a Table of Contents Business genome, establishes the inheritable characteristics of the organism. The human genome is believed to be composed of approximately 100,000 genes, which consist of an estimated 3.2 billion nucleotide bases. Genes contain the information necessary to create proteins, which are the molecules that carry out a cell s biological functions. Humans may produce one million or more distinct proteins. Most diseases, including diabetes and Alzheimer s, result from abnormalities in the presence, production or performance of proteins within cells. Consequently, pharmaceutical and biotechnology companies attempt to develop drugs that will bind to a targeted protein and alter the cell s biological function. In other cases, rather than causing disease, proteins actually direct therapeutic biological activity that can treat disease. The systematic isolation, identification and characterization of large numbers of proteins is known as proteomics. Genomic and proteomic technologies offer significant opportunities to improve the drug discovery process for at least three reasons. First, by focusing on gene and protein activity levels, or expression levels, researchers can learn more about the role genes and proteins play in causing and treating disease. Second, because genomics and proteomics help to decipher the mechanisms of disease, they provide more opportunities for intervening in the progression of disease, which should increase the ability to develop drugs with reduced side effects and increase the probability of clinical trial success. Finally, genomics and proteomics are expected to substantially increase the number of drug targets and potential new drugs. To date, genomic research has focused primarily on categorizing gene function by grouping genes into related families based on similar DNA sequences, or homologies. The DNA sequencing process identifies the order of nucleotides in a segment of DNA. This sequence is then compared to sequences of known genes. This comparison can be valuable because genes with similar DNA sequences may have related functions. The growth of genomic research has led to the widespread commercialization of automated gene sequencers. The sequencing market was $509 million in 1998 and is expected to reach $1.3 billion by 2003. Currently, the worldwide installed base of automated sequencers is more than 13,500 units. Sequence and homology data alone, however, are usually insufficient to determine gene function and materially impact the drug development process. Therefore, pharmaceutical and biotechnology companies and other research-based institutions require tools that will enable them to better understand the roles genes and proteins play in biochemical pathways and the mechanisms of disease. Gene Expression Analysis Gene expression analysis compares the activity levels of genes in diseased cells to genes in normal cells. Diseased cells often present a different expression profile than normal cells. The gene profile provides information regarding the expected expression levels of the associated proteins, which could prove to be good drug targets. In addition to facilitating the development of drug targets, expression patterns can be useful in predicting drug toxicity and efficacy in the pre-clinical testing phases. Biochips have become the preferred technology for large-scale gene expression analysis. A biochip consists of thousands of fragments of DNA (either oligonucleotides, complete genes or other DNA) adhered to a specially treated and chemically modified glass slide or other substrate. Biochips are created through contact printing, ink jet printing or photolithography. Using biochips, researchers can analyze thousands of genes simultaneously and relatively quickly, enabling the efficient accumulation of large quantities of gene expression data. To conduct gene expression analysis, biochips are exposed to a DNA sample labeled with a fluorescent tag. If a DNA molecule from the sample finds a complementary DNA molecule on the biochip, the two strands of DNA bind. This binding process is referred to as hybridization. A digitized image of the hybridized biochip is then created, and the image is analyzed using software that determines levels of gene expression. Table of Contents Business Finally, sophisticated analysis software, called bioinformatic software, compares the expression levels of genes on the biochip to the expression levels of genes on other biochips and genes stored in public and proprietary databases. The biochip market encompasses instrumentation, custom and standard biochips, reagents, other consumables and service. Customers include pharmaceutical and biotechnology companies, academic and government laboratories, and other research facilities. According to Strategic Directions International, the biochip market was $104 million in 1998 and is expected to grow to $777 million by 2003. Proteomics Proteomics involves the large-scale separation, identification and characterization of proteins. Proteins are created, or translated, based on the information contained in genes. While gene expression data provide important information regarding the underlying proteins, they cannot predict all changes that occur to a protein after translation. This inability to accurately characterize proteins based on gene expression data is a result of protein control mechanisms that occur after the protein is synthesized from the gene. These control mechanisms are responsible for the regulation of the expression of the protein and modifications that occur to the protein to make it functional, including the addition of chemically active molecules and the combination of two or more proteins to form a functional protein complex. A high throughput system for identifying proteins, measuring protein expression levels and further characterizing proteins is needed. Consequently, proteomics is emerging as one of the fastest growing segments of the life sciences market. Most proteomic researchers use two-dimensional (2-D) gel electrophoresis to separate proteins based on molecular weight and electric charge. This process allows the researcher to divide complex protein mixtures into individual proteins and quantify relative levels of protein expression under different experimental conditions. After completing the 2-D gel electrophoresis process, the researcher manually stains, washes and images the gels. These gels are then compared to each other to determine the protein expression levels. Next, the researcher locates and excises the desired proteins and separates them from the gels. These proteins are then digested into peptides, concentrated and introduced into a mass spectrometer. Most researchers utilize a specialized form of mass spectrometry, known as MALDI-TOF, to accurately determine the molecular weight of proteins while achieving high throughput. Because peptides, the building blocks of proteins, have different masses, sophisticated bioinformatic software can use molecular weight and other data to search databases for known proteins with a matching molecular weight. If the protein cannot be identified, the researcher then uses other technologies to sequence the protein. The proteomic market encompasses instrumentation, gels, reagents, other consumables and service. Strategic Directions International estimates that the proteomic market was $568 million in 1998 and will grow to $1.1 billion in 2003. Most of the growth is expected to be derived from electrophoresis and mass spectrometry products, the two largest segments of the proteomics markets. Strategic Directions International projects integrated systems combining electrophoresis and mass spectrometry will be the fastest growing segment of the proteomic electrophoresis product market. Bioinformatics Bioinformatic software is used by researchers to collect, manage, analyze and link complex data generated from genomic and proteomic studies. This software allows researchers to compare data with public and proprietary databases to quickly and cost-effectively identify those genes and proteins associated with a biological pathway and determine how abnormalities in their expression levels contribute to diseases. By better understanding the mechanism of a disease, researchers can identify potential targets for drug intervention. Table of Contents Business LIMITATIONS OF CURRENT BIOCHIP AND PROTEOMIC TECHNOLOGIES With the exception of our products, we believe that most currently available biochip and proteomic technologies suffer from the following limitations: - Poor Quality Results. Quality results depend, in large part, on sensitivity, reproducibility and statistical validity. Many available products and processes lack sufficient sensitivity to detect gene and protein expression at low levels. Due to lack of automation, these products also are prone to error, contamination and poor reproducibility. Obtaining statistical validity requires the use of a sufficiently large sample population for experimentation, which is difficult to achieve with low throughput, manual instrumentation. Compatibility problems often result when customers attempt to integrate instrumentation and software from multiple vendors, complicating analyses and producing erroneous results. - Low Productivity. Most instruments currently available for gene expression analysis and proteomics are manual and low throughput. For example, biochip analyzers are generally capable of imaging and analyzing only one biochip at a time. The lack of walk-away capabilities dictates that valuable researcher time be spent observing and performing relatively routine tasks rather than designing experiments and analyzing data. Additionally, biochip technologies that do not permit biochip production at the customer site require the researcher to wait for the biochip vendor to design, produce and ship new biochips. This process typically requires weeks to months. Likewise, manual proteomic techniques are labor intensive, low throughput and require days or weeks to complete. - Lack of Flexibility. Existing biochip and proteomic instruments often do not allow researchers to tailor experiments to meet their particular needs. For example, some biochip technologies limit the types of DNA that may be used. Other products rely upon expensive, standard biochips which cannot be customized in a reasonable period of time. In proteomics, traditional techniques can isolate and process only a small number of proteins from a gel using manual methods, limiting the scope of potential experiments. - High Cost. Many companies charge multi-million dollar access fees and significant royalties for access to their biochip and proteomic technologies. In addition, for experiments requiring relatively small numbers of biochips, set-up costs to produce custom biochips can be prohibitive. OUR SOLUTIONS Our integrated biochip and proteomic systems are designed to overcome limitations present in existing products. Our products offer the following advantages: - High Quality Results. Our integrated and automated systems reduce data variability that often plagues manual and incompatible instruments produced by multiple vendors. By providing walk-away, high throughput capabilities, our systems reduce the risk of human error and sample contamination. Each instrument is designed to serve as a component of an integrated system, resulting in increased throughput, consistency and statistical validity. For example, our GeneTAC Biochip System achieves high levels of reproducibility and sensitivity as a result of our biochip production technology, proprietary hybridization process and sophisticated imaging and analysis software. Our proprietary Duracryl gels and the staining capabilities of our Investigator Proteomic System provide enhanced resolution of proteins and broad dynamic range, which facilitate highly reproducible separation and quantification of proteins expressed at low levels. - Increased Productivity. Our systems use advanced robotics and sophisticated software to automate both gene expression and protein analysis. Our automated systems allow users to complete large scale, Table of Contents Business statistically meaningful experiments in significantly less time than with manual processes and stand-alone instruments. This allows researchers to focus on interpreting and analyzing data, instead of integrating, optimizing and validating instruments. For example, our GeneTAC Biochip System enhances productivity by providing unattended, automated biochip production, processing, imaging and analysis. With our Flexys Robotic Workstation with Autoloader, researchers can produce 336 custom biochips overnight without human intervention, eliminating the need to wait weeks or months for custom biochips from outside vendors. In addition, we believe our GeneTAC Hybridization Station is the only commercially available product for automating the hybridization of biochips. Our Investigator Proteomic System automates 2-D gel staining and washing, and protein extraction, digestion, filtration, and concentration. This reduces the man-hours required to identify 100 proteins from more than 26 hours to less than one hour. - Enhanced Flexibility. Our systems enable customers to design their experiments to meet research objectives. Our GeneTAC Biochip System permits users to select different types of DNA for production of biochips and reduces reliance on standard biochips. Furthermore, our system allows researchers to independently design and produce their own custom biochips incorporating previous experimental results in a matter of hours. Our Investigator Proteomic System enables users to quickly analyze proteins that are operator selected or pre-identified using our proprietary software, including proteins expressed at low levels that can be difficult to identify with manual techniques. - Lower Cost. Each of our systems is designed to produce results in less time and at lower cost than alternative approaches. We do not charge royalties, technology access fees or license fees for the use of our biochip or proteomic systems. Additionally, our automated systems decrease labor content by reducing the need to perform repetitive and complex tasks. Moreover, our GeneTAC Biochip System reduces the set-up costs incurred in the production of custom biochips. OUR STRATEGY We are, and intend to continue to be, a premier provider of integrated biochip and proteomic systems and services that enable our customers to analyze genomic and proteomic data, understand biochemical pathways and elucidate the mechanisms of disease. Key elements of our strategy include: - Lead genomic and proteomic product markets. We intend to strengthen our global position in the biochip and proteomic markets. To this end, we plan to continue to rapidly expand our customer base through investment in our direct sales efforts in the United States, United Kingdom and Japan. In other markets we intend to expand our customer base through our recent sales and marketing collaboration with PerkinElmer. PerkinElmer is a leading provider of analytical instrumentation and high throughput screening tools for drug discovery with marketing, sales and distribution capabilities in over 100 countries. - Enhance our product offering through internal development and acquisitions. We intend to continue to improve the throughput, reproducibility and sensitivity of our automated biochip and proteomic systems through internal research and development and acquisitions of complementary companies, products and technologies. - Generate recurring revenue. We view consumable products, contract research services and product service and support as significant opportunities to enhance our revenue. Our precast gels, biochips, reagents and other consumables are designed to optimize the performance of both our biochip and proteomic systems. In addition to our GeneMAP Cancer Array, we are developing standard biochips for chromosome, disease and tissue specific research. We also generate recurring revenue by providing Table of Contents Business contract research services, training and product service and support to users of our instrumentation and systems. We expect these revenues to continue to increase in the future. - Facilitate and capitalize on the convergence of gene expression analysis and proteomics. While gene expression analysis and proteomics are frequently viewed as distinct research areas, each provides valuable, but incomplete, data on gene and protein function. We believe that the efficient analysis of the complex relationships between genomic and proteomic data will advance the understanding of biochemical pathways and accelerate the discovery of the mechanisms of disease, leading to more productive and cost effective drug discovery. We believe that our biochip and proteomic systems, in combination with powerful bioinformatic software, can be used to produce, analyze and interpret the combined data from these two disciplines. We intend to promote, facilitate and capitalize on the convergence of gene expression analysis and proteomics. OUR PRODUCTS We design, develop, manufacture, market and sell instrumentation, software, consumables and services for large scale gene expression and proteomic research. Unlike many other life sciences companies in the gene expression and proteomics markets, we offer integrated systems with demonstrated market acceptance. Our biochip and proteomic systems provide high-volume processing, sensitivity and reproducibility, enabling researchers to perform complex, large scale gene expression and proteomic experiments at lower costs and in less time than with traditional techniques. For the past three fiscal years, the percentage of revenue attributable to our product and service categories was as follows: Percentage of Total Revenue 1999 1998 1997 Instruments 88% 87% 45% Consumables 5% 2% 0% Software* 44% Service 7% 11% 11% * Commencing in 1998, software has not been sold separately and is included in instrument revenue Our GeneTAC Biochip System Our principal system for gene expression analysis is the GeneTAC Biochip System. We believe that the GeneTAC Biochip System is the only commercially available comprehensive and integrated biochip system. The instruments comprising the system allow complete gene expression analysis, including DNA library management, biochip production, hybridization, imaging, analysis, and results reporting. Our automated systems-based approach generates highly reproducible data, facilitates usage and training, minimizes compatibility problems and allows rapid and efficient analysis. For customers who prefer not to purchase the entire GeneTAC Biochip System, we sell each of its components separately. Each modular component operates independently but is designed to seamlessly integrate with the other components to form a comprehensive system. Table of Contents Business Our GeneTAC Biochip System consists of the following components: Step Product Function 1 Flexys Robotic Workstation with AutoLoader Creates and manages DNA libraries; produces biochips by contact printing thousands of genes from DNA libraries on to glass slides 2 GeneTAC Hybridization Station Hybridizes sample DNA with the DNA printed on the biochip using automated heating, cooling and washing steps GeneTAC Hybridization Reagents Ensures high quality results using proprietary reagents 3 GeneTAC Biochip Analyzers Automatically creates digitized images of multiple biochips 4 GeneTAC Integrator Software Collects and analyzes gene expression data from the biochips GeneMAP Arrays and Custom cDNA Biochips Standard and custom biochips Flexys Robotic Workstation with Autoloader Our Flexys Robotic Workstation with Autoloader is a high-throughput, high precision robot for biochip production. It is capable of producing biochips from various types of DNA, including cDNA, oligonucleotides and complete genes. Our Flexys also performs most of the tasks required for biochip production support, including colony picking, re-arraying, high-density gridding, replicating, and other DNA library management applications. Our Flexys offers walk-away automation with the ability to produce up to 336 biochips in an overnight run without human intervention. Its matched titanium printing pins provide enhanced reproducibility and durability for biochip production. The Flexys has built-in flexibility for scaling biochip production and proven reliability with over 100 installations worldwide. GeneTAC Hybridization Station Our GeneTAC Hybridization Station provides high tolerance heating, cooling, washing and sample agitation for automated hybridization of up to 12 biochips simultaneously. Our hybridization station provides reduced experimental times, higher sensitivity and better uniformity and reproducibility than time consuming and error-prone manual methods. We believe we offer the only commercially available product for automated biochip hybridization. In addition, our hybridization station can be linked to our GeneTAC Integrator Software and its relational database for automated results databasing and analysis. We also sell a complete line of proprietary hybridization reagents used in the GeneTAC Hybridization Station. GeneTAC Biochip Analyzers We currently produce and sell two different biochip analyzers, the GeneTAC 2000 and the GeneTAC LS4. Our biochip analyzers are a complex combination of optics, electronics, detectors, mechanical components and sophisticated software used to image biochips without human intervention. Our high sensitivity analyzers are capable of rapidly imaging up to 24 biochips in a single run. The GeneTAC 2000 has the flexibility to use a larger number of fluorescent dyes, including existing dyes and those that may be developed in the future. The GeneTAC LS4 offers a higher level of detail in the image of the biochip using dyes that are presently available on a commercial basis. Table of Contents Business GeneMAP Arrays and Custom cDNA Biochips Our first standard biochip, the GeneMAP Cancer Array, consists of 1,152 genes believed to be implicated in cancers. We are currently developing additional standard and custom cDNA biochips for chromosome, tissue and disease-specific studies using a cDNA library developed in collaboration with a leading university. This library contains sequence-verified human cDNA representing more than 26,000 genes. Our Investigator Proteomic System Our Investigator Proteomic System is a complete turn-key solution for conducting advanced proteomics research on a large-scale basis. We believe it is the only commercially available automated and integrated proteomic system. Our Investigator Proteomic System integrates 2-D gel electrophoresis with mass spectrometry into a highly automated and reproducible system through a series of robots and software. For customers who prefer not to purchase the entire Investigator Proteomic System, we sell each of its components separately. Each modular component operates independently but is designed to seamlessly integrate with the other components to form a complete system. Our Investigator Proteomic System consists of the following components: Step Product Function Table of Contents Business Investigator 2-D Gel Electrophoresis System Our Investigator 2-D Gel Electrophoresis System enables high throughput protein separation with reproducible results. The system uses our proprietary Duracryl gels, which offer high resolution and about twice the tensile strength of ordinary acrylamide gels. This enhanced tensile strength provides our customers with a durable platform for protein separation and reduces the risk of tearing or other damage to the gel. To meet the high throughput requirements of proteomics, the Investigator 2-D Gel Electrophoresis System is capable of running ten gels simultaneously. We also sell a complete line of precast gels, chemicals and reagents for use with the system. Investigator Gel Processor Our Investigator Gel Processor stains gels in preparation for imaging. It is capable of automatically staining and washing ten large format gels simultaneously. We believe that it is the only commercially available product for automated staining and washing of multiple gels, offering improved productivity, uniformity and reproducibility compared to manual methods. The Gel Processor offers factory-programmed protocols and also enables the customer to add and store additional protocols. We also supply a full line of proprietary reagents for use with this product, including stains and wash solutions. Investigator Image Acquisition System Our Investigator Image Acquisition System contains a scientific grade imager for creating high-resolution, digitized images of 2-D gels stained with either visible or fluorescent dyes. With this system, the image is directly loaded into the Investigator HT Proteomic Software and is ready for analysis. Investigator ProPic Our Investigator ProPic excises and extracts protein spots, or plugs, from 2-D gels based on information provided by the Investigator HT Proteomics Software. Our ProPic is capable of extracting up to 160 gel plugs per hour from a 2-D gel, placing the extracted protein spots in 96 well plates, and cataloging the location of each plug, its approximate molecular weight, and its electric charge, all without human intervention. We also sell proprietary consumables for use with the ProPic . ProGest Digestion Station Our ProGest Digestion Station is used to break up, or digest, proteins into peptides. It is capable of automatically processing up to 96 proteins simultaneously. This system accepts 96 well plates containing protein plugs from 2-D gels that have been excised by the Investigator ProPic . The ProGest then automatically recovers the protein from gel plugs, performs all necessary wash steps, and digests the protein into peptides in preparation for mass spectrometer analysis. We believe it is the only commercially available system capable of simultaneous, automated digestion of 96 discrete proteins. We also sell a proprietary reagent kit for use with the ProGest . ProMS MALDI Preparation Station Our ProMS MALDI Preparation Station accepts a 96 well plate directly from the ProGest for filtration of the sample and concentration of the peptides. These peptides are then transferred to a MALDI-TOF mass spectrometer sample plate. The ProMS will accept MALDI sample plates from all major manufacturers. It performs additional clean-up of samples to maximize detection capability and reduce contaminants and then automatically dispenses up to 96 samples onto MALDI-TOF targets. Table of Contents Business Investigator ProTOF Mass Spectrometer Our Investigator ProTOF Mass Spectrometer is capable of extremely precise protein mass measurements, without the need for special sample preparation. The product includes an autoloader for walk-away processing of hundreds of protein samples and sophisticated software for automated database searches. Our Bioinformatic Products Our advanced bioinformatic and database software tracks, integrates and stores the data generated by the various components of our biochip and proteomic systems. This software also performs expression analyses, supports database queries and other analyses, enables data retrieval from public databases and databases owned or licensed by our customers and facilitates presentation of results. Our software is designed for use with our systems and is not sold separately. The principal software products developed for use with our biochip and proteomic systems are as follows: Product Function GeneTAC Integrator Software Interprets and analyzes gene expression data from biochips; queries proprietary and public genomic databases Investigator HT Proteomic Software Identifies proteins and determines expression levels; auto-selects proteins for further analysis Protein Warehouse Software Collects experimental data from all Investigator Proteomic System instruments and stores them in database; uses Internet-enabled collection of 2-D gel images for user interface, automatically performs searches of proprietary and public databases for identified proteins GeneTAC Integrator Software Our GeneTAC Integrator Software is a user-friendly, Windows NT based software package that collects and integrates data from the Flexys Robotic Workstation, the GeneTAC Hybridization Station and the GeneTAC Biochip Analyzers. The data are stored in a relational database. This software performs all of the biochip image analyses, and compares genes on a single biochip or across many biochips. This software provides a complete gene expression profile for each biochip and automatically collects and compares the gene data with genomic information stored in proprietary and public databases, including GenBank. The GeneTAC Integrator Software supports sophisticated database queries and presents the data in both numerical and graphical format. Investigator HT Proteomic Software Our Investigator HT Proteomic Software allows researchers to identify the expression level, electric charge, and approximate mass for each protein in a gel. We believe this software enables the most complete and automated analysis of 2-D gels commercially available, allowing faster and more accurate spot finding than other products. This advanced software links directly to our Protein Warehouse Software to provide for automated protein analysis and identification. Our Investigator Proteomic Software also sends data directly to the Investigator ProPic for automated excision of protein spots from a 2-D gel. Table of Contents Business Protein Warehouse Software Our Protein Warehouse Software collects, organizes and stores all the data produced by each instrument included in the Investigator Proteomic System. This software allows customers to store data in different formats and retrieve and analyze information collected by the various system components, including electric charge, molecular weight, mass spectrometry and other experimental data. The software offers an Internet-enabled user interface and is capable of extracting data from popular public databases like GenBank and SWISS-PROT. Our Contract Research Services We use our GeneTAC Biochip System and Investigator Proteomic System to provide contract research services. Customers may choose to use our contract research services for various reasons, including a desire to outsource gene expression and proteomic research, insufficient capacity to perform all gene expression and proteomic work in their laboratory or lack of sufficient funds to purchase or assemble a biochip or proteomic system. We employ eight scientists with PhD degrees in molecular biology, protein chemistry and related disciplines who provide contract services. We believe that our contract research services improve our market penetration and provide us with insight into our customers needs. Additionally, we generate revenue and strengthen customer relationships by conducting biochip and proteomic training classes. CUSTOMERS Since 1997, we have sold our systems and instrumentation to more than 100 pharmaceutical and biotechnology companies, government agencies, universities and private research institutions. Our five largest customers, in our three principal customer categories, based on 1997-1999 sales were: Market Segment Customers Pharmaceutical Parke-Davis, a Division of Warner-Lambert Company Merck Co., Inc. Monsanto Company Corning Incorporated Novo Nordisk A/S (Denmark) Biotechnology diaDexus, LLC Biogen, Inc. Cogent Neuroscience Inc. Shionogi BioResearch Corp. (Dana-Farber Cancer Institute) Akkadix Corporation Other Research Institutions RIKEN Genome Science Center (Japan) Ludwig Institute for Cancer Research MD Anderson Cancer Center University of Louisville National Institutes of Health MARKETING, SALES AND SUPPORT Marketing We market our products to pharmaceutical and biotechnology companies, government agencies, universities and private research institutions. Our marketing strategy emphasizes our integrated systems approach, sophisticated instrumentation, proprietary consumables and product support. We market our products Table of Contents Business through direct sales calls, advertising, marketing materials, participation in international, national and regional trade shows, and on our Website at www.genomicsolutions.com. We emphasize complete system sales and plan to increasingly target the growing aftermarket for biochips, precast gels, reagents, other consumables, support and contract research services. In December 1999, we entered into a strategic sales and marketing alliance with PerkinElmer, a global leader in analytical instruments and high throughput screening tools for drug discovery. PerkinElmer is responsible for marketing and sales of our products outside of our core markets, which include the United States, the United Kingdom and Japan. PerkinElmer markets our products at its own expense throughout its distribution territory. Under this arrangement, our products continue to be sold under our name and logo but will also have the benefit of the PerkinElmer mark, a widely recognized name in the life sciences instrumentation market. We believe the PerkinElmer relationship will increase our name recognition, market penetration and customer contacts worldwide. Sales Core Markets We consider the United States, Japan and the United Kingdom to be our core markets. Product sales in these markets generated approximately 84% of our revenues during 1999. We maintain company facilities and direct sales forces in these markets. In addition, PerkinElmer provides lead generation and sales assistance in our core markets. We will continue to invest in expanding our sales presence in these markets. Other Markets PerkinElmer, with distribution in over 100 countries and a worldwide sales and support network, has been the exclusive distributor of our products outside of the United States, Japan and the United Kingdom since December 1999. PerkinElmer has already begun to devote significant resources to its sales effort for our products. We believe the PerkinElmer relationship will allow us to accelerate sales outside of our core markets and at a lower cost than establishing our own sales, distributor and support network in these markets. We anticipate that this relationship will allow us to devote more resources to research, new product development and our core market sales. Support We consider product service and support to be a critical component of our long term growth strategy. We believe our existing customers provide opportunities for additional revenue through the purchase of service contracts, product upgrades, training, consumables and additional instruments. Service and support activities are conducted by our in-house and field service personnel in the United States, the United Kingdom and Japan and by PerkinElmer in other markets. RESEARCH AND DEVELOPMENT Research and development is an essential component of our strategy to maintain and strengthen our global position in biochip and proteomic systems. As of December 31, 1999, we had 31 employees working in research and development, 15 of whom hold PhD or other advanced degrees. In 1999, our research and development expenditures were $4.8 million, representing 35% of our total operating expenditures. We anticipate that research and development expenditures will continue to increase in the future. Table of Contents Business Our research and development efforts are divided into the following six areas: robotic and fluid handling systems; applications software; imaging systems; molecular biology; proteomics; and mass spectrometry. Our activities are focused on new technology and product development, including improvements to our existing products and development of new products or applications that capitalize on our expertise. Particular areas of focus include creation of new standard biochips, improvements to existing robotics and software, bioinformatic software for the integration of gene expression and protein data and sensitivity improvements for existing products. COMPETITION While we are a leading provider of integrated biochip and proteomic systems, the markets for our products are competitive and we expect the intensity of competition to increase. Many of our products or systems automate tasks that were historically undertaken manually. While our systems cost significantly more than manual methods, they allow researchers to perform more experiments in a shorter period of time. We expect new competitors to enter the market in those areas where we believe we are the only product or solution provider. Also, many of our existing competitors, alone or in conjunction with their strategic partners, have greater financial, operational, sales, marketing and research and development experience then we do. These competitors and others may have developed products or technologies of which we are unaware or may in the future develop technologies or products that render our products obsolete or non-competitive. We believe that our principal biochip competitors are Affymetrix Inc, Amersham Pharmacia Biotech and Incyte Pharmaceuticals Inc. While we do not believe that any of these companies offer integrated biochip systems for producing, processing, imaging and analyzing biochips, they do manufacture biochips and, in some instances, offer biochip imaging, production and analysis components employing competing technologies. We are not aware of any company developing a complete system directly competitive with the Investigator Proteomic System, although other companies currently offer, or have announced their intention to offer, various components. These companies include Amersham Pharmacia Biotech and Bio-Rad Laboratories. Finally, emerging and embryonic technologies such as capillary electrophoresis and lab-on-a-chip are potentially competitive with some of our proteomic systems components. Many companies develop bioinformatics software. While we develop and license bioinformatics software, it is designed for use with our systems and is not licensed on a stand-alone basis. As a result, we do not consider other bioinformatic software vendors to be our competitors. Our competitors may succeed in producing products that employ superior technologies or processes, obtain patents for these products or market their products more effectively than we market our products. We believe our ability to compete effectively is dependent, in part, on our ability to continue to improve the technologies underlying our products and systems to enable researchers to conduct gene expression and proteomic research with greater throughput and reproducibility at lower cost. MANUFACTURING We currently have four production facilities. Robotic and fluid handling systems manufacturing occurs in our Huntingdon, England facility, imaging systems manufacturing and engineering occurs in our Lansing, Michigan facility, application software and biochip production occurs in our Ann Arbor, Michigan facility, and reagents and consumables production occurs in our Chelmsford, Massachusetts facility. For our instrumentation products, we focus on manufacturing proprietary sub-assemblies, including electronic modules, mechanical fixtures, and optical assemblies, as well as final instrument assembly and Table of Contents Business testing. We contract labor intensive sub-assemblies of a non-proprietary nature to third party suppliers. This strategy minimizes labor overhead and maximizes quality control and space utilization. We either manufacture critical components or obtain them from a limited number of third-party manufacturers with which we have developed strong relationships. For non-critical components, we use multiple redundant third-party suppliers to guard against part shortages and component cost increases. We manage purchasing and inventory using a computerized material resource planning system that is linked via software to our accounting system. INTELLECTUAL PROPERTY To establish and protect our proprietary technologies and products, we rely on a combination of patents, copyrights, trademarks and trade secret laws, as well as confidentiality provisions in our contracts. We currently hold three U.S. patents. Our patents generally relate to robotic, imaging and microfluidic technologies incorporated into our products. In addition, we have applied for two U.S. patents, six USPO provisional patents, one United Kingdom patent and one Patent Cooperation Treaty - PCT patent. These applications may not result in issued patents. Further, issued patents may not provide us with significant protections. Generally, United States patents have a term of 17 years from the date of issue for patents issued from applications filed with the U.S. Patent Office prior to June 8, 1995, and 20 years from the application filing date or earlier claimed priority date in the case of patents issued from applications filed on or after June 8, 1995. Patents in most other countries have a term of 20 years from the date of filing the patent application. Our issued United States Patents will expire between 2007 and 2011. Our success depends to a significant degree upon our ability to develop proprietary product technologies. We intend to continue to file patent applications as we develop new products and technologies. Patents provide a level of protection for our intellectual property. However, the assertion of patent protection involves complex legal and factual determinations and is therefore uncertain. In addition, the laws governing patentability and the scope of patent coverage continue to evolve, particularly in the areas of genomics. As a result, we cannot assure you that patents will issue from any of our patent applications. The scope of any of our issued patents may not be sufficiently broad to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or unenforceable so that our patent rights would not create an effective competitive barrier. Moreover, the laws of foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States and Canada. In light of these factors, our intellectual property positions bear some degree of uncertainty. We also rely in part on trade secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees and consultants also sign agreements requiring that they assign to us their interests in patents and copyrights arising from their work for us. However, it is possible that these agreements may be breached or invalidated and if so, there may not be an adequate corrective remedy available. Despite the measures we have taken to protect our intellectual property, we cannot assure you that third parties will not breach the confidentiality provisions in our contracts or infringe or misappropriate our patents, copyrights, trademarks, trade secrets and other proprietary rights. In addition, we cannot assure you that third parties will not independently discover or invent competing technologies or reverse engineer our trade secrets, or other technology. Therefore, the measures we are taking to protect our proprietary rights may not be adequate. Table of Contents Business We copyright our software, software source code, applications protocols, operator and service manuals and other documents. While most of our technology was developed internally or acquired, we have developed certain technology in collaboration with third parties, including the Sanger Centre and HD Technologies. We licensed the intellectual property relating to our Flexys Robotic Workstation from the Sangre Center on a world-wide, exclusive basis in perpetuity. We own all intellectual property related to the development of our ProTOF mass spectrometer resulting from our collaboration with HD Technologies. Although we are not a party to any legal proceedings, in the future, third parties may file claims asserting that our technologies or products infringe on or misappropriate their intellectual property. We cannot predict whether third parties will assert these claims against us or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against such claims, whether they are with or without merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management s attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business or financial condition. COLLABORATION AND LICENSE AGREEMENTS While most of our technology was acquired or developed internally, we have collaboration or license agreements that cover the following technology: - The technology used to create the Flexys(R)Robotic Workstation was originally developed in the United Kingdom in collaboration with the Sanger Centre. We hold an exclusive worldwide license to use technology and any related improvements created by the Sanger Centre for the Flexys(R) Robotic Workstation. - Under our strategic alliance with PerkinElmer, we have the right to license various PerkinElmer technology, including time resolved florescence technologies which improve the sensitivity and quality of biochip and protein separations images, on a non-exclusive basis on such terms as may be agreed in the future. - HD Technologies, a wholly-owned subsidiary of ThermoQuest Corporation, manufactures components of our ProTOF mass spectrometer and engages in related research and development on our behalf on a contract basis. While we own all rights to the technology created by HD Technologies during the development of our ProTOF mass spectrometer, ThermoQuest has a license to use and distribute such technology for non-competitive uses. GOVERNMENT REGULATION We are not presently subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which we operate. FACILITIES Our principal executive offices are located in 14,500 square feet of leased spaced in Ann Arbor, Michigan. We also lease 11,000 square feet for our imaging system manufacturing and engineering operations in Table of Contents Business Lansing, Michigan, and 5,200 square feet in Chelmsford, Massachusetts for our proteomic contract services and consumables business and proteomic research and development. Our wholly-owned subsidiary in the United Kingdom, Genomic Solutions Ltd., leases approximately 18,000 square feet of space in Huntingdon, England for robot and fluid handing systems development and manufacture as well as marketing, sales, and support for the United Kingdom. Additionally, our wholly-owned subsidiary in Japan, Genomic Solutions KK, leases approximately 3,500 square feet of space in Tokyo for domestic marketing, sales, and technical support. EMPLOYEES As of December 31, 1999, we had 108 full-time employees, 29 of whom hold PhD or other advanced degrees. Approximately 31 employees are engaged in research and development, 31 in marketing, sales and support, 29 in manufacturing and 17 in intellectual property, finance and other administrative functions. We believe that we maintain good relations with our employees. SCIENTIFIC ADVISORS We have established a core group of scientific advisors made up of leading scholars in the fields of genomics and proteomics. Our scientific advisors consult with us on matters relating to the development of our products described elsewhere in this prospectus. Our scientific advisors are reimbursed for the reasonable expenses of attending meetings. We have granted five scientific advisors an option to purchase 5,000 shares of our callable common stock. Our scientific advisors are as follows: Advisor Institution Rolf Apweiler, PhD European Bioinformatics Institute, Hinxton, England Keith Ashman, PhD European Molecular Biology Lab, Heidelberg, Germany Michael Liebman, PhD Roche Bioscience, Palo Alto, California Ellen Pur , PhD Ludwig Institute for Cancer Research, New York, New York James Sikela, PhD University of Colorado Health Sciences Center, Department of Pharmacology and Human Medical Genetics Program Richard Wooster, PhD Haddow Laboratories, Institute for Cancer Research, Sutton, England LEGAL PROCEEDINGS We are not engaged in any legal proceedings. We have received a letter from Molecular Dynamics, Inc. threatening to file a complaint against us in California as a result of our failure to purchase shares of capital stock of Meridian Instruments, Inc. owned by Molecular Dynamics. The demand seeks payment of $732,175, increased by $8,333 each month until payment is made. In 1998, we purchased assets from Insight Biomedical Imaging, which in 1997 acquired assets of Meridian Instruments through a lien foreclosure. Molecular Dynamics claims to have had the contractual right to require Meridian Instruments to purchase the shares of Meridian Instruments owned by Molecular Dynamics. Molecular Dynamics has asserted, among other things, that we assumed the purchase obligation, that we are a legal successor of Meridian Instruments, and that there was a fraudulent transfer of Meridian Instruments assets. We do not believe we have any liability to Molecular Dynamics and we are attempting to resolve the matter. Table of Contents Management EXECUTIVE OFFICERS AND DIRECTORS Set forth below is the name, age, position and a brief account of the business experience of each of our executive officers and directors. Name Age Position Jeffrey S. Williams 34 President, Chief Executive Officer and Director Michael P. Kurek, PhD 52 Executive Vice President of Sales and Service Steven J. Richvalsky 38 Chief Financial Officer, Executive Vice President, Secretary and Treasurer Andrew A. Jakimcius 40 Executive Vice President of Operations Christine M. Ethier 37 Vice President of Proteomics Shannon M. Richey 34 Vice President of Genomics Robert G. Shepler 43 Chairman of the Board P. Nicholas King 60 Director J. Matthew Mackowski 45 Director Daniel J. Mitchell 43 Director Damion E. Wicker, M.D. 39 Director Jeffrey S. Williams Mr. Williams joined us in March 1997 as our President, Chief Executive Officer and a director. From 1995 until joining us, Mr. Williams served as the Executive Vice President and Chief Operating Officer of International Remote Imaging Systems, a publicly-traded company specializing in digital imaging products for the clinical diagnostics and research marketplaces. Mr. Williams prior employment included various positions at Boehringer Mannheim GmbH, a global healthcare company, most recently as Vice President and Global Business Manager. He also served in various sales and marketing capacities with the Organon Pharmaceutical division of Akzo Nobel and the University of Michigan s Intellectual Properties Office. Mr. Williams received a BS in Biology from Alma College and an MBA from the University of Michigan. Michael P. Kurek, PhD Dr. Kurek has served as Executive Vice President of Sales and Service since joining us in December 1997. From January 1996 until joining us, Dr. Kurek was Vice President of Business Development for Gene Codes Corporation, a bioinformatics company, where he was responsible for global sales, marketing, and business development efforts. From January 1990 to December 1996, he was Vice President of Business Development for the Michigan Center for High Technology, where he managed a business incubator and provided management assistance to over 50 start-up companies. Previously, Dr. Kurek served as Director of Marketing and Sales for BioPolymers, Inc., a start-up medical device company. Prior to BioPolymers, he was Director of Business Development for Repligen, a biotechnology company and Product Manager, Life Sciences for the Millipore Corporation. Prior to joining Millipore, Dr. Kurek had conducted biomedical research at Case Western Reserve University, the Boston University School of Medicine, and the Boston Table of Contents Management Biomedical Research Institute. Dr. Kurek received a BS in Biology from Boston College, a PhD in Genetics from Florida State University and an MBA from Boston University. Steven J. Richvalsky Mr. Richvalsky joined us as our Chief Financial Officer, Executive Vice President, Secretary and Treasurer in October 1997. From August 1995 until joining us, Mr. Richvalsky served as Senior Manager of Corporate Financial Analysis, Planning and Reporting at Comshare, Inc., a software company. Prior to Comshare, Mr. Richvalsky held various accounting and finance positions with US Robotics, Inc., a modem and data communications company, including Controller for its modem division and financial manager of its international operations. Prior to US Robotics, he was a Senior International Accountant with Galileo International, Inc. Mr. Richvalsky began his career with Ernst Young as an Audit Manager in their Entrepreneurial Services Group. Mr. Richvalsky received a BS in Business Administration from John Carroll University and is a Certified Public Accountant. Andrew A. Jakimcius Mr. Jakimcius has served as our Executive Vice President of Operations since April 1998. He joined the Bio Image Products Group of Millipore Corporation in 1991. Prior to joining us, Mr. Jakimcius held various management, engineering and software development positions at imaging and medical-related companies, including Synthetic Vision Systems, Automated Custom Systems, Machine Vision International, and Medtronic. Mr. Jakimcius received a BS in Engineering and a MS in Bioengineering from the University of Michigan and an MBA from Eastern Michigan University. Christine M. Ethier Ms. Ethier has served as our Vice President of Proteomics since November 1999. She joined our predecessor, B.I. Systems Corporation, in 1994 as a Field Marketing Manager and has held positions in product management, field marketing and technical support with us. Prior to joining us, Ms. Ethier held various sales positions with Millipore Corporation in its Analytical and Chromatography Divisions and Boehringer Mannheim Corporation in its Biochemicals Division. Ms. Ethier received a BS in Biology from Western Michigan University. Shannon M. Richey Ms. Richey has served as our Vice President of Genomics since November 1999. She joined us in 1997 as a product manager and in 1998 was given product management responsibility for the GeneTAC Biochip product line. Prior to joining us, Ms. Richey worked from 1993 to 1997 as a product manager for Baxter/ Hyland-Immuno where she managed its anti-inhibitor hemophilia line. From 1990 to 1993, Ms. Richey worked for Schering Plough, most recently as a marketing manager. Ms. Richey received a BA degree from Wayne State University and an MBA from Cornell University. Robert G. Shepler Mr. Shepler has been chairman of our board since 1994. Mr. Shepler has been a partner of Mackowski Shepler, a private equity investment firm, since 1992. Prior to Mackowski Shepler, Mr. Shepler served as a senior officer with the investment banking division of Merrill Lynch Co. He is currently a director of Table of Contents Management several other private companies. He received a BA from Duke University and an MBA from New York University. P. Nicholas King Mr. King has served as a director since January 1998. Mr. King is the founder and Managing Director of King Consultancy, a firm specializing in executive-level general management consulting since 1985. He was also Chairman of PBA Technology until it was acquired by us in December 1997. Prior to forming King Consultancy, Mr. King served in various executive roles with The Tek Group of Cambridge and Cambridge Consultants, Ltd. Mr. King s early career was spent with Staflex International Ltd., British European Air-ways and Rolls Royce Ltd. He received a Higher National Certificate in Mechanical Engineering from Derby District College of Technology and a BSc in Mechanical Engineering from the Imperial College of London University. J. Matthew Mackowski Mr. Mackowski has served as a director since 1994. Mr. Mackowski has been a partner of Mackowski Shepler since 1992. Prior to forming Mackowski Shepler, Mr. Mackowski served as a partner of Robertson, Stephens Co. and was an officer of Citicorp Venture Capital, Ltd. Mr. Mackowski is a director of Health Systems Design Corp. and several private companies. He received a BA from Duke University and an MBA from the Wharton School. Daniel J. Mitchell Mr. Mitchell has served as a director since 1997. Mr. Mitchell is currently a partner of Capital Health Venture Partners and Sequel Venture Partners. Prior to co-founding Capital Health Venture Partners in 1985, he was with the Institutional Venture Capital Fund at the First National Bank of Chicago. Mr. Mitchell is a director of Xcare.Net, Simione Central Holdings, Inc. and several private companies. He received a BS from the University of Illinois and an MBA from the University of California-Berkeley. Damion E. Wicker, M.D. Dr. Wicker has served as a director since January 1998. Dr. Wicker is a General Partner at Chase Capital Partners. Prior to joining Chase Capital Partners in April 1993, Dr. Wicker was President of Adams Scientific and held positions with MBW Venture Partners and Alexon, Inc. Dr. Wicker was also a Commonwealth Fund Medical Fellow for the National Institutes of Health. In addition to Genomic Solutions, he currently is a director of Landec, V. I. Technologies and several private companies. Dr. Wicker received a BS from MIT, an M.D. from Johns Hopkins University, and an MBA from the Wharton School. CLASSES OF THE BOARD Our board currently has six members. Under our certificate of incorporation, our board is divided into three classes of directors serving staggered three-year overlapping terms, with one class of directors elected at each annual meeting of stockholders. Our certificate also provides that in the event we give notice of the exercise of our right to redeem our callable common stock, the term of each director will terminate. Table of Contents Management BOARD COMMITTEES The audit committee of the board of directors was established in January 1998 and reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the selection of our auditors, the scope of the annual audits, the fees to be paid to the auditors, the performance of our independent auditors and our accounting practices. The members of the audit committee are Messrs. Mackowski and Shepler and Dr. Wicker. The compensation committee of the board of directors was established in January 1998 and recommends, reviews and oversees the salaries, benefits and stock plans for our employees, consultants, directors and other individuals compensated by us. The compensation committee also administers our compensation plans. The members of the compensation committee are Messrs. King, Mackowski and Mitchell. DIRECTOR COMPENSATION We do not currently pay directors cash compensation; however, they are reimbursed for the reasonable expenses of attending the meetings of the board of directors or committees. Under our 1998 Non-Employee Director and Consultant Stock Option Plan, each individual who was a non-employee member of the board of directors at the time the plan was adopted and each individual who becomes a non-employee member of the board automatically receives an option to purchase 10,000 shares of our callable common stock on the date the individual joins the board of directors. In addition, directors may receive additional options or other compensation at the board s discretion. For a further description of our benefit plans, please see Employee benefit plans. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our compensation committee currently consists of Messrs. King, Mackowski and Mitchell. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past. None of the members of the compensation committee has been an officer or employee of ours at any time. Prior to the formation of the compensation committee in January 1998, the board of directors as a whole made decisions relating to compensation of our executive officers. EMPLOYMENT AND SEVERANCE ARRANGEMENTS All of our current employees have entered into agreements with us which contain restrictions and covenants. These provisions include covenants relating to the protection of our confidential information, the assignment of inventions and restrictions on soliciting our clients, employees or independent contractors. Currently, the only executive officer with a formal employment agreement with us is Mr. Williams. With the exception of our employees in the United Kingdom, none of our employees is employed for a specified term, and each employee s employment with us is subject to termination at any time by either party for any reason, with or without cause. Mr. Williams employment agreement is for a term of three years beginning January 1, 2000 and provides for a salary of $225,000 per year, subject to periodic increases by our board of directors at its discretion. Mr. Williams is eligible to receive a bonus each year as determined by our board. In connection with his employment with us, we have agreed to grant Mr. Williams, upon the completion of this offering, options to purchase 150,000 shares of our callable common stock at a price per share of 90% of the offering price. Mr. Williams is entitled under his employment agreement to receive a liquidity bonus of $150,000. This Table of Contents Management offering, when complete, serves as a qualifying event in terms of Mr. Williams receiving a bonus. If Mr. Williams employment is terminated without cause or there is a change of control, he will be entitled to receive a severance payment equal to the greater of (i) the salary remaining to be paid over the life of the agreement, and (ii) two times his annual salary. In January 2000, we entered into a termination agreement with Dr. Kevin Auton. We entered into an employment agreement with Dr. Auton in December 1998. Dr. Auton held the position of managing director of Genomic Solutions Ltd. He received a salary of 60,000 per year, subject to periodic increases by the Genomic Solutions Ltd. board, and was also eligible for a bonus. Under the terms of the termination agreement (a) Dr. Auton confirmed that he voluntarily resigned effective May 14, 2000, (b) we agreed to pay Dr. Auton s salary through May 14, 2000, unless Dr. Auton finds other employment, and (c) Dr. Auton released all claims he may have had against us arising from his employment. Table of Contents Management EXECUTIVE COMPENSATION Cash and Other Compensation The following table shows all compensation received during the year ended December 31, 1999 by our chief executive officer and our other four executive officers whose salary and bonus exceeded $100,000 in 1999 for services rendered in all capacities to us during 1999. Other compensation for Mr. Williams includes approximately $7,400 for use of a company automobile. Long Term Compensation Awards Securities Annual Compensation Other annual underlying Name and principal position Salary Bonus compensation options Jeffrey S. Williams $200,000 $104,000 $7,400 President and Chief Executive Officer Michael P. Kurek, PhD $103,000 $53,000 Executive Vice President of Sales and Service Steven J. Richvalsky $100,000 $53,000 Chief Financial Officer, Executive Vice President, Secretary and Treasurer Andrew A. Jakimcius $93,500 $40,000 Executive Vice President of Operations Kevin Auton, PhD(1) 60,000 (2) 9,800 Managing Director, Genomic Solutions Ltd. (1) Dr. Auton resigned November 15, 1999, effective as of May 14, 2000. (2) As of December 31, 1999, the British pound was equivalent to $1.62, as published by the Wall Street Journal. Options We have not granted any stock options or stock appreciation rights to the executive officers listed in the summary compensation table above during the fiscal year ended December 31, 1999. In the year ended December 31, 1999, we granted options to purchase an aggregate of 310,750 shares of callable common stock to various officers, employees, directors and consultants. The following table shows information at December 31, 1999 concerning the number of shares of callable common stock acquired upon the exercise of stock options and the number and value of unexercised options held by each of the executive officers listed in the summary compensation table above. Options shown as exercisable in the table below are immediately exercisable. There was no public trading market for the callable common stock as of December 31, 1999. Accordingly, the value of unexercised in-the-money options listed below has been calculated on the basis of the assumed initial public offering price of $11 per share, less the applicable exercise price per share, multiplied by the number of shares underlying such options. Table of Contents Management Aggregated year-end option exercises and option values are as follows: Number of securities underlying unexercised Shares options at Acquired Value December 31, 1999 Name on Exercise Realized(1) Exercisable Unexercisable Jeffrey S. Williams 380,000 125,000 Michael P. Kurek, PhD 15,200 60,800 Steven J. Richvalsky 18,450 73,800 Andrew A. Jakimcius 14,933 $28,341 8,400 53,334 Kevin Auton, PhD 15,000 22,500 [Additional columns below] [Continued from above table, first column(s) repeated] Value of unexercised in-the-money options at December 31, 1999(2) Name Exercisable Unexercisable Jeffrey S. Williams $4,147,400 $1,342,250 Michael P. Kurek, PhD 161,576 646,304 Steven J. Richvalsky 192,456 769,824 Andrew A. Jakimcius 75,600 516,173 Kevin Auton, PhD 151,300 226,950 (1) The value realized upon exercise of options represents the difference between the deemed value of the callable common stock on the date of exercise used by us for accounting purposes and the exercise price of the options. (2) The value of unexercised in-the-money options has been calculated on the basis of the assumed initial public offering price of $11.00 per share, less the applicable exercise price per share, multiplied by the number of shares underlying such options. EMPLOYEE BENEFIT PLANS Since 1994, we have established four plans under which employees, officers, non-employee directors and consultants may receive callable common stock through incentive stock options, non-qualified stock options, restricted stock and other stock awards. These plans are the 1994 Omnibus Equity Incentive Plan, the 1998 Employee Stock Option Plan, the 1998 Non-employee Director and Consultant Stock Option Plan and the 2000 Employee Stock Purchase Plan. In addition, we have a 401(k) defined contribution plan. 1994 B.I. Systems Corporation Omnibus Equity Incentive Plan In July 1994, we adopted our 1994 Omnibus Equity Incentive Plan. Our board subsequently amended the 1994 Plan in March 2000 and the stockholders approved this amendment. The 1994 Plan provides for the grant of stock awards, including: - incentive stock options, as defined by Section 422 of the Internal Revenue Code of 1986, as amended, that may be granted solely to employees (including officers); and - non-qualified stock options (stock options other than incentive stock options), restricted stock awards, stock appreciation rights rewards and performance units and performance shares that may be granted to employees (including officers). The maximum number of options, restricted stock awards, stock appreciation rights awards, performance units and performance shares that may be granted under the 1994 plan is 1,590,000. Stock Options Stock options were granted under stock option agreements. The exercise price for an incentive stock option could not be less than 100% of the fair market value of the callable common stock on the date of grant. The exercise price for a nonqualified stock option could not be less than 50% of the fair market value of the callable common stock on the date of grant. Options granted under the 1994 plan generally became exercisable at a rate of 33% per year over three years from the date of grant. Under the terms of the applicable stock option agreements, all unvested options will become immediately exercisable upon completion of this offering. Table of Contents Management In general, the term of stock options granted under the 1994 plan may not exceed ten years. Unless the terms of an optionee s stock option agreement provide for earlier termination, in the event an optionee s service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionee (or his beneficiary) may exercise any vested options up to 12 months after the date the service relationship ends. If an optionee s relationship with us, or any affiliate of ours, ceases for any reason other than disability or death, the optionee may exercise any vested options up to three months from cessation of service, unless the terms of the stock option agreement provide otherwise. Generally, callable common stock under options issued under the 1994 plan can be purchased for cash. The plan administrator may permit payment to be made by callable common stock previously owned by the optionee, a combination of cash and callable common stock or the price from any other legal consideration approved by the administrator. Generally, an optionee may not transfer a stock option other than by will or the laws of descent or distribution. However, an optionee may designate a beneficiary who may exercise the option following the optionee s death. If PerkinElmer causes us to redeem our callable common stock and fails to timely notify us that it will either assume and substitute the options for PerkinElmer options, or notifies us that it will not assume and substitute PerkinElmer options, each vested and outstanding option will be deemed exercised in full. All callable common stock issued under an option will be redeemed by us at the same time all other shares of callable common stock are redeemed. The option holder shall be entitled to receive the redemption price per share net of any exercise price and less any taxes withheld. As of March 31, 2000, options to purchase 243,205 shares of our callable common stock were outstanding under our 1994 plan. No restricted stock awards, stock appreciation rights awards, performance units or performance shares are outstanding under the 1994 plan. We have no intention of issuing any additional options, stock awards, stock appreciation rights awards, performance units or performance shares under the 1994 plan. 1998 Employee Stock Option Plan In January 1998, we adopted our 1998 Employee Stock Option Plan. Our board subsequently amended the 1998 plan in May 1998 and February 2000 and the stockholders approved these amendments. The plan will remain in effect until all shares authorized under the plan have been issued, unless it is terminated earlier by our board. Our 1998 plan provides for the grant of stock awards, including: - incentive stock options, as defined by Section 422 of the Code that may be granted solely to employees (including officers); and - nonqualified stock options (stock options other than incentive stock options), restricted stock awards and stock appreciation rights rewards that may be granted to employees (including officers). Stock Options Stock options are granted under stock option agreements. The exercise price for an incentive stock option cannot be less than 100% of the fair market value of the callable common stock on the date of grant. The exercise price for a nonqualified stock option cannot be less than 90% of the fair market value of the Table of Contents Management callable common stock on the date of grant. Options granted under the 1998 plan vest at the rate specified in the option agreement. In general, the term of stock options granted under the 1998 plan may not exceed ten years. Unless the terms of an optionee s stock option agreement provide for earlier termination, in the event an optionee s service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionee (or his beneficiary) may exercise any vested options up to 12 months after the date the service relationship ends. If an optionee s relationship with us, or any affiliate of ours, ceases for any reason other than disability or death, the optionee may exercise any vested options up to ninety days from cessation of service, unless the terms of the stock option agreement provide otherwise. Generally, our callable common stock issued under the 1998 plan can be purchased for cash. The plan administrator may permit payment to be made by callable common stock previously owned by the optionee, a combination of cash and callable common stock or the price from any other legal consideration approved by the administrator. Generally, an optionee may not transfer a stock option other than by will or the laws of descent or distribution. However, an optionee may designate a beneficiary who may exercise the option following the optionee s death. Tax Limitations on Stock Option Grants Under current tax laws, incentive stock options may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our callable common stock with respect to incentive stock option plans granted to a single employee may not exceed $100,000 per year. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total voting power, unless the following conditions are satisfied: - the option exercise price must be at least 110% of the fair market value of the stock subject to the option on the date of grant; and - the term of any incentive stock option award must not exceed five years from the date of grant. Restricted Stock Awards Restricted stock awards are granted subject to restricted stock award agreements. Restricted share rights entitle the holder to receive callable common stock which may not be free of all restrictions on transfer prior to the expiration of three years from the date of grant. To date, we have not granted any restricted stock awards. Stock Appreciation Rights Awards Stock appreciation rights are granted subject to stock appreciation rights agreements and provide the holder with the right to receive a payment from us of an amount equal to the difference between the exercise price and the market value on the day the right is exercised. No stock appreciation right may be exercised prior to six months from the date of grant. To date, we have not granted any stock appreciation rights. Table of Contents Management Change of Control The plan administrator has the discretion to provide that any unexpired award will be fully exercisable upon specified changes of control as provided under the plan. Authorized Shares Currently, options to acquire an aggregate of 2,000,000 shares of common stock are authorized for issuance under the 1998 plan. Upon completion of this offering, the number of shares which may be issued under our 1998 plan will be limited to 10% of the total number of shares of callable common stock and common stock issued and outstanding from time to time and the number of shares of capital stock underlying incentive stock options issued under our 1998 plan is limited to 1,242,600 shares. If the callable common stock is redeemed or converted into common stock after PerkinElmer s redemption right expires, the options granted under the 1998 plan will automatically convert into options to acquire shares of common stock and the shares which may be issued will be based on the number of shares of common stock issued and outstanding from time to time. As of March 31, 2000, options to purchase 938,300 shares of our common stock were held by all participants under the 1998 plan. Upon completion of this offering, these options will automatically convert into options to acquire shares of our callable common stock. To date we have not granted any restricted stock awards or stock appreciation rights. Shares subject to awards that have expired or otherwise terminated without having been exercised in full again become available for the grant of awards under the 1998 plan. Shares issued under the 1998 plan may be previously unissued shares or reacquired shares of callable common stock or common stock, as the case may be. Effect of Redemption of Callable Common Stock If PerkinElmer causes us to redeem our callable common stock and fails to timely notify us that it will either assume or substitute the options for PerkinElmer options, or notifies us that it will not assume and substitute PerkinElmer options, each vested and outstanding option will be deemed exercised in full. All callable common stock issued under an option will be redeemed by us at the same time all other shares of callable common stock are redeemed. The option holder shall be entitled to receive the redemption price per share net of any exercise price and less any taxes withheld. Plan Administration The plan may be administered by our board or a committee appointed by the board. Our board of directors has delegated authority to our compensation committee to administer the plan. Subject to the terms of the plan, our compensation committee determines recipients, the numbers and types of stock awards to be granted, and the terms and conditions of the stock awards including the period of their exercisability and vesting. The administrator of the plan may, in its sole discretion, include additional provisions in any option or award granted or made under the plan that are not inconsistent with the plan or applicable law. In addition, the administrator, in its sole discretion, may accelerate or extend the date or dates on which all or any particular option or options granted under the plan may be exercised. 1998 Non-Employee Director and Consultant Stock Option Plan Our 1998 Non-Employee Director and Consultant Stock Option Plan was adopted by our board of directors in January 1998 and approved by our stockholders in January 1999. Our board subsequently amended this plan in February 2000 and the stockholders approved this amendment. Our board of Table of Contents Management directors administers the director plan, unless it delegates administration to a committee. The maximum number of shares of common stock that may be issued following exercise of options granted under the director plan is currently 300,000 and upon completion of this offering will be 750,000 shares of callable common stock. If our callable common stock is redeemed or converted into common stock after PerkinElmer s redemption right expires, the options granted under the director plan will automatically convert to options to acquire shares of common stock and the number of shares that may be issued following exercise of options will be limited to 750,000 shares of common stock. The plan will remain in effect until all shares authorized under the plan have been issued, unless it is terminated earlier by our board. Initial Grants Under the terms of the director plan, each person serving as a director who is not an employee is automatically granted an option to purchase 10,000 shares of callable common stock effective on the date the director plan was approved by the board if the director was a member at that time, or the date the director first becomes a member of our board. Discretionary Grants Non-employee directors and consultants are eligible to receive options to purchase callable common stock at the discretion of the board. Vesting and Exercise Terms Options under the director plan vest one year after the date of grant. The exercise price of options granted under the plan must equal the fair market value of the callable common stock on the date of grant. Options expire if not exercised within ten years from the date of grant. Generally, options granted under the director plan may only be transferred by will, the laws of descent and distribution or for specified estate planning purposes. Effect of Redemption of Callable Common Stock If PerkinElmer causes us to redeem our callable common stock and fails to timely notify us that it will either assume or substitute the options for PerkinElmer options, or notifies us that it will not assume and substitute PerkinElmer options, each vested and outstanding option will be deemed exercised in full. All callable common stock issued under an option will be redeemed by us at the same time all other shares of callable common stock are redeemed. The option holder shall be entitled to receive the redemption price per share net of any exercise price and less any taxes withheld. Change of Control The plan administrator has the discretion to provide that any unexpired award will be fully exercisable upon specified changes of control as provided under the plan. 2000 Employee Stock Purchase Plan In February 2000, we adopted our 2000 Employee Stock Purchase Plan, authorizing the issuance of callable common stock through purchase rights granted to our employees. The plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. As of the date hereof, no Table of Contents Management shares of callable common stock have been issued or purchased under the plan. The terms of the plan are set forth in the plan document and each offering under the plan. The plan provides a means by which employees may purchase our callable common stock through payroll deductions. The plan is implemented by offerings of rights to eligible employees. Generally, all our employees may participate in the plan and may authorize payroll deductions of up to 10% of their earnings for the purchase of callable common stock under the plan. Under the plan, we may specify offerings with a duration of not more than six months. The first offering will begin on the effective date of this offering and be approximately two and one-half months in duration. Subsequent offering periods will begin on each July 1st and January 1st and continue for a duration of six months. Purchases will occur each December 31st and June 30th. Unless otherwise determined by our board of directors, callable common stock is purchased for accounts of employees participating in the purchase plan at a price per share equal to the lower of: - 85% of the fair market value of a share of our callable common stock on the relevant January 1st or July 1st (except for the initial offering); or - 85% of the fair market value of a share of our callable common stock on the following June 30th or December 31st. On the first day of an offering period, we will grant to each eligible employee who has elected to participate in the purchase plan an option to purchase shares of callable common stock as follows: the employee may authorize an amount (a whole percentage from 1% to 10% of the employee s regular pay) to be deducted by us from his or her pay during the offering period. On the last day of the offering period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. For this purpose, an employee s regular pay includes only straight time earnings. If an employee is not a participant on the last day of the offering period, the employee generally is not entitled to exercise any option, and the amount of the employee s accumulated payroll deductions will be refunded. An employee s rights under the purchase plan terminate upon voluntary withdrawal from the purchase plan at any time, or generally when the employee ceases employment for any reason. However, upon termination of employment because of death, disability or retirement, the employee or the employee s beneficiary has specified rights to elect to exercise the option to purchase these shares as the payroll deductions in the participant s account will allow on the date of termination of employment. Limitations Eligible employees may be granted rights under the plan only if the rights, together with any other rights granted under any other employee stock purchase plans, do not permit the employee to purchase our callable common stock at a rate which exceeds $25,000 of the fair market value of this stock for each calendar year in which these rights are outstanding. Available Shares The plan reserves a total of 1,000,000 shares of callable common stock for use under the plan. If our callable common stock is redeemed or converted into common stock after PerkinElmer s redemption right expires, the rights granted under the plan will automatically convert to rights to purchase common stock and the shares authorized under the plan will be shares of common stock. The shares reserved under the plan may be authorized but unissued shares or shares which have been reacquired by us. Table of Contents Management Effect of Redemption of Callable Common Stock If PerkinElmer causes us to redeem our callable common stock, and if PerkinElmer notifies us that it will not assume the 2000 plan and substitute the options for PerkinElmer options or if PerkinElmer fails to timely notify us that it will assume and substitute PerkinElmer options, the purchase period of each option then in effect shall terminate, with the offering termination date being the date immediately prior to the redemption of the callable common stock. If the callable common stock is redeemed, the employee shall receive the redemption price per share less any taxes withheld. Administration The compensation committee of the board of directors administers the plan. 401(k) Plan We have a tax qualified employee savings plan which is available to all of our employees who are at least 21 years of age. Eligible employees may defer up to 15% of their earnings as a salary deferral contribution to the plan, subject to the Internal Revenue Service s annual contribution and compensation limits. Our 401(k) plan is intended to qualify under Section 401 of the Code so that contributions by employees and by us to our 401(k) plan, and income earned on plan contributions are not taxable to employees until withdrawn or distributed from the plan, and so that contributions, including employee salary deferral contributions, will be deductible by us when made. Table of Contents Relationship with PerkinElmer On December 14, 1999, we entered into an investment agreement and a separate sales, marketing and distribution agreement with PerkinElmer. To permit PerkinElmer to notify and train its international distribution personnel, the distribution activities under the distribution agreement became active on January 1, 2000. The investment agreement became effective on January 26, 2000, upon obtaining the requisite approval of at least 85% of our equity holders. PerkinElmer, formerly EG G, Inc., is a global leader in analytical instruments and a leading provider of high throughput screening tools for drug discovery with marketing, sales and distribution capabilities in over 100 countries. PerkinElmer is listed and traded on the New York Stock Exchange under the symbol PKI and is a component of the S P 500 Index. We believe that this relationship with PerkinElmer will help us meet our business objectives and therefore be beneficial to our shareholders. We granted PerkinElmer the right to cause us to redeem our stock pursuant to negotiations held in connection with the transaction. Pursuant to the investment agreement, PerkinElmer purchased 1,269,841 shares of our series P preferred stock at $6.30 per share. PerkinElmer also has an option to acquire additional shares of our callable common stock from us to increase its ownership interest to 19.9% of our outstanding capital stock, on a fully diluted basis. The pricing terms of this option are identical to the redemption price of the callable common stock described below. As part of the transaction, PerkinElmer entered into purchase agreements with holders of more than 95% of our then outstanding capital stock, options and warrants, which provide PerkinElmer with the option to purchase all of our equity securities held by these holders for a period of two years. The beginning date of this option period is extended as described below. We have effected a reclassification so that upon completion of this offering, each outstanding share of our capital stock, other than shares of capital stock held by PerkinElmer, will be converted to callable common stock and each right to receive capital stock will be converted to the callable right to receive callable common stock. Upon completion of this offering, the purchase agreements entered into between PerkinElmer and our equity holders will terminate and PerkinElmer will have the right to cause us to redeem our callable securities for a period of two years after the date PerkinElmer first can exercise this right. We designed the callable common stock to facilitate and preserve PerkinElmer s right to acquire our equity securities in a self-effectuating manner after this offering. At the time this offering is completed, we will have only two classes of capital stock outstanding, callable common stock and common stock. PerkinElmer will be the sole shareholder of common stock and all other shareholders will hold callable common stock. If PerkinElmer exercises its right to cause us to redeem our callable common stock, all outstanding shares of callable common stock will be redeemed, leaving PerkinElmer as our sole shareholder. PerkinElmer may first exercise its 19.9% option or call right on the earlier of 181 days following completion of this offering or 270 days after January 27, 2000. PerkinElmer can cause us to exercise the call right by notifying us and funding the redemption price through a cash capital contribution. The redemption price will be the greater of: - 120% of the trailing 30 trading day average closing price of our callable common stock ending on the day before PerkinElmer notifies us to exercise the right; - 120% of the last reported sales price per share on the trading day before PerkinElmer notifies us to exercise the right; and - the following price per share based on the number of days that have elapsed after the date PerkinElmer first can exercise its right to cause us to redeem our callable common stock (i) $6.75 for one through 182 days, (ii) $7.00 for 183 through 365 days, (iii) $7.50 for 366 through 548 days, and (iv) $8.00 for 549 through 730 days. Alternatively, the purchase price for our callable common stock paid by PerkinElmer could equal the price of any third-party offer received by us and which our board of directors is prepared to accept, whether higher or lower than the prices described above. PerkinElmer is prohibited from exercising its right until the earlier of 181 days following completion of this offering or 270 days after January 27, 2000. Table of Contents Relationship with PerkinElmer As part of the PerkinElmer transaction, we consolidated and reconciled rights of our preferred stockholders and warrantholders together with those rights granted to PerkinElmer in a restated stockholders agreement. We also amended our certificate of incorporation to authorize additional shares of preferred stock, designate a new series of preferred stock and to provide that the term of each member of our board will terminate if we redeem our callable common stock. The rights granted to PerkinElmer under the restated stockholders agreement, except for registration rights, will terminate upon completion of this offering. Pursuant to the sales, marketing and distribution agreement, we have granted to PerkinElmer the exclusive right and responsibility to engage in sales, marketing, distribution and field service activities with respect to our products and services in markets other than the United States, the United Kingdom and Japan. To maintain exclusive distribution rights, PerkinElmer must achieve minimum sales volumes in these markets. PerkinElmer provides lead finding and sales support for us in the United States, the United Kingdom and Japan and provides marketing, sales, field service and distribution for our products in all other markets. In addition, while all of our products will continue to be sold under our name and logo, which will be the predominant branding element, our products will also display the PerkinElmer brand name. The sales, marketing and distribution agreement is for an initial period of two years with automatic two-year renewals unless terminated by either party. Related Party Transactions SALES OF SECURITIES From January 1, 1997 through March 31, 2000, the following executive officers, directors and holders of more than 5% of our voting securities purchased more than $60,000 of our securities in the amounts and as of the dates shown below. Common(1) Preferred Stock Purchaser Stock Series B(2) Series C(3) Series D(4) Series P(5) Robert G. Shepler 87,272 (8) 180,130 (9) 15,285 4,000 J. Matthew Mackowski 101,516 (11) 526,336 (12) 142,857 10,000 Chase Venture Capital Associates, L.P.(14) 28,880 (15) 3,371,428 987,488 American Healthcare Fund II(17) 177,352 (18) 400,353 (19) 342,857 25,000 PerkinElmer, Inc. 1,269,841 Lawrence Kent 835 (21) 300,000 (22) Jeffrey S. Williams 1,075,091 (24) Price Per Share(26) $0.07-$5.00 $1.00 $1.75 $6.00 $6.30 Date(s) of Purchase 4/97-3/00 5/97 12/97 5/98 1/00 [Additional columns below] [Continued from above table, first column(s) repeated] Purchaser Notes(6) Warrants(7) Operating expenses: Selling, general and administrative 2,198 6,372 8,652 1,883 2,620 Research and development 942 3,354 4,830 1,160 1,125 Acquisition related and other unusual charges 1,578 340 Operating expenses: Selling, general and administrative 2,168 2,278 2,198 6,372 8,652 1,883 2,620 Research and development 804 864 942 3,354 4,830 1,160 1,125 Acquisition related and other unusual charges 1,578 340 Robert G. Shepler $15,000 2,418 (10) J. Matthew Mackowski $375,681 63,982 (13) Chase Venture Capital Associates, L.P.(14) $3,808,495 629,414 (16) American Healthcare Fund II(17) $550,000 86,339 (20) PerkinElmer, Inc. Lawrence Kent $175,680 36,316 (23) Jeffrey S. Williams $19,000 3,928 (25) Price Per Share(26) $0.01 Date(s) of Purchase 4/99 10/99 4/99 10/99 (1) The common stock in the table includes common stock issued upon the exercise of stock options, common stock issued upon conversion of the series A preferred stock, common stock issued as part of the reverse stock split in April 1997 and common stock issued in lieu of interest on the April and October 1999 subordinated notes. (2) We issued 1,267,711 shares of Series B preferred stock in May 1997 for an aggregate price of $1,267,711. In May 1997, we also issued 413,169 shares of Series B preferred stock and 200,986 shares of common stock in exchange for notes payable and bridge financing obtained during 1997 totaling $413,169. Each share of Series B preferred stock is convertible into 3.03 shares of callable common stock. (3) We issued 4,070,339 shares of the Series C preferred stock in December 1997 for an aggregate price of $7,123,096. Each share of Series C preferred stock is convertible into one share of callable common stock. Table of Contents Related Party Transactions (4) We issued 1,100,000 shares of Series D preferred stock in May 1998 for an aggregate price of $6.6 million. Each share of Series D preferred stock is convertible into one share of callable common stock. (5) We issued 1,269,841 shares of Series P preferred stock to PerkinElmer in January 2000 for an aggregate price of $8.0 million. Each share of Series P preferred stock is convertible into one share of common stock. (6) This column aggregates the principal amount of subordinated notes purchased by each investor in April 1999 and October 1999. The subordinated notes bear interest at a stated rate of 12%. The effective interest rate was 53.0% for the April 1999 subordinated notes and 154.1% for the October 1999 subordinated notes, calculated based on an expected maturity date of April 2000. These notes have been amended to provide that they will be repaid on the earlier to occur of one year after this offering or the date on which if we have less than $40.0 million of cash and cash equivalents. The effective interest rate on the new subordinated notes is 8.75%. (7) These warrants were issued together with the April and October 1999 subordinated notes. The exercise price of each warrant is $0.01. The number of warrants listed in this table assumes cancellation of an aggregate of 1,071,500 warrants of the 2,625,000 warrants upon completion of this offering, resulting in 1,553,500 warrants outstanding. The cancellation of these warrants is conditioned on completion of this offering on or before April 23, 2001 and the listing of our callable common stock on the Nasdaq National Market System. (8) In 1997, B.I. Systems Corporation, our predecessor, issued 9,440 shares of common stock for 916,666 shares of common stock in a reverse stock split. 6,550 shares were issued in lieu of a consulting fee owed to Mackowski Shepler. In addition, Mr. Shepler purchased 8,000 shares of common stock from an investor in December 1997 for a price of $1.75 per share. Mr. Shepler also received 19 shares of common stock in June 1999 in lieu of interest on the subordinated notes in the amount of $95. In September 1999, he received 25 shares in lieu of $125 in interest on the subordinated notes. In December 1999, he received 35 shares in lieu of $170 in interest on the subordinated notes. In March 2000, we issued Mr. Shepler 39 shares of common stock in lieu of $187 in interest on the subordinated notes. (9) In 1997, B.I. Systems Corporation, our predecessor, issued 63,164 shares of common stock and 129,969 shares of Series B Preferred Stock in satisfaction of a $125,000 loan and the interest on that loan. Mr. Shepler also purchased 30,000 shares in May 1997 and 20,161 shares in June 1997 of Series B Preferred at $1.00 per share. (10) This number of warrants assumes that 1,665 of the 4,083 warrants that were originally issued to Mr. Shepler will be cancelled upon completion of this offering. (11) In 1997, B.I. Systems Corporation, our predecessor, issued 19,642 shares of common stock in satisfaction of subordinated debt in the amount of $127,469. B.I. Systems issued 9,440 shares of common stock for 916,666 shares of common stock in a reverse stock split. B.I. Systems issued 6,550 shares in lieu of a consulting fee owed to Mackowski Shepler. In addition, Mr. Mackowski received 378 shares of common stock in June 1999 in lieu of interest on the subordinated notes in the amount of $3,024. In September 1999, he received 504 shares in lieu of $2,520 in interest on the subordinated notes. In December 1999, he received 852 shares in lieu of $4,086 in interest on the subordinated notes. In March 2000, we issued Mr. Mackowski 986 shares of common stock in lieu of $4,683 in interest on the subordinated notes. (12) In 1997, B.I. Systems Corporation, our predecessor, issued 63,164 shares of common stock and 129,969 shares of Series B Preferred Stock in satisfaction of a $125,000 loan and the interest on that loan. Mr. Mackowski purchased 396,367 shares of Series B Preferred for $1.00 per share in May 1997. (13) This number of warrants assumes that 44,173 of the 108,155 warrants that were originally issued to Mr. Mackowski will be cancelled upon completion of this offering. (14) Dr. Wicker, one of our directors, is a general partner of Chase Capital Partners, the general partner of Chase Venture Capital Associates, L.P. (15) In June 1999, we issued 4,364 shares of common stock in lieu of $21,820 in interest on the subordinated notes due to Chase Venture Capital Associates. In September 1999, we issued 5,819 shares in lieu of interest on the subordinated notes in the amount of $29,095. In December 1999, we issued 8,787 shares in lieu of interest on the subordinated notes in the amount of $42,451. In March 2000, we issued Chase Venture Capital Associates 9,910 shares in lieu of $47,476 in interest on the subordinated notes. (16) This number of warrants assumes that 434,236 of the 1,063,650 warrants that were originally issued to Chase Venture Capital Associates, L.P. will be cancelled upon completion of this offering. (17) Mr. Mitchell, one of our directors, is the general partner of Capital Health Venture Partners, the general partner of American Healthcare Fund II. (18) In 1997, B.I. Systems Corporation, our predecessor, issued American Healthcare Fund II 98,212 shares of common stock in satisfaction of subordinated debt in the amount of $637,347. In June 1999, we issued 756 shares in lieu of interest on the subordinated notes in the amount of $3,780. In September 1999, 1,008 shares were issued in lieu of interest on the subordinated notes in the amount of $5,040. In December 1999, 1,305 shares were issued in lieu of interest on the subordinated notes in the Table of Contents Related Party Transactions amount of $6,377. In March 2000, we issued American Healthcare Fund II 1,413 shares of common stock in lieu of $6,856 in interest on the subordinated notes. (19) In 1997, B.I. Systems Corporation, our predecessor, issued 74,658 shares of common stock and 153,231 shares of Series B Preferred Stock in satisfaction of a $150,000 loan and the interest on that loan. In addition, American Healthcare Fund II purchased 247,122 shares of Series B Preferred Stock for $1.00 per share. (20) This number of warrants assumes that 59,494 of the 145,833 warrants that were originally issued to American Healthcare Fund II will be cancelled upon completion of this offering. (21) We issued 348 shares of common stock to Mr. Kent in December 1999 in lieu of interest on the subordinated notes in the amount of $1,566. In March 2000, we issued Mr. Kent 487 shares of common stock in lieu of interest of $2,190 on the subordinated notes. (22) Mr. Kent purchased 300,000 shares of Series B Preferred Stock for $1.00 per share in June 1997. (23) This number of warrants assumes that 25,172 of the 61,488 warrants that were originally issued to Mr. Kent will be cancelled upon completion of this offering. (24) Mr. Williams exercised options to purchase 675,000 shares of common stock in December 1998 at $0.07 a share. In February 2000, Mr. Williams exercised options to purchase 360,000 shares of common stock at $0.07 a share and options to purchase 40,000 shares of common stock at $0.37 a share. We issued 38 shares to Mr. Williams in December 1999 in lieu of interest on the subordinated notes in the amount of $171. In March 2000, we issued Mr. Williams 53 shares of common stock in lieu of interest of $237 on the subordinated notes. (25) This number of warrants assumes that 2,722 of the 6,650 warrants that were originally issued to Mr. Williams will be cancelled upon completion of this offering. (26) The weighted average price per share for these purchases of our common stock as of February 29, 2000 was $0.81. For additional information regarding the ownership of securities by executive officers, directors and stockholders who beneficially own 5% or more of our outstanding capital stock, please see Principal stockholders. EMPLOYMENT AGREEMENTS We have entered into an employment agreement with Mr. Jeffrey S. Williams. For information regarding this agreement, please see Management-Employment and severance arrangements. INDEBTEDNESS OF MANAGEMENT In 1998 and 2000, we made loans to Jeffrey S. Williams used by Mr. Williams to exercise options to acquire callable common stock. The principal amount outstanding at March 31, 2000 is $47,250 for one loan secured by shares of our callable common stock and $40,000 for an unsecured loan. Both loans are due five years after the dates they were made and provide for full recourse against Mr. Williams. Each note bears interest at an annual rate equal to the medium term applicable federal rate which is 5.93% for the 1998 note and 6.56% for the 2000 note. INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with each of our directors and officers containing provisions that may require us to indemnify them against liabilities that may arise by reason of their status or service as directors or officers and to advance their expenses incurred as a result of any proceeding against them. However, we will not indemnify directors or officers with respect to liabilities arising from willful misconduct of a culpable nature. For more information concerning these agreements, see Description of securities-limitation of liabilities and indemnification matters. Table of Contents Related Party Transactions CONSULTING AGREEMENTS Between October 1998 and December 31, 1999, the private equity investment firm of Mackowski Shepler provided consulting services to us. These services included advising us on financings, alliances and joint ventures and assisting management with communications and presentations to investment banks, commercial banks, venture capitalists and other sources of capital. We paid Mackowski Shepler approximately $108,800 until the agreement was terminated in December 1999. In connection with our acquisition of PBA Technology in December 1997, we assumed a consulting agreement with P. Nicholas King. During 1998 and 1999 we paid Mr. King approximately 60,500 and 50,100. Services provided to us by Mr. King includes negotiating contracts for our facility expansion in the UK, and advice on mergers, acquisitions and licensing opportunities in the United Kingdom. We terminated the agreement with Mr. King in December 1999 effective as of December 31, 2000. During 2000, we are obligated to pay Mr. King approximately 36,000 for his consulting services. Table of Contents Principal stockholders The following table shows information known to us with respect to the beneficial ownership of our callable common stock as of March 31, 2000, by - each person (or group of affiliated persons) who owns beneficially 5% or more of our callable common stock; - each of our directors; - our executive officers listed in the summary compensation table above; - all of our directors and executive officers as a group. Except as indicated in the footnotes to this table and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of our callable common stock shown as beneficially owned by them. Beneficial ownership and percentage ownership are determined in accordance with the rules of the Securities and Exchange Commission. The table below includes the number of shares underlying options and warrants which are exercisable within 60 days from March 31, 2000, which shares are deemed outstanding for calculating the percentage of outstanding shares of the person holding these options or warrants but are not deemed outstanding for calculating the percentage of any other person. The table below assumes the conversion of all shares of our common stock into callable common stock, the conversion of all shares of our preferred stock, other than the series P preferred, into shares of our callable common stock and the conversion of all shares of our series P preferred stock into common stock prior to this offering and the exercise of 1,553,500 and the cancellation of 1,071,500 of the 2,625,000 warrants issued in connection with the business loan agreements in April and October 1999, and is therefore based on 16,988,729 shares of our callable common stock outstanding prior to this offering and 23,988,729 shares outstanding immediately after this offering. Each share of series M preferred stock is convertible into 5.4 shares of callable common stock, each share of series B preferred stock is convertible into 3.03 shares of callable common stock, each share of series C preferred stock is convertible into one share of callable common stock, each share of series D preferred stock is convertible into one share of callable common stock and each share of series P preferred stock is convertible into one share of common stock. The conversion of our preferred stock is conditioned on the completion of this offering and the listing of our callable common stock on the Nasdaq National Market System. The cancellation of 1,071,500 warrants is conditioned on the completion of this offering on or before April 23, 2001 and the listing of our callable common stock on the Nasdaq National Market System. Each warrant is exercisable into one share of callable common stock. All outstanding stock listed in the table below is callable common stock, except for those shares of common stock held by PerkinElmer. The address for those individuals for which an address is not otherwise indicated is our address: 4355 Varsity Drive, Suite E, Ann Arbor, Michigan 48108. Percentage of Shares Beneficially Owned Number of Shares Before After Name and Address of Beneficial Owner Beneficially Owned Offering Offering Chase Venture Capital Associates, L.P.(1) 5,037,210 29.6 % 21.0 % c/o Chase Capital Partners 380 Madison Avenue, 12th Floor New York, NY 10017 Damion E. Wicker, M.D.(2) 5,037,210 29.6 21.0 c/o Chase Capital Partners 380 Madison Avenue, 12th Floor New York, NY 10017 J. Matthew Mackowski(3) 1,933,313 11.4 8.1 c/o Mackowski Shepler 275 Post Street, Suite 600 San Francisco, CA 94108 Table of Contents Principal stockholders Percentage of Shares Beneficially Owned Number of Shares Before After Name and Address of Beneficial Owner Beneficially Owned Offering Offering American Healthcare Fund II(4) 1,864,739 11.0 7.8 4430 Arapaho Avenue, Suite 220 Boulder, CO 80303 Daniel J. Mitchell(5) 1,864,739 11.0 7.8 c/o American Healthcare Fund II 4430 Arapaho Avenue, Suite 220 Boulder, CO 80303 PerkinElmer, Inc 1,269,841 7.5 5.3 45 William Street Wellesley, MA 02481 Jeffrey S. Williams(6) 1,214,019 7.1 5.0 Lawrence J. Kent 946,242 5.6 3.9 c/o Kent Kent 404 East Lancaster Avenue Wayne, PA 19087 Robert G. Shepler(7) 674,823 4.0 2.8 c/o Mackowski Shepler 275 Post Street, Suite 600 San Francisco, CA 94108 P. Nicholas King(8) 171,449 1.0 * The Homestead, Church Road, Huntingdon Cambridgeshire, UK PE175RR Steven J. Richvalsky(9) 119,153 * * Andrew A. Jakimcius(10) 60,665 * * Michael P. Kurek, PhD(11) 46,603 * * Shannon M. Richey(12) 16,600 * * Christine M. Ethier(13) 5,400 * * Kevin Auton, PhD(14) 37,500 * * All directors and executive officers as a group (12 persons) 11,181,474 64.3 % 45.8 % * Less than 1%. (1) Includes options to purchase 20,000 shares of callable common stock. (2) All of these shares are held in the name of Chase Venture Capital Associates, L.P. and are attributed to Dr. Wicker as he is a general partner of Chase Capital Partners, the general partner of Chase Venture Capital Associates, L.P. Dr. Wicker disclaims beneficial ownership of all shares issued or issuable to Chase Venture Capital Associates, L.P. except to the extent of his pecuniary interest. (3) Includes options to purchase 20,000 shares of callable common stock. (4) Includes options to purchase 20,000 shares of callable common stock. (5) All of these shares are held in the name of American Healthcare Fund II and are attributed to Mr. Mitchell as he is the general partner of Capital Health Venture Partners, the general partner of American Healthcare Fund II. Mr. Mitchell disclaims beneficial ownership of all shares issued or issuable to American Healthcare Fund II, except to the extent of his pecuniary interest. (6) Includes options to purchase 135,000 shares of callable common stock. Includes 200,000 shares of callable common stock which are held by a trust for the benefit of Mr. Williams children. (7) Includes options to purchase 20,000 shares of callable common stock. (8) Includes options to purchase 20,000 shares of callable common stock and 73,500 shares of callable common stock which are held by Mr. King s wife and 3,000 shares of callable common stock which are held by Mr. King s children. (9) Includes options to purchase 82,600 shares of callable common stock. (10) Includes options to purchase 30,134 shares of callable common stock. (11) Includes options to purchase 15,000 shares of callable common stock. (12) Includes options to purchase 5,000 shares of callable common stock. (13) Includes options to purchase 1,667 shares of callable common stock. (14) Includes options to purchase 37,500 shares of callable common stock. Table of Contents Description of securities The following is a description of the callable common stock, common stock and preferred stock, as well as callable options and warrants to purchase our callable common stock and agreements affecting our capital stock and reflects changes to our capital structure that will occur upon the closing of this offering in accordance with the terms of our certificate of incorporation. Upon the closing of this offering and the effectiveness of our third amended and restated certificate of incorporation, our authorized capital stock will consist of 40,000,000 shares of callable common stock, par value $0.001 per share, 40,000,000 shares of common stock, par value $0.001 per share, and 15,000,000 shares of preferred stock, par value $0.001 per share. COMMON STOCK Common stock and callable common stock As of March 31, 2000, there were 3,631,446 shares of common stock outstanding and held of record by 80 stockholders. Upon completion of this offering, there will be 1,269,841 shares of common stock outstanding, all of which will be held by PerkinElmer, and 22,718,888 shares of callable common stock outstanding, which gives effect to: - the conversion of all outstanding preferred stock into common stock; - the exercise of 1,553,500 warrants to purchase callable common stock; - the cancelation of 1,071,500 warrants to purchase callable common stock so long as we complete this offering and our shares are listed on the Nasdaq National Market System on or before April 23, 2001; - a one-for-one reclassification of 15,718,888 shares of common stock into callable common stock to be effected simultaneously with the closing of this offering, except for those shares held by PerkinElmer; and - the issuance of 7,000,000 shares of callable common stock offered by us under this prospectus. We have reserved 10,533,942 shares of callable common stock for the conversion of our preferred stock other than those shares held by PerkinElmer. We have also reserved 7,247,958 shares of callable common stock for issuance under our option plans, for issuance upon the exercise of warrants and for the payment of interest on our subordinated notes. Upon completion of this offering, all of our preferred stock, other than those shares held by PerkinElmer, will be converted into callable common stock and 1,553,500 warrants to purchase callable common stock will be exercised and, so long as this offering is completed on or before April 23, 2001, 1,071,500 warrants to purchase callable common stock will be cancelled. This will leave 4,622,958 shares of callable common stock reserved for issuance under our option plans, upon the exercise of a warrant and for payment of interest on our subordinated notes. Set forth below is a description of the terms of our callable common stock and common stock. In connection with the PerkinElmer transaction and in contemplation of this offering, we amended our certificate of incorporation to authorize the issuance of callable common stock. Our third amended and restated certificate of incorporation, effective upon completion of this offering, sets forth the terms of the reclassification of all outstanding capital stock, other than those shares held by PerkinElmer, into callable common stock. Upon completion of this offering, all outstanding common stock that is not held by PerkinElmer will be callable common stock. The rights, preferences, privileges and restrictions of our callable common stock and common stock are identical in all respects, except as specifically set forth in article V of our certificate of Table of Contents Description of securities incorporation. The following description of the terms of the callable common stock does not purport to be complete and is qualified in its entirety by reference to the text of article V. Holders of our callable common stock and common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock and callable common stock entitled to vote in any election of directors may elect all of the directors standing for election. The holders of callable common stock and holders of common stock shall be entitled to vote as a separate class upon a proposed amendment to our certificate of incorporation, if the proposed amendment would increase or decrease the authorized shares or par value of a class or alter or change the rights of a class so as to affect the holders adversely. Holders of callable common stock and common stock are entitled to receive dividends on a pro rata basis, if any, as may be declared by the board of directors out of legally available funds. The outstanding shares of callable common stock and common stock are, and the shares offered by us in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of callable common stock and common stock are subject to, and may be materially adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate and issue in the future. Upon completion of this offering, there will be no shares of preferred stock outstanding. Holders of common stock and callable common stock have no preemptive, subscription, redemption or conversion rights. PerkinElmer may convert its shares of common stock to callable common stock and sell those shares, subject to compliance with applicable securities laws. If PerkinElmer does sell any shares of callable common stock, it will be prohibited from causing us to redeem our callable common stock for a period of 30 days after the date of the sale. If PerkinElmer sells more than 50% of its common stock, including any shares converted into callable common stock, it will no longer have the right to cause us to redeem our callable common stock, nor will it have the right to acquire up to 19.9% of our outstanding capital stock. Provisions applicable only to the callable common stock Call Rights All of our stock, including the shares in this offering, is callable common stock, with the exception of our common stock owned by PerkinElmer. The terms of the callable common stock and PerkinElmer s call right are set forth in our amended certificate and the related governance agreement. The callable common stock together with all securities convertible into callable common stock may be redeemed, in whole, but not in part, only at the direction of PerkinElmer. Article V of the certificate provides that the redemption price on any date of redemption shall be the greater of: - 120% of the 30 trading day trailing average closing price of our callable common stock ending on the day before PerkinElmer notifies us to exercise the right; - 120% of the last reported sales price per share on the trading day before PerkinElmer notifies us to exercise the right; or - the following price per share based on the number of days that have elapsed after the date PerkinElmer first can exercise its right to cause us to redeem our callable common stock (i) $6.75 for one through 182 days (ii) $7.00 for 183 through 365 days (iii) $7.50 for 366 through 548 days and (iv) $8.00 for 549 through 730 days. Table of Contents Description of securities In the event our board receives a bona fide firm acquisition proposal that is not subject to further due diligence and not subject to any financing contingency, at a price that our board is prepared to accept, the purchase price per share will be the price set forth in the acquisition proposal, whether higher or lower than the price described above. Call Period PerkinElmer s right to cause us to redeem our callable common stock for a two year period can first be exercised on the earlier of 181 days following completion of this offering or 270 days after January 27, 2000. PerkinElmer cannot cause us to redeem our callable common stock prior to and during the 180-day period following this offering and during the 30-day period that commences on any date PerkinElmer sells any shares of our common stock or callable common stock. In addition, if we receive an acquisition proposal and PerkinElmer does not exercise its call right within five business days of receipt of the acquisition proposal, PerkinElmer may not exercise its right until the earlier of (a) the withdrawal or rejection of the acquisition proposal, (b) the modification of the price or value of the acquisition proposal in a manner adverse to us or to our stockholders; or (c) the 180th day after the receipt of the acquisition proposal. The number of days that PerkinElmer is prohibited from causing us to redeem our callable common stock shall not exceed an aggregate of 270 days, exclusive of any 30-day period following a sale by PerkinElmer of our common stock or callable common stock, provided however, that if PerkinElmer sells any shares of our common or callable common stock within 30-days prior to the date on which the call period would otherwise end, the call period shall be extended for that number of days equal to the number of days elapsing between the date of the sale and the date the call period would have ended. If PerkinElmer sells shares of our common stock and callable common stock that in the aggregate exceed 50% of the shares held by PerkinElmer at the time of this offering, the call period shall expire. Notice of any proposed redemption of the callable common stock will be given by mailing a copy of the notice to the holders of record of the shares of callable common stock. As part of the governance agreement with PerkinElmer, we have agreed to issue and disseminate a press release announcing the redemption if PerkinElmer exercises its right. In addition, we will notify Nasdaq to suspend trading and issue stop transfer instructions to our transfer agent. Adjustments The redemption prices pursuant to the call rights that are based on the number of days that have elapsed since PerkinElmer can first exercise its call right, are subject to appropriate adjustment in the case of any subdivision, combination or recapitalization. Payment Upon Exercise of Call Rights On or prior to the date a call notice is first sent or given to our equity holders, PerkinElmer will deposit the aggregate redemption price of the shares to be redeemed with a depositary, in trust, for payment to the holders of the callable common stock. Each holder of shares of callable common stock will be paid the redemption price within three business days following the surrender of his certificates to the depositary, together with a letter of transmittal. We may instruct the depositary that any deposit remaining unclaimed at the expiration of two years revert to our general funds. Thereafter a holder will have no claim against the depositary but will have a claim as an unsecured creditor against us for the redemption price. Once properly called, all shares of callable common stock and securities convertible into, or exercisable for, callable common stock will be deemed cancelled and no longer outstanding for any purpose, and the holders will only have the right to receive the redemption price to which they are entitled. Table of Contents Description of securities Conversion of Callable Common Stock Unless PerkinElmer has previously notified us to exercise the call right, each share of callable common stock and security convertible into callable common stock outstanding following the close of business on the last day of PerkinElmer s right to cause us to exercise the call rights, automatically will be converted into one share of common stock or the right to receive common stock. Notice of the conversion date will be given by mail to the holders of record of the shares of callable common stock, not more than 30 days after the conversion date. Upon request of any holder, we will issue and deliver to the holder, as promptly as practicable after the conversion date, a replacement certificate for the number of shares of common stock, or right to receive common stock, issuable upon conversion of the security. No shares of callable common stock will be issued after the conversion date. We will reserve sufficient shares of common stock for the conversion of the callable common stock outstanding on the conversion date. Article V provides that all shares of common stock which may be issued upon conversion of the callable common stock, upon issuance will be fully paid and non-assessable by us and free from all taxes, liens and charges. Article V further provides that, if on the conversion date the callable common stock is listed on the New York Stock Exchange or the Nasdaq National Market System, we will, if permitted by the rules of the exchange, seek to list all shares of our common stock. Federal Income Tax Consequences for Holding Callable Common Stock The following discussion of federal income tax consequences is based on a legal opinion delivered to us by our counsel, Jaffe Raitt Heuer Weiss, Professional Corporation. The reclassification of our existing capital stock into callable common stock, effective at the closing of this offering, will not cause us or our existing stockholders to recognize gain or loss as the reclassification will qualify as a tax-free recapitalization. If PerkinElmer causes us to redeem our callable common stock, the exchanging shareholder will recognize gain or loss measured by the difference between the basis in the callable common stock redeemed and the amount of cash received. The gain or loss will be a capital gain or loss if the callable common stock is held as a capital asset and will be long term if at the time of the redemption, the shares of callable common stock have been held for more than one year. If PerkinElmer s right to cause us to redeem our callable common stock expires unexercised and our callable common stock is converted to common stock, no gain or loss will be recognized for federal income tax purposes. In addition, no gain or loss will be recognized by us upon the expiration of PerkinElmer s right to increase its ownership to 19.9% of our outstanding capital stock. The foregoing discussion may not apply to stockholders in special categories for tax purposes, including corporate and foreign stockholders and stockholders who acquire their shares pursuant to the exercise of stock options, or otherwise as compensation. In addition, this discussion does not address the tax consequences of the reclassification to holders of options, warrants, preferred stock or other convertible securities. Legend Each certificate representing shares of callable common stock bears the following legend: The shares of callable common stock represented hereby are subject to (i) redemption at the option of the corporation during the periods, at the prices and on the terms and conditions specified in the corporation s Third Amended and Restated Certificate of Incorporation, as the same may be amended and/or restated from time to time (the Certificate of Incorporation ) and (ii) conversion into common stock, par value $.001, of the corporation on the date specified, and upon the terms and conditions set forth in, such Certificate of Incorporation. After notification of the corporation s Table of Contents Description of securities exercise of its redemption option, the shares represented by this certificate shall cease to be outstanding for all purposes and the holder hereof shall be entitled to receive only the redemption price of such shares, without interest. After conversion this certificate shall represent the shares of Common Stock into which the shares of Callable Common Stock represented hereby shall have been converted, and this certificate may be exchanged for a new certificate representing such shares of Common Stock. PREFERRED STOCK As of March 31, 2000, there were 8,171,060 shares of preferred stock outstanding: 50,000 shares of series M preferred stock, 1,680,880 shares of series B preferred stock, 4,070,339 shares of series C preferred stock, 1,100,000 shares of series D preferred stock and 1,269,841 shares of series P preferred stock. The series P preferred stock will be converted into common stock upon the completion of this offering. Except for the series P, all outstanding shares of preferred stock will be converted into 10,533,942 shares of our common stock and reclassified as callable common stock upon the completion of this offering and these shares of preferred stock will no longer be authorized, issued or outstanding. The conversion of all of our preferred stock upon completion of this offering is conditioned on the listing of our callable common stock on the Nasdaq National Market System. Upon the completion of this offering, the board of directors will be authorized, without further stockholder approval, to issue from time to time up to an aggregate of 15,000,000 shares of preferred stock in one or more series. Our board of directors may also designate the powers, preferences, rights and any qualifications, limitations or restrictions of the shares of each series of preferred stock, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices and liquidation preferences, any or all of which may be superior to the rights of our callable common stock, and the number of shares constituting any series or designations of the series. We have no present plans to issue any shares of preferred stock. Please see Description of securities Anti-takeover effects of provisions of Delaware law and our certificate of incorporation and bylaws. WARRANTS As of March 31, 2000, we had outstanding warrants to purchase a total of 2,750,000 shares of our capital stock, at a weighted average exercise price of 28 cents per share. The warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the warrants upon the occurrence of events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction or if we sell securities at less than a specified price. The warrants grant to the holders registration rights with respect to the common stock issuable upon their exercise, which are described below. A portion of the warrants are cancelable if we effect a liquidity event at a value in excess of $5.00 per share. Warrants are cancelable based on the timing of the liquidity event and the value per share. This offering will qualify as a liquidity event and result in the cancellation of 1,071,500 of the 2,625,000 warrants issued together with subordinated notes in connection with the business loan agreements in April and October 1999 so long as the offering is completed on or before April 23, 2001 and our callable common stock is listed on the Nasdaq National Market System. Warrants to purchase 1,553,500 shares will be automatically exercised upon completion of this offering. Warrants to purchase 125,000 shares at $6.00 per share are currently exercisable and will expire on October 13, 2008. Any warrants that are not exercised upon completion of this offering will be exchanged for callable warrants. Table of Contents Description of securities REGISTRATION RIGHTS Under the terms of a shareholders agreement, purchase agreements and registration rights agreements with some of our securityholders, after the completion of this offering the holders of 14,917,442 shares of callable common stock, the holder of a callable warrant to purchase 125,000 shares of callable common stock and the holder of 1,269,841 shares of common stock have registration rights. Beginning six months after the effective date of this registration statement, holders of 10,533,942 shares of callable common stock and the holder of 1,269,841 shares of common stock will be entitled to demand the registration of their shares under the Securities Act of 1933 if holders of 30% of the registrable securities request us to do so, subject to limitations. In addition, beginning nine months after completion of this offering, holders of 1,553,500 shares of callable common stock also have a demand registration right in the event that holders of 30% of these securities request us to do so, subject to limitations. These demand rights do not apply to this offering. We are not required to effect more than one registration for each group of holders pursuant to these demand registration rights. In addition, all holders of registration rights are entitled to piggyback registration rights if we propose to register any shares of callable common stock either for our account or for the account of other security holders, including this offering. The holders of shares having piggyback rights are entitled to receive notice of the registration and are entitled to include their shares in the registration, subject to limitations. Further, at any time after we become eligible to file a registration statement on Form S-3, the same holders who have demand rights may require us to file registration statements under the Securities Act of 1933 on Form S-3 with respect to their shares of our callable common stock. These registration rights are subject to conditions and limitations, among which is the right of the underwriters of an offering to limit the number of shares of callable common stock held by security holders with registration rights to be included in the registration and in some cases, including this offering, exclude these shares entirely. We are generally required to bear all of the expenses of all these registrations, including the reasonable fees of a single counsel acting on behalf of all selling stockholders, except underwriting discounts and selling commissions. Registration of any of the shares of our callable common stock held by security holders with registration rights would result in the shares becoming freely tradable without restriction under the Securities Act of 1933 immediately upon effectiveness of the registration. These registration rights, except for the rights of those holders of 1,553,500 shares of callable common stock, terminate five years after the completion of this offering. ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained the status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A business combination includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation s voting stock. This statute could prohibit or delay the accomplishment of a merger or other takeover or change in control attempt with respect to us and, accordingly, may discourage attempts to acquire us. In addition, provisions of our certificate of incorporation and bylaws, which will be in effect upon the closing of this offering and are summarized in the following paragraphs, may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. Table of Contents Description of securities BOARD OF DIRECTORS VACANCIES Our bylaws authorize the board of directors to fill vacant directorships or increase the size of the board of directors. This may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the vacancies created by the removal with its own nominees. STAGGERED BOARD Our certificate provides that our board is classified into three classes of directors. Please see Management Classes of the board for more information regarding our staggered board. This may inhibit a stockholder from nominating and electing directors and gaining control of the board of directors. The term of each member shall terminate in the event we give notice of the exercise of our right to redeem our callable common stock. STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS Our bylaws provide that special meetings of our stockholders may be called only by the President, Chairman of the board of directors, a resolution adopted by the board of directors or at the request in writing of the stockholders owning at least 50% of our capital stock. These provisions could limit the ability of a stockholder to assemble a stockholders meeting for action they seek to propose. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS Our bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders, must provide timely notice of their intent in writing. To be timely, a stockholder s notice must be received at our principal executive offices not less than 120 days before the first anniversary of the date of our notice of annual meeting provided with respect to the previous year s annual meeting of stockholders; provided, however that if the scheduled meeting date differs from the date of the next preceding annual meeting of stockholders and if less than 130 days notice or prior public disclosure of the scheduled meeting date is given or made, notice by the stockholder to be timely, must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which the notice of the meeting was mailed to stockholders or the day on which the public disclosure was made. Our bylaws also contain specific requirements as to the form and content of a stockholder s notice. These provisions may inhibit our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES Our authorized but unissued shares of callable common stock and preferred stock are available for future issuance without stockholder approval, subject to limitations imposed by the Nasdaq National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, for corporate acquisitions and for employee benefit plans. The existence of authorized but unissued and unreserved callable common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. Table of Contents Description of securities LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION MATTERS Our certificate of incorporation provides that, except to the extent prohibited by Delaware law, our directors shall not be personally liable to us or to our stockholders for monetary damages for any breach of fiduciary duty as a director. Under Delaware law, our directors have a fiduciary duty to us which is not eliminated by this provision of the certificate and, in appropriate circumstances, equitable remedies including rescission, or injunctive or other forms of non-monetary relief will remain available. In addition, each of our directors will continue to be subject to liability under Delaware law for: - any breach of the director s duty of loyalty to us or our stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock purchases or redemptions; or - for any transaction from which the director derived an improper personal benefit. This provision also does not affect the directors responsibilities under any other laws, including the federal securities laws or state or federal environmental laws. Section 145 of the Delaware General Corporation Law empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director for the actions or omissions discussed above. Delaware law provides further that the permitted indemnification shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under our bylaws, any agreement, a vote of stockholders or otherwise. The certificate eliminates the personal liability of directors to the fullest extent permitted by Delaware law. In addition, the certificate provides that we may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that the person is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding. We have also entered into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our certificate. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. Our certificate also permits us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether Delaware law would permit indemnification. We have applied for liability insurance for our officers and directors. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under our certificate of incorporation or otherwise. We are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our callable common stock is American Stock Transfer Trust Company. Table of Contents Shares eligible for future sale Prior to this offering, there has been no public offering for our stock. The market price of our callable common stock could decline as a result of sales of a large number of shares of our callable common stock in the market after this offering, or the perception that these sales could occur. These sales also could make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. After this offering, we will have outstanding 22,718,888 shares of callable common stock and 1,269,841 shares of common stock. Of these shares, the 7,000,000 shares of callable common stock sold in this offering are freely tradable, except for up to 350,000 shares purchased by participants in the reserved shares program that may be subject to agreements with the underwriters prohibiting the resale of these shares into the public market for a period of 180 days after the date of this prospectus. The remaining 15,718,888 shares of callable common stock and 1,269,841 shares of common stock will be eligible for sale in the public market as follows: Number of Shares Date 11,785 Immediately after the date of this prospectus 14,364,666 180 days after the date of this prospectus, subject in some cases to volume limitations 2,612,278 At various times after 180 days from the date of this prospectus The holders of 99% of our capital stock, including our directors and officers, have entered into lock-up agreements under which they have agreed that they will not sell, directly or indirectly, any shares of callable common stock without the prior written consent of UBS Warburg LLC for a period of 180 days from the date of this prospectus, with the exception of family and estate planning transfers. In general, under Rule 144 of the Securities Act of 1933, as currently in effect, a person together with persons whose shares are required to be aggregated, including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of callable common stock approximately 227,189 shares immediately after this offering or the average weekly trading volume in our callable common stock during the four calendar weeks preceding the date on which notice of the sale is filed, subject to restrictions. In addition, a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell the shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from one of our affiliates, the person s holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. Following the expiration of the lock-up period, 1,392,042 shares issued upon exercise of options that we granted prior to the date of this offering will also be available for sale in the public market pursuant to Rule 701 under the Securities Act of 1933. Rule 701 permits resales of these shares in reliance upon Rule 144 under the Securities Act of 1933 but without compliance with the restrictions, including the holding-period requirement, imposed under Rule 144. As of March 31, 2000, options to purchase a total of 1,426,505 shares of callable common stock are outstanding, 552,186 of which are currently exercisable. Within 12 months after this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering the shares of callable common stock reserved for issuance under our 1998 stock option plan, our 1998 director plan and our 2000 employee stock purchase plan that will become effective upon filing. Accordingly, shares registered under that registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market after the filing, except those shares subject to lockup agreements and unvested shares. Table of Contents Shares eligible for future sale Stockholders holding approximately 14,917,442 shares of callable common stock, a callable warrant to purchase 125,000 shares of callable common stock and 1,269,841 shares of common stock have the right, subject to various conditions and limitations, to include their shares in registration statements relating to our securities. By exercising their registration rights and causing a large number of shares to be registered and sold in the public market, these holders may cause the price of the callable common stock to fall. In addition, any demand to include these shares in our registration statements could have a material adverse effect on our ability to raise needed capital. See Management Benefit plans, Principal stockholders, Description of securities Registration rights, Shares eligible for future sale and Underwriting. Table of Contents Underwriting Genomic Solutions and the underwriters for the offering named below have entered into an underwriting agreement concerning the shares being offered. Subject to conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. UBS Warburg LLC (formerly named Warburg Dillon Read LLC), Lehman Brothers Inc. and Dain Rauscher Incorporated are the representatives of the underwriters. Underwriters Number of shares UBS Warburg LLC Lehman Brothers Inc. Dain Rauscher Incorporated Total 7,000,000 If the underwriters sell more shares than the total number set forth in the table above, the underwriters have a 30-day option to buy from us an additional 1,050,000 shares at the initial public offering price less the underwriting discounts and commissions to cover these sales. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase up to an additional 1,050,000 shares. No exercise Full exercise Per share $ $ Total $ $ We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ . Shares sold by the underwriters to the public initially will be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of callable common stock to be offered. Genomic Solutions, its directors, officers, and substantially all of its stockholders have agreed with the underwriters not to offer, sell, contract to sell, hedge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any of its callable common stock or securities convertible into or exchangeable for shares of callable common stock during the period from the date of this prospectus continuing through 180 days after the date of this prospectus, without the prior written consent of UBS Warburg LLC. Table of Contents Underwriting The underwriters have reserved for sale, at the initial public offering price, up to 350,000 shares of our callable common stock being offered for sale to our employees, customers and business partners. At the discretion of our management, other parties, including our employees, may participate in the reserved shares program. Persons who purchase more than 2,500 reserved shares have agreed with the underwriters not to offer, sell, or otherwise dispose of their shares during the period from the date of this prospectus continuing through 180 days after the date of this prospectus without the prior written consent of UBS Warburg LLC. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. The underwriters intend to distribute and deliver this prospectus only by hand delivery or by mailing of printed prospectuses. Prior to this offering there has been no public market for our callable common stock. The initial public offering price will be negotiated by us and the representatives. The principal factors to be considered in determining the initial public offering price include: - the information set forth in this prospectus and otherwise available to the representatives; - the history and the prospects for the industry in which we compete; - the ability of our management; - our prospects for future earnings, the present state of our development, and our current financial position; - the general condition of the securities markets at the time of this offering; and - the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. In connection with the offering, the underwriters may purchase and sell shares of callable common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the callable common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the callable common stock. As a result, the price of the callable common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. We have agreed to indemnify the underwriters against some liabilities, including liabilities under the Securities Act of 1933 and to contribute to payments that the underwriters may be required to make in respect thereof. Table of Contents Legal matters The validity of the shares of callable common stock offered hereby will be passed upon for us by Jaffe Raitt Heuer Weiss, Professional Corporation, Detroit, Michigan. In addition, the discussion of the federal income tax consequences to our shareholders for holding our callable common stock is based on an opinion of Jaffe Raitt Heuer Weiss, Professional Corporation. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, will pass upon legal matters in connection with this offering for the underwriters. Shareholders of Jaffe Raitt Heuer Weiss, Professional Corporation, beneficially own 86,797 shares of our callable common stock. The statements in this prospectus relating to patents, patent licenses, trademarks and service marks under the following captions have been reviewed by Rader, Fishman and Grauer, Bloomfield Hills, Michigan, our intellectual property counsel, and are included in this prospectus in reliance upon that review: - Risk Factors We may be involved in lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights, which would reduce our ability to compete in the market , - Risk Factors The rights we rely on to protect the intellectual property underlying our products may not be adequate, which could enable third parties to use our technology, reducing our ability to compete in the market , - Risk Factors Our success depends on our ability to operate without infringing on or misappropriating the proprietary rights of others , and - Business Intellectual Property .
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001054298_ask_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001054298_ask_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f4ceadd83338854e7c870feba2e9850f1ffdf0f7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001054298_ask_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby and certain other matters will be passed upon for us by Cooley Godward LLP, Palo Alto, California. An investment partnership of attorneys of Cooley Godward and attorneys who have performed services for Ask Jeeves beneficially own an aggregate of 7,810 shares of common stock of Ask Jeeves.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001054721_bsquare_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001054721_bsquare_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8b00150e1436f1b86429f3c1d9d9ebfa4ddf7ba6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001054721_bsquare_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Summit Law Group, PLLC, Seattle, Washington. As of the date of this prospectus, Summit Law Group beneficially owns 34,722 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001056386_internap_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001056386_internap_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9d9e929f1b285ee997c6cb7a67ee43e86420aa61
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001056386_internap_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the shares of common stock offered hereby will be passed upon for us by Cooley Godward LLP, Kirkland, Washington. An investment partnership of Cooley Godward attorneys directly owns an aggregate of 92,592 shares of our common stock and beneficially owns 54,818 shares of our common stock through H&Q Internap Investors, LP. Cooley Godward attorneys beneficially own approximately 12,000 shares of our common stock. Certain legal matters will be passed upon for the underwriters by Morrison & Foerster LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001057083_pc-tel-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001057083_pc-tel-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4a23e6801513650a732648a3861fa50908609515
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001057083_pc-tel-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California. As of December 31, 1999, members and employees of Wilson Sonsini Goodrich and Rosati, Professional Corporation, beneficially owned an aggregate of 500 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001057234_universal_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001057234_universal_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1b6e8b3d80ace1b673ebc023ab0fbf14b647371f
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001057234_universal_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS King & Spalding, Houston, Texas, will pass upon the validity of the shares of common stock offered by this prospectus. Vinson & Elkins L.L.P., Houston, Texas, will pass upon certain legal matters in connection with this offering for the U.S. underwriters and the international managers.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001057758_tw_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001057758_tw_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..89e85fa1127c3192e491dc38a787adcd79e66acb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001057758_tw_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the Class A Common Stock offered hereby will be passed upon for the Company by Cravath, Swaine & Moore, New York, New York, for the underwriters by Shearman & Sterling, New York, New York, and for MediaOne by Weil, Gotshal & Manges, LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001057941_mce_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001057941_mce_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..31949ff30b23413653b9dadd85078f7d2ad1102c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001057941_mce_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters related to this offering will be passed upon for MCE Companies by Dykema Gossett PLLC, Detroit, Michigan, and for the underwriters by Hale and Dorr LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001059421_integrated_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001059421_integrated_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2e47427ff5281bdd09f2d601b1c768604c271cab
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001059421_integrated_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the validity of the shares of common stock are being passed upon for us by Snell Wilmer L.L.P., Phoenix, Arizona. Certain legal matters will be passed upon for the underwriters by Brobeck, Phleger Harrison LLP, Austin, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001061377_allscripts_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001061377_allscripts_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..632110cbcb7411cb254294f21b7d5dca1dec54ea
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001061377_allscripts_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Gardner, Carton & Douglas, Chicago, Illinois, will pass upon the validity of the common shares offered by this prospectus. Sonnenschein Nath & Rosenthal, Chicago, Illinois, has acted as counsel to the underwriters in connection with certain legal matters relating to the common shares offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001062019_watchguard_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001062019_watchguard_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..24ce19193d5c1ddb299003d5d03270ef2d501953
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001062019_watchguard_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS WatchGuard's legal counsel is Perkins Coie LLP of Seattle, Washington. The underwriters' legal counsel is Gray Cary Ware & Freidenrich LLP of Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001063527_august_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001063527_august_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..05be9d5c6692952b56a625994eed9406f119f26f
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001063527_august_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Fredrikson & Byron, P.A., Minneapolis, Minnesota. John Drawz, an officer and shareholder of Fredrikson & Byron, P.A., owns 23,733 of our common shares. Certain legal matters for the underwriters will be passed upon by Faegre & Benson LLP, Minneapolis, Minnesota.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001065152_aremissoft_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001065152_aremissoft_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b7953d0af2365339c3ca021fe4d8d248378bbe46
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001065152_aremissoft_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby and other legal matters in connection with this offering will be passed upon for us by Bartel Eng Linn & Schroder, Sacramento, California. Legal matters in connection with this offering will be passed upon for the underwriters by Weil, Gotshal & Manges LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001065332_nic-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001065332_nic-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1c9e1d4567a9972d7ab4b21363cf0e7a89957fa6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001065332_nic-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in connection with the offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001065663_objectspac_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001065663_objectspac_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a9c00ac0650fdaf36a735683c52b2a449f67c1bc
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001065663_objectspac_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Haynes and Boone, LLP, Dallas, Texas. Legal matters affecting the offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001066657_morgan_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001066657_morgan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..75119eb85a997ed4fb95b025c0d3fc4b3241eeea
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001066657_morgan_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters in connection with the units being offered hereby, including the discussion of the material federal income tax considerations relating to the acquisition, ownership and disposition of units, have been passed upon for each partnership and the general partner by Cadwalader, Wickersham & Taft, 100 Maiden Lane, New York, New York 10038. Cadwalader, Wickersham & Taft also has acted as counsel for Dean Witter in connection with the offering of units. Cadwalader, Wickersham & Taft may advise the general partner with respect to its responsibilities as general partner of, and with respect to matters relating to, the partnerships.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001067588_aclara_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001067588_aclara_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fd27021b9641a582f425554a5fe8e17e5926a365
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001067588_aclara_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Latham & Watkins, Menlo Park, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of the date of this prospectus, attorneys at Latham & Watkins beneficially own an aggregate of 7,500 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001068397_integrity_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001068397_integrity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e90691b70e46fe2912cbcf7ec16a020fc43f28d4
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001068397_integrity_legal_matters.txt
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+LEGAL MATTERS The validity of the shares of our common stock under Delaware law will be passed upon for us by Clifford Chance Rogers & Wells LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Heller Ehrman White & McAuliffe LLP.
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+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Maxygen by Heller Ehrman White & McAuliffe, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation. An investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own 4,546 shares of our common stock. Heller Ehrman White & McAuliffe, certain of its employees and HEWM Investors, an entity affiliated with Heller Ehrman White & McAuliffe, beneficially own 35,000 shares of our common stock. Julian N. Stern, the sole shareholder of a professional corporation that is a partner of Heller Ehrman White & McAuliffe and Secretary of Maxygen beneficially owns 66,000 shares of our common stock.
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+Table of Contents Ordering and Delivery. When our customers are ready to place an order, they can proceed through our shopping cart function directly to our checkout page. We presently accept American Express, Discover, Mastercard and Visa as payment for our products, and we plan to expand the payment options we accept. At our partnership schools, we also accept personal checks and debit student accounts. During the ordering process, we ask our customers for basic information about themselves, which we maintain in our customer database. Once a customer places an order, he or she immediately receives an e-mail that includes a unique order number and confirms that the order has been received and processed. We do not accept orders for out- of-stock items. However, through our BookPager option, students can request that we notify them by e-mail for up to 21 days if the desired book becomes available. After the order is shipped, the customer receives a second e-mail that includes a UPS tracking number and a link to a page on our Web site where they can follow their order through the delivery process. We use UPS Second Day Air to take advantage of UPS s guaranteed delivery and to ensure our customers will receive their orders within three business days. For faster delivery, our customers may choose to pay for UPS overnight service. Customer Service. We are committed to delivering superior customer service. Our customers can easily access our customer service center at any time during their visits to our Web site. The customer service page of our Web site offers answers to frequently asked questions and enables our customers to ask their own questions through e-mail. We also have a toll-free number that is staffed twenty-four hours a day, seven days a week. We increase our service center staffing during our peak periods to ensure a fast response time to our customers queries. We also maintain separate toll-free numbers dedicated to our partnership schools. Membership. Anyone who visits our Web site can open a free membership account with VarsityBooks.com by providing basic school-related and other information including shipping and billing addresses. Members can store the products they are considering in their shopping cart until they are ready to make a purchase. Each time they sign on, they have the opportunity to review their shopping cart and determine which items they want to buy. We store their shipping and billing addresses to facilitate easy ordering every time they return to our Web site. We also allow them to view their past purchases and print receipts for their own records. We provide our members with regular newsletters and marketing material via e-mail. Find a Job. The find a job section of our site enables a search for full-time and part-time jobs as well as internships. In addition, we provide job interview tips and industry and company information. Also, we offer relocation tools to assist job seekers in evaluating opportunities. Marketing Our goal is to be the leading online college retailer and most effective marketing channel to college students. As such, we believe it is critical that college students are exposed to our Web site, www.varsitybooks.com. Our marketing strategy is designed to increase awareness of the VarsityBooks.com brand name, increase customer traffic to our Web site, build strong brand loyalty, acquire more customers, maximize repeat customers and develop incremental revenue opportunities. We advertise our Web site through our student representatives and through a comprehensive national media plan featuring radio, print, e-mail and online banner advertisements. In addition to targeting college students, we market to professors, teaching assistants, dorm resident assistants and parents to have them encourage students to visit our Web site. The marketing channels we have developed are as follows: Student Representatives. To penetrate the difficult-to-reach college student market, we have created a network of student representatives, employing over 2,000 as of January 17, 2000. A portion of our full time staff is dedicated to selecting, training, managing and monitoring our growing network of student representatives. We actively scout college campuses to determine names of student leaders on campus. We then recruit and rigorously screen these students for our lead student representative positions. We conduct regular training sessions for our lead representatives, during which we teach them about our company, marketing techniques and how to select a student representative team. Our lead student Table of Contents representatives are responsible for hiring and managing a campus team consisting of up to fifteen student representatives. We provide each lead student representative with a comprehensive marketing kit that they use to market directly to classrooms, student organizations and dormitories, depending on what they consider to be the best method for their campus. We pay our representatives an hourly wage and offer sales-based commissions. We also grant stock options to our lead representatives. Off-line Advertising and Public Relations. We combine the active marketing of our student representatives with a comprehensive media campaign to emphasize our brand and ensure our reach is broad enough to raise awareness among key student influencers such as parents. We engage in a coordinated program of print advertising in college, specialized and general circulation newspapers and magazines as well as a radio advertising campaign in targeted markets. We increase our marketing in the period before classes start and through the prime book buying season. As a result of our own public relations activities, as well as unsolicited invitations, we have been featured in a variety of television shows, newspaper and magazine articles and radio programs including CNN, The New York Times , The Wall Street Journal and National Public Radio. Online Advertising. We place advertisements on other high-profile and high-traffic college-oriented Web sites. These advertisements usually take the form of banners that encourage readers to click through directly to www.varsitybooks.com. In addition, we obtain lists of e-mail addresses of college students who have consented to receive relevant information and send e-mails to these students directing them to our Web site. Awareness Program. We market to college students before the beginning of each school year through awareness programs which target incoming students. We send our student representative teams to freshman orientations, and advertise on the radio at major student summer destinations to reach students on the way back to school. Affiliate Programs. We offer student organizations, such as fraternities, sororities and other clubs, a fundraising opportunity through our affiliate program. Organizations can work with us to market our brand by creating links from their Web site to ours and through direct marketing. We track the customers who reach our Web site through affiliate lines and we pay our affiliates a sales-based commission. Alliances and Relationships We have arrangements with a number of college-oriented Web sites and other organizations to provide a link to www.varsitybooks.com. We believe this enhances our marketing efforts and allows us to capitalize on the recognition of other noncompeting Web sites: AOL s ICQ. We entered into a three-year interactive marketing agreement with AOL s ICQ pursuant to which we are the exclusive college-targeted commerce partner on the ICQ instant messaging service as well as its Web site, www.icq.com . We will act as the exclusive third-party targeted advertiser and a marketer of the ICQ service and ICQ.com on U.S. college campuses. Our exclusivity provisions expire on December 31, 2000, and the agreement itself is scheduled to expire on December 22, 2002 unless earlier terminated because of breach, insolvency, or change of control affecting us. Sallie Mae. We entered into both a marketing services agreement and a product promotion agreement with Sallie Mae, Inc., an educational loan delivery organization. Pursuant to the marketing services agreement, Sallie Mae will pay us $2.0 million over the two year term. In exchange, we will customize a marketing plan for Sallie Mae to reach the college market. In addition, we entered into a product promotion agreement with Sallie Mae under which we will pay Sallie Mae referral fees based on a percentage of any revenue generated by its customers during the term of the arrangement. Sallie Mae will promote our products to its customers. Sallie Mae will also actively promote our partnership program to the schools to which it sells and promotes its products. In addition, Sallie Mae will maintain links on its Web site to our Web site and we will be the exclusive textbook retailer on the Sallie Mae site. In exchange, we granted Sallie Mae a (in thousands, except share and per share data) Statement of Operations Data Net sales $ 132 $ 96 $ 8,866 Operating expenses 2,825 1,428 28,179 Loss from operations (2,693 ) (1,332 ) (19,313 ) Other income (expense), net 4 6 156 Net loss (2,689 ) (1,326 ) (19,157 ) Preferred stock dividends 682 Net loss applicable to common stockholders (2,689 ) (1,326 ) (19,839 ) Net loss per share: Basic and diluted $ (1.53 ) $ (0.80 ) $ (9.40 ) Table of Contents warrant to purchase up to 616,863 shares of common stock, which represents 3.5% of our aggregate common stock outstanding and reserved for issuance immediately prior to the completion of this offering, at a price equal to the initial public offering price in this offering. Of these shares, 352,493 are currently vested and the remaining 264,370 shares will vest over the two year term of the agreement depending on the number of customer transactions and partnership school referrals Sallie Mae delivers during that period. Both of these agreements will expire on February 1, 2002 unless earlier terminated because of breach, insolvency, or change of control affecting us. edu.com. We are currently the only online retailer of textbooks for edu.com, a Web site that offers discounts on hardware, software and other products exclusively to students. edu.com verifies that its customers are enrolled at a higher education institution before selling any products. Once students are members of edu.com, they can initiate a textbook search by author, title, ISBN number or keyword directly on the edu.com Web site. Once a search is initiated, the student is linked to a VarsityBooks.com page to continue the shopping and ordering process. The written agreement we have entered into with edu.com is scheduled to expire on August 20, 2000 unless both parties agree to its renewal. The agreement provides that edu.com will receive a percentage of the revenue generated from the co-branded edu.com/VarsityBooks.com Web site. Book Tech. We have a partnership with Book Tech, Inc., a custom publisher of digitally printed and copywritten material. Under the agreement, Book Tech provides co-branded course packets, which we offer on our Web site. The written agreement we have entered into with Book Tech is scheduled to expire on June 30, 2000, but will extend automatically for one-year terms unless either party elects not to renew. The agreement provides that Book Tech will receive a percentage of revenue from our sales of books that originated from Book Tech s Web site. Kaplan Educational Centers. We have a relationship with Kaplan Educational Centers, under which Kaplan allows us to distribute flyers and market our services in their learning centers. Kaplan is an educational and career service company. We do not have a written agreement with Kaplan Educational Centers. JobDirect.com. We have a relationship with JobDirect.com that enables students who visit our Web site to search for part-time and full-time jobs and internships. JobDirect.com is an online database for employers to target, search and find prospective job candidates from the college market. Our agreement with JobDirect.com terminates December 31, 2000, but is subject to cancellation with 60 days written notice. As we add other product and service offerings, we plan to enter into similar arrangements to support our growth. Partnership Program As of January 17, 2000, we were the exclusive new textbook supplier for 25 institutions. At these institutions, which include smaller, traditional four-year colleges, private high schools, distance learning programs and continuing and professional education programs, we work directly with our partners to market our services to their students. By partnering with private high schools, we reach students early, enabling us to extend our brand and establish a customer relationship with students prior to their attending college. Distance learning programs, in particular, represent a growing market that the traditional campus bookstore cannot efficiently serve. According to International Data Corporation, over 50% of college students have indicated an interest in distance learning. As a result, IDC estimates that over 84% of higher education institutions will offer distance learning programs and that the number of students taking such courses will increase by more than 30% per year before 2002. Our exclusive relationships generally are for a period of up to four years and automatically renew on a year-to-year basis. For each school that has an intranet, we create and maintain a virtual bookstore directly on their site. When students click on the school s virtual bookstore, they link directly to a co-branded Web site. Our partner schools receive a share of the revenues their students generate. By taking Table of Contents advantage of the convenience and cost-savings of this program, our partner schools provide a valuable service to their students. Fulfillment We fulfill all of our textbook orders through Baker Taylor, a leading distributor of books, videos and music products with whom we have a series of written agreements, each of which are scheduled to expire on October 1, 2002 with automatic renewal for one year unless either party elects in writing not to renew. The agreements are terminable upon up to 30 days notice by either party in the event of a default. Under these agreements with Baker Taylor, we agree to provide Baker Taylor with our written demand forecasts for each upcoming semester and we agree to use Baker Taylor as our principal supplier of textbooks and drop-ship and fulfillment services. We pay fees and expenses related to the services Baker Taylor provides and we purchase products from Baker Taylor at a discount to the suggested price. In return, Baker Taylor agrees not to provide drop-ship services to any online textbook retailer serving students at colleges and universities or distance learning programs located in the United States that require students to purchase textbooks, unless the retailer was an existing customer of Baker Taylor on or prior to June 10, 1998, the date we initially contracted with Baker Taylor. Our agreements with Baker Taylor provide us access to and use of an electronic set of data elements from Baker Taylor s title file database which contains bibliographic records. In addition, under these agreements, Baker Taylor provides us with promotional, customer service, and database management services. As a result of the data access our agreements provide, information on availability of book titles is automatically updated on our Web site on an hourly basis from 8:00 a.m. to 10:00 p.m. eastern standard time based on a direct feed from Baker Taylor, ensuring our customers receive accurate in-stock inventory information. Orders placed on our Web site are automatically transmitted to Baker Taylor within twenty minutes of their receipt. At the Baker Taylor warehouse currently used for fulfillment, the order is processed, packaged in a VarsityBooks.com branded box and shipped directly to our customers via UPS so that it arrives within three business days of the placement of the order. We extend a convenient return policy to our customers under which returns are shipped directly to Baker Taylor to expedite processing. Providing Baker Taylor with our demand forecasts for each semester helps to ensure they maintain an adequate and relevant inventory to meet the demands of our customers. Technology We use an array of site management, search, customer interaction, transaction-processing and fulfillment services and systems using a combination of proprietary technologies and commercially available, licensed technologies. Our strategy is to license commercially available technology whenever possible rather than seek internally developed solutions. Our technology environment is designed to provide: a satisfying customer experience; consistent system availability and good performance; high security for all transactions, particularly, our customers commerce transactions; scalability for continued growth; and the collection, maintenance and security of valuable information. We currently use a Microsoft Windows NT operating system platform and multiple Compaq application servers that house our Web server and search engine applications. These servers are able to handle applications including accepting and validating customer orders, handling multiple shipment methods and accepting, authorizing and charging customer credit cards. In addition, our system maintains ongoing automated e-mail communications with customers throughout the ordering process. These systems entirely automate many routine communications, facilitate management of customer e-mail inquiries and Table of Contents allow customers to, on a self-service basis, check order status and order history, change their personal information and check subscriptions to personal notification services. We manage user requests and other traffic using load balancing devices that work across the entire complement of our hardware. This strategy of balancing traffic allows all customers and site users to enjoy favorable response times and other performance measures, regardless of traffic fluctuations. Although we own and maintain our hardware and software systems, Frontier/ Global Center, located in Herndon, Virginia, hosts our two separate server environments and acts as our Internet service provider and we lease the space in which our hardware system resides from Frontier/ Global Center. A group of in-house systems administrators and network engineers and Frontier/ Global personnel monitor and operate our Web site, network operations and transaction-processing systems. Our agreement with Frontier/ Global Center currently provides for service to be provided on an annual basis, subject to renewal. We pay for the space in which our hardware system resides and our Internet access based on our usage, on a monthly basis. We may terminate this agreement on any annual renewal date without penalty. We use the Microsoft suite of tools for our development environment, including Site Server Commerce, InterDev and SQL SVR for the database engine. Additionally, we have separate database servers that capture and retain transaction logs of all activity that occurs on the site. These log databases can, among other things, trace a transaction from its inception to its completion. Our separate recording database generates and delivers reports and interfaces for our marketing, operations and financial systems. We employ SSL data encryption technology to protect credit card data while it is passed from the customer through the site during a purchase transaction. This prevents outside parties from intercepting the customer s credit card data during transaction processing. Competition Both the e-commerce market and online textbook business are highly competitive. Since the introduction of e-commerce to the Internet, the number of e-commerce Web sites competing for customers attention has increased rapidly, and the market for online textbook sales is relatively new, intensely competitive and rapidly changing. We expect future competition to intensify given the relative ease with which new Web sites can be developed. We currently or potentially compete, directly and indirectly, for customers, advertisers and sponsors with the following categories of companies: traditional new textbook retailers, such as campus bookstores; traditional used college textbook retailers, some of which have or are expected to begin online selling; Internet-based textbook retailers such as bigwords.com, ecampus.com (affiliated with Wallace s Bookstores, Inc.), efollett.com (affiliated with The Follett Corporation) and textbooks.com (affiliated with Barnes Noble College Bookstores, Inc.); Internet-based general booksellers such as Amazon.com, barnesandnoble.com and Borders.com; general purpose consumer online services such as America Online and Microsoft Network, each of which provides access to student-related content and services; vendors of college student information, merchandise, products and services distributed through other means, including retail stores, direct mail and schools; and Web sites targeted to students generally or to students of a particular school, such as Web sites developed by College Club, CommonPlaces and Student.Net Publishing. Part of our strategy is to offer additional products and services. For many of these products and services, there are already other traditional and online retailers offering these products. Pro forma basic and diluted $ (1.27 ) $ (2.99 ) Table of Contents We believe that the principal competitive factors in attracting and retaining student customers are: convenience; discount pricing; selection of available products; customer service; quality of content and navigability tools; brand recognition; and reliability and speed of fulfillment. Our success will depend heavily upon our ability to provide a compelling and satisfying shopping experience and advertising environment, as well as our continued ability to attract and retain experienced personnel. Intellectual Property We regard our copyrights, service marks, trademarks, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers, independent contractors, sponsors and others to protect our proprietary rights. We have applied to register VarsityBooks.com as a trademark with the United States Patent and Trademark Office. We received an anticipatory refusal to our application for registration on December 15, 1998 because of a prior-filed application to register VARSITY BOOK for personal computers, peripheral equipment and various hardware items. We filed a response to this anticipatory refusal on June 15, 1999. The examining attorney at the United States Patent and Trademark Office will review that response and decide whether to withdraw the anticipatory refusal, in which case our application would proceed, or to continue it, in which case our application would be suspended until the prior-filed application matures into a registration or is abandoned. We may be required to obtain licenses from others to refine, develop, market and deliver new products and services. There can be no assurance that we will be able to obtain any such license on commercially reasonable terms or at all, or that rights granted pursuant to any licenses will be valid and enforceable. Domain names are the user s Internet address. Domain names have been the subject of significant trademark litigation in the United States. Domain names derive value from the individual s ability to remember such names, therefore there can be no assurance that our domain name will not lose its value if, for example, users begin to rely on mechanisms other than domain names to access online resources. The current system for registering, allocating and managing domain names has been the subject of litigation and of proposed regulatory reform. There can be no assurance that our domain name will not lose its value, or that we will not have to obtain an entirely new domain name in addition to or in lieu of our current domain name, if such litigation or reform effort results in a restructuring of the current domain name system. Government Regulation Internet Regulation in General. There are an increasing number of laws and regulations pertaining to the Internet. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted relating to issues such as to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services. Moreover, it may take years to determine whether and how existing laws such as those governing intellectual property ownership and infringement, privacy, libel, copyright, trade mark, trade secret, obscenity, personal privacy, taxation and the regulation of the sale of other specified goods and services apply to the Internet. The requirement that Table of Contents we comply with any new legislation or regulation, or any unanticipated application or interpretation of existing laws, may decrease the growth in the use of the Internet, which could in turn decrease the demand for our Internet-based services, increase our cost of doing business or otherwise materially harm our business. Privacy Concerns. Federal, state and foreign governments have enacted or may enact laws or consider regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. Such regulations may include requirements that companies establish procedures to: give adequate notice to consumers regarding information collection and disclosure practices; provide consumers with the ability to have personal identifying information deleted from a company s data; provide consumers with access to their personal information and with the ability to rectify inaccurate information; clearly identify affiliations or a lack thereof with third parties that may collect information or sponsor activities on a company s Web site; obtain express parental consent prior to collecting and using personal identifying information obtained from children; and the Federal Children s Online Privacy Act. Such regulation may also include enforcement and redress provisions. While we have implemented programs designed to enhance the protection of the privacy of our users, including children, there can be no assurance that such programs will conform with applicable laws or regulations. Moreover, even in the absence of such regulations, the Federal Trade Commission has begun investigations into the privacy practices of companies that collect information on the Internet. One such investigation has resulted in a consent decree pursuant to which an Internet company agreed to establish programs to implement the privacy safeguards described above. We may become subject to such an investigation, or the FTC s regulatory and enforcement efforts may adversely affect the ability to collect demographic and personal information from users, which could have an adverse effect on the our ability to provide highly targeted opportunities for advertisers and e-commerce marketers. Any such developments could harm our business. It is also possible that cookies may become subject to laws limiting or prohibiting their use. The term cookies refers to information keyed to a specific server, file pathway or directory location that is stored on a user s hard drive, possibly without the user s knowledge, and which is used to track demographic information and to target advertising. Some of the currently available Internet browsers allow users to modify their browser settings to remove cookies or prevent cookies from being stored on their hard drives. In addition, a number of Internet commentators, advocates and governmental bodies in the United States and other countries have urged the passage of laws limiting or abolishing the use of cookies. Limitations on or elimination of the use of cookies could limit the effectiveness of our targeting of advertisements, which could harm our ability to generate advertising revenue. We currently obtain and retain personal information about our Web site users with their consent. We have a stringent privacy policy covering this information. However, if third persons were able to penetrate our network security and gain access to, or otherwise misappropriate, our users personal information, we could be subject to liability. Such liability could include claims for misuses of personal information, such as for unauthorized marketing purposes or unauthorized use of credit cards. These claims could result in litigation, our involvement in which, regardless of the outcome, could require us to expend significant financial resources. Data Protection. Legislation pending in Congress, if passed, would afford broader rights to owners of databases of information, such as stock quotes and sports scores. Such protection already exists in the European Union. If enacted, this legislation could result in an increase in the price of services that provide data to Web sites. In addition, such legislation could create potential liability for unauthorized use of such data. Shares used in computation of basic and diluted loss per share 1,755,536 1,660,714 2,111,621 Table of Contents Internet Taxation. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet and some states have taken measures to tax Internet-related activities. Although Congress recently placed a three-year moratorium, due to expire in October 2001, on state and local taxes on Internet access or on discriminatory taxes on e-commerce, existing state or local laws were expressly excepted from this moratorium. Further, once this moratorium is lifted, some type of federal or state taxes may be imposed upon Internet commerce. Such legislation or other attempts at regulating commerce over the Internet may substantially impair the growth of commerce on the Internet and, as a result, adversely affect our opportunity to derive financial benefit from such activities. Jurisdiction. Due to the global reach of the Internet, it is possible that, although our transmissions over the Internet originate primarily in the Commonwealth of Virginia, the governments of other states and foreign countries might attempt to regulate Internet activity and our transmissions or take action against us for violations of their laws. Employees As of January 17, 2000, we had approximately 200 full-time employees and over 2,000 student representatives, including over 600 lead student representatives. Each semester our lead student representatives recruit up to 15 representatives each to work on their campus teams. We also hire temporary employees, particularly at the beginning of each school semester, and contract service providers as necessary. As we continue to grow and introduce additional products and services, we expect to hire additional employees, particularly in sales and marketing, online product development and booklist operations. None of our employees is represented by a labor union or is the subject of a collective bargaining agreement. We believe that relations with our employees are good. Facilities Our headquarters are at 2020 K Street, N.W. in Washington, D.C. At this headquarters site, we presently lease an aggregate of approximately 34,000 square feet. Our current lease for this facility expires in February 2003. We believe this space will be sufficient for our needs for approximately twelve months. Legal Proceedings On October 29, 1999, the National Association of College Stores, or N.A.C.S., sued us in the United States District Court for the District of Columbia. In their complaint, N.A.C.S. alleged that we use false and misleading advertisements in our efforts to sell textbooks. Specifically, the complaint alleges that we falsely advertise discounts of 40% on textbooks on our Web site. The complaint also alleges that there is no suggested retail price for textbooks from which to calculate discounts. N.A.C.S. claims that, in making the alleged false and misleading statements, we are implying that N.A.C.S. member stores overcharge students for their textbooks. The complaint requests that we be prevented from claiming in any advertising or promotional material, packaging or the like, or representing in any way, that we offer discounts or percentages off of textbooks, unless we clearly and prominently identify the true basis for the claimed discount, the source of the comparative price we use to determine the discounts we offer and the true percentage of textbooks offered at the stated discounted price. In addition, N.A.C.S. seeks to have us retract all prior claims through prominent statements on our Web site. The complaint does not seek monetary damages, other than attorneys fees. We believe these claims to be completely without merit. Our Web site and our advertising truthfully state that we offer college textbooks at up to 40% off suggested price. We also believe that the industry data we use to determine the suggested price from which we calculate discounts is appropriate. We have filed a motion to dismiss these claims and are awaiting a ruling on our motion. (In thousands) 1999 $ 185 2000 205 2001 Eric J. Kuhn 29 Co-founder, Chief Executive Officer, President and Chairman of the Board Timothy J. Levy 29 Co-founder, Executive Vice President, Development and Director Richard Hozik 48 Senior Vice President and Chief Financial Officer Maryann Bastnagel 42 Senior Vice President and Chief Information Officer Debra Graham 34 Vice President of Marketing Andrew E. Green 30 Vice President, Operations and Business Development Jonathan Kaplan 35 Vice President, Communications and Strategic Planning Helen Kim 32 Vice President of Marketing Bruce McNamer 37 Vice President, Business Development Jonathan N. Grayer(2) 34 Director Allen L. Morgan(1)(2) 46 Director Andrew J. Oleszczuk(1) 43 Director Gene Riechers(1)(2) 44 Director James S. Ulsamer (1) Member of the compensation and stock option committee. (2) Member of the audit committee. Eric J. Kuhn co-founded VarsityBooks.com and has served as our Chief Executive Officer and Chairman of the Board since our inception. He has also served as our President since June 1999. From August 1997 to April 1998, Mr. Kuhn practiced law at Greenberg Traurig Hoffman Lippoff Rosen and Quentel P.A. in Miami, Florida, and from September 1996 to July 1997, practiced law at Kaye, Scholer, Fierman, Hays Handler L.L.P. in New York, New York. Mr. Kuhn serves on the board of directors of the Electronic Commerce Forum, a public/private organization representing the interests of the emerging electronic commerce industry. Mr. Kuhn received a B.A. with honors from Haverford College in 1993 and a J.D. with honors from The George Washington University Law School in 1996. Timothy J. Levy co-founded VarsityBooks.com and has served as a Director since our inception. He has served as our Executive Vice President, Development since June 1999. From December 1997 to June 1999, Mr. Levy served as our President. From September 1997 to April 1998, Mr. Levy practiced law at Arent Fox Kintner Plotkin Kahn, P.L.L.C. in Washington, D.C. From August 1996 to August 1997, Mr. Levy served as a judicial clerk for the Hon. William A. Dreier, Presiding Judge, Appellate Division of New Jersey. Mr. Levy serves on the board of directors of the Electronic Commerce Forum, a public/private organization representing the interests of the emerging electronic commerce industry. Mr. Levy received a B.A. from Columbia University in 1992 and a J.D. with honors from The George Washington University Law School in 1996. Richard Hozik has served as our Senior Vice President and Chief Financial Officer since June 1999. From November 1995 through May 1999, Mr. Hozik served as Senior Vice President and Chief Financial Officer of LCC International, Inc., a publicly-traded radio frequency engineering and wireless telecommunications consulting company. From October 1992 through October 1995, Mr. Hozik served as Senior Vice President and Chief Financial Officer of the J.E. Robert Companies, a privately held real Table of Contents estate investment and management company. Mr. Hozik is a Certified Public Accountant and received a B.S. in Accounting from the University of Maryland in 1973. Maryann Bastnagel has served as our Senior Vice President and Chief Information Officer since May 1999. From June 1997 to May 1999, Ms. Bastnagel served as the Senior Vice President of Travel Services International, Inc., a distributor of specialized leisure travel services. From February 1989 to June 1997, Ms. Bastnagel served as the Vice President of Business Technology Strategy of Marriott International. Ms. Bastnagel received a B.A. and a B.S. from the University of Maryland at College Park in 1979 and 1985, respectively. She also received an M.S. from Johns Hopkins University in 1989. Debra Graham has served as a Vice President of Marketing since November 1998. From 1995 to 1998, Ms. Graham was at Dean Company where, as a Manager, she focused on retail and high-tech marketing. From 1993 to 1995, Ms. Graham worked in brand management at Procter Gamble. Ms. Graham received an A.B. from Harvard and Radcliffe Colleges in 1988 and a M.B.A. from Harvard Business School in 1993. Andrew E. Green has served as our Vice President of Operations and Business Development since October 1998. From September 1996 to October 1998, Mr. Green practiced law in the Cyberlaw and Communications groups at Wiley, Rein Fielding in Washington, D.C. Mr. Green received a B.A. from the University of California, Berkeley in 1991 and a J.D. with honors from The George Washington University Law School in 1996. Jonathan Kaplan has served as our Vice President of Communications and Strategic Planning since October 1999. From 1994 to 1999, Mr. Kaplan worked in the Clinton Administration, most recently in the White House as Special Assistant to the President for Economic Policy and Chief of Staff of the National Economic Council. From 1992 to 1994, Mr. Kaplan practiced law at Covington Burling in Washington, D.C. where he specialized in general litigation matters. Mr. Kaplan received an A.B. (with honors) from Harvard College in 1986 and a J.D. from the Boston University School of Law in 1992. Helen Kim has served as a Vice President of Marketing since May 1999. From 1997 to May 1999, Ms. Kim was with SRI Consulting, a subsidiary of Stanford Research Institute. From 1995 to 1997, Ms. Kim served as the Director of Marketing and Corporate Development for Rally s Inc. Ms. Kim received a B.A. from the University of Virginia in 1989 and an M.B.A. from Darden Business School at the University of Virginia in 1994. Bruce McNamer has served as our Vice President of Business Development since February 2000. From 1998 to 1999, Mr. McNamer served as a White House Fellow at the National Economic Council. From 1996 to 1998 Mr. McNamer was with McKinsey Company. From 1985 through 1988, Mr. McNamer worked for Morgan Stanley Company. Mr. McNamer received an A.B. (with honors) from Harvard College in 1985, a J.D. from Stanford Law School in 1996, and an M.B.A. from the Stanford University Graduate School of Business, also in 1996. Jonathan N. Grayer has served as a Director since April 1999. Since July 1994, Mr. Grayer has served as the President and Chief Executive Officer of Kaplan Educational Centers, a provider of educational and career services. Mr. Grayer received an A.B., with honors, from Harvard College in 1986 and an M.B.A. from Harvard Business School in 1990. Allen L. Morgan has served as a Director since February 1999. Since January 1999, Mr. Morgan has been a General Partner of the Mayfield Fund, a venture capital fund. From May 1997 to December 1998, Mr. Morgan was a partner in the corporate department of Latham Watkins in Menlo Park, California. From November 1982 to May 1997, Mr. Morgan was a partner in the corporate department of Wilson, Sonsini, Goodrich Rosati in Menlo Park, California. He received an A.B. from Dartmouth College in 1976, a B.A. and M.A. from Oxford University in 1978 and 1983, respectively, and a J.D. from the University of Virginia in 1981. Andrew J. Oleszczuk has served as a Director since September 1999. Since August 1998, Mr. Oleszczuk has been the President of Tribune Ventures, a division of Tribune Company. From Shares used in computation of pro forma basic and diluted loss per share 2,125,397 6,411,494 Table of Contents November 1993 to July 1998, Mr. Oleszczuk served as Vice President of Development at Tribune Company. Mr. Oleszczuk received a B.A. from Northwestern University in 1978 and an M.B.A. from the Wharton Graduate School of Business in 1980. Gene Riechers has served as a Director since February 1999. Since 1996, Mr. Riechers has served as the Managing Director of FBR Technology Venture Partners L.P., a venture capital fund. From December 1995 to December 1996, Mr. Riechers served as the Chief Financial Officer of CyberCash, Inc., an Internet payment systems company. From September 1993 to December 1995, he served as Chief Financial Officer and Vice President, Business Development of Online Resources Communications Corp. Mr. Riechers also serves as a director of LifeMinders.com, Inc. and webMethods, Inc. Mr. Riechers received a B.S. from Pennsylvania State University in 1977 and an M.B.A. from Loyola College in 1984. James S. Ulsamer has served as a Director since July 1998. Mr. Ulsamer has served as President of Baker Taylor Retail, a division of Baker Taylor Corporation, a distributor of books, music and videos, since July 1999 and as Executive Vice President of Baker Taylor since June 1994. From June 1994 to July 1999, he also served as President of Baker Taylor Books. Mr. Ulsamer earned a B.A. in Economics from Rutgers University in 1972. Board of Directors Our board of directors is divided into three classes, designated as Class I, Class II and Class III. Members of each class hold office for staggered three-year terms. At each annual meeting of our stockholders commencing in 2000, the successors to the directors whose terms expire at that meeting will be elected to serve until the third annual meeting after their election or until their successors have been elected and qualified. Messrs. Oleszczuk and Ulsamer are Class I directors whose terms expire at the 2000 annual meeting of the stockholders. Messrs. Grayer, Levy and Morgan are Class II directors whose terms expire at the 2001 annual meeting of the stockholders. Messrs. Kuhn and Riechers are Class III directors whose terms expire at the 2002 annual meeting of stockholders. With respect to each class, a director s term will be subject to the election and qualification of their successors, or their earlier death, resignation or removal. This classification of our board of directors, when taken in conjunction with other provisions of our amended and restated certificate of incorporation, may delay or prevent a change in control of our company. Board Committees Our board of directors has established an audit committee and a compensation and stock option committee. The audit committee reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the recommendation of our independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, the performance of our independent auditors and our accounting practices. The audit committee consists of Messrs. Grayer, Morgan and Riechers. The compensation and stock option committee determines the salaries and benefits for our employees, consultants, directors and other individuals compensated by our company. In addition, the compensation and stock option committee administers our stock option plan. The compensation and stock option committee consists of Messrs. Morgan, Oleszczuk and Riechers. Director Compensation Except for reimbursement for reasonable travel expenses relating to attendance at board meetings and the granting of stock options, directors are not compensated for their services as directors. Our directors are eligible to participate in our stock option plan. As of December 31, 1999, we had granted to Mr. Kuhn an option to purchase 138,052 shares at an exercise price of $0.30 per share and an option to purchase 453,383 shares which includes options to purchase 107,913 shares we granted on February 3, 2000 pursuant to the AOL, Imperial and Sallie Mae transactions at an exercise price of $10.00 per share. On Eric J. Kuhn $ 52,000 $ Chief Executive Officer Option Grants During Fiscal 1998 Mr. Kuhn was not granted any options or stock appreciation rights in 1998. In August 1999, we granted Mr. Kuhn an option to purchase 138,052 shares of our common stock at an exercise price of $0.30 per share. In December 1999, we granted Mr. Kuhn an option to purchase 453,383 shares of our common stock, which includes options to purchase 107,913 shares granted on February 3, 2000 in conjunction with the warrants we issued to AOL, Imperial and Sallie Mae, at an exercise price of $10.00 per share. Both options vest ratably each month from the date of grant for four years. Option Exercises and Fiscal Year-End Option Values Mr. Kuhn did not exercise any options to purchase securities during 1998 and did not hold any such options as of December 31, 1998. Agreements Regarding Employment We have entered into agreements with Mr. Kuhn and Mr. Levy. Compensation. The compensation of Mr. Kuhn and Mr. Levy is determined by the board of directors provided that, according to their respective agreements, Mr. Kuhn will receive a salary of not less than $160,000 per year and Mr. Levy will receive a salary of not less than $150,000 per year. Effective August 1, 1999 the board of directors has determined that Mr. Kuhn will receive an annual salary of $160,000 and Mr. Levy will receive an annual salary of $150,000. In addition, Mr. Kuhn and Mr. Levy are eligible for cash performance bonuses of up to 25% of their base salary. Stock Option Grants. The board of directors may grant stock options to Mr. Kuhn and Mr. Levy. Termination of Agreements. Mr. Kuhn s and Mr. Levy s agreements may be terminated with or without cause by either Mr. Kuhn, Mr. Levy or us. If we terminate the agreement of either Mr. Kuhn or Mr. Levy with cause, or if either resigns without good reason, he is only entitled to his base salary through the date of termination. If we terminate the agreement of either Mr. Kuhn or Mr. Levy without cause or if either Mr. Kuhn or Mr. Levy resign for good reason, he is entitled to his base salary through the date of termination, together with his pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn or Mr. Levy, we will pay an amount equal to twelve months salary, payable in twelve equal installments after termination of his employment. If there is a change in control of the Company, and if at anytime thereafter the employment of Mr. Kuhn or Mr. Levy is terminated without cause, or if Mr. Kuhn or As of September 30, 1999 Table of Contents Mr. Levy terminate his employment with good reason, we will pay his base salary through the date of termination at the rate in effect at the time, together with pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn or Mr. Levy, we will pay a severance payment in an amount equal to 150% of their base salary in effect as of termination. Noncompetition and Confidentiality. Neither Mr. Kuhn nor Mr. Levy may compete with us during the term of his employment and neither may solicit our employees for a period of twelve months immediately following the termination of his relationship with us for any reason, whether with or without cause. Confidentiality and Assignment of Inventions. Mr. Kuhn and Mr. Levy are also bound by confidential information and invention assignment agreements that prohibit them from, among other things, disseminating or using confidential information about our business or clients in any way that would be adverse to us. Mr. Kuhn and Mr. Levy have agreed to assign to VarsityBooks.com all inventions which they may develop during their respective terms of employment. Stock Option Plan We have adopted our 1998 Stock Option Plan. The plan provides for grants of incentive stock options and nonqualified stock options to our employees, consultants, advisors and directors. The plan authorizes the issuance of an aggregate of up to 4,000,000 shares of common stock. As of December 31, 1999, we had options to purchase 1,851,982 shares of common stock outstanding under the plan. We adopted the plan to promote our best interests. We believe that encouraging stock ownership enables us to attract, retain and incent employees, directors, consultants and advisors. In addition, we want to reward those employees, directors, consultants and advisors who contribute to our success. The board of directors, or a committee appointed by the board, has the authority to determine the terms of the options, including the exercise price of the options, the number of shares subject to each option, the terms upon which the option may be exercised and the form of consideration payable on such exercise. The exercise price must be at least 100% of fair market value for incentive stock options. Incentive stock options granted to any holder of 10% or more of the combined voting power of all classes of our stock must have an exercise price of not less than 110% of fair market value. An option granted pursuant to our stock option plan must be exercised within ten (10) years from the effective date of grant. The board of directors may amend or terminate the plan at any time except that such amendment or termination may not adversely affect or alter any right or obligation with respect to any outstanding option, except to allow the outstanding option to qualify as an incentive stock option. Employee Stock Purchase Plan The Employee Stock Purchase Plan will become effective upon the completion of this offering. A total of 500,000 shares of common stock are available for issuance under the plan. The number of shares of common stock available for issuance under the plan will be increased on the first day of each of our fiscal years during the term of the plan by the lesser of 300,000 shares or 2% of our issued and outstanding common stock as of the last day of the preceding year. The plan will be administered by a committee appointed by the board of directors. Employees are eligible to participate if they are customarily employed by us for at least 20 hours per week and more than five months in any fiscal year. The plan permits an eligible employee to purchase our common stock at a discount through accumulated payroll deductions of up to 15% of his or her compensation. The plan, which is intended to qualify under Section 423 of the IRS Code, will be implemented by a series of overlapping offering periods of 24 months duration, with new offering periods, other than the first offering period, commencing on or about January 1, April 1, and July 1 and October 1 of each year. Each offering period will consist of eight consecutive purchase periods of approximately three months duration, Actual As Adjusted Table of Contents and at the end of each three month period, an automatic purchase will be made for participants. The initial offering period is expected to commence on the date of this offering and end on December 31, 2001; the initial purchase period is expected to begin on the date of this offering and end on March 31, 2000. Participants generally may not purchase more than 1,000 shares on any purchase date or stock having a value measured at the beginning of the offering period greater than $25,000 in any calendar year. Individuals who are eligible employees as of the first business day of each offering period may enter the plan as of that offering period. Once enrolled in the plan, a participant will continue to participate in the plan for future offering periods, until the participant ceases to be an eligible employee, withdraws from the plan or discontinues his or her contributions. The purchase price per share will be 85% of the lower of (1) the fair market value of our common stock on the purchase date and (2) the fair market value of a share of our common stock on the last trading day before the offering date, or, in the case of the first offering period under the plan, the price at which one share of our common stock is offered to the public in our initial public offering. The board may at any time amend, modify or terminate the plan. The plan will terminate no later than December 17, 2009. Eric J. Kuhn Chief Executive Officer 35,714 Timothy J. Levy Executive Vice President, Development 35,714 Jason M. Kuhn and Susan B. Kuhn Brother and sister-in-law of Mr. Kuhn 17,857 Karen L. Kuhn Mother of Mr. Kuhn 35,714 Trust for the Benefit of Eric J., Jordan D. and Jason M. Kuhn Mr. Kuhn and the brothers of Mr. Kuhn 71,428 Deborah R. Levy Sister of Mr. Levy 14,285 Jeffrey C. Levy Brother of Mr. Levy 17,857 Linda R. Levy Mother of Mr. Levy 35,714 Paul G. Levy Father of Mr. Levy 21,428 In connection with this private placement, we entered into an investors rights agreement and a right of first refusal and co-sale agreement with investors in our Series A preferred stock. The investors rights agreement granted the holders of the Series A preferred stock the right to nominate a director to our board and rights to receive information about our financial performance and obligated us to meet operational covenants. The nominee of the Series A preferred stock resigned from our board in September 1999. The right of first refusal and co-sale agreement granted the investors in the Series A preferred stock the ability to purchase any shares of common stock proposed to be sold by Mr. Kuhn or Mr. Levy and, if they were not all purchased by the investors, for the nonpurchasing investors to sell their shares, on a pro rata basis, to the third party purchaser with those proposed to be sold by Mr. Kuhn or Mr. Levy. The holders of the Series A preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series A preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering. None of the rights may be exercised in connection with this offering. The sales to our directors, executive officers and holders of 5% or more of our common stock, as well as any other rights granted to them, were on the same terms as those agreed to by third parties on an arm s-length basis. Series B Private Placement On February 25, 1999, we sold an aggregate of 6,933,806 shares of our Series B preferred stock at a price of $1.44 per share. Immediately prior to the consummation of this offering, shares of Series B preferred stock will convert into an aggregate of 3,466,897 shares of common stock. The purchasers of Eric J. Kuhn Chief Executive Officer 29,750 Richard Hozik Chief Financial Officer 29,762 Allen L. Morgan Director 14,881 Roger A. Kuhn and Karen L. Kuhn Parents of Eric Kuhn 37,203 Jason M. Kuhn Brother of Eric Kuhn 7,441 Linda R. Levy Mother of Tim Levy 7,441 Paul G. Levy Father of Tim Levy 7,441 Tribune Ventures, a division of Tribune Company 2,976,191 Carlyle Venture Partners 2,232,143 Mayfield Fund 1,681,551 FBR Technology Venture Partners L.P. 595,239 Table of Contents In connection with this private placement, we entered into a second amended and restated investors rights agreement and a second amended and restated right of first refusal and co-sale agreement with investors in our Series A preferred stock, Series B preferred stock and Series C preferred stock. The amendments granted the holders of the Series C preferred stock the same rights enjoyed by the holders of the Series A and Series B preferred stock. In accordance with those agreements, Mr. Oleszczuk, a designee of the holders of the Series C preferred stock, has been elected to our board. In addition, the holders of the Series C preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series C preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering. None of the rights may be exercised in connection with this offering. The sales to our directors, executive officers and holders of 5% or more of our common stock, as well as any other rights granted to them, were on the same terms as those agreed by third parties on an arm s-length basis. AOL/ICQ and Sallie Mae Transactions In connection with the AOL/ICQ transaction, we entered into a third amended and restated investors rights agreement. The amendment granted AOL the right to require us to register their shares for sale or participate in subsequent registrations of our common stock, if the warrants become exercisable and are exercised. In connection with the Sallie Mae warrants, we entered into a fourth amended and restated investors rights agreement. The amendment granted Sallie Mae the right to require us to register their shares for sale or participate in subsequent registrations of our common stock, if the warrants become exercisable and are exercised. In addition, AOL and Sallie Mae will have registration rights applicable to the shares of common stock issuable upon exercise of their warrants. Other than the registration rights, all other rights under this agreement terminate upon the closing of this offering. None of the rights may be exercised in connection with this offering. The terms of these amendments are no more favorable than those that would have been agreed upon by third parties on an arm s length basis. Transactions with Baker Taylor On July 10, 1998, we entered into an Equity Investment and Operating Agreement, and other related agreements, with Baker Taylor, Inc., our principal supplier of textbooks, fulfillment, shipping and handling services and a supplier of promotional, customer service and data base management services. In consideration for Baker Taylor s fulfillment and drop-ship services and assistance in developing our product and customer base, we sold Baker Taylor 535,714 shares of our common stock at par value and granted a warrant to purchase an additional 107,143 shares of our common stock at a weighted average exercise price of $2.33 per share. In accordance with this agreement, James S. Ulsamer was elected to our board. In October 1998, we issued to Baker Taylor a warrant to purchase 50,000 shares of our common stock at an exercise price of $0.20. In December 1998, we issued a warrant to purchase 53,571 shares of our common stock at an exercise price of $2.33 in conjunction with a bridge loan from Baker Taylor in the amount of $500,000. In February 1999, we issued a warrant to Baker Taylor to purchase 5,950 shares of our common stock at an exercise price of $2.33 per share in conjunction with the December 1998 bridge loan. In February 1999, we issued to Baker Taylor a warrant to purchase 62,500 shares of our common stock at an exercise price of $0.22 per share. In addition, we converted a bridge loan note in the amount of $500,000 issued in December 1998 into 173,611 shares of our Series B preferred stock. Table of Contents In August 1999, Baker Taylor transferred its ownership interest in VarsityBooks.com to B T ENTERPRISES, L.L.C., a limited liability company owned by some of the stockholders of Baker Taylor. Effective October 1, 1999, we entered into a new Operating Agreement with Baker Taylor and amended the other agreements governing our operating relationship. Baker Taylor has agreed for a period of 18 months not to provide direct to consumer fulfillment services for any online textbook retailer serving students at colleges and universities, distance learning programs and high schools located in the United States that require students to purchase their textbooks, with the exception of any retailers who were existing customers of Baker Taylor as of July 10, 1998, the date we initially contracted with Baker Taylor. In return, we have agreed to use Baker Taylor as our principal supplier. The exclusivity is automatically extended each semester to remain at 18 months as long as we agree with Baker Taylor on the amount of inventory they need to acquire for the upcoming semester. The agreement provides that Baker Taylor would provide its services initially for three years, subject to automatic annual extensions after the initial period. We believe the terms of our agreements with Baker Taylor were on terms no more favorable than those that would have been agreed upon by third parties on an arm s-length basis. Indebtedness of Management On August 24, 1999, we sold to each of Mr. Kuhn and Mr. Levy 207,077 shares of our common stock at a purchase price of $0.30 per share. Each of Mr. Kuhn and Mr. Levy paid for these shares with a full recourse promissory note. The notes bear interest at a floating rate equal to the current applicable federal rate, which was 5.41% for October 1999, and are due August 1, 2001. The shares purchased by Mr. Kuhn and Mr. Levy are subject to forfeiture based on conditions relating to their continued employment. These conditions lapse with respect to 82,831 shares each on August 1, 2000 and with respect to 124,246 shares each on August 1, 2001. The terms of the sale of the shares of common stock to Mr. Kuhn and Mr. Levy and the terms of the promissory notes executed by Mr. Kuhn and Mr. Levy were negotiated on our behalf by the board of directors, excluding Mr. Kuhn and Mr. Levy. We believe the terms of these transactions with Mr. Kuhn and Mr. Levy were fair to us, but we are not certain if these transactions were on terms no more favorable than those that would have been agreed upon by third parties on an arm s length basis. Transactions with Promoters Mr. Kuhn and Mr. Levy, each a director or an executive officer, were involved in our founding and organization and each may be deemed a promoter for purposes of the federal securities laws. At our inception, we issued 750,000 shares of common stock to each of Mr. Kuhn and Mr. Levy and received a nominal amount of capital for their initial capitalization. When issued, all 750,000 of the shares purchased by each of Mr. Kuhn and Mr. Levy were subject to forfeiture based on conditions relating to their continued employment. As of December 31, 1999, an aggregate of 694,445 shares remain subject to repurchase by us. These conditions lapse with respect to 13,889 shares for each of Mr. Kuhn and Mr. Levy on the first day of each month until July 1, 2001, at which point our repurchase right expires as to any remaining shares. We believe the terms of these transactions with Mr. Kuhn and Mr. Levy were on terms no more favorable than those that would have been agreed upon by third parties on an arm s length basis. * Represents less than 1% of the outstanding shares of common stock. (1) Includes 1,992,489 shares held by Mayfield IX, 104,868 shares held by Mayfield Associates Fund IV and 245,537 shares held by the Varsity Books Trust, a revocable trust. Mayfield IX Management LLC is the general partner of Mayfield IX and Mayfield Associates Fund IV both of which are Delaware limited partnerships. Mr. Morgan, one of our directors, is a nonmanaging member on Table of Contents Mayfield IX Management LLC. He has no management authority with respect to Mayfield IX Management and disclaims beneficial ownership of our shares held directly by Mayfield IX Management, Mayfield IX, and Mayfield Association Fund IV except to the extent of any pecuniary interest therein. Mayfield Fund, L.P. s address is 2800 Sand Hill Road, Menlo Park, California 94025 (2) The Carlyle Group includes 745,483 shares held by Carlyle Venture Partners, L.P., 155,625 shares held by C/ S Venture Investors, L.P., 116,092 shares held by Carlyle Venture Coinvestment L.L.C. and 98,870 shares held by Carlyle U.S. Venture Partners, L.P., as well as 712,836 shares currently outstanding and 279,164 shares issuable upon exercise of outstanding warrants, all of which are exercisable within the next 60 days at a weighted average exercise price of $1.48 per share held by B T ENTERPRISES, L.L.C., a limited liability company. TC Group, L.L.C., an affiliate of The Carlyle Group, is the manager of B T ENTERPRISES, L.L.C. and has sole control over the voting and disposition of the shares held by B T ENTERPRISES, L.L.C. TC Group, L.L.C. disclaims beneficial ownership of any of the shares held by B T ENTERPRISES, L.L.C. TCG Ventures, Ltd, an affiliate of The Carlyle Group, is the general partner of both Carlyle Venture Partners, L.P. and C/S Venture Investors, L.P. TCG Ventures, L.L.C., an affiliate of The Carlyle Group, is the general partner of both Carlyle Venture Coinvestment L.L.C. and Carlyle U.S. Venture Partners, L.P. The Carlyle Group s address is 1001 Pennsylvania Avenue, N.W., Suite 220 South, Washington, D.C. 20004. (3) Tribune Ventures is a division of Tribune Company and is located at 435 North Michigan Avenue, Chicago, Illinois 60611 (4) Includes 999,616 shares currently outstanding and 39,750 shares subject to options exercisable within the next 60 days. (5) The address for FBR Technology Venture Partners L.P. is Potomac Tower, 1001 19th Street North, Arlington, Virginia 22209. (6) Includes 984,741 shares currently outstanding. (7) Includes 14,881 shares currently outstanding. None of the options held by Mr. Hozik are exercisable within the next 60 days. (8) None of the options held by Ms. Bastnagel are exercisable within the next 60 days. (9) Includes 1,992,489 shares held by Mayfield IX, 104,868 shares held by Mayfield Associates Fund IV, 245,537 shares held by the Varsity Book Trust and 7,440 shares held directly by Mr. Morgan. Except for those shares held by Mr. Morgan, Mr. Morgan disclaims beneficial ownership of all other shares except to the extent of any pecuniary interest therein. (10) Includes 1,488,095 shares beneficially owned by Tribune Ventures, a division of Tribune Company. Mr. Oleszczuk is President of Tribune Ventures, and, as such may be deemed to have voting and investment power over such shares. Mr. Oleszczuk disclaims beneficial ownership of these shares. (11) Includes 992,063 shares beneficially owned by FBR Technology Venture Partners L.P. Mr. Riechers is a partner of FBR Technology Venture Partners L.P. and, as such, may be deemed to have voting and investment power over such shares. Mr. Riechers disclaims beneficial ownership of these shares except to the extent of any pecuniary interest therein. Table of Contents DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part. Our authorized capital stock consists of 60,000,000 shares of common stock, $0.0001 par value, and 20,000,000 shares of preferred stock, $0.0001 par value, after giving effect to the filing of our amended and restated certificate of incorporation to delete references to Series A, Series B and Series C preferred stock, which will occur upon conversion of such preferred stock into common stock immediately prior to the closing of this offering, and the subsequent authorization of shares of undesignated preferred stock, as described below. Common Stock As of December 31, 1999, there were 60,000,000 shares of common stock authorized, of which 11,610,158 were outstanding, after giving effect to the conversion of our outstanding preferred stock into common stock. These shares were held of record by 70 stockholders. Following this offering, there will be 15,610,158 shares of common stock outstanding, after giving effect to the sale of the shares of common stock to the public offered hereby and the conversion of our outstanding preferred stock into common stock. In addition, as of December 31, 1999, there were outstanding stock options for the purchase of an aggregate of 1,851,982 shares of common stock, approximately 119,000 of which were exercisable within the next 60 days, and warrants for the purchase of an aggregate of 1,638,451 shares of common stock, 946,588 of which were exercisable within the next 60 days, assuming completion of this offering and the issuance of the Imperial and Sallie Mae warrants. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at times and in amounts as the board of directors may determine from time to time. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Upon our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights and is not subject to redemption. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. Preferred Stock Our amended and restated certificate of incorporation authorizes 20,000,000 shares of preferred stock. Our board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of each series, such as dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the right to increase or decrease the number of shares of any series, without further vote or action by the stockholders. Our board of directors may issue preferred stock with voting or conversion rights that may have the effect of delaying, deferring or preventing a change in control of VarsityBooks.com and could adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We currently have no plans to issue any preferred stock. Warrants Upon completion of this offering, AOL will hold warrants to purchase 528,738 shares of common stock, at an exercise price equal to the initial public offering price in this offering. Of these shares, 176,245 will be immediately exercisable and the remaining 352,493 will vest based upon ICQ s performance under the interactive marketing agreement. In lieu of paying the exercise price in cash, AOL may elect to surrender a portion of the shares of common stock underlying the warrant, using the difference between the per share exercise price of the warrant and the current per share fair market value of the underlying Table of Contents common stock to purchase the remaining shares of common stock. The exercise price of the warrant is subject to adjustment downward in the event we issue shares of common stock at a price below the then current fair market value of the common stock. This warrant expires on December 22, 2006. In addition, B T ENTERPRISES, L.L.C. will hold warrants to purchase 279,164 shares of common stock at a weighted average exercise price of $1.48 per share all of which are currently exercisable. In lieu of paying the exercise price in cash, B T ENTERPRISES, L.L.C. may elect to surrender a portion of the shares of common stock underlying the warrants, using the difference between the per share exercise price of the warrant and the current per share fair market value of the underlying common stock to purchase the remaining shares of common stock. These warrants expire on dates ranging from October 2, 2003 to February 23, 2004. In addition, Palmer Private Equity, Thompson and Jane Rogers, Paul Bagley, Donald Jackson, L. Wayne Harber, W. Duke DeGrassi, Mario Giannini, Leslie Brun, Jim Fried, Andy Cahill, John McKey and Mesirow Financial Inc., as custodian for Mary H. Jochim, hold warrants to purchase an aggregate of 101,186 shares of common stock at an exercise price of $2.33 per share. In lieu of paying the exercise price in cash, these holders may elect to surrender a portion of the shares of common stock underlying the warrants, using the difference between the per share exercise price of the warrant and the current per share fair market value of the common stock to purchase the remaining shares of common stock. All of these warrants are presently exercisable. These warrants expire on dates ranging from December 8, 2003 to February 1, 2004. In addition, Campus Pipeline, Inc. has warrants to purchase 75,000 shares of common stock at an exercise price of $6.00 per share. In lieu of paying the exercise price in cash, Campus Pipeline may elect to surrender a portion of the shares of common stock underlying the warrants, using the difference between the per share exercise price of the warrant and the current fair market value of the common stock to purchase the remaining shares of common stock. These warrants expire on dates ranging from December 31, 2000 to July 31, 2001. These warrants are exercisable upon the occurrence of events relating to traffic generated from our distribution agreement with Campus Pipeline. As of December 31, 1999 none of these warrants were exercisable. In addition, Imperial Bank has presently exercisable warrants to purchase 37,500 shares of common stock at an exercise price of $10.00 per share. If we do not close this offering by February 29, 2000, we would be obligated to issue warrants to purchase additional shares of our common stock each month in an amount equal to an aggregate exercise price of $150,000 divided by the lesser of $10.00 per share or the price of a private equity offering in the event we were to undertake such an offering. These warrants expire on January 19, 2005. In addition, Sallie Mae has warrants to purchase 616,863 shares of our common stock, of which 352,493 shares are immediately exercisable and the remaining 264,370 shares will vest over the next two years based on Sallie Mae s performance under the product promotion agreement. These warrants will expire on February 3, 2007. Registration Rights Convertible Preferred and Common Stock. The 17,933,797 shares of convertible preferred stock outstanding will be automatically converted into 8,966,879 shares of common stock in connection with this offering. Pursuant to the terms of our third amended and restated investors rights agreement, all of the holders of our convertible preferred stock outstanding prior to this offering and Baker Taylor, Eric J. Kuhn and Timothy J. Levy, who hold 11,416,747 shares of outstanding common stock, and AOL, which will hold a warrant to purchase 528,738 shares of common stock, which includes an additional warrant to purchase 1,125 shares of common stock which we granted to AOL when we entered into definitive agreements with Imperial Bank and an additional warrant to purchase 34,367 shares of common stock which we granted when we entered into the product promotion agreement with Sallie Mae are entitled to specified registration rights with respect to the registration of its shares of common stock under the Securities Act of 1933 (the Securities Act ). If we propose to register shares of our common stock under Table of Contents the Securities Act, these holders are entitled to notice of the registration and are entitled to include their shares of common stock in the registration at our expense. If the registration is underwritten, the managing underwriters have the right to limit the number of shares included in the registration. Subject to various conditions and limitations, these holders may require us, at our expense but on not more than ten occasions, to file a registration statement under the Securities Act with respect to their shares of common stock. These rights to require registration may not be exercised until 180 days after the date of this prospectus. Subject to various conditions and limitations, these holders may also require us, at our expense, to register their shares of common stock on Form S-3 when we become eligible to use that form. These rights expire five years from the date of this prospectus. We are not required to act on any demand registration: (a) in any jurisdiction in which we would be required to execute a general consent to service of process unless we are already subject to service in that jurisdiction; (b) prior to 90 days following the closing date of our initial public offering; (c) if we deliver 30 days notice to the holders stating that we intend to file a registration statement for our initial public offering within 90 days; or (d) after we have effected the two demand registrations for any particular series of former-holders of preferred shares granted rights under the agreement. In addition, once in any 12 month period, we may delay a registration for 90 days if we provide our holders with a certificate, signed by our president, stating that in the good faith judgment of the board of directors it would be detrimental to us or our shareholders for a registration statement to be filed in the near future. We anticipate granting similar rights to Sallie Mae once we enter into the product promotion agreement for that transaction. With the exception of demand registration rights, we anticipate granting similar rights to Imperial Bank once we enter into definitive agreements for that transaction. Warrant Holders. Pursuant to the terms of its warrants, Campus Pipeline is also entitled to registration rights designated in its registration rights agreement with respect to the registration of its shares of common stock under the Securities Act. If we propose to register shares of the common stock under the Securities Act, other than this offering, holders are entitled to notice of the registration and are entitled to include their shares of common stock in the registration at our expense. If the registration is underwritten, the managing underwriters have the right to limit the number of shares included in the registration. Subject to certain conditions and limitations, holders may require us, at our expense but on not more than one occasion, to file a registration statement under the Securities Act with respect to their shares of common stock. These rights expire five years from the date of this prospectus. Anti-Takeover Effects of Certain Provisions Of Delaware Law and Our Certificate of Incorporation and Bylaws Section 203 of the General Corporation Law We are subject to Section 203 of the General Corporation Law of the State of Delaware, or DGCL, which, subject to various exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. This restriction applies unless: prior to the date the stockholder became an interested stockholder, the board of directors approves either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (1) persons who are directors and also officers and (2) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or Table of Contents on or subsequent to the date the stockholder became an interested stockholder the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: any merger or consolidation involving the corporation and the interested stockholder; any sale, lease, exchange, mortgage, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder, subject to various exceptions; any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person who owns 15% or more of the outstanding voting stock of the corporation, and (i) any entity or person controlling, controlled by or under common control with the entity or person, (ii) any relative or spouse of the person or (iii) any entity in which the entity or person owns 20% or more of any class of voting stock or any trust or estate in which the person has a 20% beneficial ownership interest or for which the person serves in a fiduciary capacity. Additional Anti-Takeover Provisions In addition, some provisions of our amended and restated certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over-the-market price for the shares held by our stockholders. These provisions include: Board of Directors. Our board is divided into three classes of directors serving staggered three-year terms. Our certificate of incorporation authorizes our board to fill vacant directorships or increase the size of the board. This may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board by filling the vacancies created by such removal with its own nominees. Stockholder Action; Special Meeting of Stockholders. Our certificate of incorporation provides that stockholders may take action only at a duly called annual or special meeting of stockholders and may not take action by written consent. Our certificate of incorporation further provides that special meetings of our stockholders may be called only by the chairman of the board, by a committee of the board or a majority of the board, and in no event may the stockholders call a special meeting. Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely written notice. To be timely, a stockholder s notice must be delivered to or mailed and received at our principal executive offices not less than 120 days prior to the first anniversary of the date of our notice of annual meeting provided with respect to the previous year s annual meeting of stockholders. However, if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days from the time contemplated at the time of the previous year s proxy statement, then a proposal shall be received no later than the close of business on the 10th day following the date on which notice of the date of the meeting was mailed or a public announcement was made, whichever occurs first. The bylaws also include a similar requirement for making Table of Contents nominations at special meetings and specify certain requirements as to the form and content of a stockholder s notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual or special meeting of stockholders. Authorized But Unissued Shares. The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to limitations imposed by the DGCL and the Nasdaq National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of VarsityBooks.com by means of a proxy contest, tender offer, merger or otherwise. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation s certificate of incorporation or bylaws, unless a corporation s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. We have provisions in our certificate and bylaws which require a super-majority vote of the stockholders to amend, revise or repeal the anti-takeover provisions described above. Limitation of Liability and Indemnification Matters Our certificate of incorporation provides that, except to the extent prohibited by the DGCL, our directors shall not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director. Under the DGCL, the directors have a fiduciary duty to us that is not eliminated by this provision of the certificate of incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director s duty of loyalty to us for acts or omissions which are found by a court of competent jurisdiction not to be in good faith or that involve intentional misconduct, or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL. This provision also does not affect the directors responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: for any breach of the director s duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, arising under Section 174 of the DGCL, or for any transaction from which the director derived an improper personal benefit. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under a corporation s bylaws, any agreement, a vote of stockholders or otherwise. Our certificate of incorporation eliminates the personal liability of directors to the fullest extent permitted by the DGCL and provides that we may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was an employee, director or officer of VarsityBooks.com or is or was serving at our request as an employee, director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Table of Contents We have entered into agreements to indemnify our directors and officers, in addition to the indemnification provided for in our bylaws. We believe that these provisions and agreements are necessary to attract and retain qualified directors and officers. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether the DGCL would permit indemnification. At present, there is no pending litigation or proceeding involving any director, officer or employee as to which indemnification will be required or permitted under our certificate of incorporation. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. Transfer Agent And Registrar Upon the closing of this offering, the transfer agent and registrar for the common stock will be American Stock Transfer and Trust. Listing Our common stock has been approved for quotation on the Nasdaq National Market under the symbol VSTY. Table of Contents SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as we describe below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering we will have 15,610,158 shares of common stock outstanding, assuming no exercise of the underwriters over-allotment option or of options and warrants to purchase 2,800,578 shares of common stock that are outstanding as of December 31, 1999. Of the outstanding shares, the shares sold in this offering will be freely transferable, without restriction or registration under the Securities Act, except for any shares purchased by one of our existing affiliates, as that term is defined in Rule 144 under the Securities Act. The remaining 11,535,158 shares of common stock outstanding as of December 31, 1999 are restricted securities within the meaning of Rule 144. Holders of restricted shares may sell those shares in the public market only if the sale is registered or if the shares qualify for an exemption from registration under Rules 144 or 701 under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: Beginning 90 days after the date of this prospectus, approximately 394,994 additional shares will be eligible for sale, subject to volume, manner-of-sale and other limitations under Rule 144. Beginning 180 days after the date of this prospectus, approximately 6,503,706 additional shares will be eligible for sale, all of which will be subject to volume, manner-of-sale and other limitations under Rule 144. The remaining 4,636,458 shares will become eligible for sale under Rule 144 upon the expiration of various one-year holding periods. Lock-Up Agreements. All of our officers and directors, stockholders owning 1% or more of our outstanding stock prior to this offering and other stockholders, who will together hold 11,175,520 shares of our common stock and 1,261,444 shares subject to then exercisable options or warrants to purchase common stock after this offering, have signed lock-up agreements with our underwriters under which they agreed during the period ending 180 days after the date of this prospectus, not to offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options, warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by such holders or with respect to which they have the power of disposition, other than shares acquired on the open market, without the prior written consent of FleetBoston Robertson Stephens Inc. Notwithstanding earlier eligibility for sale under the provisions of Rules 144 and 701, shares subject to lock-up agreements will not be salable until these agreements expire or are released by FleetBoston Robertson Stephens Inc. There are no existing agreements between the representatives of the underwriters and any of our stockholders providing consent to the sale of shares prior to the expiration of the lock-up period. Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after this offering, a person, or persons whose shares are aggregated, who owns shares that were purchased from us, or any of our affiliates, at least one year previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of our then-outstanding shares of common stock, which will equal approximately 156,102 shares immediately after this offering, or the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to manner-of-sale provisions, notice requirements and the availability Table of Contents of current public information about us. Any person, or persons whose shares are aggregated, who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who owns shares that are restricted securities under Rule 144 that were purchased from us, or any affiliate, at least two years previously, would be entitled to sell the shares under Rule 144(k) without regard to the volume limitations, manner-of-sale provisions, public information requirements or notice requirements. Rule 701. Our employees, directors, officers, consultants or advisers who purchased common stock from us prior to the date we become subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, under written compensatory benefit plans or written contracts relating to the compensation of these persons may rely on Rule 701 with respect to the resale of that stock. Rule 701 also will apply to stock options we grant before we become subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of the options, including exercises after the date of this prospectus. Shares of common stock we issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, may be resold by persons other than affiliates, beginning 90 days after the date of this prospectus, subject only to the manner-of-sale provision of Rule 144, and by affiliates, beginning 90 days after the date of this prospectus, subject to all provisions of Rule 144 except its one-year minimum holding period. Registration Rights. Upon completion of this offering, the holders of approximately 11,416,747 shares of outstanding common stock, or their transferees, will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. Stock Plans. Promptly after this offering, we intend to file a registration statement under the Securities Act covering 4,000,000 shares of common stock issued or reserved for issuance under our Stock Option Plan and a second registration statement covering 500,000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan. We expect these registration statements to become effective as soon as practicable after the effective date of this offering. As of December 31, 1999, options to purchase 1,851,982 shares of our common stock were issued and outstanding. All of these shares will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations and holding period requirements applicable to our affiliates and the expiration of lock-up agreements. The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus will be determined through negotiations among us and the representatives of the underwriters. Among the factors to be considered in such negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the representatives of the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 611,250 additional shares of common stock to cover over-allotments, if any, at the public offering price less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of the additional 611,250 shares of common stock, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares to be purchased by each of them bears to the total number of shares of common stock offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered hereby are being sold. We will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus will be determined through negotiations among us and the representatives of the underwriters. Among the factors to be considered in such negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the representatives of the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 611,250 additional shares of common stock to cover over-allotments, if any, at the public offering price less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of the additional 611,250 shares of common stock, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares to be purchased by each of them bears to the total number of shares of common stock offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered hereby are being sold. We will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. Public offering price $ $ $ Underwriting Discounts and Commissions payable by VarsityBooks.com Underwriting Discounts and Commissions payable by the selling stockholders We estimate that the expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $1,480,650. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 107 filed public offerings of equity securities, of which 79 have been completed, and has acted as a syndicate member in an additional 54 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or controlling persons, except with respect to its contractual relationship with us pursuant to the underwriting agreement entered into in connection with this offering. FBR Technology Venture Partners L.P., an affiliate of Friedman, Billings, Ramsey Co., Inc., owns 1,388,889 shares of Series B preferred stock and 595,239 shares of Series C preferred stock. Directed Share Program The underwriters have reserved up to five percent of the common stock to be issued by us and offered for sale in this offering, at the initial public offering price, to directors, officers, employees, business associates and persons otherwise connected to us. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase reserved shares. Any reserved shares which are not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this offering. Internet Distribution DLJdirect Inc. will make allocations of securities distributed by it in this offering through the use of the Internet. Approximately two to three weeks prior to the scheduled offering date, DLJdirect will post on its Web site (www.dljdirect.com) a brief description of the offering which contains only the information permitted under Rule 134. At that time, DLJdirect will also send an e-mail to all DLJ direct account holders with $100,000 or more in assets in their accounts advising them of the offering. These account holders will have access to the preliminary prospectus by links on the DLJdirect Web site. DLJdirect will allocate the shares it has underwritten based on its subjective judgment of what is in the best interest of the issuer, considering the following criteria with respect to the account holders expressing an interest in the offering: asset level of the account, trading history of the account, tenure of the account at DLJdirect and post-offering activity in previous offerings. fbr.com, a division of FBR Investment Services, Inc., which is an affiliate of Friedman, Billings, Ramsey Co., Inc., will also be facilitating Internet distribution for this offering. Friedman, Billings, Ramsey Co., Inc. has agreed to allocate a limited number of shares to fbr.com for sale to its online brokerage account holders. An electronic prospectus is available on the Web site maintained by fbr.com. Other than the prospectus in electronic format, the information on the DLJdirect and fbr.com Web sites relating to this offering is not a part of this prospectus and should not be relied upon by prospective investors. Table of Contents Indemnity The underwriting agreement contains covenants of indemnity among the underwriters, us and the selling stockholders against certain civil liabilities, including liabilities under the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements Each director, officer and stockholder owning more than 1% of the outstanding common stock and some other stockholders, who will together hold 11,175,520 shares of our common stock and 1,261,444 shares subject to then exercisable options or warrants to purchase common stock after this offering, including each selling stockholder, has agreed, during the period ending 180 days after the date of this prospectus, subject to specified exceptions, not to offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options, warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, other than: (a) shares acquired on the open market; (b) as a bona fide gift, provided the recipient(s) agree to be bound by the lock-up agreement; (c) as a distribution to partners or shareholders, provided the recipient(s) agree to be bound by the lock-up agreement; or (d) with the prior written consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives of the underwriters and any of our stockholders providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of FleetBoston Robertson Stephens Inc., subject to specified exceptions, consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, and the issuance of common stock upon the exercise of outstanding options and the issuance of options under existing stock option and incentive plans, provided that those options do not vest prior to the expiration of the lock-up period. Listing Our common stock has been approved for quotation on the Nasdaq National Market under the symbol VSTY. Stabilization The representatives have advised us that, pursuant to Regulation M under the Securities Act, some persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A stabilizing bid is a bid for or the purchase of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A syndicate covering transaction is the bid for or the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A penalty bid is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Table of Contents LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Shaw Pittman, a law partnership including professional corporations, located in McLean, Virginia. Jack L. Lewis, whose professional corporation is a member of Shaw Pittman, serves as our secretary. Hale and Dorr LLP, located in Washington, D.C. will serve as legal counsel to the underwriters in this offering.
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+Legal Matters The validity of the common stock offered hereby will be passed on for us by Wy- rick Robbins Yates & Ponton LLP, Raleigh, North Carolina. Attorneys of Wyrick Robbins Yates & Ponton LLP beneficially own 14,484 shares of our common stock and warrants to purchase 1,355 shares of common stock. Certain legal matters in connection with the offering will be passed on for the underwriters by Cahill Gordon & Reindel, New York, New York.
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+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001073508_student_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001073508_student_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7cd4b5fe289076ed226c9ab741a71b89f3368b57
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001073508_student_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for Student Advantage by Hale and Dorr LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001076641_niku-corp_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001076641_niku-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..61639933ff7749d81beb8108f000c424d5046cdb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001076641_niku-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling, Menlo Park, California. As of January 29, 2000, three investment partnerships associated with Fenwick & West LLP beneficially owned an aggregate of 55,126 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001076804_adaytum_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001076804_adaytum_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1fc7c456f8e497025c1aef8779d2844de49c776a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001076804_adaytum_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon the validity of the issuance of shares of common stock offered by this prospectus for us. Fulbright & Jaworski L.L.P., New York, NY, will pass upon certain legal matters for the underwriters. D&W Ventures I, LLC, a limited liability company all of the members of which are current or former partners of Dorsey & Whitney LLP, beneficially owns a total of 84,746 shares of our Series B preferred stock, 45,084 shares of our Series C preferred stock and 12,000 shares of our Series D preferred stock, which will automatically convert into a total of 146,196 shares of our common stock on completion of this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001079270_lifeminder_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001079270_lifeminder_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e7d11dd48abe6a7a277d440c9607a73b58094a10
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001079270_lifeminder_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the securities in this offering will be passed upon for us by our counsel, Brobeck, Phleger & Harrison LLP of Washington, DC. Agreed upon legal matters will be passed upon for the underwriters by its counsel, Cooley Godward LLP of Reston, Virginia.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001080034_conversant_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001080034_conversant_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9063f0aba214f6b6c0ed4339fdcc651213f746c0
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001080034_conversant_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for ValueClick by Brobeck, Phleger & Harrison LLP, Los Angeles, California. Pillsbury Madison & Sutro LLP, San Francisco, California, is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001081394_scient_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001081394_scient_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..745a7bb617ba70cadacd7514e37f952b012c5ffc
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001081394_scient_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. Members of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP participating in the consideration of legal matters relating to the common stock offered hereby are the beneficial owners of 30,650 shares of our common stock. Legal matters in connection with this offering will be passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001081630_healthgate_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001081630_healthgate_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f4f7cc0c1702ddd8b9ce4ef6bd178ba3408616ee
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001081630_healthgate_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the authorization and issuance of the securities offered hereby will be passed upon for HealthGate by Rich, May, Bilodeau & Flaherty, P.C., Boston, Massachusetts. Stephen M. Kane, a member of Rich, May, Bilodeau & Flaherty, P.C., is an Assistant Secretary of HealthGate and has been granted options for the purchase of up to 1983 shares of HealthGate's common stock. Mr. Kane and other attorneys of Rich, May, Bilodeau & Flaherty, P.C. will be purchasing shares from the underwriters as part of HealthGate's reserved share program. Certain legal matters will be passed upon for the underwriters by Shearman & Sterling, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001081935_rosetta_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001081935_rosetta_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..948845705cfa4573846749165bc643eba0c4526a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001081935_rosetta_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon by Venture Law Group, Professional Corporation, Kirkland, Washington. Certain legal matters will be passed upon for the underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. Investment partnerships associated with Venture Law Group and individual attorneys of Venture Law Group beneficially own an aggregate of 69,273 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001082129_telergy_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001082129_telergy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e5f724dadf353878ec89ab341c5ad72e4875f6e2
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001082129_telergy_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares we are offering will be passed upon for us by Shearman & Sterling. Certain regulatory matters will be passed upon by Swidler Berlin Shereff Friedman, LLP. Certain legal matters relating to the offering will be passed upon for the underwriters by Cahill Gordon & Reindel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001082397_viewlocity_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001082397_viewlocity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b287a5753d30ff0111f4c35208748fdea848323c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001082397_viewlocity_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS King & Spalding, Atlanta, Georgia, will pass upon the validity of the shares of common stock offered by this prospectus. Proskauer Rose LLP, New York, New York, will pass upon certain legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001082797_mypoints_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001082797_mypoints_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8e344a94187eabdefb29fcf3485b2a667832695b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001082797_mypoints_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California will pass upon the validity of the common stock sold in this offering for MyPoints.com. Fenwick & West LLP, Palo Alto, California will pass upon certain legal matters in connection with this offering for the underwriters. As of December 31, 1999, investment partnerships and a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially owned an aggregate of 149,720 shares of common stock of MyPoints.com. Mario M. Rosati, one of our directors and our secretary, and Christopher D. Mitchell, our assistant secretary, are members of Wilson Sonsini Goodrich & Rosati. Of these shares, 16,666 are issuable upon exercise of options held by Mr. Rosati, which options have an exercise price of $0.10 per share. From our inception through December 31, 1999, MyPoints.com, Inc. has accrued a total of $819,166.65 in fees to Wilson Sonsini Goodrich & Rosati.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001083243_nzch-corp_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001083243_nzch-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d3e336d5eab182d0e9e949c83c850c15570b9894
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001083243_nzch-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain matters relating to this Offering are being passed upon by, Woods Oviatt Gilman of Rochester, New York. Woods Oviatt Gilman is legal counsel to both Zapata and Zap.Com and a partner of the firm is corporate secretary for both corporations.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001083392_digitalcon_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001083392_digitalcon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0026d357e2ad512684a366f76d665752aff729e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001083392_digitalcon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Vinson & Elkins L.L.P., Dallas, Texas. Vinson & Elkins L.L.P. owns 39,118 shares of our Series B preferred stock. In addition, Jeffrey A. Chapman, a partner of Vinson & Elkins L.L.P., owns 5,040 shares of our common stock and 3,556 shares of our Series B preferred stock. Various legal matters in connection with the common stock offered by this prospectus will be passed upon for the underwriters by Chadbourne & Parke LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001083427_freei_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001083427_freei_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a95057076683a963f3afa6d3490b3fdd19cb8a53
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001083427_freei_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Freei Networks, Inc. by Summit Law Group, PLLC, Seattle, Washington. Some members of Rainier Investors II, which owns 4,073 shares of our common stock, are affiliated with Summit Law Group, PLLC. Legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins, Costa Mesa, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001084361_yupi_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001084361_yupi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2db40ad46e8f45087559b367fbfc8b95b4e5a09f
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001084361_yupi_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed upon for Yupi by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. The validity of shares of common stock offered hereby and certain other legal matters, including matters relating to Florida law, will be passed upon for Yupi by Steel Hector & Davis LLP, Miami, Florida. Certain legal matters will be passed upon for the underwriters by Piper Marbury Rudnick & Wolfe LLP, Reston, Virginia.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001084587_360network_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001084587_360network_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..90671bcf03dfd0539613e530945a32102b13b87a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001084587_360network_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Subordinate Voting Shares offered in this prospectus and certain legal matters concerning the Subordinate Voting Shares in connection with the offering will be passed upon for us by Cahill Gordon & Reindel, New York, New York (concerning matters of U.S. law), Farris, Vaughan, Wills & Murphy, Vancouver, British Columbia (concerning matters of Canadian law) and Stewart McKelvey Stirling Scales, Halifax, Nova Scotia (concerning matters of Nova Scotia law). Certain legal matters concerning the Subordinate Voting Shares in connection with the offering will be passed upon for the Underwriters by Latham & Watkins, New York, New York (concerning matters of U.S. law) and Osler, Hoskin & Harcourt LLP, Toronto, Ontario (concerning matters of Canadian law).
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001084654_broadband_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001084654_broadband_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..88605e0f2e581b66ef4916f0cc1002be6d080c5b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001084654_broadband_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon by Morrison & Foerster LLP, Irvine, California. Certain matters in connection with this offering will be passed upon for the Underwriters by Cooley Godward LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001085707_nextel_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001085707_nextel_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..be2c031aacb6d9487cbbed34034edcc2b29f48e0
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001085707_nextel_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed on for Nextel Partners by Summit Law Group, PLLC, Seattle, Washington. Certain legal matters will be passed upon for the underwriters by Latham & Watkins, New York, New York. Certain other legal matters will be passed upon for us by our special FCC counsel, Willkie Farr & Gallagher, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001085866_dsl-net_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001085866_dsl-net_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..827f97eb48b8bbd34a2f87e8973f6824825710e6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001085866_dsl-net_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal matters will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP. 66 <PAGE>
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001086216_metapath_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001086216_metapath_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..44af2235d870d970093c75c8d8a97a07cae30fca
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001086216_metapath_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Weil, Gotshal & Manges, London, England will pass for us upon the validity of the shares of common stock offered by this prospectus. Simpson Thacher & Bartlett, London, England will pass upon certain legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001086757_braun_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001086757_braun_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3acd394985c40418591d744fdbdc8045e31facad
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001086757_braun_legal_matters.txt
@@ -0,0 +1,2314 @@
+LEGAL MATTERS
+
+ 
+
+ The
+ validity of the issuance of the common stock offered by this prospectus
+ will be passed upon for Braun Consulting by Locke Liddell & Sapp LLP,
+ Houston, Texas. The underwriters have been represented by Sachnoff &
+ Weaver, Ltd., Chicago, Illinois.
+
+ 
+
+ 
+ 
+ EXPERTS
+
+ 
+
+ The
+ consolidated financial statements of Braun Consulting, Inc. and its
+ subsidiaries as of
+ 
+
+ December 31, 1998 and 1999 and for each of the three years in the period
+ ended December 31, 1999 included in this prospectus have been audited by
+ Deloitte & Touche LLP, independent auditors, as stated in their report
+ appearing herein, and have been so included in reliance upon the report of
+ such firm given upon their authority as experts in accounting and
+ auditing.
+
+ 
+
+ The
+ financial statements of Emerging Technologies Consultants, Inc. as of
+ December 31, 1998 and September 30, 1999 and for the year ended December
+ 31, 1998 and the nine months ended September 30, 1999 included in this
+ prospectus have been audited by Deloitte & Touche LLP, independent
+ auditors, as stated in their report appearing herein, and have been so
+ included in reliance upon the report of such firm given upon their
+ authority as experts in accounting and auditing.
+
+ 
+
+ 
+ 
+ WHERE YOU CAN FIND MORE INFORMATION
+
+ 
+
+ We have
+ filed with the Securities and Exchange Commission a registration statement
+ on Form S-1 with respect to the common stock being sold in this offering.
+ This prospectus constitutes a part of that registration statement. This
+ prospectus does not contain all the information set forth in the
+ registration statement and the exhibits and schedules to the registration
+ statement, because some parts have been omitted in accordance with the
+ rules and regulations of the Commission. For further information with
+ respect to us and our common stock being sold in this offering, you should
+ refer to the registration statement and the exhibits and schedules filed as
+ part of the registration statement. Statements contained in this prospectus
+ regarding the contents of any agreement, contract or other document
+ referred to are not necessarily complete; reference is made in each case to
+ the copy of the contract or document filed as an exhibit to the
+ registration statement. Each statement is qualified in all respects by
+ reference to the exhibit. You may inspect a copy of the registration
+ statement without charge at the Commission s principal office in
+ Washington, D.C. and obtain copies of all or any part thereof, upon payment
+ of certain fees, from the Commission s Public Reference Room at the
+ Commission s principal office, 450 Fifth Street, N.W., Washington,
+ D.C. 20549, or at the Commission s regional offices in New York,
+ located at 7 World Trade Center, Suite 1300, New York, New York 10048, or
+ in Chicago, located at 500 West Madison Street, Suite 1400, Chicago,
+ Illinois 60661. You may obtain information regarding the operation of the
+ Public Reference Room by calling the Commission at 1-800-SEC-0330. The
+ Commission maintains an Internet site that contains reports, proxy and
+ information statements and other information regarding registrants that
+ file electronically with the Commission. The Commission s World Wide
+ Web address is www.sec.gov.
+
+ 
+
+ We are
+ subject to the information and reporting requirements of the Securities and
+ Exchange Act of 1934 and we file annual and quarterly reports, proxy
+ statements and other information with the Commission. These reports, proxy
+ statements and other information are available for inspection and copying
+ at the Commission s public reference rooms and the Commission s
+ website referred to above.
+
+ 
+ 
+ BRAUN CONSULTING, INC. AND SUBSIDIARIES
+
+ 
+
+ INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
+
+ 
+
+ 
+ 
+ 
+ 
+ Page
+ 
+
+ 
+ Braun Consulting, Inc.
+ and Subsidiaries:
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Independent Auditors
+ Report
+ 
+ F-2
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Consolidated Financial
+ Statements as of December 31, 1998 and 1999 and for Each of the Three
+ Years
+ 
+
+ in the Period Ended December 31,
+ 1999:
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Consolidated Balance
+ Sheets
+ 
+ F-3
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Consolidated Statements of Income
+ 
+ 
+ F-4
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Consolidated Statements of
+ Stockholders Equity 
+ 
+ F-5
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Consolidated Statements of Cash Flows
+ 
+ 
+ F-6
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Notes to Consolidated Financial
+ Statements
+ 
+ F-7
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Emerging Technologies
+ Consultants, Inc.:
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Independent Auditors
+ Report
+ 
+ F-17
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Financial Statements as
+ of December 31, 1998 and September 30, 1999 and for the Year Ended
+ 
+
+ December 31, 1998 and the Nine Months Ended
+ September 30, 1999:
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Balance Sheets
+ 
+ F-18
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Statements of Income 
+ 
+ F-19
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Statements of Stockholders 
+ Equity 
+ 
+ F-20
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Statements of Cash Flows 
+ 
+ F-21
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Notes to Financial
+ Statements
+ 
+ F-22
+ 
+
+ 
+ 
+
+ INDEPENDENT AUDITORS REPORT
+
+ 
+
+ The Board of Directors and Stockholders of
+ 
+
+ Braun Consulting, Inc.:
+
+ 
+
+ We have
+ audited the accompanying consolidated balance sheets of Braun Consulting,
+ Inc. and subsidiaries (the Company ) as of December 31, 1998 and
+ 1999 and the related consolidated statements of income, stockholders 
+ equity, and cash flows for each of the three years in the period ended
+ December 31, 1999. These financial statements are the responsibility of the
+ Company s management. Our responsibility is to express an opinion on
+ these financial statements based on our audits.
+
+ 
+
+ We
+ conducted our audits in accordance with generally accepted auditing
+ standards. Those standards require that we plan and perform the audit to
+ obtain reasonable assurance about whether the financial statements are free
+ of material misstatement. An audit includes examining, on a test basis,
+ evidence supporting the amounts and disclosures in the financial
+ statements. An audit also includes assessing the accounting principles used
+ and significant estimates made by management, as well as evaluating the
+ overall financial statement presentation. We believe that our audits
+ provide a reasonable basis for our opinion.
+
+ 
+
+ In our
+ opinion, such consolidated financial statements present fairly, in all
+ material respects, the financial position of Braun Consulting, Inc. and
+ subsidiaries as of December 31, 1998 and 1999, and the results of their
+ operations and their cash flows for each of the three years in the period
+ ended December 31, 1999 in conformity with generally accepted accounting
+ principles.
+
+ 
+
+ /s/ DELOITTE & 
+ TOUCHE
+ LLP
+
+ 
+
+ DELOITTE & TOUCHE LLP
+
+ Chicago, Illinois
+
+ January 21, 2000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ BRAUN CONSULTING, INC. AND SUBSIDIARIES
+
+ 
+
+ CONSOLIDATED BALANCE SHEETS
+
+ 
+
+ 
+ 
+ 
+ 
+ As of December
+ 31,
+ 
+
+ 
+ 
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ ASSETS
+ 
+
+ 
+ 
+ 
+ (In thousands,
+ 
+
+ except share and
+ 
+
+ per share data)
+ 
+ 
+ 
+
+ 
+ Current
+ assets:
+ 
+
+ 
+ 
+ Cash and cash equivalents
+ 
+ $ 570
+ 
+ 
+ 
+ $ 5,947
+ 
+ 
+ 
+
+ 
+ 
+ Marketable securities
+ 
+ 
+ 
+ 
+ 
+ 3,902
+ 
+ 
+ 
+
+ 
+ 
+ Accounts receivable (net of
+ allowance: $90 in 1998; $100 in 1999)
+ 
+ 6,548
+ 
+ 
+ 
+ 12,251
+ 
+ 
+ 
+
+ 
+ 
+ Accounts receivable
+ employees
+ 
+ 357
+ 
+ 
+ 
+ 73
+ 
+ 
+ 
+
+ 
+ 
+ Receivable from Wincite current
+ portion (Note 5)
+ 
+ 114
+ 
+ 
+ 
+ 114
+ 
+ 
+ 
+
+ 
+ 
+ Income taxes receivable
+ 
+ 
+ 
+ 
+ 
+ 609
+ 
+ 
+ 
+
+ 
+ 
+ Prepaid expenses and other current
+ assets
+ 
+ 251
+ 
+ 
+ 
+ 948
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total current assets
+ 
+ 7,840
+ 
+ 
+ 
+ 23,844
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Receivable from Wincite
+ (Note 5)
+ 
+ 95
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Equipment, furniture and
+ software net (Note 6)
+ 
+ 1,831
+ 
+ 
+ 
+ 3,703
+ 
+ 
+ 
+
+ 
+ Intangible assets (net of
+ accumulated amortization: $71 in 1998; $840 in 1999) (Note 7)
+ 
+ 79
+ 
+ 
+ 
+ 25,545
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total assets
+ 
+ $9,845
+ 
+ 
+ 
+ $53,092
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ LIABILITIES AND STOCKHOLDERS 
+ EQUITY
+ 
+
+ 
+ Current
+ liabilities:
+ 
+
+ 
+ 
+ Notes payable (Note 8)
+ 
+ $2,745
+ 
+ 
+ 
+ $ 639
+ 
+ 
+ 
+
+ 
+ 
+ Accounts payable
+ 
+ 1,124
+ 
+ 
+ 
+ 1,648
+ 
+ 
+ 
+
+ 
+ 
+ Accrued offering expenses
+ 
+ 
+ 
+ 
+ 
+ 366
+ 
+ 
+ 
+
+ 
+ 
+ Accrued compensation
+ 
+ 871
+ 
+ 
+ 
+ 741
+ 
+ 
+ 
+
+ 
+ 
+ Accrued merger costs
+ 
+ 
+ 
+ 
+ 
+ 325
+ 
+ 
+ 
+
+ 
+ 
+ Other accrued liabilities
+ 
+ 145
+ 
+ 
+ 
+ 389
+ 
+ 
+ 
+
+ 
+ 
+ Unearned revenue
+ 
+ 270
+ 
+ 
+ 
+ 414
+ 
+ 
+ 
+
+ 
+ 
+ Current deferred income taxes (Note
+ 11)
+ 
+ 61
+ 
+ 
+ 
+ 159
+ 
+ 
+ 
+
+ 
+ 
+ Distributions payable to
+ stockholders
+ 
+ 1,002
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total current liabilities
+ 
+ 6,218
+ 
+ 
+ 
+ 4,681
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Deferred income taxes
+ (Note 11)
+ 
+ 
+ 
+ 
+ 
+ 425
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Stockholders 
+ equity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Common stock, no par value at
+ December 31, 1998; $0.001 par value at
+ 
+
+ 
+ December 31, 1999; authorized 100,000,000 shares at
+ December 31, 1998 and
+ 
+
+ 
+ 50,000,000 at December 31, 1999; issued and outstanding
+ shares 11,964,002 at
+ 
+
+ 
+ December 31, 1998 and 17,130,783 shares at December 31,
+ 1999
+ 
+ 804
+ 
+ 
+ 
+ 17
+ 
+ 
+ 
+
+ 
+ 
+ Additional paid-in capital
+ 
+ 
+ 
+ 
+ 
+ 48,041
+ 
+ 
+ 
+
+ 
+ 
+ Notes receivable from
+ stockholders
+ 
+ (38
+ )
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Unearned deferred compensation (Note
+ 13)
+ 
+ (320
+ )
+ 
+ (837
+ )
+ 
+
+ 
+ 
+ Retained earnings
+ 
+ 3,181
+ 
+ 
+ 
+ 765
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total stockholders equity
+ 
+ 3,627
+ 
+ 
+ 
+ 47,986
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total liabilities and stockholders 
+ equity
+ 
+ $9,845
+ 
+ 
+ 
+ $53,092
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ See notes to consolidated financial statements.
+
+ 
+
+ BRAUN CONSULTING, INC. AND SUBSIDIARIES
+
+ 
+
+ CONSOLIDATED STATEMENTS OF INCOME
+
+ 
+
+ 
+ 
+ 
+ 
+ Years Ended December
+ 31,
+ 
+
+ 
+ 
+ 
+ 1997
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ (In thousands, except
+ share
+ 
+
+ and per share data)
+ 
+
+ 
+ Revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Consulting services
+ 
+ $17,444
+ 
+ 
+ 
+ $26,907
+ 
+ 
+ 
+ $44,973
+ 
+
+ 
+ 
+ Product sales
+ 
+ 2,064
+ 
+ 
+ 
+ 955
+ 
+ 
+ 
+ 2,331
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total revenues
+ 
+ 19,508
+ 
+ 
+ 
+ 27,862
+ 
+ 
+ 
+ 47,304
+ 
+
+ 
+ Costs and
+ expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Project personnel and
+ expenses
+ 
+ 10,148
+ 
+ 
+ 
+ 15,879
+ 
+ 
+ 
+ 24,124
+ 
+
+ 
+ 
+ Cost of products sold
+ 
+ 2,032
+ 
+ 
+ 
+ 884
+ 
+ 
+ 
+ 2,017
+ 
+
+ 
+ 
+ Selling and marketing
+ expenses
+ 
+ 1,111
+ 
+ 
+ 
+ 2,303
+ 
+ 
+ 
+ 3,761
+ 
+
+ 
+ 
+ General and administrative
+ expenses
+ 
+ 4,345
+ 
+ 
+ 
+ 7,777
+ 
+ 
+ 
+ 11,948
+ 
+
+ 
+ 
+ Amortization of intangible
+ assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 719
+ 
+
+ 
+ 
+ Stock compensation
+ 
+ 13
+ 
+ 
+ 
+ 271
+ 
+ 
+ 
+ 620
+ 
+
+ 
+ 
+ Merger costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 170
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total costs and expenses
+ 
+ 17,649
+ 
+ 
+ 
+ 27,114
+ 
+ 
+ 
+ 43,359
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Operating
+ income
+ 
+ 1,859
+ 
+ 
+ 
+ 748
+ 
+ 
+ 
+ 3,945
+ 
+
+ 
+ Interest
+ income
+ 
+ 10
+ 
+ 
+ 
+ 16
+ 
+ 
+ 
+ 461
+ 
+
+ 
+ Interest
+ expense
+ 
+ 69
+ 
+ 
+ 
+ 137
+ 
+ 
+ 
+ 137
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Income from continuing
+ operations
+ 
+ 1,800
+ 
+ 
+ 
+ 627
+ 
+ 
+ 
+ 4,269
+ 
+
+ 
+ Loss from discontinued
+ operations (Note 5)
+ 
+ (84
+ )
+ 
+ (101
+ )
+ 
+ 
+ 
+
+ 
+ Gain on sale of
+ discontinued operations (Note 5)
+ 
+ 
+ 
+ 
+ 
+ 254
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Income before provision
+ for income taxes
+ 
+ 1,716
+ 
+ 
+ 
+ 780
+ 
+ 
+ 
+ 4,269
+ 
+
+ 
+ Provision (benefit) for
+ income taxes
+ 
+ 81
+ 
+ 
+ 
+ (3
+ )
+ 
+ 1,230
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net income
+ 
+ $ 1,635
+ 
+ 
+ 
+ $ 783
+ 
+ 
+ 
+ $ 3,039
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Pro forma (Unaudited
+ Note 4):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Income before provision for income
+ taxes
+ 
+ $ 1,716
+ 
+ 
+ 
+ $ 780
+ 
+ 
+ 
+ $ 4,269
+ 
+
+ 
+ 
+ Pro forma provision for income
+ taxes
+ 
+ 702
+ 
+ 
+ 
+ 457
+ 
+ 
+ 
+ 2,249
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Pro forma net income
+ 
+ $ 1,014
+ 
+ 
+ 
+ $ 323
+ 
+ 
+ 
+ $ 2,020
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Earnings (loss) per share
+ basic:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Continuing operations
+ 
+ $ 0.17
+ 
+ 
+ 
+ $ 0.05
+ 
+ 
+ 
+ $ 0.31
+ 
+
+ 
+ 
+ Discontinued operations
+ 
+ (0.01
+ )
+ 
+ 0.01
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Pro forma net income (Unaudited
+ Note 4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.14
+ 
+
+ 
+ Earnings (loss) per share
+ diluted:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Continuing operations
+ 
+ $ 0.15
+ 
+ 
+ 
+ $ 0.05
+ 
+ 
+ 
+ $ 0.28
+ 
+
+ 
+ 
+ Discontinued operations
+ 
+ (0.01
+ )
+ 
+ 0.01
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Pro forma net income (Unaudited
+ Note 4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.13
+ 
+
+ 
+ Weighted average
+ shares:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Basic
+ 
+ 10,843,584
+ 
+ 11,572,451
+ 
+ 13,979,808
+ 
+
+ 
+ Diluted
+ 
+ 12,077,775
+ 
+ 12,570,533
+ 
+ 15,340,809
+ 
+
+ 
+ 
+
+ See notes to consolidated financial statements.
+
+ 
+
+ BRAUN CONSULTING, INC. AND SUBSIDIARIES
+
+ 
+
+ CONSOLIDATED STATEMENTS OF STOCKHOLDERS 
+ EQUITY
+
+ 
+
+ 
+ 
+ 
+ 
+ Shares
+ 
+ Common
+ 
+
+ Stock
+ 
+ Additional
+ 
+
+ Paid-In
+ 
+
+ Capital
+ 
+ Notes
+ 
+
+ Receivable
+ 
+
+ from
+ 
+
+ Stockholders
+ 
+ Unearned
+ 
+
+ Deferred
+ 
+
+ Compensation
+ 
+ Retained
+ 
+
+ Earnings
+ 
+ Total
+ 
+
+ 
+ 
+ 
+ (In thousands, except
+ share data)
+ 
+
+ 
+ BALANCE, JANUARY 1,
+ 1997
+ 
+ 10,843,584
+ 
+ $ 132
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $1,692
+ 
+ 
+ 
+ $ 1,824
+ 
+ 
+ 
+
+ 
+ 
+ Distributions to stockholders
+ 
+
+ 
+ declared
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (752
+ )
+ 
+ (752
+ )
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,635
+ 
+ 
+ 
+ 1,635
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ BALANCE, DECEMBER 31,
+ 1997
+ 
+ 10,843,584
+ 
+ 
+ 132
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,575
+ 
+ 
+ 
+ 2,707
+ 
+ 
+ 
+
+ 
+ 
+ Exercise of stock options
+ 
+ 1,120,418
+ 
+ 81
+ 
+ 
+ 
+ 
+ 
+ $(38
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 43
+ 
+ 
+ 
+
+ 
+ 
+ Issuance of stock options
+ 
+ 
+ 
+ 591
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $ (591
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Amortization of deferred
+ 
+
+ 
+ compensation expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 271
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 271
+ 
+ 
+ 
+
+ 
+ 
+ Distributions to stockholders
+ 
+
+ 
+ declared
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (177
+ )
+ 
+ (177
+ )
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 783
+ 
+ 
+ 
+ 783
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ BALANCE, DECEMBER 31,
+ 1998
+ 
+ 11,964,002
+ 
+ 
+ 804
+ 
+ 
+ 
+ 
+ 
+ (38
+ )
+ 
+ 
+ (320
+ )
+ 
+ 3,181
+ 
+ 
+ 
+ 3,627
+ 
+ 
+ 
+
+ 
+ 
+ Exercise of stock options
+ 
+ 673,448
+ 
+ 30
+ 
+ 
+ 
+ $ 790
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 820
+ 
+ 
+ 
+
+ 
+ 
+ Income tax benefit from
+ 
+
+ 
+ disqualifying dispositions
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 100
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 100
+ 
+ 
+ 
+
+ 
+ 
+ Issuance of stock options
+ 
+ 
+ 
+ 743
+ 
+ 
+ 
+ 394
+ 
+ 
+ 
+ 
+ 
+ (1,137
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Amortization of deferred
+ 
+
+ 
+ compensation expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 620
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 620
+ 
+ 
+ 
+
+ 
+ 
+ Collection of notes receivable
+ 
+
+ 
+ from stockholders
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 38
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 38
+ 
+ 
+ 
+
+ 
+ 
+ Conversion to C corp status and
+ 
+
+ par
+ value stock
+ 
+ 
+ 
+ (1,565
+ )
+ 
+ 3,769
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2,641
+ )
+ 
+ (437
+ )
+ 
+
+ 
+ 
+ Distributions to stockholders
+ 
+
+ 
+ declared
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2,814
+ )
+ 
+ (2,814
+ )
+ 
+
+ 
+ 
+ Proceeds from initial public
+ 
+
+ 
+ offering
+ 
+ 4,000,000
+ 
+ 4
+ 
+ 
+ 
+ 24,489
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 24,493
+ 
+ 
+ 
+
+ 
+ 
+ Issuance of common stock for
+ 
+
+ 
+ acquired
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001087008_orius-corp_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001087008_orius-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..70e2711733d5b5e9159fd55c0f535599832ab02c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001087008_orius-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Akerman, Senterfitt & Eidson, P.A., Fort Lauderdale, Florida and Kirkland & Ellis, a partnership that includes professional corporations, Chicago, Illinois, will pass upon certain other legal matters for us. Some partners of Kirkland & Ellis, through an investment company, have a limited partnership interest in Willis Stein & Partners II, L.P. These partners do not have the power to vote or dispose of the shares owned by Willis Stein & Partners. Kirkland & Ellis has from time to time represented, and may continue to represent Willis Stein & Partners and some of its affiliates, including our company, in connection with various legal matters. Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York will pass upon certain legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001087401_co-space_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001087401_co-space_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c6a23aa8cc060598829b0c9997e8f9bda70e94c4
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001087401_co-space_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for CO Space by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Certain legal matters related to the sale of the common stock offered hereby will be passed upon for the underwriters by Latham & Watkins, Washington, D.C. As of the date of this prospectus, attorneys at Goodwin, Procter & Hoar LLP and an investment partnership composed of current and former attorneys at Goodwin, Procter & Hoar LLP beneficially owned an aggregate of 18,844 shares of our series B preferred stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001087432_intermune_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001087432_intermune_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5659de7def7f10e7dd8815332eb246ffb948cbde
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001087432_intermune_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of this prospectus, certain partners and associates of Cooley Godward LLP own an aggregate of 17,889 shares of common stock through an investment partnership.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001087875_coolsaving_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001087875_coolsaving_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..748dcc2f335d912d92d2641dea4be4f0282aecf6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001087875_coolsaving_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for CoolSavings by Jaffe, Raitt, Heuer & Weiss, Professional Corporation, Detroit, Michigan. Pillsbury Madison & Sutro LLP, San Francisco, California, is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus. Shareholders of Jaffe, Raitt, Heuer & Weiss, Professional Corporation beneficially own 961,897 shares of our common stock in the aggregate. Assuming that the fair market value of a share of our common stock is $7.00, these shares have a fair market value of approximately $6.7 million. The statements in this prospectus relating to patents, patent licenses, trademarks and service marks and related litigation under "Table of Contents" and under the captions "Risk Factors--Intellectual property litigation against us can be costly and could result in the loss of significant rights," "Risk Factors--Protecting our patents, trademarks and proprietary rights may be costly and may distract our management" and "Business--Intellectual Property" and the statements in this prospectus relating to intellectual property and related litigation under the caption "Business--Legal Proceedings" have been reviewed and approved by Niro, Scavone, Haller & Niro, Chicago, Illinois, our intellectual property counsel, and are included in this prospectus in reliance upon that review and approval. Shareholders of Niro, Scavone, Haller & Niro beneficially own 234,600 shares of our common stock in the aggregate. Assuming that the fair market value of a share of our common stock is $7.00, these shares have a fair market value of approximately $1.6 million.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001088022_ipix-corp_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001088022_ipix-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bfef2adff183d3e69da00d7077a7e74842e84615
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001088022_ipix-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Baker, Donelson, Bearman & Caldwell, a professional corporation, Memphis, Tennessee. Members of Baker, Donelson, Bearman & Caldwell, in the aggregate, beneficially own 16,841 shares of our common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Cahill Gordon & Reindel, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001088244_intermix_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001088244_intermix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2f46c1bd99b76ec933ef31ba857c40f0250031fa
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001088244_intermix_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for eUniverse, Inc. by Martin, Gasparrini & Chioffi, LLP, Stamford, Connecticut.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001088626_releasenow_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001088626_releasenow_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f00d9358db27cd4e8f98b7451b905fc26137674e
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001088626_releasenow_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of common stock offered hereby will be passed upon for ReleaseNow.com by Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of the date of this prospectus, attorneys employed by Brobeck, Phleger & Harrison LLP and funds associated with the firm beneficially own an aggregate of 88,572 shares of our common stock. Pillsbury Madison & Sutro LLP, Palo Alto, California, is acting as counsel for the underwriters in connection with various legal matters relating to the shares of common stock offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001089439_beatnik_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001089439_beatnik_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..26713991d562d0e50b7140221cd0fdc94f3cbf74
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001089439_beatnik_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Selected legal matters with respect to the validity of the common stock offered by this prospectus are being passed upon for Beatnik by Pillsbury Madison & Sutro LLP, Palo Alto, California. Certain partners of Pillsbury Madison & Sutro LLP and an investment partnership comprised of partners and former partners of that firm beneficially own an aggregate of 139,982 shares of Beatnik common stock. Legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001089443_digimarc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001089443_digimarc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..95ff1299c7258b8fb510cf50aada09fefd3584ff
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001089443_digimarc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in connection with the offering will be passed upon for the underwriters by O'Melveny & Myers LLP, San Francisco, California. Attorneys employed by Morrison & Foerster LLP or investment partnerships of which they are the beneficial owners hold approximately 61,000 shares of common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001089448_servicesof_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001089448_servicesof_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..22bac4a0c824c023a1fddd0369c667d0ce58f534
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001089448_servicesof_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by McDermott, Will & Emery, Boston, Massachusetts. As of July 31, 2000, an investment partnership comprised of certain partners of McDermott, Will & Emery beneficially owned 7,420 shares of our Series J preferred stock. Various legal matters related to the sale of the common stock offered hereby will be passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Waltham, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001089754_nbc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001089754_nbc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..253ff88d5792a4bd198c957518a90fe248359bb4
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001089754_nbc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Class A common stock offered hereby will be passed upon for NBCi by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in connection with the offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001089925_alteon_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001089925_alteon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bc1dca9879f011bd2b5e8eccd520f0a0c5b79739
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001089925_alteon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Cooley Godward LLP, Palo Alto, California, will provide Alteon with an opinion as to the validity of the common stock offered under this prospectus. Fenwick & West LLP, Palo Alto, California, will pass upon certain legal matters related to this offering for the underwriters. As of the date of this prospectus, certain partners and associates of Cooley Godward LLP own an aggregate of 70,800 shares of common stock of Alteon through investment partnerships and certain partners and associates own 25,582 shares of common stock directly.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001091621_mediaplex_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001091621_mediaplex_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b08adccafe4debb127636175c06d2ce3909ca9bf
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001091621_mediaplex_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California will pass upon legal matters for the underwriters. As of the date of this prospectus, WS Investments, an investment partnership composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, and certain individual attorneys of this firm, beneficially own a total of 43,116 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001092325_resourceph_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001092325_resourceph_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cddc457f8244f2d9ecf1448da9046db1dbcaef33
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001092325_resourceph_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters with respect to the validity of the Class A common stock offered hereby are being passed upon for ReSourcePhoenix.com by Wilson Sonsini Goodrich & Rosati, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001092367_sycamore_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001092367_sycamore_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..43e23fdbb634907b9041d26a8107535073c2d925
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001092367_sycamore_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain partners and employees of Skadden, Arps, Slate, Meagher & Flom LLP beneficially own, in aggregate, approximately 3,120 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001092605_emerge_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001092605_emerge_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8ede49860b61a65deddd53dfc81a829361540cbf
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001092605_emerge_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS An opinion as to the validity of the shares of class A common stock offered hereby will be provided to us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering are being passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001092675_moai_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001092675_moai_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d8149973e7615be6454999f8e4ea59d4d5a2d70b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001092675_moai_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock in this offering will be passed upon by Venture Law Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park, California 94025. Donald M. Keller, Jr., a Director of Venture Law Group, is our Secretary. Legal matters in connection with this offering will be passed upon for the underwriters by O'Melveny & Myers LLP, Embarcadero Center West, 275 Battery Street, San Francisco, California 94111. As of the date of this prospectus, attorneys of Venture Law Group and an investment partnership controlled by Venture Law Group beneficially own an aggregate of 138,172 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001092693_velocity_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001092693_velocity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0e40f321cc5ad5e3cb1595b8d2fd4232c75a31a2
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001092693_velocity_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters will be passed upon for the underwriter by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001093324_state_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001093324_state_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..13e122d0510eec7b865065d21fa5da47026d2058
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001093324_state_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Wyche, Burgess, Freeman & Parham, P.A., Greenville, South Carolina. At the time of completion of this offering, attorneys of Wyche, Burgess, Freeman & Parham, P.A. are expected to own approximately 33,333 shares of our common stock and warrants to purchase 4,500 shares at $2.00 per share. Certain legal matters will be passed on for us by Cravath, Swaine & Moore, New York, New York. Various regulatory matters in connection with this offering are being passed upon for us by Kelley Drye & Warren LLP, Washington, D.C. Various legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001093425_carlson_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001093425_carlson_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..033072cc36c2e18dc4693dcf837a4e08827be262
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001093425_carlson_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Class A common stock offered by this prospectus and other legal matters will be passed upon for us by Faegre & Benson LLP, Minneapolis, Minnesota. The validity of the shares of Class A common stock offered by this prospectus will be passed upon for the underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), Los Angeles, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001093709_organic_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001093709_organic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..52cd9ac77ba7cf088497fc9e30be41eeabf9130f
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001093709_organic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in connection with the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001094087_jni-corp_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001094087_jni-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bfc3bf27121019eeb51a0522ac812d4a4632c6c5
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001094087_jni-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for JNI by Latham & Watkins, San Diego, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by O'Melveny & Myers LLP, Newport Beach, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001094451_skillsoft_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001094451_skillsoft_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4c1a93236624be9bebd0e15adf871fbd2d37c1a9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001094451_skillsoft_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for SkillSoft by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters will be passed upon for the underwriters by Katten Muchin Zavis, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001094814_cartesian_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001094814_cartesian_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cf0f83c25500edd7494cedd5ddf2b21c4097b694
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001094814_cartesian_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP, San Francisco, California. As of July 1, 2000, a certain investment partnership and members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially owned an aggregate of 37,500 shares of our common stock. Mario M. Rosati, one of our directors, and Christopher D. Mitchell, our secretary, are members of Wilson Sonsini Goodrich & Rosati.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001094819_intellesal_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001094819_intellesal_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b92d5110f53d138f3de9a6121904c765816258f9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001094819_intellesal_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Bryan Cave LLP, St. Louis, Missouri, as our counsel, has issued an opinion as to the validity of the common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Fulbright & Jaworski L.L.P. Bryan Cave LLP from time to time serves as legal counsel to us and to some of our affiliates, including Applied Digital Solutions.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001094959_h-power_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001094959_h-power_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8013055c0143e13bbdc751c003643411edf64746
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001094959_h-power_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for H Power by Fulbright & Jaworski L.L.P., New York, New York. Merrill M. Kraines, a partner in Fulbright & Jaworski L.L.P., has served as our Secretary since December 1999. Certain legal matters in connection with the offering will be passed upon for the underwriters by Greenberg Traurig, LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001094961_monogram_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001094961_monogram_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1b4f41f62ef72d21a00b0f173f429ae30353139d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001094961_monogram_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of shares of common stock offered by this prospectus will be passed upon for us by Cooley Godward LLP, San Diego, California. Certain legal matters will be passed upon for the underwriters by McDermott, Will & Emery.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001095157_caminus_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001095157_caminus_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8b6fd057f49dd21be4f6c9362620a976f9686ea7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001095157_caminus_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts, and for the underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001095158_l90-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001095158_l90-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6d5e3f737f7c257a6ad0837b957bac8cb898b705
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001095158_l90-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Matters relating to this offering are being passed upon for us by Paul, Hastings, Janofsky & Walker LLP, Los Angeles, California. Brobeck, Phleger & Harrison LLP, Los Angeles, California is acting as counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001095478_interwave_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001095478_interwave_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5f65cd70abfac7ed99761c2797f3ee78934d99b5
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001095478_interwave_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares offered hereby and other matters of Bermuda law relating to the offering are being passed upon for us by Conyers Dill & Pearman, Bermuda. Certain legal matters relating to the offering are being passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, with respect to U.S. law. Certain legal matters relating to the offering are being passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001095558_artisan_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001095558_artisan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..550ab9f7f19717c29594b91d8838dfb9707adfb8
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001095558_artisan_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Some of the legal matters in connection with the issuance of the common stock will be passed upon for Artisan by Kirkland & Ellis, Los Angeles, California and Chicago, Illinois. Some of the legal matters in connection with the offering will be passed upon for the underwriters by Cahill Gordon & Reindel, New York, New York. Kirkland & Ellis has, from time to time, represented and may continue to represent, some of the underwriters in connection with various legal matters, and Audax Entertainment, L.P., Artisan Entertainment Inc. and other affiliates in connection with various legal matters. William S. Kirsch, P.C., a partner of Kirkland & Ellis, Chicago, Illinois, is also a member of Artisan's board of directors. Some partners of Kirkland & Ellis are partners in Randolph Street Partners, which owns 12,283 shares of common stock of Artisan.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001095583_advanced_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001095583_advanced_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bd535ee697f912c2bdc74a343120615e23686cc
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001095583_advanced_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Fried, Frank, Harris, Shriver & Jacobson, a partnership including professional corporations, in Washington, D.C., will pass upon the validity of the shares of common stock offered by this prospectus. Davis Polk & Wardwell, in New York, New York, will pass upon certain legal matters relating to the offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001095594_t-r_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001095594_t-r_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ced6d742200663e46e7c55553d1f058dec6707b0
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001095594_t-r_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for T/R Systems by Jones, Day, Reavis & Pogue, Atlanta, Georgia. Hale and Dorr LLP, Washington, D.C., is serving as legal counsel to the underwriters for this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001096000_worldres_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001096000_worldres_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..dc36bf961222f9d69ffa8f9e66d334452408d843
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001096000_worldres_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for WorldRes.com by Orrick, Herrington & Sutcliffe LLP, San Francisco, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher and Flom LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001096573_participat_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001096573_participat_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7cf253f39be4ca2f37cab1e89e67dc51d28c8584
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001096573_participat_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by McDermott, Will & Emery, Chicago, Illinois. As of the date of this prospectus, Wilson Sonsini Goodrich & Rosati and its members beneficially owned an aggregate of 15,402 shares of Series B preferred stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001096788_knology_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001096788_knology_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0040a0230b204dbb952ae62e0bdccb96ee335feb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001096788_knology_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Hogan & Hartson L.L.P., of Washington, D.C., has issued an opinion about certain legal matters with respect to our Series A preferred stock, options and common stock. Anthony S. Harrington, a partner of Hogan & Hartson, currently owns 80,768 shares of common stock of ITC Holding and will receive 87,986 shares of our Series A preferred stock in the distribution. Arthur Andersen LLP has issued an opinion about certain tax matters with respect to Federal income tax consequences of the distribution to ITC Holding option holders.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001097119_zengine_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001097119_zengine_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2567c5673cdd3e4076a162954fe4ff16651559c6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001097119_zengine_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C. Certain legal matters in connection with this offering will be passed upon for the underwriters by Sidley & Austin, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001097264_allos_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001097264_allos_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f588b249c386b1df6b0f77536a3199c49bd862ea
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001097264_allos_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Cooley Godward LLP, Denver, Colorado. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brown & Wood LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001097338_witness_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001097338_witness_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..eceefcea8ef248ba8c87be1023f9a6aaaa0d9a38
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001097338_witness_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Morris, Manning & Martin, LLP, Atlanta, Georgia. Certain legal matters in connection with this offering will be passed upon for the underwriters by Alston & Bird LLP, Atlanta, Georgia.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098114_netjewels_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098114_netjewels_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2224b4793dd6c2d53f52001ef022d89495cfa5e5
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098114_netjewels_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the common stock and warrants offered by this prospectus and certain legal matters in connection with the offering will be passed upon for us by Gersten, Savage & Kaplowitz, LLP, New York, New York. The underwriters have been represented by Orrick, Herrington & Sutcliffe LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098155_excelergy_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098155_excelergy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0aa36b687fab0e0e0ee88a848823a6857dd245f6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098155_excelergy_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for Excelergy by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal matters will be passed upon for the underwriters by Choate, Hall & Stewart, Boston, Massachusetts. A fund affiliated with Testa, Hurwitz & Thibeault, LLP purchased 11,933 shares of Series C redeemable convertible preferred stock for an aggregate purchase price of $99,998.54. A partner of Testa, Hurwitz & Thibeault, LLP also purchased 2,983 shares of Series C redeemable convertible preferred stock for an aggregate purchase price of $24,997.54.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098277_websense_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098277_websense_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..78d7fce935d61278b72e15416743717fa882ac55
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098277_websense_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered in this offering will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Diego, California. As of the date of this prospectus, members of that firm own 19,959 shares of our common stock. Legal matters will be passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP, San Diego, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098402_via-net_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098402_via-net_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..39bc4e043c71a9bd67e0c45bb58b385f9ccae8a6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098402_via-net_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Hogan & Hartson L.L.P., Washington, D.C., will pass upon the validity of the issuance of the shares being offered. O'Melveny & Myers LLP will act as counsel for the underwriters. Matters relating to Dutch tax law have been passed upon by Nauta Dutilh.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098430_netlibrary_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098430_netlibrary_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..483d7540be7a6cb30259fc50789dbbe1757fdce1
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098430_netlibrary_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered in this prospectus will be passed upon for us by Hogan & Hartson L.L.P., Boulder, Colorado. Legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098432_lumenon_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098432_lumenon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..afd553c12d5f6b76ca404d2023835029351c491b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098432_lumenon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus is being passed upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098489_linc-net_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098489_linc-net_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5867149f397527b114c96469573c04b77e08ca4b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098489_linc-net_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares we are offering will be passed upon for us by Kirkland & Ellis, Chicago, Illinois. Certain partners of Kirkland & Ellis are partners in Randolph Street Partners, which owns 48,792 shares of Linc.net common stock. The validity of the shares we are offering will be passed upon for the underwriters by Shearman & Sterling, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001098659_mediacom_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001098659_mediacom_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8ca37c39767b77cf95952f411e8c4971c0588c80
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001098659_mediacom_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Class A common stock offered hereby will be passed upon for us by Cooperman Levitt Winikoff Lester & Newman, P.C., New York, New York. Robert L. Winikoff, one of our director nominees, is a partner of Cooperman Levitt Winikoff Lester & Newman, P.C. Cahill Gordon & Reindel, New York, New York, will pass upon certain legal matters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001099413_more-com_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001099413_more-com_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4b6e9c3a337d97859613e26716c49d3eba1bf5b3
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001099413_more-com_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. Legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Attorneys employed by Morrison & Foerster LLP will purchase shares in our directed share program.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001099414_tanox-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001099414_tanox-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d8ecb631a99615f357ac674b17bb2e3e902213ef
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001099414_tanox-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas will pass upon certain legal matters with respect to the legality of the issuance of the shares of common stock offered by this prospectus. Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois will pass upon certain legal matters in connection with this offering for the underwriters. Wilburn O. McDonald, Jr., and seven other shareholders of Chamberlain, Hrdlicka, White, Williams & Martin, hold an aggregate of 9,266 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001099421_stockpoint_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001099421_stockpoint_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ca421f41d747a2a88c8bd6be000148dfc1229309
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001099421_stockpoint_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon the validity of the issuance of shares of common stock offered by this prospectus for Stockpoint. Dewey Ballantine LLP, New York, New York will pass upon various legal matters in connection with the offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001099531_vantagemed_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001099531_vantagemed_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..811721b1f65f4287cc8ea763f342bb92dd89bc0e
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001099531_vantagemed_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of the common stock offered hereby will be passed upon for us by Gray Cary Ware & Freidenrich LLP, Sacramento, California and certain matters will be passed upon for the underwriters by McDermott, Will & Emery.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001099589_bolt-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001099589_bolt-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..88b31e099efba5f7b3e9d15af9cdab1ce2b528f9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001099589_bolt-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered by us in this offering will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. As of the date of this prospectus, persons and entities affiliated with Mintz Levin own an aggregate of 15,916 shares of our common stock. The underwriters are being represented by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001099795_iprint_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001099795_iprint_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..00aef7cf20d189a91b2b05764c78c16831d08eb8
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001099795_iprint_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Various legal matters relating to the offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California. As of September 30, 1999, an investment partnership and a partner at Gray Cary Ware & Freidenrich LLP owned an aggregate of 73,404 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001100370_lante-corp_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001100370_lante-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e89e1ed6f0f066d244d5a3b41994cd1701fced69
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001100370_lante-corp_legal_matters.txt
@@ -0,0 +1,6975 @@
+LEGAL MATTERS
+
+ 
+
+ 
+ Katten Muchin Zavis, Chicago, Illinois will pass
+ upon the validity of this offering of our common stock for us.
+ Cravath, Swaine & Moore, New York, New York has represented
+ the underwriters in this offering.
+
+ 
+
+ 
+ 
+ EXPERTS
+
+ 
+
+ 
+ The consolidated financial statements as of December
+ 31, 1997 and 1998 and September 30, 1999 and for each of the
+ three years in the period ended December 31, 1998 and the nine
+ months ended September 30, 1999, included in this prospectus
+ have been so included in reliance on the report of
+ PricewaterhouseCoopers LLP, independent accountants, given on
+ the authority of said firm as experts in auditing and
+ accounting.
+
+ 
+
+ 
+ 
+ WHERE YOU CAN FIND MORE INFORMATION
+
+ 
+
+ 
+ This prospectus is part of a registration statement
+ on Form S-1 we filed with the SEC. This prospectus does not
+ contain all of the information contained in the registration
+ statement and all of its exhibits and schedules. For further
+ information about us, please see the complete registration
+ statement. Summaries of agreements or other documents in this
+ prospectus are not necessarily complete. Please refer to the
+ exhibits to the registration statement for complete copies of
+ these documents.
+
+ 
+
+ 
+ You may read and copy our registration statement and
+ all of its exhibits and schedules at the following SEC public
+ reference rooms:
+
+ 
+
+ 
+ 
+ 450 Fifth
+ Street, N.W.
+
+ Judiciary Plaza
+
+ Room 1024
+
+ Washington, D.C. 20549
+
+ 
+ 
+ Seven World Trade Center
+
+ Suite 1300
+
+ New York, NY 10048
+
+ 
+ 
+ Citicorp Center
+
+ 500 West Madison Street
+
+ Suite 1400
+
+ Chicago, IL 60661
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ You may obtain information on the operation of the
+ SEC public reference room in Washington, D.C. by calling the SEC
+ at 1-800-SEC-0330. The registration statement is also available
+ from the SEC s web site at http://www.sec.gov, which
+ contains reports, proxy and information statements and other
+ information regarding issuers that file
+ electronically.
+
+ 
+
+ 
+ We intend to furnish our stockholders with annual
+ reports containing financial statements audited by an
+ independent public accounting firm and make available to our
+ stockholders quarterly reports for the first three quarters of
+ each fiscal year containing interim unaudited financial
+ information.
+
+ 
+ 
+ INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Page
+ 
+
+ 
+ Consolidated Financial Statements of Lante
+ Corporation:
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Report of Independent Accountants
+ 
+ 
+ F-2
+ 
+
+ 
+ 
+ 
+ Consolidated Statements of Operations
+ 
+ 
+ F-3
+ 
+
+ 
+ 
+ 
+ Consolidated Balance Sheets
+ 
+ 
+ F-4
+ 
+
+ 
+ 
+ 
+ Consolidated Statements of Stockholders 
+ Equity (Deficit)
+ 
+ 
+ F-5
+ 
+
+ 
+ 
+ 
+ Consolidated Statements of Cash Flows
+ 
+ 
+ F-6
+ 
+
+ 
+ 
+ 
+ Notes to Consolidated Financial Statements
+ 
+ 
+ F-7
+ 
+
+ 
+ 
+ 
+ Report of Independent Accountants
+
+ 
+
+ December 6, 1999
+
+ 
+
+ To the Board of Directors and Stockholders
+ of
+
+ Lante Corporation
+
+ 
+
+ 
+ In our opinion, the accompanying consolidated
+ balance sheets of Lante Corporation (the Company )
+ and the related consolidated statements of operations, of
+ stockholders equity (deficit) and of cash flows present
+ fairly, in all material respects, the financial position of the
+ Company at December 31, 1997 and 1998 and September 30, 1999,
+ and the results of its operations and its cash flows for each of
+ the three years in the period ended December 31, 1998 and the
+ nine months ended September 30, 1999, in conformity with
+ generally accepted accounting principles. These consolidated
+ financial statements are the responsibility of the Company
+ s management; our responsibility is to express an opinion
+ on these financial statements based on our audits. We conducted
+ our audits of these statements in accordance with generally
+ accepted auditing standards which require that we plan and
+ perform the audit to obtain reasonable assurance whether the
+ financial statements are free of material misstatement. An audit
+ includes examining, on a test basis, evidence supporting the
+ amounts and disclosures in the financial statements, assessing
+ the accounting principles used and significant estimates made by
+ management, and evaluating the overall financial statement
+ presentation. We believe that our audits provide a reasonable
+ basis for the opinion expressed above.
+
+ 
+
+ PRICEWATERHOUSE
+ COOPERS 
+ LLP
+
+ 
+
+ Chicago, Illinois
+
+ LANTE CORPORATION
+
+ 
+
+ 
+ 
+ CONSOLIDATED STATEMENTS OF OPERATIONS
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Year ended December
+ 31,
+ 
+ Nine months ended
+ 
+
+ September 30,
+ 
+
+ 
+ 
+ 
+ 
+ 1996
+ 
+ 1997
+ 
+ 1998
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+
+ 
+ Revenues
+ 
+ $ 
+ 8,640
+ 
+ 
+ $11,134
+ 
+ 
+ $15,369
+ 
+ 
+ $11,128
+ 
+ 
+ $13,364
+ 
+ 
+
+ 
+ Related party revenues ZixIt Corporation (Note
+ 9)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7,979
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Total
+ revenues
+ 
+ 8,640
+ 
+ 
+ 
+ 11,134
+ 
+ 
+ 15,369
+ 
+ 
+ 11,128
+ 
+ 
+ 21,343
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Operating expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Professional services
+ 
+ 4,381
+ 
+ 
+ 6,175
+ 
+ 
+ 7,001
+ 
+ 
+ 5,170
+ 
+ 
+ 11,263
+ 
+ 
+
+ 
+ 
+ Selling,
+ general and administrative
+ 
+ 4,019
+ 
+ 
+ 4,722
+ 
+ 
+ 6,803
+ 
+ 
+ 4,893
+ 
+ 
+ 10,711
+ 
+ 
+
+ 
+ 
+ 
+ Amortization of deferred compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 631
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Total
+ operating expenses
+ 
+ 8,400
+ 
+ 
+ 10,897
+ 
+ 
+ 13,804
+ 
+ 
+ 10,063
+ 
+ 
+ 22,605
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Income (loss) from operations
+ 
+ 240
+ 
+ 
+ 237
+ 
+ 
+ 1,565
+ 
+ 
+ 1,065
+ 
+ 
+ (1,262
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Interest (expense) income, net
+ 
+ (19
+ )
+ 
+ (20
+ )
+ 
+ (1
+ )
+ 
+ (12
+ )
+ 
+ 353
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Income (loss) before income taxes
+ 
+ 221
+ 
+ 
+ 217
+ 
+ 
+ 1,564
+ 
+ 
+ 1,053
+ 
+ 
+ (909
+ )
+ 
+
+ 
+ Income tax (provision) benefit
+ 
+ (1
+ )
+ 
+ (4
+ )
+ 
+ (8
+ )
+ 
+ (5
+ )
+ 
+ 602
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Net
+ income (loss)
+ 
+ 220
+ 
+ 
+ 213
+ 
+ 
+ 1,556
+ 
+ 
+ 1,048
+ 
+ 
+ (307
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Dividends and accretion on mandatorily redeemable
+ 
+
+ preferred stock
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (521
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net
+ income (loss) available to common stockholders
+ 
+ $ 
+ 220
+ 
+ 
+ $ 
+ 213
+ 
+ 
+ $ 
+ 1,556
+ 
+ 
+ $ 
+ 1,048
+ 
+ 
+ $ 
+ (828
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net
+ income (loss) per common share, basic and
+ 
+
+ diluted
+ 
+ $ 
+ 0.01
+ 
+ 
+ $ 
+ 0.01
+ 
+ 
+ $ 
+ 0.08
+ 
+ 
+ $ 
+ 0.05
+ 
+ 
+ $ 
+ (0.04
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Unaudited pro forma data (Note 2):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net
+ income (loss) per common share, basic and
+ 
+
+ diluted
+ 
+ $ 
+ 0.01
+ 
+ 
+ $ 
+ 0.01
+ 
+ 
+ $ 
+ 0.04
+ 
+ 
+ $ 
+ 0.03
+ 
+ 
+ $ 
+ (0.06
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Weighted average shares outstanding, basic and
+ 
+
+ diluted
+ 
+ 
+ 20,250
+ 
+ 
+ 20,167
+ 
+ 
+ 20,607
+ 
+ 
+ 20,384
+ 
+ 
+ 22,113
+ 
+ 
+
+ 
+ 
+
+ The accompanying notes are an integral part
+ of these consolidated financial statements.
+
+ LANTE CORPORATION
+
+ 
+
+ 
+ 
+ CONSOLIDATED BALANCE SHEETS
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+ September 30,
+ 
+
+ 1999
+ 
+
+ 
+ Assets
+ 
+ 1997
+ 
+ 1998
+ 
+
+ 
+ Current assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Cash and cash
+ equivalents
+ 
+ $ 
+ 850
+ 
+ $3,377
+ 
+ $13,206
+ 
+ 
+
+ 
+ 
+ Trade accounts
+ receivable (net of allowance of $216, $313 and $801 at
+ December 31,
+ 
+
+ 
+ 1997, 1998 and September 30, 1999,
+ respectively)
+ 
+ 2,338
+ 
+ 3,088
+ 
+ 4,672
+ 
+ 
+
+ 
+ 
+ Trade accounts
+ receivable related party
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,976
+ 
+ 
+
+ 
+ 
+ Deferred income
+ taxes
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 895
+ 
+ 
+
+ 
+ 
+ Other current
+ assets
+ 
+ 34
+ 
+ 103
+ 
+ 564
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total current assets
+ 
+ 3,222
+ 
+ 6,568
+ 
+ 21,313
+ 
+ 
+
+ 
+ 
+ Property and
+ equipment, net
+ 
+ 597
+ 
+ 682
+ 
+ 2,312
+ 
+ 
+
+ 
+ 
+ Other
+ assets
+ 
+ 74
+ 
+ 70
+ 
+ 3,551
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total assets
+ 
+ $3,893
+ 
+ $7,320
+ 
+ $27,176
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Liabilities
+ and Stockholders Equity (Deficit)
+ 
+ 
+ 
+ 
+
+ 
+ Current liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Accounts
+ payable
+ 
+ $ 
+ 154
+ 
+ $ 
+ 328
+ 
+ $ 
+ 1,928
+ 
+ 
+
+ 
+ 
+ Accrued compensation
+ and related costs
+ 
+ 1,120
+ 
+ 1,284
+ 
+ 2,297
+ 
+ 
+
+ 
+ 
+ Notes
+ payable
+ 
+ 800
+ 
+ 8
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Deferred
+ revenues
+ 
+ 599
+ 
+ 62
+ 
+ 762
+ 
+ 
+
+ 
+ 
+ Deferred revenues
+ related party
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 842
+ 
+ 
+
+ 
+ 
+ Other current
+ liabilities
+ 
+ 5
+ 
+ 6
+ 
+ 391
+ 
+ 
+
+ 
+ 
+ Current portion of
+ note payable redeemed shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,002
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total current
+ liabilities
+ 
+ 2,678
+ 
+ 1,688
+ 
+ 7,222
+ 
+ 
+
+ 
+ Long-term notes payable, net of current
+ portion
+ 
+ 350
+ 
+ 16
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Subordinated convertible debt
+ 
+ 
+ 
+ 
+ 2,644
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Other
+ noncurrent liabilities
+ 
+ 68
+ 
+ 57
+ 
+ 303
+ 
+ 
+
+ 
+ Noncurrent portion of note payable redeemed
+ shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,005
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ liabilities
+ 
+ 3,096
+ 
+ 4,405
+ 
+ 9,530
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Commitments and contingencies
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Mandatorily redeemable preferred stock
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Series A convertible
+ preferred stock, $0.01 par value; 4,243 shares allocated and
+ 3,536
+ 
+
+ 
+ shares issued and outstanding as of September 30,
+ 1999
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 25,334
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Stockholders equity (deficit):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Preferred stock,
+ $0.01 par value; 10 shares authorized as of December 31, 1997
+ and
+ 
+
+ 
+ 1998, 10,000 shares authorized as of September 30,
+ 1999; none issued and
+ 
+
+ 
+ outstanding as of December 31, 1997 and 1998;
+ 4,243 shares allocated to Series A
+ 
+
+ 
+ convertible preferred stock as of September 30,
+ 1999
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Common stock, $0.01
+ par value; none authorized, issued or outstanding at December
+ 
+
+ 
+ 31, 1997 and 1998, 50,000 authorized, 25,023
+ shares issued and outstanding at
+ 
+
+ 
+ September 30, 1999
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 250
+ 
+ 
+
+ 
+ 
+ Common stock Class
+ A, $0.01 par value, 10,041 and 10,191 shares issued and
+ 
+
+ 
+ outstanding at December 31, 1997 and 1998; none
+ authorized, issued and
+ 
+
+ 
+ outstanding at September 30, 1999
+ 
+ 100
+ 
+ 102
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Common stock Class
+ B, $0.01 par value, 10,041 and 12,291 shares issued and
+ 
+
+ 
+ outstanding at December 31, 1997 and 1998; none
+ authorized, issued and
+ 
+
+ 
+ outstanding at September 30, 1999
+ 
+ 100
+ 
+ 123
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Additional paid in
+ capital
+ 
+ 20
+ 
+ 577
+ 
+ 5,263
+ 
+ 
+
+ 
+ 
+ Retained earnings
+ (deficit)
+ 
+ 577
+ 
+ 2,113
+ 
+ (7,331
+ )
+ 
+
+ 
+ 
+ Deferred
+ compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2,599
+ )
+ 
+
+ 
+ 
+ Note receivable
+ stockholder
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (3,271
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total stockholders equity
+ (deficit)
+ 
+ 797
+ 
+ 2,915
+ 
+ (7,688
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total liabilities and
+ stockholders equity
+ 
+ $3,893
+ 
+ $7,320
+ 
+ $27,176
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ The accompanying notes are an integral part
+ of these consolidated financial statements.
+
+ 
+
+ LANTE CORPORATION
+
+ 
+
+ 
+ 
+ CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
+ (DEFICIT)
+
+ (In thousands)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Common stock
+ 
+ Additional
+ 
+
+ paid in
+ 
+
+ capital
+ 
+ Retained
+ 
+
+ earnings
+ 
+
+ (deficit)
+ 
+ Deferred
+ 
+
+ Compen-
+ 
+
+ sation
+ 
+ Note
+ 
+
+ receivable
+ 
+
+ stockholder
+ 
+ Total
+ 
+
+ stockholders 
+ 
+
+ equity
+ 
+
+ (deficit)
+ 
+
+ 
+ 
+ 
+ 
+ Shares
+ 
+ Par value
+ 
+
+ 
+ 
+ 
+ 
+ Common
+ 
+ Class A
+ 
+ Class B
+ 
+ Common
+ 
+ 
+ 
+
+ Class A
+ 
+ Class B
+ 
+
+ 
+ Balance at December 31,
+ 
+
+ 1995
+ 
+ 68
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $ 
+ 1
+ 
+ 
+ $ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ 
+ $ 
+ 236
+ 
+ 
+ $ 
+ 244
+ 
+ 
+ $ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ 
+ $ 
+ 481
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Conversion of common shares
+ 
+
+ to Class A and B common
+ 
+
+ stock (15 for 1)
+ 
+ (68
+ )
+ 
+ 1,012
+ 
+ 
+ 1,012
+ 
+ 
+ (1
+ )
+ 
+ 10
+ 
+ 
+ 10
+ 
+ 
+ (19
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Common stock split (5 for 1)
+ 
+ 
+ 
+ 
+ 
+ 4,050
+ 
+ 
+ 4,050
+ 
+ 
+ 
+ 
+ 
+ 
+ 40
+ 
+ 
+ 40
+ 
+ 
+ (80
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Common stock split (2 for 1)
+ 
+ 
+ 
+ 
+ 
+ 5,063
+ 
+ 
+ 5,063
+ 
+ 
+ 
+ 
+ 
+ 
+ 51
+ 
+ 
+ 51
+ 
+ 
+ (102
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net
+ income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 220
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 220
+ 
+ 
+
+ 
+ Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (100
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (100
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Balance at December 31,
+ 
+
+ 1996
+ 
+ 
+ 
+ 
+ 
+ 10,125
+ 
+ 
+ 10,125
+ 
+ 
+ 
+ 
+ 
+ 
+ 101
+ 
+ 
+ 101
+ 
+ 
+ 35
+ 
+ 
+ 364
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 601
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net
+ income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 213
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 213
+ 
+ 
+
+ 
+ Redemption of common stock
+ 
+ 
+ 
+ 
+ 
+ (84
+ )
+ 
+ (84
+ )
+ 
+ 
+ 
+ 
+ 
+ (1
+ )
+ 
+ (1
+ )
+ 
+ (15
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (17
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Balance at December 31,
+ 
+
+ 1997
+ 
+ 
+ 
+ 
+ 
+ 10,041
+ 
+ 
+ 10,041
+ 
+ 
+ 
+ 
+ 
+ 
+ 100
+ 
+ 
+ 100
+ 
+ 
+ 20
+ 
+ 
+ 577
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 797
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Redemption of common stock 
+ 
+
+ Class A and B
+ 
+ 
+ 
+ 
+ 
+ (150
+ )
+ 
+ (150
+ )
+ 
+ 
+ 
+ 
+ 
+ (1
+ )
+ 
+ (1
+ )
+ 
+ (30
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (32
+ )
+ 
+
+ 
+ Issuance of common stock 
+ 
+
+ Class A and B
+ 
+ 
+ 
+ 
+ 
+ 300
+ 
+ 
+ 1,200
+ 
+ 
+ 
+ 
+ 
+ 
+ 3
+ 
+ 
+ 12
+ 
+ 
+ 322
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 337
+ 
+ 
+
+ 
+ Exercise of stock options and
+ 
+
+ issuance of restricted
+ 
+
+ shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,200
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 12
+ 
+ 
+ 258
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 270
+ 
+ 
+
+ 
+ Amortization of compensation
+ 
+
+ expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7
+ 
+ 
+
+ 
+ Net
+ income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,556
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,556
+ 
+ 
+
+ 
+ Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (20
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (20
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Balance at December 31,
+ 
+
+ 1998
+ 
+ 
+ 
+ 
+ 
+ 10,191
+ 
+ 
+ 12,291
+ 
+ 
+ 
+ 
+ 
+ 
+ 102
+ 
+ 
+ 123
+ 
+ 
+ 577
+ 
+ 
+ 2,113
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,915
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Conversion of Class A and
+ 
+
+ Class B common stock to one
+ 
+
+ class of common shares
+ 
+ 22,481
+ 
+ 
+ (10,191
+ )
+ 
+ (12,291
+ )
+ 
+ 225
+ 
+ 
+ (102
+ )
+ 
+ (123
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Redemption of common stock
+ 
+ (4,460
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (45
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (4,916
+ )
+ 
+ (4,567
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (9,528
+ )
+ 
+
+ 
+ Issuance of common stock
+ 
+ 2,830
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4,157
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (3,271
+ )
+ 
+ 914
+ 
+ 
+
+ 
+ Conversion of debt to common
+ 
+
+ stock
+ 
+ 2,700
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 27
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,667
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,694
+ 
+ 
+
+ 
+ Exercise of stock options
+ 
+ 1,472
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 15
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 333
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 348
+ 
+ 
+
+ 
+ Preferred stock dividends and
+ 
+
+ accretion
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (521
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (521
+ )
+ 
+
+ 
+ Deferred compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,966
+ 
+ 
+ 
+ 
+ 
+ 
+ (2,966
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Amortization of compensation
+ 
+
+ expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 367
+ 
+ 
+ 
+ 
+ 
+ 
+ 367
+ 
+ 
+
+ 
+ Net
+ loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (307
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (307
+ )
+ 
+
+ 
+ Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (4,570
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (4,570
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Balance at September 30,
+ 
+
+ 1999
+ 
+ 25,023
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $250
+ 
+ 
+ $ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ 
+ $5,263
+ 
+ 
+ $(7,331
+ )
+ 
+ $(2,599
+ )
+ 
+ $(3,271
+ )
+ 
+ $(7,688
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ The accompanying notes are an integral part
+ of these consolidated financial statements.
+
+ 
+
+ LANTE CORPORATION
+
+ 
+
+ 
+ 
+ CONSOLIDATED STATEMENTS OF CASH FLOWS
+
+ (In thousands)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Year ended December
+ 31,
+ 
+ Nine months ended
+ 
+
+ September 30,
+ 
+
+ 
+ 
+ 
+ 
+ 1996
+ 
+ 1997
+ 
+ 1998
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+
+ 
+ Cash
+ flows from operating activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Net
+ income (loss)
+ 
+ $220
+ 
+ 
+ $213
+ 
+ 
+ $1,556
+ 
+ 
+ $ 
+ 1,048
+ 
+ 
+ $ 
+ (307
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Adjustments to reconcile net income to net cash
+ 
+
+ 
+ provided by (used in) operating
+ activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Depreciation and amortization
+ 
+ 130
+ 
+ 
+ 255
+ 
+ 
+ 267
+ 
+ 
+ 197
+ 
+ 
+ 329
+ 
+ 
+
+ 
+ 
+ 
+ Deferred
+ income taxes
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (679
+ )
+ 
+
+ 
+ 
+ 
+ 
+ Amortization of compensation expense and warrant
+ 
+
+ 
+ 
+ expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7
+ 
+ 
+ 3
+ 
+ 
+ 631
+ 
+ 
+
+ 
+ 
+ 
+ Other,
+ net
+ 
+ (32
+ )
+ 
+ 8
+ 
+ 
+ (11
+ )
+ 
+ 24
+ 
+ 
+ 57
+ 
+ 
+
+ 
+ 
+ 
+ Increase
+ (decrease) in cash attributable to changes in assets
+ 
+
+ 
+ 
+ and liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Trade
+ accounts receivable
+ 
+ 
+ (381
+ )
+ 
+ 
+ (312
+ )
+ 
+ (750
+ )
+ 
+ 
+ (1,096
+ )
+ 
+ (3,405
+ )
+ 
+
+ 
+ 
+ 
+ 
+ Other
+ current assets
+ 
+ 20
+ 
+ 
+ 94
+ 
+ 
+ (69
+ )
+ 
+ 14
+ 
+ 
+ (504
+ )
+ 
+
+ 
+ 
+ 
+ 
+ Other
+ assets
+ 
+ (35
+ )
+ 
+ (9
+ )
+ 
+ 4
+ 
+ 
+ (33
+ )
+ 
+ (2,586
+ )
+ 
+
+ 
+ 
+ 
+ 
+ Accounts
+ payable
+ 
+ 87
+ 
+ 
+ 57
+ 
+ 
+ 174
+ 
+ 
+ (12
+ )
+ 
+ 1,560
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Accrued
+ compensation and related costs
+ 
+ 453
+ 
+ 
+ (345
+ )
+ 
+ 164
+ 
+ 
+ 118
+ 
+ 
+ 1,368
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Deferred
+ revenues
+ 
+ (195
+ )
+ 
+ 387
+ 
+ 
+ (537
+ )
+ 
+ (412
+ )
+ 
+ 1,542
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Other
+ liabilities
+ 
+ 
+ 
+ 
+ 
+ (8
+ )
+ 
+ 65
+ 
+ 
+ (8
+ )
+ 
+ 5
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net cash
+ provided by (used in) operating
+ 
+
+ 
+ 
+ 
+ 
+ activities
+ 
+ 267
+ 
+ 
+ 340
+ 
+ 
+ 870
+ 
+ 
+ (157
+ )
+ 
+ (1,989
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Cash
+ flows from investing activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Capital
+ expenditures
+ 
+ (97
+ )
+ 
+ (588
+ )
+ 
+ (367
+ )
+ 
+ (187
+ )
+ 
+ (1,804
+ )
+ 
+
+ 
+ 
+ 
+ Acquisitions, net of cash acquired
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (426
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net cash
+ used in investing activities
+ 
+ (97
+ )
+ 
+ (588
+ )
+ 
+ (367
+ )
+ 
+ (187
+ )
+ 
+ (2,230
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Cash
+ flows from financing activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Payments
+ on bank debt and other note payable
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (800
+ )
+ 
+ (800
+ )
+ 
+ (24
+ )
+ 
+
+ 
+ 
+ Payments
+ on stockholder note payable
+ 
+ 
+ 
+ 
+ 
+ (450
+ )
+ 
+ (350
+ )
+ 
+ (350
+ )
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Proceeds
+ from issuance of bank debt and other note payable
+ 
+ 
+ 
+ 
+ 
+ 800
+ 
+ 
+ 24
+ 
+ 
+ 24
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Proceeds
+ from issuance of subordinated convertible debt
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,595
+ 
+ 
+ 2,595
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Proceeds
+ from issuance of mandatorily redeemable preferred stock,
+ 
+
+ 
+ net
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 24,814
+ 
+ 
+
+ 
+ 
+ Proceeds
+ from issuance of common stock
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 607
+ 
+ 
+ 608
+ 
+ 
+ 3,577
+ 
+ 
+
+ 
+ 
+ 
+ Redemption of common stock
+ 
+ 
+ 
+ 
+ 
+ (17
+ )
+ 
+ (32
+ )
+ 
+ (32
+ )
+ 
+ (6,521
+ )
+ 
+
+ 
+ 
+ Loan to
+ executive officer
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (3,228
+ )
+ 
+
+ 
+ 
+ 
+ Dividends paid
+ 
+ (41
+ )
+ 
+ (59
+ )
+ 
+ (20
+ )
+ 
+ (20
+ )
+ 
+ (4,570
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net cash
+ (used in) provided by financing
+ 
+
+ 
+ 
+ 
+ 
+ activities
+ 
+ (41
+ )
+ 
+ 274
+ 
+ 
+ 2,024
+ 
+ 
+ 2,025
+ 
+ 
+ 14,048
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net
+ increase in cash and cash equivalents
+ 
+ 129
+ 
+ 
+ 26
+ 
+ 
+ 2,527
+ 
+ 
+ 1,681
+ 
+ 
+ 9,829
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Cash
+ and cash equivalents, beginning of period
+ 
+ 695
+ 
+ 
+ 824
+ 
+ 
+ 850
+ 
+ 
+ 850
+ 
+ 
+ 3,377
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Cash
+ and cash equivalents, end of period
+ 
+ $824
+ 
+ 
+ $850
+ 
+ 
+ $3,377
+ 
+ 
+ $ 
+ 2,531
+ 
+ 
+ $13,206
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Supplemental disclosure of cash flow
+ information:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Cash
+ paid for interest
+ 
+ $ 
+ 45
+ 
+ 
+ $ 
+ 68
+ 
+ 
+ $ 
+ 47
+ 
+ 
+ $ 
+ 47
+ 
+ 
+ $ 
+ 15
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Cash
+ paid for taxes
+ 
+ $ 
+ 
+ 
+ 
+ $ 
+ 5
+ 
+ 
+ $ 
+ 4
+ 
+ 
+ $ 
+ 4
+ 
+ 
+ $ 
+ 408
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ The accompanying notes are an integral part
+ of these consolidated financial statements.
+
+ LANTE CORPORATION
+
+ 
+
+ 
+ 
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 1. Nature of Business
+
+ 
+
+ 
+ Lante Corporation (the Company ), a
+ Delaware corporation, is an Internet services company that
+ develops sophisticated technology-based solutions that enable
+ emerging electronic markets. These markets, which the Company
+ refers to as e-markets, are dynamic Internet based business
+ networks that enable multiple buyers and sellers to conduct
+ business efficiently online. Lante s strategists, user
+ experience experts and technologists work as a
+ multi-disciplinary team to build these solutions. Lante
+ integrates its competencies through an iterative development
+ process with the client that is overseen by Lante s
+ delivery management specialists. This approach helps Lante
+ achieve rapid time to market, maximize its clients revenue
+ generation and cost reduction and develop effective customer and
+ supplier relationships.
+
+ 
+
+ 2. Summary of Significant Accounting
+ Policies
+
+ 
+
+ 
+ 
+ 
+ Principles of Consolidation
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The consolidated financial statements include the
+ accounts of the Company and its wholly-owned subsidiary (see
+ Note 3) after elimination of all significant intercompany
+ accounts and transactions.
+
+ 
+
+ 
+ 
+ 
+ Revenue Recognition
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Revenues from fixed-fee engagements are recognized
+ on the percentage-of-completion method of accounting, based on
+ the cost incurred compared to total estimated cost. Revenues
+ from time and materials engagements are recognized as services
+ are provided. Anticipated losses on engagements, if any, are
+ charged to earnings when identified.
+
+ 
+
+ 
+ Unbilled revenues on engagements consist of revenues
+ recognized in excess of billings, and deferred revenues consist
+ of billings or cash received in excess of revenues
+ recognized.
+
+ 
+
+ 
+ 
+ 
+ Cash and Cash Equivalents
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Cash and cash equivalents consist of cash and
+ overnight investments and investment-grade commercial paper with
+ original maturities of three months or less and whose carrying
+ amount approximates market value.
+
+ 
+
+ 
+ 
+ 
+ Property and Equipment
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Property and equipment are stated at cost, net of
+ accumulated depreciation and amortization. Expenditures for
+ renewals and improvements that significantly extend the useful
+ life of an asset are capitalized. Expenditures for maintenance
+ and repairs are charged to operations as incurred. Depreciation
+ and amortization are computed using the straight-line method
+ over the estimated useful lives of the assets. Leasehold
+ improvements are amortized over the lesser of the estimated
+ useful lives of the assets or the remaining lease term. The
+ estimated useful lives are as follows:
+
+ 
+
+ 
+ 
+ Computers, computer peripherals and software
+ 
+ 3-5
+ years
+ 
+
+ 
+ Office machines and equipment
+ 
+ 5-7
+ years
+ 
+
+ 
+ Furniture and fixtures
+ 
+ 10
+ years
+ 
+
+ 
+ 
+
+ 
+ The Company reviews the carrying values of
+ long-lived assets for impairment when events or changes in
+ circumstances indicate that the carrying amount of the assets
+ may not be recoverable.
+
+ 
+
+ LANTE CORPORATION
+
+ 
+
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+ (Continued)
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+ 
+ 
+ Income Taxes
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Prior to June 17, 1999, the Company had elected
+ S-Corporation status for tax purposes. It was the Company s
+ policy to distribute to its stockholders amounts at least equal
+ to their estimated federal and state tax liabilities resulting
+ from the pass-through of the Company s taxable income. As
+ of June 17, 1999, the Company terminated its S-Corporation
+ status for federal and state income tax purposes. At that time,
+ deferred taxes were provided for temporary differences between
+ the financial reporting basis and the tax basis of the Company
+ s assets and liabilities in accordance with Statement of
+ Financial Accounting Standards (SFAS) No. 109, Accounting
+ for Income Taxes .
+
+ 
+
+ 
+ 
+ 
+ Use of Estimates in the Preparation of
+ Financial Statements
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The preparation of financial statements in
+ conformity with generally accepted accounting principles
+ requires management to make estimates and assumptions that
+ affect the reported amounts of assets and liabilities,
+ disclosure of contingent assets and liabilities at the date of
+ the financial statements and the reported amounts of revenues
+ and expenses during the reporting period. The estimates and
+ assumptions used in the accompanying financial statements are
+ based upon management s evaluation of the relevant facts
+ and circumstances as of the date of the financial statements.
+ Actual results could differ from those estimates.
+
+ 
+
+ 
+ 
+ 
+ Concentration of Credit Risk
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Financial instruments that potentially subject the
+ Company to a concentration of credit risk consist of cash and
+ cash equivalents and trade accounts receivable.
+
+ 
+
+ 
+ The Company performs ongoing credit evaluations of
+ its customers and generally does not require collateral on
+ accounts receivable. The Company maintains allowances for
+ potential credit losses and such losses have been within
+ management s expectations. As of September 30, 1999, the
+ largest client accounted for 31% of the accounts receivable
+ balance. As of December 31, 1998, the three largest clients
+ accounted for 15%, 12% and 11% of the accounts receivable
+ balance. As of December 31, 1997, the three largest clients
+ accounted for 19%, 16% and 11% of the accounts receivable
+ balance. The two largest clients (in excess of 10%) accounted
+ for 37% and 16% of total revenues in the nine months ended
+ September 30, 1999. The three largest clients in 1998 accounted
+ for 21%, 12% and 11% of total revenues. In 1997, the two largest
+ clients accounted for 27% and 13% of total revenues. In 1996,
+ the largest client accounted for 30% of total
+ revenues.
+
+ 
+
+ 
+ 
+ 
+ Fair Value of Financial
+ Instruments
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The carrying value of current assets and liabilities
+ approximated their fair value at December 31, 1997 and 1998 and
+ at September 30, 1999. The carrying value of long-term notes
+ payable and subordinated convertible debt approximates fair
+ value based on current rates of interest available to the
+ Company for notes of similar maturities.
+
+ 
+
+ 
+ 
+ 
+ Stock-Based Compensation
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The Company accounts for stock-based compensation
+ using the intrinsic value method prescribed in Accounting
+ Principles Board (APB) Opinion No. 25, Accounting for
+ Stock Issued to Employees and related interpretations and
+ elects the disclosure option of Statement of SFAS No. 123. SFAS
+ No. 123 requires that companies either recognize compensation
+ expense for grants of stock, stock options, and other equity
+ instruments based on fair value, or provide pro forma disclosure
+ of net income and earnings per share in the notes to the
+ financial statements. Accordingly, compensation expense for
+ stock options is measured as the excess, if any, of the fair
+ value of the Company s stock at the date of grant over the
+ exercise price (see Note 12).
+
+ LANTE CORPORATION
+
+ 
+
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+ (Continued)
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+
+ 
+ 
+ 
+ Comprehensive Income
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Effective January 1, 1998, the Company implemented
+ SFAS No. 130 Reporting Comprehensive Income . SFAS
+ No. 130 establishes standards for reporting comprehensive income
+ and its components in the financial statements. Comprehensive
+ income, as defined, includes all changes in equity (net assets)
+ during a period from non-owner sources. To date, the Company has
+ not had any transactions that are required to be reported in
+ comprehensive income.
+
+ 
+
+ 
+ 
+ 
+ Reclassification
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Certain prior year amounts have been reclassified to
+ conform to the current year presentation.
+
+ 
+
+ 
+ 
+ 
+ Unaudited Information
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The interim financial information as of and for the
+ nine months ended September 30, 1998 is unaudited. However, in
+ the opinion of management, such information has been prepared on
+ the same basis as the audited financial statements and includes
+ all adjustments, consisting solely of normal recurring
+ adjustments, necessary for a fair presentation of the financial
+ position, results of operations and of cash flows for the
+ periods presented. Interim results, however, are not necessarily
+ indicative of results for any future period.
+
+ 
+
+ 
+ 
+ 
+ Stock Split
+
+ 
+ 
+
+ 
+ 
+
+ 
+ In October 1999, the Board of Directors declared a
+ two for one stock split of the common stock effected in the form
+ of a dividend. The accompanying consolidated financial
+ statements and related notes give retroactive effect to this
+ stock split.
+
+ 
+
+ 
+ 
+ 
+ Basic and Diluted Net Income (Loss) Per
+ Share
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The Company computes basic and diluted net income
+ (loss) per share in accordance with SFAS No. 128, Earnings
+ per Share , and SEC Staff Accounting Bulletin No. 98 (
+ SAB 98 ). Basic net income (loss) per common share is
+ computed by dividing the net income available to common
+ stockholders for the period by the weighted average number of
+ shares of common stock outstanding during the period. The
+ calculation of diluted net income per share is based on the
+ weighted average number of shares of common stock outstanding,
+ adjusted, if dilutive, for the effect of common stock
+ equivalents. Common stock equivalents are composed of
+ incremental shares of common stock issuable upon the exercise of
+ stock options and warrants, common stock subject to restrictions
+ and incremental shares of stock issuable upon the conversion of
+ subordinated convertible debt and Series A convertible preferred
+ stock.
+
+ 
+
+ 
+ The following table sets forth the weighted average
+ effect of common stock equivalents that are not included in the
+ diluted net income (loss) per share calculation for each
+ respective period because the exercise price exceeded the
+ average estimated fair market value price for that period. There
+ were no common stock equivalents outstanding prior to
+ 1998.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+
+ 1998
+ 
+ September 30,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+
+ 
+ Weighted average effect of common stock
+ equivalents:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Restricted shares
+ 
+ 479
+ 
+ 229
+ 
+ 901
+ 
+
+ 
+ 
+ Options
+ outstanding
+ 
+ 1,948
+ 
+ 1,337
+ 
+ 202
+ 
+
+ 
+ 
+ 
+ Convertible debt
+ 
+ 1,380
+ 
+ 920
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Warrants
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 76
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 3,807
+ 
+ 2,486
+ 
+ 1,179
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ LANTE CORPORATION
+
+ 
+
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+ (Continued)
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+ For the nine-month period ended September 30, 1999,
+ additional shares potentially issuable for restricted shares,
+ stock options, convertible debt, and the Company s Series A
+ convertible preferred stock would have been 5,615, but for the
+ net loss recorded.
+
+ 
+
+ 
+ The following table gives pro forma effect for
+ income taxes assuming that the Company was a C-Corporation for
+ all periods presented (see Note 6).
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Year ended December 31,
+ 
+ Nine months ended
+ 
+
+ September 30,
+ 
+
+ 
+ 
+ 
+ 
+ 1996
+ 
+ 1997
+ 
+ 1998
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+
+ 
+ Pro
+ forma (unaudited):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Net
+ income (loss) available to common stockholders
+ 
+ $220
+ 
+ 
+ $213
+ 
+ 
+ $1,556
+ 
+ 
+ $1,048
+ 
+ 
+ $ 
+ (828
+ )
+ 
+
+ 
+ 
+ Pro
+ forma adjustment to tax (provision) benefit
+ 
+ (63
+ )
+ 
+ (60
+ )
+ 
+ (675
+ )
+ 
+ (477
+ )
+ 
+ (529
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Pro
+ forma net income (loss) available to common
+ 
+
+ 
+ stockholders
+ 
+ $157
+ 
+ 
+ $153
+ 
+ 
+ $ 
+ 881
+ 
+ 
+ $ 
+ 571
+ 
+ 
+ $(1,357
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Pro
+ forma net income (loss) per share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Basic
+ and diluted
+ 
+ $0.01
+ 
+ 
+ $0.01
+ 
+ 
+ $ 
+ 0.04
+ 
+ 
+ $ 
+ 0.03
+ 
+ 
+ $ 
+ (0.06
+ )
+ 
+
+ 
+ 
+
+ 3. Acquisitions
+
+ 
+
+ 
+ On September 2, 1999 the Company acquired Ingenious,
+ Inc. ( Ingenious ), a consulting company, for total
+ consideration of $1,121. The acquisition was recorded under the
+ purchase method of accounting. As part of the acquisition, the
+ two principal owners of Ingenious agreed to employment
+ agreements with the Company through August 31, 2002. If these
+ individuals do not comply with the employment agreements, they
+ will be required to remit to the Company $1,000 of the
+ consideration received. Consequently, $1,000 of the purchase
+ price has been recorded as deferred compensation and will be
+ amortized ratably as professional service expense through August
+ 31, 2002. The balance of the total purchase price principally
+ has been allocated to other current operating assets. The
+ Ingenious acquisition and another acquisition are not
+ significant and as such, separate pro forma financial
+ information is not necessary.
+
+ 
+
+ 4. Property and Equipment
+
+ 
+
+ 
+ Property and equipment consists of the
+ following:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+ September 30,
+ 
+
+ 1999
+ 
+
+ 
+ 
+ 
+ 
+ 1997
+ 
+ 1998
+ 
+ 
+ 
+ 
+
+ 
+ Computers, computer peripheral and software
+ 
+ $ 
+ 701
+ 
+ 
+ $ 
+ 753
+ 
+ 
+ $ 
+ 2,511
+ 
+ 
+
+ 
+ Furniture and fixtures
+ 
+ 316
+ 
+ 
+ 328
+ 
+ 
+ 405
+ 
+ 
+
+ 
+ Office machines and equipment
+ 
+ 207
+ 
+ 
+ 258
+ 
+ 
+ 343
+ 
+ 
+
+ 
+ Leasehold improvements
+ 
+ 50
+ 
+ 
+ 54
+ 
+ 
+ 70
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 1,274
+ 
+ 
+ 
+ 1,393
+ 
+ 
+ 3,329
+ 
+ 
+
+ 
+ Less:
+ Accumulated depreciation and amortization
+ 
+ (677
+ )
+ 
+ (711
+ )
+ 
+ 
+ (1,017
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Property and equipment, net
+ 
+ $ 
+ 597
+ 
+ 
+ $ 
+ 682
+ 
+ 
+ $ 
+ 2,312
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ LANTE CORPORATION
+
+ 
+
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+ (Continued)
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+
+ 5. Notes Payable and Line of
+ Credit
+
+ 
+
+ 
+ 
+ 
+ Stockholder Note Payable
+
+ 
+ 
+
+ 
+ 
+
+ 
+ On December 23, 1994, the Company borrowed $1,000
+ from a stockholder. As of December 31, 1997 the Company had $350
+ outstanding under this note. The note was fully repaid in 1998.
+ The note bore interest at a rate equal to the short-term
+ applicable federal rate , and was payable, under its terms,
+ one year after demand. At December 31, 1997 the applicable
+ federal interest rate was 5.56%.
+
+ 
+
+ 
+ 
+ 
+ Bank Line of Credit
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The Company has a line of credit in place pursuant
+ to a loan agreement with its commercial bank dated December 29,
+ 1998 and maturing two years thereafter. There were no borrowings
+ under the loan as of December 31, 1998 or September 30, 1999.
+ The line has a maximum borrowing amount of $3,500 of which
+ $3,000 is subject to a formula based on 75% of eligible accounts
+ receivable. Borrowings are secured by accounts receivable and
+ general Company assets. Borrowings bear interest at the lender
+ s index rate of 7.75% and 8.25% at December
+ 31, 1998 and September 30, 1999, respectively. An unused
+ facility fee is due semiannually in an amount equal to 0.25% of
+ the difference between $3,500 and the average daily outstanding
+ principal. The loan agreement contains certain financial
+ covenants, including maintenance of 1.75 to 1 debt service ratio
+ and capital funds greater than $7,500 (both as defined). The
+ Company was not in violation of its financial covenants at
+ December 31, 1998 and received a waiver in respect to certain
+ covenants at September 30, 1999. The amount drawn under prior
+ line of credit arrangements as of December 31, 1997 was $800 at
+ a rate of 8.5%.
+
+ 
+
+ 
+ 
+ 
+ Subordinated Convertible
+ Debt
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The Company issued eight notes on June 30, 1998 to
+ the Company s advisors, directors and former Chief
+ Operating Officer. The notes had an aggregate face value of
+ $2,190 and were issued at a premium of $405. The stated interest
+ rate was 5.79%. The accrued interest aggregated $64 at December
+ 31, 1998. The notes were carried on the books at their face
+ value, plus unamortized original issue premium, plus accrued
+ interest. The original issue premium was being amortized using
+ the effective interest rate method over the ten-year life of the
+ notes.
+
+ 
+
+ 
+ On July 1, 1999, the holders converted the notes
+ into 2,700 shares of common stock pursuant to an agreement with
+ the Company. The face value of the notes plus accrued interest
+ at conversion aggregated $2,317. As provided in the terms of the
+ notes, the conversion rate was adjusted to $0.86 per share as a
+ result of the common stock dividend distributions prior to
+ conversion of the notes.
+
+ 
+
+ 6. Income Taxes
+
+ 
+
+ 
+ The Company s income tax provision consisted
+ solely of current state taxes of $1, $4, $8, and $5 (unaudited)
+ for the years ended December 31, 1996, 1997 and 1998, and the
+ nine months ended September 30, 1998, respectively. The Company
+ s income tax benefit of $602 for the nine months ended
+ September 30, 1999 consisted of current state tax expense of
+ $77, deferred federal tax benefit of $572 and deferred state tax
+ benefit of $107.
+
+ 
+
+ 
+ The Company terminated its S-Corporation election
+ for federal and state purposes on June 17, 1999. Accordingly,
+ all income that was earned in the subsequent C-Corporation
+ period was taxable at the statutory federal and state tax rates.
+ In order to present amounts in a comparable format, the
+ statements of operations include a pro forma adjustment for
+ additional taxes that would have been recorded if the Company
+ had been a
+ C-Corporation for all periods presented, based upon the tax laws
+ in effect during those periods. Unaudited pro forma income tax
+ provisions (benefits) calculated on a separate company basis in
+ conformity with SFAS 109, are as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Year ended
+ 
+
+ December 31,
+ 
+ Nine months
+ 
+
+ ended
+ 
+
+ September 30,
+ 
+
+ 
+ Unaudited
+ pro forma
+ 
+ 1996
+ 
+ 1997
+ 
+ 1998
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ Current:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Federal
+ 
+ $43
+ 
+ $11
+ 
+ $124
+ 
+ $ 
+ 8
+ 
+ 
+ $649
+ 
+ 
+
+ 
+ 
+ 
+ State
+ 
+ 14
+ 
+ 3
+ 
+ 28
+ 
+ 2
+ 
+ 
+ 144
+ 
+ 
+
+ 
+ Deferred:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Federal
+ 
+ 6
+ 
+ 44
+ 
+ 468
+ 
+ 473
+ 
+ 
+ 
+ (768
+ )
+ 
+
+ 
+ 
+ 
+ State
+ 
+ 1
+ 
+ 6
+ 
+ 63
+ 
+ (1
+ )
+ 
+ (98
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total
+ income tax expense (benefit)
+ 
+ $64
+ 
+ $64
+ 
+ $683
+ 
+ $482
+ 
+ 
+ $ 
+ (73
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ The pro forma provisions for income taxes differ
+ from the amount of income tax determined by applying the
+ applicable U.S. statutory federal income tax rate to income from
+ operations as a result of the following differences:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Year ended
+ 
+
+ December 31,
+ 
+ Nine months
+ 
+
+ ended
+ 
+
+ September 30,
+ 
+
+ 
+ Unaudited
+ pro forma
+ 
+ 1996
+ 
+ 1997
+ 
+ 1998
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ Income tax provision at statutory U.S. tax rates of
+ 34%
+ 
+ $75
+ 
+ 
+ $74
+ 
+ 
+ $532
+ 
+ $359
+ 
+ $(312
+ )
+ 
+
+ 
+ Increase (decrease) in rates resulting from:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Graduated average rate
+ 
+ 
+ (27
+ )
+ 
+ 
+ (26
+ )
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Change
+ in graduated average rate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 64
+ 
+ 64
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ State
+ taxes
+ 
+ 13
+ 
+ 
+ 13
+ 
+ 
+ 74
+ 
+ 50
+ 
+ (27
+ )
+ 
+
+ 
+ 
+ Other,
+ net
+ 
+ 3
+ 
+ 
+ 3
+ 
+ 
+ 13
+ 
+ 9
+ 
+ 266
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Pro
+ forma provision (benefit) for income taxes
+ 
+ $64
+ 
+ 
+ $64
+ 
+ 
+ $683
+ 
+ $482
+ 
+ $ 
+ (73
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ Deferred tax (liabilities) assets on an unaudited
+ pro forma basis at December 31, 1997 and 1998, and actual basis
+ at September 30, 1999, respectively, are as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+ September 30,
+ 
+
+ 1999
+ 
+
+ 
+ 
+ 
+ 
+ 1997
+ 
+ 1998
+ 
+
+ 
+ 
+ 
+ 
+ (Pro forma)
+ 
+
+ (unaudited)
+ 
+ (Actual)
+ 
+
+ 
+ Current
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Accrual to cash
+ 
+ $(175
+ )
+ 
+ $(682
+ )
+ 
+ $ 
+ (23
+ )
+ 
+
+ 
+ Provision for doubtful accounts
+ 
+ 59
+ 
+ 
+ 121
+ 
+ 
+ 309
+ 
+ 
+
+ 
+ Net
+ operating loss carryforward
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 548
+ 
+ 
+
+ 
+ Other, net
+ 
+ (44
+ )
+ 
+ (111
+ )
+ 
+ 61
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Current
+ deferred tax (liabilities) assets 
+ 
+ $(160
+ )
+ 
+ $(672
+ )
+ 
+ $895
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Noncurrent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Depreciation
+ 
+ $ 
+ 3
+ 
+ 
+ $ 
+ (17
+ )
+ 
+ $ 
+ (66
+ )
+ 
+
+ 
+ Other, net
+ 
+ 1
+ 
+ 
+ 1
+ 
+ 
+ 
+ (150
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Noncurrent deferred tax (liabilities) assets 
+ 
+ 4
+ 
+ 
+ (16
+ )
+ 
+ (216
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Net
+ deferred tax (liabilities) assets 
+ 
+ $(156
+ )
+ 
+ $(688
+ )
+ 
+ $679
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ LANTE CORPORATION
+
+ 
+
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+ (Continued)
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+
+ 7. Commitments and
+ Contingencies
+
+ 
+
+ 
+ 
+ 
+ Operating Leases
+
+ 
+ 
+
+ 
+ 
+
+ 
+ The Company is obligated under various
+ noncancellable operating leases for its office space in
+ Charlotte, Chicago, Dallas, New York, San Francisco and Seattle.
+ Future minimum rental commitments under all noncancellable
+ operating leases with initial or remaining terms in excess of
+ one year are $312 for the quarter ending December 31, 1999. They
+ are as follows for each respective year ending December
+ 31:
+
+ 
+
+ 
+ 
+ 2000
+ 
+ $ 
+ 1,598
+ 
+
+ 
+ 2001
+ 
+ 1,534
+ 
+
+ 
+ 2002
+ 
+ 1,578
+ 
+
+ 
+ 2003
+ 
+ 1,471
+ 
+
+ 
+ 2004
+ 
+ 1,406
+ 
+
+ 
+ Thereafter
+ 
+ 4,965
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ $12,552
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ Rent expense for the years ended December 31, 1996,
+ 1997 and 1998 and the nine months ended September 30, 1999 was
+ $319, $580, $657 and $501, respectively.
+
+ 
+
+ 
+ 
+ 
+ Letter of Credit
+
+ 
+ 
+
+ 
+ 
+
+ 
+ As of September 30, 1999, the Company had standby
+ letters of credit issued by its bank in the amounts of $200 and
+ $222 related to security deposits on office leases.
+
+ 
+
+ 
+ 
+ 
+ Litigation
+
+ 
+ 
+
+ 
+ 
+
+ 
+ A former employee has filed a claim against the
+ Company alleging that the Company failed to comply with a
+ shareholder s agreement to repurchase common stock held by
+ the former employee. The Company intends to vigorously defend
+ the litigation. Since this case has not proceeded to a hearing
+ on the merits, the Company is unable to evaluate or estimate the
+ extent of any potential loss.
+
+ 
+
+ 8. Employee Loans
+
+ 
+
+ 
+ In June 1999, the Company entered into an employment
+ agreement with one of its executive officers. Pursuant to this
+ agreement the Company loaned the executive $2,500 under a note
+ that will mature and be due on the earlier of six months after
+ termination of employment or June 30, 2003. The note bears
+ interest at 5.37% per annum. The loan will be payable upon
+ maturity if the executive is still employed by the Company but
+ only if the Company has a liquidity event (as defined) and the
+ fair market value of the executive s holdings in the Company
+ s common stock is greater than an agreed-upon amount,
+ provided that if these conditions are met, but executive does
+ not have the ability to liquidate his stock, the maturity will
+ be postponed. Otherwise, if these conditions are not met, the
+ loan will be forgiven at the rate of $100 per month commencing
+ on the maturity date until all principal and interest is
+ forgiven. The Company recorded the loan as deferred compensation
+ and is amortizing the loan over 30 months, the shortest period
+ in which the loan may be forgiven. In addition, upon execution
+ of the employment agreement, the executive purchased 2,400
+ restricted shares of common stock at $1.35 per share. The
+ Company recorded $2,148 in deferred compensation related to this
+ sale of securities and is amortizing such amount over the 48
+ month period during which the restrictions lapse. The
+ restrictions lapse over four years at 
+ 1
+ /48 per month, subject to certain
+ acceleration provisions upon a change in control and upon
+ termination of employment. The Company loaned the executive
+ $3,228 on a fully recourse basis to purchase the restricted
+ stock. The loan bears interest at 5.37%. The loan and related
+ interest is due upon the earlier of June 20, 2005 or three years
+ after a liquidity event (as defined). 
+
+ 
+
+ LANTE CORPORATION
+
+ 
+
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+ (Continued)
+
+ (In thousands, except per share
+ data)
+
+ 
+
+ 
+
+ 9. Related Party Transactions
+
+ 
+
+ 
+ The Company s chairman is a member of the Board
+ of Directors of a corporation that was the Company s most
+ significant client during the nine-month period ended September
+ 30, 1999. In addition, he is a stockholder with beneficial
+ ownership of less than 1% of this client s outstanding
+ common stock. The Company believes that the fees billed to this
+ client have been at customary business terms.
+
+ 
+
+ 10. Retirement Plan
+
+ 
+
+ 
+ The Company has a defined contribution profit
+ sharing plan which is qualified under section 401K of the
+ Internal Revenue Code and for which most employees are eligible.
+ The plan provides for discretionary Company contributions based
+ on a percentage of eligible participants compensation, as
+ defined. In addition, the Company may make year-end matching
+ contributions based on eligible participants deferral
+ contributions. In 1996, 1997, 1998 and for the nine month period
+ ended September 30, 1999, the Company expensed matching
+ contributions in the amounts of $154, $137, $260 and $166,
+ respectively.
+
+ 
+
+ 11. Mandatorily Redeemable Preferred
+ Stock
+
+ 
+
+ 
+ In 1999, the Company issued 3,536 shares of Series A
+ redeemable convertible preferred stock, par value $0.01 per
+ share for an aggregate value of $25,000, net of issuance costs
+ of $186. The rights of the Series A convertible preferred stock
+ are as follows:
+
+ 
+
+ 
+ 
+ 
+ Voting
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Each share of Series A convertible preferred stock
+ has voting rights equal to an equivalent number of shares of
+ common stock into which it is convertible and votes together as
+ one class with common stock.
+
+ 
+
+ 
+ 
+ 
+ Dividends
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Holders of the Series A convertible preferred stock
+ are entitled to receive dividends at the rate of 7% per annum on
+ the sum of the liquidation value plus all accumulated and unpaid
+ dividends, subject to reduction (as defined) based upon
+ increases in the fair market value of the common stock at the
+ date of conversion of the Series A convertible preferred stock.
+ Any dividends declared or paid upon the common stock shall also
+ be declared and paid to holders of the Series A convertible
+ preferred stock based upon the number of shares of common stock
+ issuable upon conversion of the preferred stock.
+
+ 
+
+ 
+ 
+ 
+ Liquidation
+
+ 
+ 
+
+ 
+ 
+
+ 
+ In the event of liquidation, dissolution or winding
+ up of the Company, the holders of the Series A convertible
+ preferred stock shall be entitled to receive the greater of (i)
+ $7.07 per share plus any accrued and unpaid dividends or (ii)
+ such amount per share as would have been payable had such shares
+ been converted into common stock immediately prior to
+ liquidation.
+
+ 
+
+ 
+ 
+ 
+ Conversion
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Each share of Series A convertible preferred stock
+ will be convertible at the option of the holder at any time into
+ two shares of common stock, or 7,072 shares in total, subject to
+ anti-dilution adjustments. Each share of Series A convertible
+ preferred stock automatically converts into common stock at the
+ then effective conversion ratio upon (i) the written request of
+ the holders of a majority of the outstanding shares, or (ii) the
+ completion of an initial public offering with aggregate proceeds
+ of at least $20,000 and a minimum specified initial offering
+ price based on the timing of the initial offering.
+
+ 
+
+ 
+ 
+ 
+ Redemption
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Absent a conversion, the Company shall redeem from
+ each holder of Series A convertible preferred stock one fourth
+ of such holder s Series A convertible preferred stock
+ annually beginning on June 30, 2004 at a redemption price equal
+ to the greater of (i) $7.07 plus all accrued and unpaid
+ dividends or (ii) the fair market value of the shares of the
+ common stock on an as converted basis. In the event of a change
+ in control, each holder of the Series A convertible preferred
+ stock may elect to require the Company to redeem all or a
+ portion of the holder s preferred stock at the redemption
+ price. The difference between the net issuance price and the
+ redemption value of the Series A convertible preferred stock is
+ being accreted by periodic charges to additional paid-in
+ capital.
+
+ 
+
+ 12. Stockholders Equity and Other Stock
+ Related Information
+
+ 
+
+ 
+ 
+ 
+ Preferred Stock and Common
+ Stock
+
+ 
+ 
+
+ 
+ 
+
+ 
+ In June 1999, the Company amended its Certificate of
+ Incorporation to provide for one class of common stock and one
+ class of preferred stock. The amendment authorized 50,000 shares
+ of common and 10,000 shares of preferred stock and allocated
+ 4,243 shares as Series A convertible preferred stock (see Note
+ 11). Each previously issued and outstanding share of voting
+ Class A common stock and non-voting Class B common stock was
+ converted and exchanged into one share of common stock, $0.01
+ par value.
+
+ 
+
+ 
+ The effect of stock splits and re
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001100412_array_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001100412_array_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..400b5cbf1b4752441fddc4a05dd5eb08a7b14c38
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001100412_array_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered in this prospectus will be passed upon for us by Hogan & Hartson L.L.P., Boulder, Colorado. Legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Latham & Watkins, Costa Mesa, California. William R. Roberts and Christopher D. Ozeroff, partners of Hogan & Hartson L.L.P., own 13,607 shares and 37,621 shares, respectively, of our preferred stock. These shares will be converted on a one-to-one basis into shares of our common stock upon completion of this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001100683_ipet_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001100683_ipet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a4069cabbcd6f424680ec8e71e4a183da22a3832
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001100683_ipet_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Pets.com by Venture Law Group, A Professional Corporation, Menlo Park, California. John V. Bautista, a director at Venture Law Group, is Secretary of Pets.com. Legal matters specified by the underwriters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling, Menlo Park, California. As of the date of this prospectus, an investment partnership associated with Venture Law Group owns an aggregate of 45,502 shares of our common stock, and individual directors and attorneys of Venture Law Group beneficially own a total of 48,575 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001100893_southern_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001100893_southern_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a77fb17e73eeefa7a81897601126585fa115cf8c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001100893_southern_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Potter Anderson & Corroon LLP, Wilmington, Delaware, will issue an opinion on behalf of Southern States Capital Trust concerning the legality of the capital securities. Mays & Valentine, L.L.P., Richmond Virginia, will issue an opinion for Southern States concerning the validity of the junior subordinated debentures and the guarantee, and on the United States federal income taxation of the capital securities. Sullivan & Cromwell, New York, New York, will issue an opinion for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001100901_orix_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001100901_orix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f2734852864d2f57c74166a37d8a660da8f09340
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001100901_orix_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Sullivan & Cromwell, New York, New York will provide a legal opinion relating to the notes in its capacity as special counsel to the trust, the trust depositor, the originator, the servicer and the administrator. Riker, Danzig, Scherer, Hyland and Perretti, Morristown, New Jersey will provide a legal opinion relating to New Jersey tax matters in its capacity as special New Jersey tax counsel to the trust. Other legal matters for the underwriters will be passed upon by Moore & Van Allen, PLLC, Charlotte, North Carolina.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001100969_asiainfo_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001100969_asiainfo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c93c65e367c63ef93387227ea07beece8c016591
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001100969_asiainfo_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares and certain other legal matters will be passed upon for us by Clifford Chance Rogers & Wells LLP. Certain legal matters will be passed upon for the underwriters by Milbank, Tweed, Hadley & McCloy LLP, Hong Kong. Certain matters relating to Chinese law will be passed upon for us and the underwriters by Haiwen & Partners and Commerce & Finance Law Offices, respectively.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001100985_broadbandn_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001100985_broadbandn_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e6aa7b7993b92d13db4a6b48eb245ac5e3f5c157
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001100985_broadbandn_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for us by King & Spalding, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Jenkens & Gilchrist, P.C., Dallas, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101012_venture_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101012_venture_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c39a3c892f30540c2f5d237f9fb0cfa7b757b332
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101012_venture_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters............................................................37 Management...............................................................37 Executive Compensation...................................................38 Certain Transactions.....................................................48 Principal Stockholders...................................................49 Description of Capital Stock.............................................50 Shares Eligible for Future Sale..........................................52 Underwriting.............................................................54 Experts..................................................................57 Additional Information...................................................57 SUMMARY You should read the following summary together with the more detailed information and financial statements and the notes to those statements appearing elsewhere in this prospectus. This prospectus contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward looking statements as a result of the factors set forth under "Risk Factors" and elsewhere in this prospectus. Venture Capital.Com, Incorporated We intend to offer venture capital to parties and companies in development. In addition we plan to offer business financing of various types to start up businesses and established companies. Our Strategy Our objective is to become an Internet based provider of venture capital, financing, investments and other business services needed by businesses and companies in development To achieve this objective, our strategy includes the following key elements: . Enhancing our brand name through a variety of marketing and promotional techniques; . Forming strategic partnerships with companies in the Internet, software, financial services and media industries; . Leveraging our internet-based solution and technology platform to enhance our service offering and expand the benefits of secure online communications; and Corporate Information In 1999 our founder began research to investigate the feasibility entering into an Internet based venture capital program also offering additional business financing services. In December of 1999 we were incorporated in the State of Nevada as Venture Capital.Com, Incorporated. Our executive offices are located at 6015 South Virginia Street, Suite 421, Reno, Nevada 89502. Information contained on our Web Site does not constitute part of this prospectus. The Offering Common stock offered....................... shares Common stock to be outstanding after this offering................................. shares Use of proceeds............................ To expand marketing and partnerships, for further development of our technology and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol has not been applied for at this writing. The number of shares outstanding after this offering is 25,000,000 shares. Summary Financial Data (in thousands, except share and per share data) The following table sets forth certain of our summary financial data. This information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this prospectus. The pro forma calculations give effect to the conversion of all outstanding shares of our preferred stock into common stock upon the closing of this offering as if such conversion occurred at inception, or the date of original issuance, if later. Our as adjusted column reflects the sale of shares of common stock offered hereby at the initial public offering price of $ per share after deducting the underwriter discount and estimated expenses payable by us. <TABLE> December 20, 1999 December 20, 1999 (inception) (inception) through through December 31, 1999 December 31, 1999 <CAPTION> ----------------- --------------- <S> <C> <C> <C> (unaudited) (unaudited) Statement of Operations Data: Net revenues.................. $ -- $ -- $ -- Loss from operations.......... -- -- Net loss...................... -- Basic and diluted net loss per share....................... -- Pro forma basic and diluted net loss per share.......... Shares outstanding used in basic and diluted net loss per share calculations...... Shares outstanding used in pro forma basic and diluted net loss per share calculation.. </TABLE> As of December 31, 1999 (unaudited) Actual As Adjusted ------- Balance Sheet Data: Cash and cash equivalents................................... $-0- Working capital............................................. -0- Total assets................................................ -0- Line of credit and capital lease obligations................ -0- Total stockholders' equity.................................. -0- RISK FACTORS You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our stock could decline, and you may lose all or part of your investment. This prospectus also contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements as a result of the risks described below and elsewhere in this prospectus. We face risks associated with our operations We have not commenced operations as yet. We have no clients and we may not be able to attract a client base. We face uncertainty in the Internet venture capital market. As of December 31, 1999, we had not generated any revenues. We are in the early stages of development and expect to incur losses in the future. We expect to incur increasing sales and marketing, product development and administrative expenses. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot be certain that we will achieve sufficient revenues for profitability. If we do achieve profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis. Our ability to obtain and retain customers depends on our customer service capabilities. We plan to add customer service personnel and resources to meet demand for our Internet venture capital service; however, we cannot predict whether the quantity or quality of our customer service will be sufficient to address our customers' needs. If we are unable at any time during and after our controlled national launch to appropriately address customer service issues or provide a satisfactory customer experience for current or potential customers, our business and reputation may be damaged. We may be unable to effectively manage our rapid growth. Our reputation and our ability to attract, retain and serve our customers depend upon the reliable performance of our Web site, network infrastructure and transaction-processing systems. We have a limited basis upon which to evaluate the capability of our service to handle controlled or full commercial availability of our Internet venture capital service. We will need to improve existing and implement new transaction-processing, operational and financial systems, procedures and controls. In addition, we will need to expand, train and manage an employee base. We will also need to expand our finance, administrative and operations staff. In addition, we will be required to relocate our administrative and operations personnel due to capacity constraints at our current facility. We may not be able to effectively manage this growth. Our planned expansion and we expect our future expansion to place a significant strain on our managerial, operational and financial resources. Our current and planned personnel, systems, procedures and controls may be inadequate to support our future operations. If we are unable to manage growth effectively or experience disruptions during our expansion, our business will suffer and our financial condition and results of operations will be seriously affected. We have a limited operating history. In March, 1999, our founder began to investigate the feasibility of entering into the Internet based venture capital business. In December 1999 we were incorporated in the State of Nevada and accordingly, we have a very limited operating history. As of December 31, 1999 we had generated no revenues and do not expect to generate any significant revenues for some time. You should consider our prospects in light of the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets. These risks include, among other things, our: . need to expand our sales and support organizations; . ability to establish and expand our brand name; . ability to expand our operations to meet the commercial demand for our service; . development of and reliance on strategic and distribution relationships; . ability to prevent and respond quickly to service interruptions; . competition from our competitors with greater capital resources and brand awareness. We have not established strategic relationships with any third parties. We believe we must establish substantial relationships to effectively market our service. We have limited experience in establishing and maintaining these strategic relationships and we may fail in our efforts to establish and maintain our strategic relationships. As is customary with technology companies, from time to time, we may receive or become aware of correspondence claiming potential infringement of other parties' proprietary rights. We could incur significant costs and diversion of management time and resources to defend claims regardless of the validity of these claims. We may not have adequate resources to defend these claims, and any associated costs and distractions could have a material adverse effect on our business, financial condition and results of operations. As an alternative to litigation, we may seek licenses for other parties' intellectual property rights. We may not be successful in obtaining any necessary licenses on commercially reasonable terms, if at all. We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in our products, services, know-how and information. We will rely on several types of services for revenues. We expect that a substantial percentage, if not all, of our future revenues will be generated from our Internet venture capital service. Our ability to gain commercial acceptance of our Internet venture capital service is critical to our success. Any failure to successfully gain commercial acceptance of our Internet venture capital service would not only have a material adverse effect on our business and results of operations but also on our ability to seek any incremental revenue opportunities. Despite our efforts to minimize interruption and security risks, our systems and operations are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, telecommunications failure, break-ins, earthquakes and similar events. Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We have experienced system interruptions in the past and may experience them again in the future. Any substantial interruptions in the future could result in the loss of data and could completely impair our ability to generate revenues from our service. We do not presently have a formal disaster recovery plan in effect. We are currently evaluating our business interruption insurance to determine whether we have sufficient coverage to compensate us for losses that may occur after our commercial launch. A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Advances incomputer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the algorithms we may use to protect customer transaction data. Should someone circumvent our security measures, it could seriously harm our reputation, business, financial condition and results of operations. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information. As a result, we may be required to expend a significant amount of financial and other resources to protect against security breaches or to alleviate any problems that they may cause. We may face disruptions in our operations during our relocation to a new facility in the near future. Our current facilities are inadequate for our current growth plans. As a result, we will be relocating all operations to new facilities in the near future. We may experience temporary interruptions in our normal operating activities during the moving process. If we experience more permanent disruptions related to our move, or if we are unable to complete the move in a timely manner, our development efforts and business could be harmed. We will need to expand our product and service offerings. We may pursue the acquisition of new or complementary businesses, products or technologies in an effort to enter into new business areas, diversify our sources of revenue and expand our product and service offerings. At present, we have no commitments or agreements and are not currently engaged in discussions for any material acquisitions or investments. To the extent we pursue new or complementary businesses, we may not be able to expand our service offerings and related operations in a cost-effective or timely manner. We may experience increased costs, delays and diversions of management's attention when integrating any new businesses or services. We may lose key personnel from our operations or those of any acquired business. Furthermore, any new business or service we launch that is not favorably received by users could damage our reputation and brand name. We also cannot be certain that we will generate satisfactory revenues from any expanded services or products to offset related costs. Any expansion of our operations would also require significant additional expenses, and these efforts may strain our management, financial and operational resources. Additionally, future acquisitions may also result in potentially dilutive issuances of equity securities, the incurrence of additional debt, the assumption of known and unknown liabilities, and the amortization of expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our business, financial condition and operating results. New issuances of securities may also have rights, preferences and privileges senior to those of our common stock. We expect that the fluctuations in our operating results could cause our stock price to fall. As of December 31, 1999, we had not generated any revenues from our operations. Accordingly, we have little basis upon which to predict future operating results. We expect that our revenues, margins and operating results will fluctuate significantly due to a variety of factors, many of which are outside of our control. These factors include: . timing of the commercial release of our Internet venture capital service; . the costs of our marketing programs to establish the Venture Capital.Com brand name; . demand for our Internet services; . our ability to develop and maintain strategic relationships; . the number, timing and significance of new products or services introduced by both us and our competitors; . our ability to develop, market and introduce new and enhanced services on a timely basis; . the level of service and price competition; . changes in our operating expenses as we expand operations; and . general economic factors. Our cost of revenues includes costs for systems operations, customer service, Internet connection and security services; all of these costs fluctuate depending upon the demand for our service. In addition, a substantial portion of our operating expenses will be related to personnel costs, marketing programs and overhead, which cannot be adjusted quickly and are therefore relatively fixed in the short term. Our operating expense levels are based, in significant part, on our expectations of future revenues. If our expenses precede increased revenues, both gross margins and results of operations would be materially and adversely affected because a relatively small amount of our costs and expenses varies with our revenues in the short term. Due to the foregoing factors and the other risks discussed in this prospectus, you should not rely on period-to-period comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations will be below the expectations of public market analysts and investors. In this event, the market price of our common stock is likely to fall. We may not achieve broad brand recognition necessary to succeed. We must quickly build our Venture Capital.com brand to gain market acceptance for our service. We believe it is imperative to our long term success that we obtain significant market share for our services before other competitors enter the Venture Capital markets. We must make substantial expenditures on product development, strategic relationships and marketing initiatives in an effort to establish our brand awareness. In addition, we must devote significant resources to ensure that our users are provided with a high quality online experience supported by a high level of customer service. We cannot be certain that we will have sufficient resources to build our brand and realize commercial acceptance of our service. If we fail to gain market acceptance for our service, our business will suffer dramatically. We will face intense competition. The market for Venture Capital products and services is not new and we expect it to be intensely competitive. At present there are numerous other companies and financial institutions around the country which are in competition in the venture capital markets. We expect that our competitors will include: . traditional providers of venture capital products and services; . potential providers of venture capital products and services, Banks, finance companies, private investors and groups, domestic and foreign; . a number of indirect competitors that offer financial services or derive a substantial portion of their revenue from business lending, electronic commerce; and . other companies with substantial customer bases in the computer and other technical fields. We may not be able to establish or maintain a competitive position against current or future competitors as they enter the market. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition, greater financial, marketing, service, support, technical, intellectual property and other resources than us. As a result, our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to Web site and systems development than us. This increased competition may result in reduced operating margins, loss of market share and a diminished brand. We may from time to time make certain pricing, service or marketing decisions or acquisitions as a strategic response to changes in the competitive environment. These actions could result in reduced margins and seriously harm our business. We also face competitive pressures from new technologies and the expansion of existing technologies. Companies that control access to transactions through a network or Web browsers could also promote our competitors or charge us a substantial fee for inclusion. Our competitors may also be acquired by, receive investments from or enter into other commercial relationships with larger, better-established and better-financed companies as use of the Internet and other online services increases. We may be unable to compete successfully against current and future competitors, and the competitive pressures we face could seriously harm our business. We rely on relatively new management and need additional personnel to grow our business. Our management is new and we intend to continue to hire key management personnel, including a Chief Operating Officer. For example, our Founder and Chief Executive Officer, James Martin was hired in December , 1999 and at present is the only officer and employee of the Company. There can be no assurance that we will successfully assimilate new managers or that we can successfully locate, hire, assimilate and retain qualified key management personnel. Our business is largely dependent on the personal efforts and abilities of our senior management, including Mr. Martin, our Chief Executive Officer, and managers we expect to hire in the future as other key personnel. Any of our officers or employees can terminate his or her employment relationship at any time. The loss of certain key employees or our inability to attract or retain other qualified employees could have a material adverse effect on our results of operations and financial condition. Our future success depends on our ability to attract, retain and motivate highly skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. We plan to hire additional personnel in all areas of our business. Competition for such personnel is intense, particularly in the Internet and high technology industries. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel. Further, we may be unable to retain the employees we currently employ or attract additional technical personnel. The failure to retain and attract the necessary personnel could seriously harm our business, financial condition and results of operations. We may not be able to keep up with rapid technological and other changes. The development of our service and other proprietary technology entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online operations. The Internet and the electronic commerce industry are characterized by: . rapid technological change; . changes in user and customer requirements and preferences; . frequent new product and service introductions embodying new technologies; and . the emergence of new industry standards and practices. The evolving nature of the Internet could render our existing technology and systems obsolete.Our success will depend, in part, on our ability to: . license or acquire leading technologies useful in our business; . enhance our existing service; . develop new services and technology that address the increasingly sophisticated and varied needs of our current and prospective users; and . respond to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner. Future advances in technology may not be beneficial to, or compatible with, our business. Furthermore, we may not successfully use new technologies effectively or adapt our proprietary technology and transaction-processing systems to user requirements or emerging industry standards on a timely basis. Our ability to remain technologically competitive may require substantial expenditures and lead time. If we are unable to adapt in a timely manner to changing market conditions or user requirements, our business, financial condition and results of operations could be seriously harmed. If we achieve significant international acceptance of our service, our business activities will be subject to a variety of potential risks, including the adoption of laws and regulatory requirements, political and economic conditions, difficulties protecting our intellectual property rights and actions by third parties that would restrict or eliminate our ability to do business in certain jurisdictions. If we begin to transact business in foreign currencies, we will become subject to the risks attendant to transacting in foreign currencies, including the potential adverse effects of exchange rate fluctuations. Many existing computer systems and software products are coded to accept only two digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. If not corrected, there could be system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced to comply with these "Year 2000" requirements. We use and depend on third-party equipment and software that may not be Year 2000 compliant. We have not completed an assessment of this third-party equipment and software. If Year 2000 issues prevent our users from accessing the Internet or our service, our business and operations will suffer. Any failure of our third-party equipment or software to operate properly could require us to incur unanticipated expenses, which could seriously harm our business, operating results and financial condition. Our failure to make our service Year 2000 compliant could result in: . a decrease in sales of our service; . an increase in the allocation of resources to address Year 2000 problems of our users without additional revenue commensurate with such dedication of resources; and . an increase in litigation costs relating to losses suffered by our users due to such Year 2000 problems. Furthermore, the purchasing patterns of users or potential users may be affected by Year 2000 issues as companies expend significant resources to correct their current systems. These expenditures may result in reduced funds available to take advantage our service, which could seriously harm our business, operating results and financial condition. We have conducted a preliminary review of our internal computer systems to identify the systems that could be affected by the Year 2000 issue. Based on this preliminary review, we believe that our internal software systems are Year 2000 compliant. However, we continually evaluate our systems and intend to develop a contingency plan to address any Year 2000 issues we discover. We may be unable to meet our future capital requirements. We believe that our current cash balances together with the net proceeds of this offering will allow us to fund our operations for at least the next 12 months. However, we may require substantial working capital to fund our business and we may need to raise additional capital. We cannot be certain that additional funds will be available on satisfactory terms when needed, if at all. Our future capital needs depend on many factors, including: . market acceptance of Internet venture capital; . the level of promotion and advertising required to launch our service; and . changes in technology. The various elements of our business and growth strategies, including our plans to support fully the commercial release of our service, our introduction of new products and services and our investments in infrastructure will require additional capital. If we are unable to raise additional necessary capital in the future, we may be required to curtail our operations significantly or obtain funding through the relinquishment of significant technology or markets. Also, raising additional equity capital would have a dilutive effect on existing stockholders. We face risks related to the Internet industry The success of our business will depend on the continued growth of the Internet electronic commerce and the acceptance by consumers of an Internet venture capital sales channel. Our success depends in part on widespread acceptance and use of the Internet as a way to take advantage of venture capital. This practice is at an early stage of development, and demand and continued market acceptance is uncertain. We cannot predict the extent to which users will be willing to shift their habits from traditional to online contacts. To be successful, our future clients must accept and utilize e-commerce to satisfy their product needs. Our future revenues and profits, if any, substantially depend upon theacceptance and use of the Internet and other online services as an effective medium of commerce by our target users. The Internet may not become a viable long-term commercial marketplace due to potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. The commercial acceptance and use of the Internet may not continue to develop at historical rates. Our business, financial condition and results of operations would be seriously harmed if: . use of the Internet and other online services does not continue to increase or increases more slowly than expected; . the infrastructure for the Internet and other online services does not effectively support future expansion; . concerns over security and privacy inhibit the growth of the Internet; or . the Internet and other online services do not become a viable commercial marketplace. Regulatory and legal uncertainties could harm our business. We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, and laws or regulations directly applicable to electronic commerce. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to: . user privacy; . pricing; . content; . copyrights; . distribution; and . characteristics and quality of products and services. The adoption of any additional laws or regulations may decrease the expansion of the Internet. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many issues governing issues such as property ownership, export of encryption technology, sales tax, libel and personal privacy. Our business, financial condition and results of operations could be seriously harmed by any such new legislation or regulation. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could also harm our business. We plan to offer our service over the Internet in multiple states and foreign countries. Such jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each state or foreign country. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Other states and foreign countries may also attempt to regulate our Internet commerce or prosecute us for violations of their laws. Further, we might unintentionally violate such laws and such laws may be modified and new laws may be enacted in the future. We are subject to risks related to the offering. No prior public market exists for our common stock. Prior to this offering, there has been no public market for our common stock and we cannot be sure that an active trading market for the common stock will develop or continue as a result of this offering. The concentrated control of our company could adversely affect stockholders. After this offering, our executive officers, directors and 5% stockholders, in the aggregate, will control % of our voting stock. As a result, these stockholders will have significant influence and ability to control most matters requiring board and stockholder approval, including a significant corporate transaction like the sale of our company, a change in control, or the terms of future equity financings. Purchasers in this offering will experience immediate and substantial dilution. If you purchase common stock in this offering, you will incur immediate and substantial dilution in the net tangible book value of the shares purchased. We estimate this dilution to be approximately $ per share, or approximately % (based on an initial public offering price of $ ). Additional dilution may occur upon the exercise of outstanding stock options. Our stock price could fluctuate dramatically. The trading price of our common stock is likely to be volatile and could fluctuate dramatically in response to: factors such as the following, some of which are beyond our control: . changes in expectations of our future financial performance, including financial estimates by securities analysts and investors; . changes in operating and stock price performance of other Internet and online companies similar to us; . future sales of our common stock; or . general economic factors. Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance may adversely affect the price of our common stock. In particular, following initial public offerings, the market prices for stocks of Internet and technology-related companies often reach levels that bear no relationship to the operating performance of these companies. These market prices are generally not sustainable and could vary widely. The market prices of the securities of Internet- related and online companies have been especially volatile. If our common stock trades to such high levels following this offering, it could eventually experience a significant decline. Our offering price does not necessarily relate to any established criteria of value. Through negotiations with the underwriters, we will determine the public offering price of the shares of our common stock. This price will not necessarily relate to our book value, assets, past operating results, financial condition or any other established criteria of value. As a result, the shares being offered may trade at market prices below the initial public offering price. Additional shares may be sold into the public market. Sales of substantial amounts of our common stock in the public market after this offering could adversely affect the prevailing market price of our common stock. Upon completion of this offering, we will have shares of common stock outstanding. Of those shares, a total of shares (plus additional shares if the underwriters exercise their over-allotment option in full) will be freely tradable under the Securities Act unless purchased or held by our "affiliates," as that term is defined in Rule 144 under the Securities Act. Sales of substantial amounts of common stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price for the common stock and could impair our ability to raise capital through a public offering of equity securities. Our management has broad discretion over use of the proceeds from this offering. The net proceeds of this offering are estimated to be approximately $ million (approximately $ million if the underwriters' over-allotment is exercised in full) at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discount and estimated offering expenses. Our management will retain broad discretion as to the allocation of the proceeds of this offering. Certain provisions in our charter documents could deter takeover efforts. Provisions of our Certificate of Incorporation, Bylaws and Nevada law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Nevada statute could prohibit or delay the accomplishment of mergers or other takeover or change in control in attempts with respect to us and, accordingly, may discourage attempts to acquire us. --------------------- INFORMATION REGARDING FORWARD LOOKING STATEMENTS This prospectus contains forward looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. When used in this prospectus, the words "expects," "anticipates," "estimates," "intends," "believes" and similar expressions are intended to identify forward looking statements. These statements include, but are not limited to, statements under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The cautionary statements made in this prospectus should be read as being applicable to all related forward looking statements wherever they appear in this prospectus. USE OF PROCEEDS Our net proceeds from the sale of the shares of common stock offered hereby are estimated to be approximately $ ($ million of the underwriters exercise their over-allotment option in full) based upon an assumed offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of the offering: . for expansion of our marketing and distribution partnerships; . to enhance our server and network infrastructure and the functionality of our Web site; and . for working capital and other general corporate purposes. As of the date of this prospectus, we cannot specify with certainty the particular uses for the net proceeds to be received upon completion of the offering. Pending such uses, the net proceeds of the offering will be invested in short-term, interest-bearing, investment-grade instruments. We intend to maintain flexibility in our use of the proceeds of this offering. The amounts actually expended for each of the purposes listed above are at our discretion and may vary significantly depending upon a number of factors, including the progress of our marketing programs, capital spending requirements, and developments in the venture capital markets and Internet commerce. Accordingly, we reserve the right to reallocate the proceeds of this offering as we deem appropriate. From time to time, in the ordinary course of business, we may pursue the acquisition of new or complementary businesses, products or technologies in an effort to enter into new business areas, diversify our sources of revenue and expand our product and service offerings. A portion of the net proceeds may be used to fund acquisitions or investments. We currently have no arrangements, agreements or understandings, and are not engaged in active negotiations for any material acquisitions or investments. DIVIDEND POLICY We have never declared nor paid cash dividends on our capital stock. We currently intend to retain all available funds for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors it deems relevant. CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999. At present the company has no tangible assets and no liabilities. As a result there is no financial statement which could be examined under audit conditions. December 31, 1999 - -------------------- (Unaudited) Pro Forma Actual As Adjusted ------- - ----------- Line of credit and capital lease obligations ............. $ -0- ------- ------- Stockholders' equity: Common stock, par value $0.001; 25,000,000 shares authorized, -0- issued and outstanding, actual; authorized, -0- issued and outstanding, pro forma as adjusted............................................ Additional paid-in capital................................ -0- Notes receivable for stock sales.......................... -0- Accumulated deficit during development stage.............. -0- ------- ------- Total stockholders' equity............................... $ -0- Total capitalization.................................... $-0- ======= ======= DILUTION Our pro forma net tangible book value as of December 31, 1999 was approximately $ million, or $ per share of common stock. Pro forma net tangible book value per share represents the amount of our pro forma total tangible assets less pro forma total liabilities divided by the pro forma number of shares of common stock outstanding as of December 31, 1999. Without taking into account any other changes in pro forma net tangible book value other than to give effect to our sale of the shares of common stock offered hereby and the receipt and application of the net proceeds therefrom, the pro forma net tangible book value of as of December 31, 1999 would have been $ million, or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to investors purchasing common stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............... $ Pro forma net tangible book value per share as of December 31, 1999....................................................... $ -0- Increase per share attributable to new investors............. ------ Pro forma net tangible book value per share after this offering.................................................... - ------ Dilution per share to new investors........................... $ -0- ====== The following table summarizes, on a pro forma basis as of December 31, 1999 the difference between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors, assuming an initial public offering price of $ per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us: Shares Purchased Total Consideration Average -------------- ---------------------- Price Number Percent Amount Percent per Share ------ ------- ----------- ---------- - --------- Existing stockholders....... $ -0- $ New investors............... -0- Total..................... 100% $ 100% === === =========== ======= The foregoing table assumes no exercise of the underwriters' over-allotment option or shares underlying outstanding options. As of December 31, 1999, options to purchase shares of common stock were outstanding at a weighted average exercise price of $ per share. To the extent that these options are exercised, new investors will experience further dilution. SELECTED FINANCIAL DATA (in thousands, except per share data) The following selected financial data should be read in conjunction with our financial statements and the notes to such statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. We have no financial statements, no assets or liabilities. We have no statement of operations data for the period from inception through December 31, 1999. In addition we have no balance sheet Please be advised that historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year. December 31, 1999 ------------------- ------------------- - ------------------ (unaudited) (unaudited) Statement of Operations Data: Net revenues............ $ -- $ -- $ - -- Costs and expenses: Research and development.......... General and administrative....... -- ---------- ---------- - ----------- Total costs and -0- expenses............ Loss from operations....-0- Interest expense, net... ---------- ---------- - ----------- Net loss................ $ -0- ========== ========== =========== Basic and diluted net loss per share........ $ -0- Pro forma basic and diluted net loss per share................. $ -0- Weighted average shares outstanding used in basic and diluted net loss per share calculation........... -0- Weighted average shares outstanding used in pro forma basic and diluted net loss per share calculation..... -0- As of December 31, 1999 ----------------- -------------- (unaudited) Balance Sheet Data: Cash and cash equivalents........... $ -0- Working capital......... -0- Total assets............ -0- Line of credit and capital lease obligations........... -0- Total stockholders' equity................ -- All expenses other than those related to research and development are classified as general, administrative and have been provided for outside of the Company by the Founder, James D. Martin at no cost to the Company. Until we recognize revenue from our principal business activities we shall classify all expenses related to research and development as general and administrative. In addition, the provision for income taxes which consist solely of minimum state taxes is classified as general and administrative.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101144_playboy_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101144_playboy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..da3548177974276dae294463c1123e3cfe141486
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101144_playboy_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Brobeck, Phleger & Harrison LLP, New York, New York. Certain legal matters in connection with the offering will be passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Waltham, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101175_iteris-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101175_iteris-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f11e796c3b443e2f9c1379bf7d58cdf0f6b90294
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101175_iteris-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for Iteris by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. Certain legal matters in connection with this offering will be passed upon for the representatives of the underwriters by Katten Muchin Zavis, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101179_uproar-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101179_uproar-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fd097a607c1a78e7af5fedd29b132e698be5fa37
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101179_uproar-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares offered hereby will be passed upon for Uproar by Brobeck, Phleger & Harrison LLP, New York, New York. Various legal matters in connection with the offering will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101290_demandstar_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101290_demandstar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..187f3749530359b4369655c4c6cfb27ed359c42d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101290_demandstar_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the DemandStar common stock offered hereby will be passed upon by Greenberg Traurig, P.A., Orlando, Florida.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101376_alamosa_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101376_alamosa_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b23a3c4fad9cbef2e6dd013e75b1b8f4e2068bd9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101376_alamosa_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Haynes and Boone, LLP, Dallas, Texas, our counsel, will issue an opinion regarding the validity of the notes offered by this prospectus. Certain legal matters will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101380_alamosa_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101380_alamosa_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b23a3c4fad9cbef2e6dd013e75b1b8f4e2068bd9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101380_alamosa_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Haynes and Boone, LLP, Dallas, Texas, our counsel, will issue an opinion regarding the validity of the notes offered by this prospectus. Certain legal matters will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101381_texas_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101381_texas_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b23a3c4fad9cbef2e6dd013e75b1b8f4e2068bd9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101381_texas_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Haynes and Boone, LLP, Dallas, Texas, our counsel, will issue an opinion regarding the validity of the notes offered by this prospectus. Certain legal matters will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101513_neopoint_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101513_neopoint_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..82977beb185cbc22e096e7d9948e08d1af831a6e
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101513_neopoint_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins, San Diego, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101528_chaparral_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101528_chaparral_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8ed93460f131a32f4ba2fa0244beaa0231c0b9a1
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101528_chaparral_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Davis, Graham & Stubbs LLP, Denver, Colorado. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101644_real_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101644_real_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..553d261ddbb8d3dea9c2498e278285d8d13c3f5c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101644_real_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Dechert Price & Rhoads, Philadelphia, Pennsylvania, will pass upon the validity of our common stock offered by this prospectus for Real Media. Simpson Thacher & Bartlett, New York, New York, will pass upon certain legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001101706_partminer_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001101706_partminer_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ef865b292c7907feba42416a910601d35a99e1f0
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001101706_partminer_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Kirkpatrick & Lockhart LLP, New York, NY. Proskauer Rose LLP, New York, NY has acted as counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001102283_colo-com_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001102283_colo-com_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f1a31ea9ff7f45d34600a500aafddc57cb3fdb24
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001102283_colo-com_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California will pass upon the validity of the common stock sold in this offering for COLO.COM. Shearman & Sterling, New York, New York and Menlo Park, California is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus. As of the date of this prospectus, an investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati and certain members of and persons associated with Wilson Sonsini Goodrich & Rosati, beneficially owned an aggregate of 123,132 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001102341_tallan-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001102341_tallan-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ad54d4dc5d6b4e28df546cc6f7690fd98a0e5f9a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001102341_tallan-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Legal matters in connection with this offering will be passed upon for the underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001102546_collegeclu_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001102546_collegeclu_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2780ca384b5f5b8dffad11be0a3044555e03a8ad
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001102546_collegeclu_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Brobeck, Phleger & Harrison LLP, San Diego, California, will pass upon the validity of the shares of common stock offered by this prospectus. Morrison & Foerster LLP, Irvine, California is acting as legal counsel to the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103241_zland-com_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103241_zland-com_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9c2e6038a0fb5fa672b4beb3963a7f6431936d17
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103241_zland-com_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered in this prospectus will be passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California. Certain legal matters relating to this offering will be passed upon for the underwriters by Stoel Rives LLP. Partners of Rutan & Tucker, LLP own 128,444 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103345_beacon_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103345_beacon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..63fd7424d4849edd5dd6ea0b01fdf8e20451aa05
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103345_beacon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Edwards & Angell, LLP, Boston, Massachusetts. Various legal matters related to this offering will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103354_signalsoft_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103354_signalsoft_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a88da176774b36713153ad6df7ba796c5b10a6d7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103354_signalsoft_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Holme Roberts & Owen LLP, Denver, Colorado, will pass upon the validity of the shares of common stock on our behalf. Cravath, Swaine & Moore, New York, New York, will pass upon legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103600_digitalwor_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103600_digitalwor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e389c03dc1b0468d9f18e469f279dd0ff1f548d8
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103600_digitalwor_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered in this offering will be passed upon for us by Freeborn & Peters, Chicago, Illinois. Certain legal matters will be passed upon for the underwriters by Morgan, Lewis & Bockius LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103777_sirenza_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103777_sirenza_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..494170c23abb7b1c8a2cfe13067d16efbc8d8bdb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103777_sirenza_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, will pass upon the validity of the common stock offered hereby for Stanford Microdevices. Morrison & Foerster LLP, Irvine, California, will pass upon certain legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103779_crl_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103779_crl_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ddb12d057fdc3b65c205fb59bb4ed535f391a171
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103779_crl_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the new notes offered hereby will be passed upon for Charles River Laboratories, Inc. and Charles River Laboratories Holdings, Inc. by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103801_kbkids_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103801_kbkids_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fe214cefd5412e625061f5dba0a440e2a2851d2c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103801_kbkids_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed on for us by Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland, Ohio. Davis Polk & Wardwell is acting as counsel for the underwriters in connection with various legal matters relating to this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103837_crown_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103837_crown_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2f1600e8fdf1f8f5e7cca6f4ac455e97a47de4cf
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103837_crown_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed upon for us by Wachtell, Lipton, Rosen & Katz, New York, New York, Judith C. Whittaker, Esq., Vice President and General Counsel of Hallmark Cards, Charles Stanford, Esq., Senior Vice President -- Legal and Business Affairs of Crown Media and Harriet Beck, Esq., Los Angeles, California, and for the underwriters by Weil, Gotshal & Manges LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001103970_viewlocity_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001103970_viewlocity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cb1fd3cb52274809fcb2416cec189b5dfc226c14
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001103970_viewlocity_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Morris, Manning & Martin, L.L.P., Atlanta, Georgia. As of the date of this prospectus, attorneys with Morris, Manning and Martin, L.L.P. own approximately 10,535 shares of our common stock. King & Spalding has served as counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001104180_drugabuse_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001104180_drugabuse_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..75a2548c610ce10542372f0aeeefa947586efb02
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001104180_drugabuse_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the common stock being offered in the United States will be passed upon for DrugAbuse Sciences, Inc. by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California and for the underwriters by Brobeck, Phleger & Harrison LLP, Broomfield, Colorado, and Brobeck Hale and Dorr, London, England. Attorneys at Brobeck, Phleger & Harrison LLP beneficially own, through an investment trust, 20,032 shares of our common stock. Regulatory matters will be passed upon for DrugAbuse Sciences, Inc. by Venable, Baetjer, Howard & Civiletti, LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001104235_chematch_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001104235_chematch_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..81c030c321273b121d5c07ef7eb34f7548e05d3e
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001104235_chematch_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed on for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters relating to the common stock offered by this prospectus will be passed on for the underwriters by Fulbright & Jaworski L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001104400_clientlogi_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001104400_clientlogi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c32409aedd4e3f671ddfdb999eb181492c8dd3e7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001104400_clientlogi_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Class A common stock offered by this prospectus will be passed upon for us by Weil, Gotshal & Manges LLP, Dallas, Texas and New York, New York. Certain legal matters in connection with the offering will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001104903_cyber_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001104903_cyber_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a60842d39c9799779a10727e2a378b7e134323fa
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001104903_cyber_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Washington, D.C. Other legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001105472_sonus-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001105472_sonus-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..14346ef6de23634cc7cae40fbb32dffd0d8a26ed
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001105472_sonus-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Bingham Dana LLP, Boston, Massachusetts. As of May 15, 2000, partners at Bingham Dana LLP owned shares of Series A, Series B and Series C redeemable convertible preferred stock, which will convert into an aggregate of 87,210 shares of common stock upon the completion of this offering. The validity of the shares of common stock we are offering will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001105519_radvision_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001105519_radvision_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..35b2cf62d716c7153336f0a067b9173958c945d3
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001105519_radvision_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ordinary shares being offered by this prospectus and other legal matters concerning this offering relating to Israeli law will be passed upon for us by Goldfarb, Levy, Eran & Co., Tel Aviv, Israel. Some legal matters concerning this offering relating to United States law will be passed upon for us by Weil, Gotshal & Manges LLP, New York, New York. Some legal matters concerning this offering relating to Israeli law will be passed upon for the underwriters by Meitar, Liquornik, Geva & Co., Ramat Gan, Israel. Some legal matters concerning this offering relating to United States law will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001105653_mtvi_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001105653_mtvi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d872063ea3c0b0f6c7a698027d62f4711dc153f
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001105653_mtvi_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Some legal matters with respect to the validity of the shares of common stock offered by this prospectus will be passed upon for us by Shearman & Sterling, and for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP and Hughes Hubbard & Reed LLP. Hughes Hubbard & Reed LLP has provided legal services to us, Viacom and our respective affiliates from time to time for which they have received customary fees and expenses.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001106850_skystream_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001106850_skystream_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3b34a186dcea893e77a47249754e9dc05a322d8d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001106850_skystream_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of the date of this prospectus, WS Investment Company 97A and WS Investment Company 98A investment partnerships composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to certain current individual members and associates of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of 71,702 shares of preferred stock which will automatically convert into SkyStream's common stock upon the close of this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001107001_workscape_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001107001_workscape_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1da60947801afdeab842b6ffb06ec589b7678752
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001107001_workscape_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins, Los Angeles, California. Certain legal matters will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001107128_interpacke_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001107128_interpacke_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5e8cdfbbd9b472b4b984159c81dbd58852cf06b1
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001107128_interpacke_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered under this prospectus will be passed upon for InterPacket by Riordan & McKinzie, A Professional Law Corporation, Los Angeles, California. Certain principals of Riordan & McKinzie own an aggregate of 417,995 shares of InterPacket's common stock. Certain legal matters raised in connection with this offering will be passed upon for the underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001107721_activcard_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001107721_activcard_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a8ae0f1a42784e0cd343aaa9ebe054845f5a2190
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001107721_activcard_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs offered hereby will be passed upon for ActivCard by Shearman & Sterling, New York, New York. The validity of the shares represented by the ADSs will be passed upon by Shearman & Sterling, Paris, France. Cahill Gordon & Reindel, New York, New York is acting as counsel for the underwriters in connection with selected legal matters relating to this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001107733_paytrust_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001107733_paytrust_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2db6182ee77691e86b5cc59a2ff8f0ff9ab861f7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001107733_paytrust_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morgan, Lewis & Bockius LLP, Princeton, New Jersey and Philadelphia, Pennsylvania. Legal matters will be passed upon for the underwriters by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001107738_rcl-trust_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001107738_rcl-trust_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..155c788fcf8d37aaec57daaae7dc43447d4238de
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001107738_rcl-trust_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents RED CARPET LEASE PORTFOLIO Residual Value Analysis Three Months Ended March 31, Calendar Year Table of Contents rulings, judicial decisions and other applicable authorities in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. There can be no assurance that the Internal Revenue Service will not challenge the conclusions reached in this section, and no ruling from the IRS has been or will be sought on any of the issues discussed below. This summary does not purport to deal with all aspects of federal income taxation that may be relevant to the beneficial owners of the senior notes , as we refer to them as senior note owners in this section and the next section in light of their personal investment circumstances. Nor does this summary purport to deal with any specific type, except for some limited discussions of particular topics, of senior note owners subject to special treatment under the federal income tax laws. For example, the specific federal income tax consequences for financial institutions, broker-dealers, life insurance companies and tax-exempt organizations are not discussed here. This information is directed to senior note owners who hold the senior notes as capital assets within the meaning of Section 1221 of the Code and not to note owners who hold the senior notes in connection with a conversion transaction within the meaning of Code section 1258. General Tax characterization of the senior notes, the titling companies, the transferor and the issuer. In the opinion of Skadden, Arps, Slate, Meagher Flom LLP, the special tax counsel to Ford Credit, subject to the assumptions and qualifications contained in the opinion, for federal income tax purposes under existing law: the senior notes will be treated as debt; and none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation. This opinion is based on the assumption, among other things, that the senior notes, the subordinated notes and the lease trust certificates will be issued under the terms of the basic documents and that those terms will be complied with, and further, on the assumption that the titling companies either have not elected to be taxed as corporations or have rescinded such election. These opinions are based on the assumption, among other things, that the senior notes, the subordinated notes and the lease trust certificates will be issued under the terms of the basic documents and that these terms will be complied with. Stated interest. Stated interest on the senior notes will be taxable as ordinary income for federal income tax purposes when received or accrued according to a senior note owner s method of tax accounting. Original Issue Discount. A senior note will be treated as issued with original issue discount ( OID ) if the excess of the senior note s stated redemption price at maturity over its issue price equals or exceeds a de minimis amount equal to 1/4 of 1 percent of the senior note s stated redemption price at maturity multiplied by the number of complete years, based on the anticipated weighted average life of a senior note, to its maturity. Any amount not treated as OID because it is de minimis OID must be included in income as principal payments are received on the senior notes in the proportion that each payment bears to the original principal balance of the senior note. In general, OID, if any, will equal the difference between the stated redemption price at maturity of a senior note and its issue price. A holder of a senior note must include OID in gross income as ordinary interest income as it accrues under a method taking into account an Table of Contents economic accrual of the discount. In general, OID must be included in income before the cash representing that income is received. The issue price of a senior note will generally be the initial offering price at which a substantial amount of the senior notes are sold. The issuer intends to treat the issue price as including, in addition, the amount paid by the senior noteholder for accrued interest that relates to a period before the closing date. The stated redemption price at maturity generally will equal the principal amount of the senior note. The holder of a senior note issued with OID must include in gross income for each taxable year the OID accrued for each day during its taxable year on which it holds the senior note. The daily portions are determined by calculating the OID for the accrual period and then allocating to each day a proportionate portion of the OID that accrued during the accrual period. The issuer intends to report OID, if any, on the basis of an accrual period that corresponds to the interval between payment dates. OID, if any, on the senior notes will be computed by taking into account the anticipated rate of prepayments assumed in pricing the senior notes, which will be % ABS, a prepayment model which assumes a constant percentage of the original number of leases in a pool prepay each month. The effect of this method is to increase the rate at which a senior noteholder includes OID in income to take into account prepayments on the leases at a rate that exceeds the anticipated rate of prepayments, and to decrease, but not below zero, for any period the rate at which a senior noteholder includes OID in income to take into account prepayments on the leases at a rate that is slower than the anticipated rate of prepayments. Although OID will be reported to senior noteholders based on the anticipated rate of prepayments, no representation is made to senior noteholders that leases will be prepaid at that rate or at any other rate. A holder of a senior note that acquires the senior note for an amount that exceeds its stated redemption price will not include any OID in gross income. A subsequent holder who purchases a senior note for an amount that exceeds its adjusted issue price will be entitled, as will an initial holder who pays more than a senior note s issue price, to reduce the amount of OID included in income in each period by the amount of OID multiplied by a fraction, whose numerator is: the purchaser s adjusted basis in the senior note immediately after purchase of that senior note, minus the adjusted issue price of the senior note; and whose denominator is: all amounts remaining to be paid on the senior note after the purchase date, except qualified stated interest, minus the adjusted issue price of the senior note. Market Discount. The senior notes, whether or not issued with OID, will be subject to the market discount rules of Section 1276 of the Code. In general, these rules provide that if the senior note owner purchases a senior note at a market discount that is, discount from its stated redemption price at maturity or, if the senior notes were issued with OID, its original issue price plus any accrued original issue discount, that exceeds a de minimis amount specified in the Code and thereafter, if the senior note owner recognizes gain upon a disposition or if he receives payments of principal, the senior note owner s income from the senior notes will be taxed as ordinary interest income for the lesser amount of: the gain or principal payment; or the accrued market discount. Table of Contents Generally, market discount may be accrued either on a ratable or a constant yield method, taking into account the Prepayment Assumption. Limitations imposed by the Code intended to match deductions with the taxation of income may defer deductions for interest on indebtedness incurred or continued, or short-sale expenses incurred, to purchase or carry a senior note with accrued market discount. A senior note owner may elect to include market discount in gross income as it accrues and, if the senior note owner makes that election, is exempt from this rule. Any market discount election will apply to all debt instruments acquired by the taxpayer on or after the first day of the first taxable year to which that election applies. Total Accrual Election. A senior note owner may elect to include in gross income all interest that accrues on a senior note using the constant-yield method described above under Original Issue Discount, with modifications described below. For purposes of this election, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium described below under Amortizable Bond Premium or acquisition premium. This election will generally apply only to the senior note for which it is made and may not be revoked without the consent of the IRS. Senior note owners should consult their own tax advisors as to the effect in their circumstances of making this election. Amortizable Bond Premium. In general, if a senior note owner purchases a senior note at a premium that is, an amount in excess of the amount payable upon the maturity of the senior note the senior note owner will be considered to have purchased the senior note with amortizable bond premium equal to the amount of the excess. That senior note owner may elect to amortize the bond premium as an offset to interest income and not as a separate deduction item as it accrues under a constant-yield method over the remaining term of the senior note. The senior note owner s tax basis in the senior note will be reduced by the amount of the amortized bond premium. Any amortization election: shall apply to all debt instruments, except instruments the interest on which is excludible from gross income, held by the senior note owner at the beginning of the first taxable year for which the election applies or thereafter acquired; and is irrevocable without the consent of the IRS. Bond premium on a senior note held by a senior note owner who does not elect to amortize the premium will decrease the gain or increase the loss otherwise recognized on the disposition of the senior note. Disposition of Senior Notes. A senior note owner s adjusted tax basis in a senior note will be its cost, increased by the amount of any OID, market discount, acquisition discount and gain previously included in income with respect to the senior note, and reduced by the amount of any payment on the senior note that is not qualified stated interest and the amount of bond premium previously amortized with respect to the senior note. A senior note owner will generally recognize gain or loss on the sale or retirement of a senior note equal to the difference between the amount realized on the sale or retirement and the tax basis of the senior note. That gain or loss will be capital gain or loss, except to the extent attributable to accrued but unpaid interest or as described above under Market Discount, and will be long-term capital gain or loss if the senior note was held for more than one year. Waivers and Amendments The indenture trustee permits the senior noteholders to waive an event of default under the indenture in some circumstances upon a vote of the requisite percentage of senior noteholders. This waiver, if it were to continue for a period that exceeds two years and any additional period Table of Contents during which the senior noteholders conduct good faith negotiations, or certain amendments to the terms of the senior notes, would be treated for federal income tax purposes as a constructive exchange by a senior noteholder of the senior notes for new notes, upon which gain or loss would be recognized. See Description of the Senior Notes Indenture for a description of the events of default under the indenture. Tax Consequences to Foreign Investors The following information describes the U.S. federal income tax treatment of investors that are not U.S. persons, which are any persons except: citizens or residents of the United States; corporations, partnerships or other entities treated as corporations or partnerships for United States federal income tax purposes organized in or under the laws of the United States, any state or the District of Columbia, unless, in the case of a partnership or entity treated as a partnership, Treasury regulations provide otherwise; estates whose income is includible in gross income for U.S. federal income tax purposes, regardless of its source; or trusts if a U.S. court is able to exercise primary supervision over the administration of the trusts and one or more U.S. persons has authority to control all substantial decisions of the trust. Interest paid or accrued to a non-U.S. person that is not effectively connected with the conduct of a trade or business within the United States by the non-U.S. person generally (1) will be considered portfolio interest and (2) will not be subject to U.S. federal income tax and withholding tax, as long as the non-U.S. person: is not actually or constructively a 10 percent shareholder of the issuer or a controlled foreign corporation with respect to which the issuer is a related person within the meaning of the Code; and provides an appropriate statement, signed under penalties of perjury, certifying that the beneficial owner of a senior note is a non-U.S. person and providing that non-U.S. person s name and address. If the information provided in this statement changes, the non-U.S. person must so inform the indenture trustee within 30 days of the change. The statement generally must be provided in the year a payment occurs or in either of the two preceding years. If the interest were not portfolio interest, then it would be subject to U.S. federal income and withholding tax at a rate of 30 percent unless reduced or eliminated under an applicable income tax treaty. Any capital gain realized on the sale or other taxable disposition of a senior note by a non-U.S. person will be exempt from U.S. federal income and withholding tax, only if: the gain is not effectively connected with the conduct of a trade or business in the United States by the non-U.S. person; and in the case of an individual non-U.S. person, the non-U.S. person is not present in the United States for 183 days or more in the taxable year and several other requirements are met. If the interest, gain or income on a senior note held by a non-U.S. person is effectively connected with the conduct of a trade or business in the United States by the non-U.S. person, the beneficial owner of a senior note, although exempt from the withholding tax previously discussed if a duly executed Form 4224 is furnished, generally will be subject to U.S. federal income tax on the interest, gain or income at regular federal income tax rates. In addition, if the Table of Contents non-U.S. person is a foreign corporation, it may be subject to a branch profits tax under the Code equal to 30 percent of its effectively connected earnings and profits for the taxable year, as adjusted for specified items, unless it qualified for a lower rate under an applicable tax treaty. Recent Treasury regulations could affect the procedures to be followed by a non-U.S. person in complying with the United States federal withholding, backup withholding, and information reporting rules. The regulations will generally be effective for payments made after December 31, 2001. Prospective investors are advised to consult their own tax advisors regarding the effect, if any, of the tax regulations on the purchase, ownership and disposition of the senior notes. MATERIAL STATE INCOME TAX CONSEQUENCES Because of the variation in each state s income tax laws, it is impossible to predict tax consequences to senior note owners in all states. Described below is a summary of Michigan and Delaware state income tax consequences of the purchase, ownership and disposition of the senior notes. This discussion is based upon current law, administrative rulings, judicial decisions and other applicable authorities in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. There can be no assurance that state income tax authorities in these states will not challenge the conclusions reached in this prospectus, and no ruling from state income tax authorities has been or will be sought on any of the issues discussed below. Senior note owners are urged to consult their own tax advisors concerning state tax consequences arising out of the purchase, ownership and disposition of senior notes. Michigan. In general, state tax laws conform to federal income tax principles, and partnerships, grantor trusts and mere security devices are not subject to tax at the entity level. The State of Michigan, however, imposes a single business tax on corporations, partnerships and other entities doing business in Michigan. Because the administrative agent is headquartered in Michigan, tax authorities in Michigan may attempt to assert that each of the titling companies, the transferor or the issuer is subject to an entity level tax. Tax authorities of Michigan have issued a bulletin stating that Michigan will follow the federal entity classification rules, in which case, none of the titling companies, the transferror or the issuer will be subject to the single business tax at the entity level. However, the bulletin is not a legally binding authority in Michigan and counsel to Ford Credit cannot affirmatively opine that none of these entities will be subject to the Michigan single business tax at the entity level. While counsel to Ford Credit believes that the laws of Michigan support the position taken by the tax authorities in the bulletin, the position set forth in the bulletin may change or may be found to be inapplicable to the titling companies, the transferor or the issuer. Assuming that the senior notes will be treated as debt for federal income tax purposes, in the opinion of Hurley D. Smith, Esq., Secretary and Corporate Counsel of Ford Credit: the senior notes will be treated as debt for Michigan income tax and single business tax purposes; and senior note owners not otherwise subject to taxation in Michigan would not become subject to taxation in Michigan solely because of a senior note owner s ownership of a senior note. Assuming further that the lease trust certificates except the lease trust certificates retained by the transferor will be treated as debt for federal income tax purposes and that none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation for federal income tax purposes, in the opinion of Hurley D. Smith, Esq., none of the titling companies, the transferor or the issuer should be subject to Michigan income tax and single business tax at the entity level. Table of Contents Delaware. The transferor has been organized as a Delaware business trust. In the opinion of Skadden, Arps, Slate, Meagher Flom LLP, special tax counsel, assuming that the senior notes are treated as debt for federal income tax purposes, the senior notes will be treated as debt for Delaware state income tax purposes. Assuming further that none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation for federal income tax purposes, none of them will be subject to Delaware state income tax at the entity level. Further, in the opinion of the special tax counsel to Ford Credit, senior note owners not otherwise subject to taxation in Delaware would not become subject to taxation in Delaware solely because of a senior note owner s ownership of a senior note. * * * The federal and state tax discussions described above: are included for general information only; do not purport to address the applicability of state tax laws except the treatment of the trusts and the senior note owners under the laws of Michigan and Delaware; and may not be applicable depending upon a senior note owner s particular tax situation. Prospective purchasers should consult their tax advisors with respect to the tax consequences to them of the purchase, ownership and disposition of senior notes, including the tax consequences under state, local, foreign and other tax laws and the possible effects of changes in federal or other tax laws. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended, and the Code impose requirements on Plans and on persons who are fiduciaries of Plans. In accordance with ERISA s general fiduciary standards, before investing in securities, a Plan fiduciary should determine, among other factors, whether the investment: is permitted under the governing Plan; is appropriate for the Plan in view of its overall investment policy and the composition and diversification of its portfolio; and is prudent considering the factors discussed in this prospectus. ERISA and the Code prohibit some transactions involving assets of a Plan and persons who are parties in interest under ERISA or disqualified persons under the Code. Prohibited transactions may generate excise taxes and other liabilities. A fiduciary of any Plan should carefully review with its legal and other advisors whether the purchase or holding of any senior notes of the issuer could give rise to a transaction prohibited or otherwise impermissible under ERISA or the Code. Prohibited Transaction Considerations Whether or not an investment in the senior notes will give rise to a transaction prohibited or otherwise impermissible under ERISA or the Code will depend on the structure of the issuer. Transactions involving the issuer might be deemed to constitute prohibited transactions under ERISA and the Code if assets of the issuer were deemed to be assets of a Plan investing in securities issued by the issuer. Under a regulation, 29 C.F.R. Section 2510.3-101, issued by the United States Department of Labor referred to in this section as plan assets regulations the assets of the issuer would be treated as assets of a Plan for purposes of Table of Contents ERISA and the Code if the Plan acquires an equity interest in the issuer and none of the exceptions contained in the plan assets regulation is applicable. An equity interest is defined under the plan assets regulation as an interest other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Under the plan assets regulation, if a Plan invests in an equity interest of an entity that is neither a publicly offered security nor a security issued by an investment company registered under the Investment Company Act of 1940, the Plan s assets are deemed to include both the equity interest itself and an undivided interest in each of the entity s underlying assets, unless it is established that the entity is an operating company or that equity participation by Benefit Plan Investors is not significant. Equity participation in an entity by Benefit Plan Investors is significant on any date if immediately after the most recent acquisition of any equity interest in the entity, 25% or more of the value of any class of equity interest in the entity is held by Benefit Plan Investors. The purchase of senior notes by a Plan may give rise to potential prohibited transactions, and all prospective investors should review the discussion in this prospectus with their legal advisors. Investment in Senior Notes The transferor believes that the senior notes of the issuer should be treated as indebtedness without substantial equity features for purposes of the plan assets regulation. However, regardless of whether the senior notes of the issuer are treated as an equity interest for the plan assets regulation purposes, the acquisition or holding of the senior notes by or on behalf of a Plan could be considered to give rise to a prohibited transaction if the issuer, the trustee of the issuer, the trustee of the transferor, the indenture trustee, the FCTT trustee, the FCMTT trustees, the FCAL administrator, the FCALM administrator, any holder of the lease trust certificates of the issuer or any of their respective affiliates, is or becomes a party in interest or a disqualified person with respect to that Plan. In those circumstances, some exemptions from the prohibited transaction rules could be applicable depending on the type and circumstances of the Plan fiduciary making the decision to acquire a senior note. There are five class exemptions issued by the Department of Labor that could apply in the event of a prohibited transaction. These Department of Labor Prohibited Transaction Class Exemptions apply to: plan asset transactions determined by independent qualified professional asset managers (PTE 84-14); certain transactions involving bank collective investment funds (PTE 91-38); certain transactions involving insurance company pooled separate accounts (PTE 90-1); certain transactions involving insurance company general accounts (PTE 95-60); and plan asset transactions determined by in-house asset manager (PTE 96-23). It should be noted, however, that even if the conditions specified in one or more of these exemptions are met, the scope of relief provided by these exemptions may not necessarily cover all acts that might be construed as prohibited transactions. Special Considerations Applicable to Insurance Company General Accounts Moreover, based on the reasoning of the United States Supreme Court in John Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company s general account may be deemed to include assets of the Plans investing in the general account, such as through the purchase of an annuity contract, and the insurance company might be Table of Contents treated as a party in interest with respect to a Plan by virtue of that investment. Any purchaser that is an insurance company using the assets of an insurance company general account should note that the Small Business Job Protection Act of 1996 added new Section 401(c) of ERISA relating to the status of the assets of insurance company general accounts under ERISA and Section 4975 of the Code. Under Section 401(c), the Department of Labor issued final regulations effective January 5, 2000 with respect to insurance policies issued on or before December 31, 1998 that are supported by an insurer s general account. As a result of these regulations, assets of an insurance company general account will not be treated as plan assets for purposes of the fiduciary responsibility provisions of ERISA and Section 4975 of the Code to the extent the assets relate to contracts issued to employee benefit plans on or before December 31, 1998 and the insurer satisfies various conditions. Section 401(c) also provides that, except in the case of avoidance of these final regulations and actions brought by the Secretary of Labor relating to breaches of fiduciary duties that also constitute breaches of state or federal criminal law, until the date that is 18 months after these final regulations issued by the Department of Labor become final, no liability under the fiduciary responsibility and prohibited transaction provisions of ERISA and Section 4975 of the Code may result on the basis of a claim that the assets of the general account of an insurance company constitute the plan assets of any Plan. The plan asset status of insurance company separate accounts is unaffected by new Section 401(c) of ERISA, and separate account assets continue to be treated as the plan assets of any Plan invested in a separate account. Plans Not Subject to ERISA or the Code Some employee benefit plans, such as governmental plans and some church plans, each of which is defined in ERISA, are not subject to the prohibited transaction provisions of ERISA and Section 4975 of the Code. Accordingly, assets of those plans may, subject to the provisions of any other applicable federal and state law, be invested in securities of the issuer without regard to the factors described in this prospectus. It should be noted, however, that any of those plans that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction rules provided in Section 503 of the Code. General Investment Considerations Prospective investors who are Benefit Plan Investors should consult with their legal advisors concerning the impact of ERISA and the Code and the potential consequences of making an investment in any securities of the issuer with respect to those investors specific circumstances. Moreover, each Plan fiduciary should take into account, among other considerations: whether the fiduciary has the authority to make the investment; the composition of the Plan s portfolio relating to diversification by type of asset; the Plan s funding objectives; the tax effects of the investment; and whether under the general fiduciary standards of investment prudence and diversification an investment in any securities of the issuer is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan s investment portfolio. The closing of the sale of the senior notes is conditioned on the closing of the issuance of the subordinated notes and the issuance and sale of the lease trust certificates. The indenture trustee may, from time to time, invest the funds in the collection account, the payahead account, the cash collateral account, the payment account and the lease trust distribution account in Permitted Investments acquired from the underwriters. In the ordinary course of business, the underwriters and their affiliates have engaged and may engage in investment banking and commercial banking transactions with Ford Motor Company and its affiliates. The transferor and Ford Credit have agreed to jointly and severally indemnify the underwriters against some of their liabilities including civil liabilities under the Securities Act of Table of Contents 1933, as amended or to contribute to payments which the underwriters may be required to make relating to those liabilities. LEGAL MATTERS Certain legal matters relating to the senior notes will be passed upon for the issuer and Ford Credit by Hurley D. Smith, Esq., Secretary Corporate Counsel of Ford Credit, and for the underwriters by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York. Certain federal income tax and other matters will be passed upon for the issuer by Skadden, Arps, Slate, Meagher Flom LLP. Certain Michigan income tax and other matters will be passed upon for the issuer by Mr. Hurley D. Smith, Esq., Secretary Corporate Counsel of Ford Credit. Mr. Smith is a full-time employee of Ford Credit and he owns and holds options to purchase shares of Common Stock of Ford Motor Company. Skadden, Arps, Slate, Meagher Flom LLP has from time to time represented Ford Motor Company and Ford Credit in connection with specified transactions.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001107926_dynacs-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001107926_dynacs-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fb0cb29d26204d1aaa651dfa155f1bd7bc94fcd2
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001107926_dynacs-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered in this prospectus will be passed upon for Dynacs by Frankfurt, Garbus, Kurnit, Klein & Selz, P.C., New York, NY. Orrick, Herrington & Sutcliffe LLP, New York, NY is acting as counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001107954_blaxxun_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001107954_blaxxun_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..460a25b615de5f07722f620e144a09fdb308a6bf
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001107954_blaxxun_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston, Massachusetts. Certain matters of German law will be passed upon for the underwriters by Bruckhaus Westrick Heller Lober.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108051_imx_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108051_imx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7459514c962057acc654a481ceec8b60caac2b01
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108051_imx_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters relating to the offering will be passed upon for the underwriters by Morrison & Foerster, LLP, San Francisco, California. As of the date of this prospectus, investment partnerships composed of current and former partners of and persons associated with Gray Cary Ware & Freidenrich LLP and one partner of Gray Cary Ware & Freidenrich LLP beneficially own an aggregate of 40,428 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108052_2bridge_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108052_2bridge_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..972b26f02a64194e736f6935e4200c6906ea9c04
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108052_2bridge_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Gray Cary Ware & Friedenrich LLP, San Francisco, California. WS Investment Company, an investment partnership composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as well as individual attorneys of this firm, beneficially own an aggregate of 43,104 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108429_novo_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108429_novo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..02fb696bec8106dc1571e7ead0e1b023b32f66da
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108429_novo_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered will be passed upon for us by Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation, San Francisco, California, which has acted as our counsel in connection with this offering. Certain legal matters in connection with this offering will be passed upon by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108514_paperexcha_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108514_paperexcha_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..16e5681ac7e95087fa726d078190b9ba83aae4be
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108514_paperexcha_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for PaperExchange by Bingham Dana LLP, Boston, Massachusetts. Legal matters in connection with this offering will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108538_chemconnec_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108538_chemconnec_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4893ac174c3bd41fbb31c84db76f3d2c94fad5ed
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108538_chemconnec_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the our common stock offered hereby will be passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of the date of this prospectus, members and employees of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP beneficially owned an aggregate of 58,333 shares of our common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108674_stratagene_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108674_stratagene_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..25706bf9935cb1602eb61d235056aea56f05aca6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108674_stratagene_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins, San Diego, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Debevoise & Plimpton, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108691_arbinet_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108691_arbinet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6a115252c3a283166b32c14cc33ab74120f7b034
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108691_arbinet_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered hereby will be passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New York. Weil, Gotshal & Manges LLP, New York, New York, is acting as counsel to the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108820_doubletwis_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108820_doubletwis_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..274af33c6980190c3cf1098dde9078b00fa3be1a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108820_doubletwis_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered by DoubleTwist will be passed upon for DoubleTwist by Heller Ehrman White & McAuliffe LLP, La Jolla, California, which has acted as our counsel in connection with this offering. Patricia M. Thayer, a partner in the law firm of Heller Ehrman White & McAuliffe LLP, is the wife of Gregory C. Thayer, the general counsel, vice president of corporate development and secretary of DoubleTwist. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001108837_national_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001108837_national_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a230b4f21c24636f01cfedda200ad3d88fc8015b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001108837_national_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares offered by this prospectus will be passed upon for us by Morse, Zelnick, Rose & Lander, LLP, New York, New York. Greenberg Traurig, LLP, New York, New York, has acted as counsel to the underwriters named in this prospectus in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001109637_rts_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001109637_rts_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e9bfcc7aa910ce6f30f723f160fb8d228484d409
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001109637_rts_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the sale of the shares of common stock offered hereby will be passed upon for us by Parker Chapin LLP, New York, New York and for the underwriters by Cahill Gordon & Reindel, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001109661_homestead_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001109661_homestead_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..74340a012dcb4b6b7cdda71c0f3961bdb1efff91
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001109661_homestead_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of this prospectus, partners and associates of Cooley Godward LLP own an aggregate of approximately 80,500 shares of common stock directly and 43,816 shares of common stock through an investment partnership. Legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001109696_burst_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001109696_burst_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ea3d4b6469bc68181360a57e59cd8cd25bb3e4b1
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001109696_burst_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters relating to this offering are being passed upon for us by Arent Fox Kintner Plotkin & Kahn, PLLC, Washington, D.C. Certain legal matters relating to this offering will be passed upon for the underwriters by Shearman & Sterling, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001109913_petroleum_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001109913_petroleum_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c60396202d45012994b00d1d06b5ec53c0ca342d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001109913_petroleum_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Cooley Godward LLP, Boulder, Colorado will pass upon the validity of the shares of common stock offered hereby. Akin, Gump, Strauss, Hauer & Feld, L.L.P. will pass upon certain legal matters in connection with the offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001110009_genaissanc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001110009_genaissanc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..123436776a533e27d65e77ead0c2900ccd3105df
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001110009_genaissanc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Palmer & Dodge LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001110519_saturn_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001110519_saturn_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5a4e19643a04e5620d729ebdb62cb2402e8ba94b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001110519_saturn_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the shares offered hereby by us and the selling shareholders is being passed upon by Honigman Miller Schwartz and Cohn LLP, Detroit, Michigan. If the underwriters exercise their over-allotment option, certain legal matters will be passed upon for MascoTech by Mr. David B. Liner, Vice President and General Counsel of MascoTech. Certain legal matters will be passed upon for the underwriters by McDermott, Will & Emery, Chicago, Illinois. [Artwork showing graphic representations of the automotive, communications, computer and military end markets served by us, and our design, engineering, testing and manufacturing services, as well as our logo.] PRIMARY END MARKETS SERVED PRINCIPAL SERVICES OFFERED TO PRIMARY END MARKETS SERVED [SATURN LOGO] [SATURN LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses of the issuance and distribution, all of which are payable by us, will be as follows (all amounts are estimated except the SEC registration fee, the NASD fee and the New York Stock Exchange listing fee): <TABLE> <S> <C> SEC Registration Fee........................................ $ 34,848 NASD Fee.................................................... 17,060 New York Stock Exchange Listing Fee......................... 196,394 Printing and Engraving Expenses............................. 250,000 Accounting Fees and Expenses................................ 175,000 Legal Fees and Expenses..................................... 225,000 Transfer Agent's Fees and Expenses.......................... 4,000 Miscellaneous Expenses...................................... 297,698 ---------- Total.................................................. $1,200,000 ========== </TABLE> ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Michigan law allows the articles of incorporation of a Michigan corporation to contain a provision eliminating or limiting directors' liability to a corporation or its shareholders for money damages for any action taken or any failure to take any action as a director, except for liability for specified acts, and our amended and restated articles of incorporation contain such a provision. In addition, our amended and restated bylaws obligate us to indemnify our directors and officers, and our former directors and officers, to the maximum extent permitted by Michigan law. Our obligation to indemnify such individuals includes indemnification against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service as an officer or director in advance of the final disposition of any covered matter. To be indemnified, the officer or director must have acted, or failed to act, in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our or our shareholders' best interests and he or she must not have derived an improper personal benefit from such actions or omission. To be indemnified in connection with any criminal action or proceeding, a director or officer must have had no reasonable cause to believe his or her conduct was unlawful. Our indemnification obligations extend to claims made against our officers or directors because they acted as an officer or director of another company at our request. We maintain directors' and officers' liability insurance that provides coverage in the amount of $20.0 million. These provisions may discourage shareholders from bringing lawsuits against our directors for breach of their fiduciary duties. These provisions may also reduce the likelihood of derivative litigation against our directors and officers, even though such action, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder's investment may be adversely affected to the extent we are liable for damages awarded against our directors and officers pursuant to these indemnification provisions. We believe that these provisions and the related insurance are necessary to attract and retain talented, experienced directors and officers. At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for indemnification. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information reflects our recent sales of unregistered securities, none of which involved any underwriters: On March 15, 2000, we granted a warrant for 1,565,331 shares of common stock to Motorola. The exercise price per share is 90% of the initial public offering price per share. We issued the warrant in reliance upon the exemption from registration available under Section (4)2 of the Securities Act, including Regulation D promulgated thereunder, as a transaction by an issuer not involving any public offering. The warrant certificate has a legend imprinted on it stating that it have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or unless an exemption applies. In 1999, we granted options to purchase 869,400 unregistered shares of common stock to 104 employees, including 3 executive officers, and 5 directors. The exercise price per share was $3.888. These shares were issued by us in reliance upon the exemption from registration contained in Rule 701 of the Securities Act. In 1998, we granted options to purchase 709,500 unregistered shares of common stock to 34 employees, including 3 executive officers, and 4 directors. The exercise price per share ranged from $2.233 to $2.875. These shares were issued by us in reliance upon the exemption from registration contained in Rule 701 of the Securities Act. In 1997, we granted options to purchase 831,000 unregistered shares of common stock to 40 employees, including 3 executive officers, and 3 directors. The exercise price per share ranged from $1.748 to $2.233. These shares were issued by us in reliance upon the exemption from registration contained in Rule 701 of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits <TABLE> <C> <S> <C> 1* -- Form of Underwriting Agreement 3.1* -- Form of Amended and Restated Articles of Incorporation of Saturn Electronics & Engineering, Inc. 3.2* -- Form of Amended and Restated Bylaws of Saturn Electronics & Engineering, Inc. 4.1* -- Form of Certificate for shares of Common Stock 5*** -- Opinion of Honigman Miller Schwartz and Cohn LLP 10.1* -- Tanon Manufacturing, Inc. Amended and Restated Agreement of Purchase and Sale between Tanon Manufacturing, Inc. and Smartflex Systems, Inc., dated December 2, 1998 10.2* -- Stock Purchase Agreement by and among Logical Services Incorporated, the Shareholders of Logical Services Incorporated and Smartflex Systems, Inc., dated October 7, 1998 10.3* -- Methuen Division Agreement of Purchase and Sale by and between EA Industries, Inc. and Methuen Acquisition Corp., dated December 2, 1998 10.4* -- Stock Purchase Agreement between World Wide Industrial Invest, B.V. and Saturn Electronics & Engineering, Inc., dated April 16, 1999 10.5* -- Agreement and Plan of Merger among Saturn Electronics & Engineering, Inc., SSI Acquisition Corp., and Smartflex Systems, Inc., dated, July 6, 1999 10.6* -- Split-Dollar Agreement between Saturn Electronics & Engineering, Inc., Wallace K. Tsuha, and Sherman Cruz, Trustee of the Wallace K. Tsuha Irrevocable Life Insurance Trust of December 13, 1991, dated July 15, 1999 10.7* -- Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated December 1, 1999 </TABLE> II-2 <TABLE> <C> <S> <C> 10.8* -- Amendment to Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated February 28, 2000 10.9* -- Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan 10.10* -- Amendment No. 1 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated November 19, 1997 10.11* -- Amendment No. 2 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated July 29, 1999 10.12* -- Amendment No. 3 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated September 28, 1999 10.13* -- Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated April 16, 1998 10.14* -- Amendment No. 1 to Loan Agreement and Revolving Credit Note by and between Saturn Electronics Texas, LLC and Comerica Bank, dated June 10, 1999 10.15* -- Amendment No. 2 to Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated January 11, 2000 10.16* -- Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated August 24, 1999 10.17* -- Amendment No. 1 to Credit Agreement between Saturn Electronics & Engineering, Inc. and Comerica Bank, dated September 24, 1999 10.18* -- Amendment No. 2 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated November 10, 1999 10.19* -- Amendment No. 3 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated March 27, 2000 10.20* -- Saturn Electronics Texas, LLC Membership Regulations, dated February 25, 1998 10.21* -- Amendment No. 1 to Saturn Electronics Texas, LLC Membership Regulations, dated September 21, 1998 10.22* -- Amendment No. 2 to Saturn Electronics Texas, LLC Membership Regulations, dated February 28, 1999 10.23* -- Amendment No. 3 to Saturn Electronics Texas, LLC Membership Regulations, dated June 21, 1999 10.24* -- Amendment No. 4 to Saturn Electronics Texas, LLC Membership Regulations, dated October 21, 1999 10.25* -- Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated August 20, 1999 10.26* -- First Amendment to Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated March 27, 2000 10.27* -- Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 15, 2000 10.28* -- First Amendment to Saturn Electronics & Engineering, Inc. to Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 27, 2000 10.29* -- Registration Rights Agreement 10.30* -- Saturn Electronics & Engineering, Inc. 2000 Stock Option Plan 21* -- List of subsidiaries 23.1** -- Consent of PricewaterhouseCoopers LLP 23.2** -- Consent of Ernst & Young LLP 23.3*** -- Consent of Honigman Miller Schwartz and Cohn LLP (contained in their opinion filed as Exhibit 5) </TABLE> II-3 <TABLE> <C> <S> <C> 24* -- Power of Attorney (included on the signature page to this Registration Statement) 27* -- Financial Data Schedule for the year ended December 31, 1999 27.1** -- Financial Data Schedule for the six months ended June 30, 2000 </TABLE> --------------- * Previously filed. ** Filed by Amendment No. 6. *** To be filed by amendment. (b) Financial Statement Schedules. ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, or the Act, 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. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rules 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 6 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Auburn Hills, Michigan on August 10, 2000. SATURN ELECTRONICS & ENGINEERING, INC. By: /s/ DONALD J. COWIE ------------------------------------ Donald J. Cowie Chief financial officer, executive vice president, treasurer and assistant secretary (principal financial and accounting officer) Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 6 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /s/ WALLACE K. TSUHA, JR.* President, chief executive August 10, 2000 --------------------------------------------------- officer, chairman of the board Wallace K. Tsuha, Jr. and director (principal executive officer) /s/ DONALD J. COWIE Chief financial officer, August 10, 2000 --------------------------------------------------- executive vice president, Donald J. Cowie treasurer and assistant secretary (principal financial and accounting officer) /s/ WILLIAM T. ANDERSON* Director August 10, 2000 --------------------------------------------------- William T. Anderson /s/ DAVID E. COLE* Director August 10, 2000 --------------------------------------------------- David E. Cole /s/ SHERMAN L. CRUZ* Director August 10, 2000 --------------------------------------------------- Sherman L. Cruz /s/ FOREST J. FARMER* Director August 10, 2000 --------------------------------------------------- Forest J. Farmer </TABLE> II-5 <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /s/ RICK INATOME* Director August 10, 2000 --------------------------------------------------- Rick Inatome /s/ GARY E. LIEBL* Director August 10, 2000 --------------------------------------------------- Gary E. Liebl *By: /s/ DONALD J. COWIE August 10, 2000 --------------------------------------------- Donald J. Cowie Attorney-in-Fact </TABLE> II-6 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. ----------- <C> <S> <C> 1* -- Form of Underwriting Agreement 3.1* -- Form of Amended and Restated Articles of Incorporation of Saturn Electronics & Engineering, Inc. 3.2* -- Form of Amended and Restated Bylaws of Saturn Electronics & Engineering, Inc. 4.1* -- Form of Certificate for shares of Common Stock 5*** -- Opinion of Honigman Miller Schwartz and Cohn LLP 10.1* -- Tanon Manufacturing, Inc. Amended and Restated Agreement of Purchase and Sale between Tanon Manufacturing, Inc. and Smartflex Systems, Inc., dated December 2, 1998 10.2* -- Stock Purchase Agreement by and among Logical Services Incorporated, the Shareholders of Logical Services Incorporated and Smartflex Systems, Inc., dated October 7, 1998 10.3* -- Methuen Division Agreement of Purchase and Sale by and between EA Industries, Inc. and Methuen Acquisition Corp., dated December 2, 1998 10.4* -- Stock Purchase Agreement between World Wide Industrial Invest, B.V. and Saturn Electronics & Engineering, Inc., dated April 16, 1999 10.5* -- Agreement and Plan of Merger among Saturn Electronics & Engineering, Inc., SSI Acquisition Corp., and Smartflex Systems, Inc., dated, July 6, 1999 10.6* -- Split-Dollar Agreement between Saturn Electronics & Engineering, Inc., Wallace K. Tsuha, and Sherman Cruz, Trustee of the Wallace K. Tsuha Irrevocable Life Insurance Trust of December 13, 1991, dated July 15, 1999 10.7* -- Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated December 1, 1999 10.8* -- Amendment to Independent Contractor Agreement between Sherman L. Cruz and Saturn Electronics & Engineering, Inc., dated February 28, 2000 10.9* -- Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan 10.10* -- Amendment No. 1 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated November 19, 1997 10.11* -- Amendment No. 2 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated July 29, 1999 10.12* -- Amendment No. 3 to Saturn Electronics & Engineering, Inc. 1995 Management Stock Option Plan, dated September 28, 1999 10.13* -- Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated April 16, 1998 10.14* -- Amendment No. 1 to Loan Agreement and Revolving Credit Note by and between Saturn Electronics Texas, LLC and Comerica Bank, dated June 10, 1999 10.15* -- Amendment No. 2 to Loan Agreement by and between Saturn Electronics Texas, LLC and Comerica Bank, dated January 11, 2000 10.16* -- Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated August 24, 1999 10.17* -- Amendment No. 1 to Credit Agreement between Saturn Electronics & Engineering, Inc. and Comerica Bank, dated September 24, 1999 10.18* -- Amendment No. 2 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated November 10, 1999 10.19* -- Amendment No. 3 to Credit Agreement between Comerica Bank and Saturn Electronics & Engineering, Inc., dated March 27, 2000 </TABLE> <TABLE> <CAPTION> EXHIBIT NO. ----------- <C> <S> <C> 10.20* -- Saturn Electronics Texas, LLC Membership Regulations, dated February 25, 1998 10.21* -- Amendment No. 1 to Saturn Electronics Texas, LLC Membership Regulations, dated September 21, 1998 10.22* -- Amendment No. 2 to Saturn Electronics Texas, LLC Membership Regulations, dated February 28, 1999 10.23* -- Amendment No. 3 to Saturn Electronics Texas, LLC Membership Regulations, dated June 21, 1999 10.24* -- Amendment No. 4 to Saturn Electronics Texas, LLC Membership Regulations, dated October 21, 1999 10.25* -- Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated August 20, 1999 10.26* -- First Amendment to Sublease between Saturn Electronics & Engineering, Inc. and MSX International Engineering Services, Inc., dated March 27, 2000 10.27* -- Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 15, 2000 10.28* -- First Amendment to Saturn Electronics & Engineering, Inc. to Warrant to Purchase Shares of Class B Nonvoting Common Stock, dated March 27, 2000 10.29* -- Registration Rights Agreement with MascoTech, Inc. 10.30* -- Saturn Electronics & Engineering, Inc. 2000 Stock Option Plan 21* -- List of subsidiaries 23.1** -- Consent of PricewaterhouseCoopers LLP 23.2** -- Consent of Ernst & Young LLP 23.3*** -- Consent of Honigman Miller Schwartz and Cohn LLP (contained in their opinion filed as Exhibit 5) 24* -- Power of Attorney (included on the signature page to this Registration Statement) 27* -- Financial Data Schedule for the year ended December 31, 1999 27.1* -- Financial Data Schedule for the six months ended June 30, 2000 </TABLE> --------------- * Previously filed. ** Filed by Amendment No. 6. *** To be filed by Amendment. </TEXT> SATURN ELECTRONICS & ENGINEERING, INC.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001110691_intira_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001110691_intira_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9ff8564277c2e98ab6ac1f4798e236849966acac
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001110691_intira_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, and for the underwriters by Shearman & Sterling, New York, New York. As of the date of this prospectus, WS Investment Company 99B, an investment partnership composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to certain current individual members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of 78,128 shares of common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111147_thrupoint_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111147_thrupoint_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6174889aa60f3a9052ae6909cdb0179ee6fec27c
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111147_thrupoint_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Dewey Ballantine LLP, New York, New York. Various legal matters in connection with this offering will be passed upon for ThruPoint by Wollmuth Maher & Deutsch LLP, New York, New York. An attorney at Wollmuth Maher & Deutsch holds 3,402 shares of our common stock. Various legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111288_cruel_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111288_cruel_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..539aab4ce2ba4b6d9facbfddbb3989703341bc62
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111288_cruel_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Orrick, Herrington & Sutcliffe LLP is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111289_element-k_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111289_element-k_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2df147bfe6baff50d5dc5bbde88f35a2edf2d8b5
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111289_element-k_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the Class A common stock offered in this prospectus and certain tax and other legal matters will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP. Certain legal matters will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York. Skadden, Arps, Slate, Meagher & Flom LLP and Cravath, Swaine & Moore provide legal services to Wasserstein Perella from time to time on various matters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111312_cytocore_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111312_cytocore_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f6ca872137e3055899faed1415398bed77397a47
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111312_cytocore_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the validity of the common stock offered by this prospectus will be passed upon for Applied Molecular Evolution by Pillsbury Madison & Sutro LLP, San Francisco, California and for the underwriters by McDermott, Will & Emery, Los Angeles, California. A partner of Pillsbury Madison & Sutro LLP owns 70,000 shares of common stock and 121,023 shares of preferred stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111556_environmax_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111556_environmax_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..76b12a508afb5b0789aa49a93df417b26ffa6827
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111556_environmax_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares offered hereby will be passed upon for us by Parsons Behle & Latimer, a Professional Law Corporation, Salt Lake City, Utah.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111557_protocol_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111557_protocol_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bbbee9c8043f60870e3be006918c2248643620d9
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111557_protocol_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered hereby and certain other legal matters in connection with this offering with respect to New York laws and the federal laws of the United States will be passed upon for Protocol by Chadbourne & Parke LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Dewey Ballantine LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111652_internetco_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111652_internetco_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3dab39657d891277bb8e201875466772c0b77413
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111652_internetco_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Kirkpatrick & Lockhart LLP, Los Angeles, California. Certain legal matters will be passed upon for the underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles, California. A predecessor of Kirkpatrick & Lockhart LLP holds a warrant to purchase 90,000 shares of common stock at an exercise price of $1.00 per share and a warrant to purchase 33,000 shares of common stock at an exercise price of $.15 per share.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111693_moredirect_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111693_moredirect_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5304d7f3a99cffd1214ffac1ce0b4f1468c77ae3
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111693_moredirect_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Akerman, Senterfitt & Eidson, P.A., Fort Lauderdale, Florida will pass upon the validity of the common stock offered by this prospectus for us. Certain legal matters in connection with the offering will be passed upon for the underwriters by Cadwalader, Wickersham & Taft, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001111721_stratos_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001111721_stratos_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9dd7296f9fe404dabbdd9546c8beb378e8c80a10
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001111721_stratos_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Lord, Bissell & Brook, Chicago, Illinois. Certain legal matters relating to the offering will be passed upon for the underwriters by Dewey Ballantine LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001112006_iconixx_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001112006_iconixx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..adc13175376d065acd0a16333b605b05d62ad5ff
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001112006_iconixx_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Hogan & Hartson L.L.P., Washington, D.C., will pass upon the validity of the issuance of the shares being offered. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, will act as counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001112319_phase2medi_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001112319_phase2medi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..59927714b40d1654d7897d2dee96c9f5505f879f
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001112319_phase2medi_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for Phase2Media by Fulbright & Jaworski L.L.P., New York, New York. Certain legal matters in connection with the offering will be passed upon for the underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001112437_flashcom_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001112437_flashcom_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..18828c65d4108812122e872d57befa8fbd1ffba7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001112437_flashcom_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for Flashcom by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. Certain legal matters in connection with this offering will be passed upon for the representatives of the underwriters by Paul, Hastings, Janofsky & Walker LLP. Certain investment partnerships composed of certain current and former shareholders of Stradling Yocca Carlson & Rauth, as well as a current individual shareholder of Stradling Yocca Carlson & Rauth, beneficially own an aggregate of 76,696 shares of preferred stock that will automatically convert into an aggregate of 136,764 shares of our common stock upon the closing of this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001112822_adesso_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001112822_adesso_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b3595e5f854ae849f1cab7a27c60064584d5a053
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001112822_adesso_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Dewey Ballantine LLP, New York, New York, is acting as counsel for the underwriters in connection with various legal matters relating to the shares of common stock offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001112828_fort_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001112828_fort_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b16738b2c257505cea6695577a468e7c13f03b12
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001112828_fort_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gibson, Dunn & Crutcher LLP, San Francisco, California. A limited liability company composed of current and former partners of Gibson, Dunn & Crutcher LLP who elected to invest in the limited liability company purchased and holds 11,422 shares of our Series E preferred stock that will convert into 11,422 shares of our common stock on the consummation of this offering. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001112880_argonaut_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001112880_argonaut_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7ed589cbaf6b2076440d5415788fd2f97742597a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001112880_argonaut_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of our common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich and Rosati P.C., Palo Alto, California. As of the date of this prospectus, an investment partnership composed of certain members of and persons associated with Wilson Sonsini Goodrich & Rosati P.C., in addition to an individual member of Wilson Sonsini Goodrich & Rosati P.C., beneficially own an aggregate of 3,385 shares of our preferred stock. Dewey Ballantine LLP, New York, New York, is acting as counsel for the underwriters in connection with various legal matters relating to the shares of common stock offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001113049_golden_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001113049_golden_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..df83f8a4ed60d7239510816b57ba59015f14bfc6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001113049_golden_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock and the notes offered hereby will be passed upon for Golden Books and Golden Books Publishing by Proskauer Rose LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001113054_lrm_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001113054_lrm_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..df83f8a4ed60d7239510816b57ba59015f14bfc6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001113054_lrm_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock and the notes offered hereby will be passed upon for Golden Books and Golden Books Publishing by Proskauer Rose LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001113148_infinity_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001113148_infinity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e2f64fd6f73431aa6cf2c23bd6ed60fadad21868
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001113148_infinity_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Diego, California. Certain attorneys of Brobeck, Phleger & Harrison beneficially own 2,875 shares of our common stock. Cooley Godward LLP, San Diego, California, is acting as counsel for the underwriters in connection with various legal matters relating to the shares of common stock offered by this prospectus.
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diff --git a/parsed_sections/legal_matters/2000/CIK0001113527_at-t_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001113527_at-t_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..566eb6f2f125c546b9e6fdbbc2bc916bd17bece2
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001113527_at-t_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Class A common stock offered by this prospectus will be passed upon by Debevoise & Plimpton, New York, New York, counsel to AT&T Latin America. Certain legal matters in connection with the Class A common stock offered by this prospectus will be passed upon for the underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001113529_o2wireless_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001113529_o2wireless_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..58df921befd7e121f54299f005d866e0906d1cf6
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001113529_o2wireless_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Smith, Gambrell & Russell, LLP, Atlanta, Georgia will pass upon the validity of the shares of common stock offered by this prospectus and certain other legal matters. Alston & Bird LLP Atlanta, Georgia, will pass upon certain legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001113617_hydrogen_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001113617_hydrogen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..db7eaf8504a9a74e96b3e72e470215c879197943
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001113617_hydrogen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Manatt, Phelps & Phillips, LLP, Los Angeles, California. As of April of 2000, Donald W. Meaders, a partner of Manatt, Phelps & Phillips, LLP, owned 4,000 shares of our common stock. Certain legal matters will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001113669_dean_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001113669_dean_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ca061bb99940f807235695e0c6fb00727ef26b0a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001113669_dean_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Kaye, Scholer, Fierman, Hays & Handler, LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001115369_propel-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001115369_propel-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4a171dcbc94e765694f8004630d1ea06c0442117
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001115369_propel-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby and certain other legal matters will be passed upon for us by Kirkland & Ellis, a partnership including professional corporations, Chicago, Illinois. Certain legal matters will be passed upon for the underwriters by Shearman & Sterling, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001115836_belmond_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001115836_belmond_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c8662cc50dedb20efa5521bbdd280059a46726cd
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001115836_belmond_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Carter, Ledyard & Milburn, New York, New York, will pass upon legal matters for Orient-Express Hotels and Sea Containers with respect to this offering, and Shearman & Sterling, New York, New York will pass upon legal matters for the underwriters with respect to this offering. Carter, Ledyard & Milburn and Shearman & Sterling will rely upon Appleby Spurling & Kempe, Hamilton, Bermuda, with respect to matters of Bermuda law. Robert M. Riggs, a member of Carter, Ledyard & Milburn, is a director of Sea Containers, and John D. Campbell, senior counsel of Appleby Spurling & Kempe, is a director and a vice president of Sea Containers and Orient-Express Hotels.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001116081_jupiter_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001116081_jupiter_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1f126643477c940e707d99210707afdf2ab85205
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001116081_jupiter_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain matters in connection with the overseas offering will be passed upon for Jupiter by Latham & Watkins, Los Angeles, U.S. counsel for Jupiter. The validity of our ordinary shares, including ordinary shares represented by ADSs, offered by this prospectus and certain other matters will be passed upon by Nishimura & Partners, Japanese counsel for Jupiter, and by Tomotsune Kimura & Mitomi, Japanese counsel for the underwriters. Certain matters in connection with the overseas offering will be passed upon on behalf of the underwriters by Cleary, Gottlieb, Steen & Hamilton, U.S. counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001116201_integrated_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001116201_integrated_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aadef5f97fbbbe1b86f3926d68e2360da674ab26
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001116201_integrated_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of the date of this prospectus, WS Investment Company 2000 A composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, as well as certain individual attorneys of this firm, own an option to purchase 100,000 shares of our common stock, subject to vesting. Certain legal matters will be passed upon for the underwriters by Cooley Godward LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001116309_ford_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001116309_ford_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..155c788fcf8d37aaec57daaae7dc43447d4238de
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001116309_ford_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents RED CARPET LEASE PORTFOLIO Residual Value Analysis Three Months Ended March 31, Calendar Year Table of Contents rulings, judicial decisions and other applicable authorities in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. There can be no assurance that the Internal Revenue Service will not challenge the conclusions reached in this section, and no ruling from the IRS has been or will be sought on any of the issues discussed below. This summary does not purport to deal with all aspects of federal income taxation that may be relevant to the beneficial owners of the senior notes , as we refer to them as senior note owners in this section and the next section in light of their personal investment circumstances. Nor does this summary purport to deal with any specific type, except for some limited discussions of particular topics, of senior note owners subject to special treatment under the federal income tax laws. For example, the specific federal income tax consequences for financial institutions, broker-dealers, life insurance companies and tax-exempt organizations are not discussed here. This information is directed to senior note owners who hold the senior notes as capital assets within the meaning of Section 1221 of the Code and not to note owners who hold the senior notes in connection with a conversion transaction within the meaning of Code section 1258. General Tax characterization of the senior notes, the titling companies, the transferor and the issuer. In the opinion of Skadden, Arps, Slate, Meagher Flom LLP, the special tax counsel to Ford Credit, subject to the assumptions and qualifications contained in the opinion, for federal income tax purposes under existing law: the senior notes will be treated as debt; and none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation. This opinion is based on the assumption, among other things, that the senior notes, the subordinated notes and the lease trust certificates will be issued under the terms of the basic documents and that those terms will be complied with, and further, on the assumption that the titling companies either have not elected to be taxed as corporations or have rescinded such election. These opinions are based on the assumption, among other things, that the senior notes, the subordinated notes and the lease trust certificates will be issued under the terms of the basic documents and that these terms will be complied with. Stated interest. Stated interest on the senior notes will be taxable as ordinary income for federal income tax purposes when received or accrued according to a senior note owner s method of tax accounting. Original Issue Discount. A senior note will be treated as issued with original issue discount ( OID ) if the excess of the senior note s stated redemption price at maturity over its issue price equals or exceeds a de minimis amount equal to 1/4 of 1 percent of the senior note s stated redemption price at maturity multiplied by the number of complete years, based on the anticipated weighted average life of a senior note, to its maturity. Any amount not treated as OID because it is de minimis OID must be included in income as principal payments are received on the senior notes in the proportion that each payment bears to the original principal balance of the senior note. In general, OID, if any, will equal the difference between the stated redemption price at maturity of a senior note and its issue price. A holder of a senior note must include OID in gross income as ordinary interest income as it accrues under a method taking into account an Table of Contents economic accrual of the discount. In general, OID must be included in income before the cash representing that income is received. The issue price of a senior note will generally be the initial offering price at which a substantial amount of the senior notes are sold. The issuer intends to treat the issue price as including, in addition, the amount paid by the senior noteholder for accrued interest that relates to a period before the closing date. The stated redemption price at maturity generally will equal the principal amount of the senior note. The holder of a senior note issued with OID must include in gross income for each taxable year the OID accrued for each day during its taxable year on which it holds the senior note. The daily portions are determined by calculating the OID for the accrual period and then allocating to each day a proportionate portion of the OID that accrued during the accrual period. The issuer intends to report OID, if any, on the basis of an accrual period that corresponds to the interval between payment dates. OID, if any, on the senior notes will be computed by taking into account the anticipated rate of prepayments assumed in pricing the senior notes, which will be % ABS, a prepayment model which assumes a constant percentage of the original number of leases in a pool prepay each month. The effect of this method is to increase the rate at which a senior noteholder includes OID in income to take into account prepayments on the leases at a rate that exceeds the anticipated rate of prepayments, and to decrease, but not below zero, for any period the rate at which a senior noteholder includes OID in income to take into account prepayments on the leases at a rate that is slower than the anticipated rate of prepayments. Although OID will be reported to senior noteholders based on the anticipated rate of prepayments, no representation is made to senior noteholders that leases will be prepaid at that rate or at any other rate. A holder of a senior note that acquires the senior note for an amount that exceeds its stated redemption price will not include any OID in gross income. A subsequent holder who purchases a senior note for an amount that exceeds its adjusted issue price will be entitled, as will an initial holder who pays more than a senior note s issue price, to reduce the amount of OID included in income in each period by the amount of OID multiplied by a fraction, whose numerator is: the purchaser s adjusted basis in the senior note immediately after purchase of that senior note, minus the adjusted issue price of the senior note; and whose denominator is: all amounts remaining to be paid on the senior note after the purchase date, except qualified stated interest, minus the adjusted issue price of the senior note. Market Discount. The senior notes, whether or not issued with OID, will be subject to the market discount rules of Section 1276 of the Code. In general, these rules provide that if the senior note owner purchases a senior note at a market discount that is, discount from its stated redemption price at maturity or, if the senior notes were issued with OID, its original issue price plus any accrued original issue discount, that exceeds a de minimis amount specified in the Code and thereafter, if the senior note owner recognizes gain upon a disposition or if he receives payments of principal, the senior note owner s income from the senior notes will be taxed as ordinary interest income for the lesser amount of: the gain or principal payment; or the accrued market discount. Table of Contents Generally, market discount may be accrued either on a ratable or a constant yield method, taking into account the Prepayment Assumption. Limitations imposed by the Code intended to match deductions with the taxation of income may defer deductions for interest on indebtedness incurred or continued, or short-sale expenses incurred, to purchase or carry a senior note with accrued market discount. A senior note owner may elect to include market discount in gross income as it accrues and, if the senior note owner makes that election, is exempt from this rule. Any market discount election will apply to all debt instruments acquired by the taxpayer on or after the first day of the first taxable year to which that election applies. Total Accrual Election. A senior note owner may elect to include in gross income all interest that accrues on a senior note using the constant-yield method described above under Original Issue Discount, with modifications described below. For purposes of this election, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium described below under Amortizable Bond Premium or acquisition premium. This election will generally apply only to the senior note for which it is made and may not be revoked without the consent of the IRS. Senior note owners should consult their own tax advisors as to the effect in their circumstances of making this election. Amortizable Bond Premium. In general, if a senior note owner purchases a senior note at a premium that is, an amount in excess of the amount payable upon the maturity of the senior note the senior note owner will be considered to have purchased the senior note with amortizable bond premium equal to the amount of the excess. That senior note owner may elect to amortize the bond premium as an offset to interest income and not as a separate deduction item as it accrues under a constant-yield method over the remaining term of the senior note. The senior note owner s tax basis in the senior note will be reduced by the amount of the amortized bond premium. Any amortization election: shall apply to all debt instruments, except instruments the interest on which is excludible from gross income, held by the senior note owner at the beginning of the first taxable year for which the election applies or thereafter acquired; and is irrevocable without the consent of the IRS. Bond premium on a senior note held by a senior note owner who does not elect to amortize the premium will decrease the gain or increase the loss otherwise recognized on the disposition of the senior note. Disposition of Senior Notes. A senior note owner s adjusted tax basis in a senior note will be its cost, increased by the amount of any OID, market discount, acquisition discount and gain previously included in income with respect to the senior note, and reduced by the amount of any payment on the senior note that is not qualified stated interest and the amount of bond premium previously amortized with respect to the senior note. A senior note owner will generally recognize gain or loss on the sale or retirement of a senior note equal to the difference between the amount realized on the sale or retirement and the tax basis of the senior note. That gain or loss will be capital gain or loss, except to the extent attributable to accrued but unpaid interest or as described above under Market Discount, and will be long-term capital gain or loss if the senior note was held for more than one year. Waivers and Amendments The indenture trustee permits the senior noteholders to waive an event of default under the indenture in some circumstances upon a vote of the requisite percentage of senior noteholders. This waiver, if it were to continue for a period that exceeds two years and any additional period Table of Contents during which the senior noteholders conduct good faith negotiations, or certain amendments to the terms of the senior notes, would be treated for federal income tax purposes as a constructive exchange by a senior noteholder of the senior notes for new notes, upon which gain or loss would be recognized. See Description of the Senior Notes Indenture for a description of the events of default under the indenture. Tax Consequences to Foreign Investors The following information describes the U.S. federal income tax treatment of investors that are not U.S. persons, which are any persons except: citizens or residents of the United States; corporations, partnerships or other entities treated as corporations or partnerships for United States federal income tax purposes organized in or under the laws of the United States, any state or the District of Columbia, unless, in the case of a partnership or entity treated as a partnership, Treasury regulations provide otherwise; estates whose income is includible in gross income for U.S. federal income tax purposes, regardless of its source; or trusts if a U.S. court is able to exercise primary supervision over the administration of the trusts and one or more U.S. persons has authority to control all substantial decisions of the trust. Interest paid or accrued to a non-U.S. person that is not effectively connected with the conduct of a trade or business within the United States by the non-U.S. person generally (1) will be considered portfolio interest and (2) will not be subject to U.S. federal income tax and withholding tax, as long as the non-U.S. person: is not actually or constructively a 10 percent shareholder of the issuer or a controlled foreign corporation with respect to which the issuer is a related person within the meaning of the Code; and provides an appropriate statement, signed under penalties of perjury, certifying that the beneficial owner of a senior note is a non-U.S. person and providing that non-U.S. person s name and address. If the information provided in this statement changes, the non-U.S. person must so inform the indenture trustee within 30 days of the change. The statement generally must be provided in the year a payment occurs or in either of the two preceding years. If the interest were not portfolio interest, then it would be subject to U.S. federal income and withholding tax at a rate of 30 percent unless reduced or eliminated under an applicable income tax treaty. Any capital gain realized on the sale or other taxable disposition of a senior note by a non-U.S. person will be exempt from U.S. federal income and withholding tax, only if: the gain is not effectively connected with the conduct of a trade or business in the United States by the non-U.S. person; and in the case of an individual non-U.S. person, the non-U.S. person is not present in the United States for 183 days or more in the taxable year and several other requirements are met. If the interest, gain or income on a senior note held by a non-U.S. person is effectively connected with the conduct of a trade or business in the United States by the non-U.S. person, the beneficial owner of a senior note, although exempt from the withholding tax previously discussed if a duly executed Form 4224 is furnished, generally will be subject to U.S. federal income tax on the interest, gain or income at regular federal income tax rates. In addition, if the Table of Contents non-U.S. person is a foreign corporation, it may be subject to a branch profits tax under the Code equal to 30 percent of its effectively connected earnings and profits for the taxable year, as adjusted for specified items, unless it qualified for a lower rate under an applicable tax treaty. Recent Treasury regulations could affect the procedures to be followed by a non-U.S. person in complying with the United States federal withholding, backup withholding, and information reporting rules. The regulations will generally be effective for payments made after December 31, 2001. Prospective investors are advised to consult their own tax advisors regarding the effect, if any, of the tax regulations on the purchase, ownership and disposition of the senior notes. MATERIAL STATE INCOME TAX CONSEQUENCES Because of the variation in each state s income tax laws, it is impossible to predict tax consequences to senior note owners in all states. Described below is a summary of Michigan and Delaware state income tax consequences of the purchase, ownership and disposition of the senior notes. This discussion is based upon current law, administrative rulings, judicial decisions and other applicable authorities in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. There can be no assurance that state income tax authorities in these states will not challenge the conclusions reached in this prospectus, and no ruling from state income tax authorities has been or will be sought on any of the issues discussed below. Senior note owners are urged to consult their own tax advisors concerning state tax consequences arising out of the purchase, ownership and disposition of senior notes. Michigan. In general, state tax laws conform to federal income tax principles, and partnerships, grantor trusts and mere security devices are not subject to tax at the entity level. The State of Michigan, however, imposes a single business tax on corporations, partnerships and other entities doing business in Michigan. Because the administrative agent is headquartered in Michigan, tax authorities in Michigan may attempt to assert that each of the titling companies, the transferor or the issuer is subject to an entity level tax. Tax authorities of Michigan have issued a bulletin stating that Michigan will follow the federal entity classification rules, in which case, none of the titling companies, the transferror or the issuer will be subject to the single business tax at the entity level. However, the bulletin is not a legally binding authority in Michigan and counsel to Ford Credit cannot affirmatively opine that none of these entities will be subject to the Michigan single business tax at the entity level. While counsel to Ford Credit believes that the laws of Michigan support the position taken by the tax authorities in the bulletin, the position set forth in the bulletin may change or may be found to be inapplicable to the titling companies, the transferor or the issuer. Assuming that the senior notes will be treated as debt for federal income tax purposes, in the opinion of Hurley D. Smith, Esq., Secretary and Corporate Counsel of Ford Credit: the senior notes will be treated as debt for Michigan income tax and single business tax purposes; and senior note owners not otherwise subject to taxation in Michigan would not become subject to taxation in Michigan solely because of a senior note owner s ownership of a senior note. Assuming further that the lease trust certificates except the lease trust certificates retained by the transferor will be treated as debt for federal income tax purposes and that none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation for federal income tax purposes, in the opinion of Hurley D. Smith, Esq., none of the titling companies, the transferor or the issuer should be subject to Michigan income tax and single business tax at the entity level. Table of Contents Delaware. The transferor has been organized as a Delaware business trust. In the opinion of Skadden, Arps, Slate, Meagher Flom LLP, special tax counsel, assuming that the senior notes are treated as debt for federal income tax purposes, the senior notes will be treated as debt for Delaware state income tax purposes. Assuming further that none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation for federal income tax purposes, none of them will be subject to Delaware state income tax at the entity level. Further, in the opinion of the special tax counsel to Ford Credit, senior note owners not otherwise subject to taxation in Delaware would not become subject to taxation in Delaware solely because of a senior note owner s ownership of a senior note. * * * The federal and state tax discussions described above: are included for general information only; do not purport to address the applicability of state tax laws except the treatment of the trusts and the senior note owners under the laws of Michigan and Delaware; and may not be applicable depending upon a senior note owner s particular tax situation. Prospective purchasers should consult their tax advisors with respect to the tax consequences to them of the purchase, ownership and disposition of senior notes, including the tax consequences under state, local, foreign and other tax laws and the possible effects of changes in federal or other tax laws. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended, and the Code impose requirements on Plans and on persons who are fiduciaries of Plans. In accordance with ERISA s general fiduciary standards, before investing in securities, a Plan fiduciary should determine, among other factors, whether the investment: is permitted under the governing Plan; is appropriate for the Plan in view of its overall investment policy and the composition and diversification of its portfolio; and is prudent considering the factors discussed in this prospectus. ERISA and the Code prohibit some transactions involving assets of a Plan and persons who are parties in interest under ERISA or disqualified persons under the Code. Prohibited transactions may generate excise taxes and other liabilities. A fiduciary of any Plan should carefully review with its legal and other advisors whether the purchase or holding of any senior notes of the issuer could give rise to a transaction prohibited or otherwise impermissible under ERISA or the Code. Prohibited Transaction Considerations Whether or not an investment in the senior notes will give rise to a transaction prohibited or otherwise impermissible under ERISA or the Code will depend on the structure of the issuer. Transactions involving the issuer might be deemed to constitute prohibited transactions under ERISA and the Code if assets of the issuer were deemed to be assets of a Plan investing in securities issued by the issuer. Under a regulation, 29 C.F.R. Section 2510.3-101, issued by the United States Department of Labor referred to in this section as plan assets regulations the assets of the issuer would be treated as assets of a Plan for purposes of Table of Contents ERISA and the Code if the Plan acquires an equity interest in the issuer and none of the exceptions contained in the plan assets regulation is applicable. An equity interest is defined under the plan assets regulation as an interest other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Under the plan assets regulation, if a Plan invests in an equity interest of an entity that is neither a publicly offered security nor a security issued by an investment company registered under the Investment Company Act of 1940, the Plan s assets are deemed to include both the equity interest itself and an undivided interest in each of the entity s underlying assets, unless it is established that the entity is an operating company or that equity participation by Benefit Plan Investors is not significant. Equity participation in an entity by Benefit Plan Investors is significant on any date if immediately after the most recent acquisition of any equity interest in the entity, 25% or more of the value of any class of equity interest in the entity is held by Benefit Plan Investors. The purchase of senior notes by a Plan may give rise to potential prohibited transactions, and all prospective investors should review the discussion in this prospectus with their legal advisors. Investment in Senior Notes The transferor believes that the senior notes of the issuer should be treated as indebtedness without substantial equity features for purposes of the plan assets regulation. However, regardless of whether the senior notes of the issuer are treated as an equity interest for the plan assets regulation purposes, the acquisition or holding of the senior notes by or on behalf of a Plan could be considered to give rise to a prohibited transaction if the issuer, the trustee of the issuer, the trustee of the transferor, the indenture trustee, the FCTT trustee, the FCMTT trustees, the FCAL administrator, the FCALM administrator, any holder of the lease trust certificates of the issuer or any of their respective affiliates, is or becomes a party in interest or a disqualified person with respect to that Plan. In those circumstances, some exemptions from the prohibited transaction rules could be applicable depending on the type and circumstances of the Plan fiduciary making the decision to acquire a senior note. There are five class exemptions issued by the Department of Labor that could apply in the event of a prohibited transaction. These Department of Labor Prohibited Transaction Class Exemptions apply to: plan asset transactions determined by independent qualified professional asset managers (PTE 84-14); certain transactions involving bank collective investment funds (PTE 91-38); certain transactions involving insurance company pooled separate accounts (PTE 90-1); certain transactions involving insurance company general accounts (PTE 95-60); and plan asset transactions determined by in-house asset manager (PTE 96-23). It should be noted, however, that even if the conditions specified in one or more of these exemptions are met, the scope of relief provided by these exemptions may not necessarily cover all acts that might be construed as prohibited transactions. Special Considerations Applicable to Insurance Company General Accounts Moreover, based on the reasoning of the United States Supreme Court in John Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company s general account may be deemed to include assets of the Plans investing in the general account, such as through the purchase of an annuity contract, and the insurance company might be Table of Contents treated as a party in interest with respect to a Plan by virtue of that investment. Any purchaser that is an insurance company using the assets of an insurance company general account should note that the Small Business Job Protection Act of 1996 added new Section 401(c) of ERISA relating to the status of the assets of insurance company general accounts under ERISA and Section 4975 of the Code. Under Section 401(c), the Department of Labor issued final regulations effective January 5, 2000 with respect to insurance policies issued on or before December 31, 1998 that are supported by an insurer s general account. As a result of these regulations, assets of an insurance company general account will not be treated as plan assets for purposes of the fiduciary responsibility provisions of ERISA and Section 4975 of the Code to the extent the assets relate to contracts issued to employee benefit plans on or before December 31, 1998 and the insurer satisfies various conditions. Section 401(c) also provides that, except in the case of avoidance of these final regulations and actions brought by the Secretary of Labor relating to breaches of fiduciary duties that also constitute breaches of state or federal criminal law, until the date that is 18 months after these final regulations issued by the Department of Labor become final, no liability under the fiduciary responsibility and prohibited transaction provisions of ERISA and Section 4975 of the Code may result on the basis of a claim that the assets of the general account of an insurance company constitute the plan assets of any Plan. The plan asset status of insurance company separate accounts is unaffected by new Section 401(c) of ERISA, and separate account assets continue to be treated as the plan assets of any Plan invested in a separate account. Plans Not Subject to ERISA or the Code Some employee benefit plans, such as governmental plans and some church plans, each of which is defined in ERISA, are not subject to the prohibited transaction provisions of ERISA and Section 4975 of the Code. Accordingly, assets of those plans may, subject to the provisions of any other applicable federal and state law, be invested in securities of the issuer without regard to the factors described in this prospectus. It should be noted, however, that any of those plans that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction rules provided in Section 503 of the Code. General Investment Considerations Prospective investors who are Benefit Plan Investors should consult with their legal advisors concerning the impact of ERISA and the Code and the potential consequences of making an investment in any securities of the issuer with respect to those investors specific circumstances. Moreover, each Plan fiduciary should take into account, among other considerations: whether the fiduciary has the authority to make the investment; the composition of the Plan s portfolio relating to diversification by type of asset; the Plan s funding objectives; the tax effects of the investment; and whether under the general fiduciary standards of investment prudence and diversification an investment in any securities of the issuer is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan s investment portfolio. The closing of the sale of the senior notes is conditioned on the closing of the issuance of the subordinated notes and the issuance and sale of the lease trust certificates. The indenture trustee may, from time to time, invest the funds in the collection account, the payahead account, the cash collateral account, the payment account and the lease trust distribution account in Permitted Investments acquired from the underwriters. In the ordinary course of business, the underwriters and their affiliates have engaged and may engage in investment banking and commercial banking transactions with Ford Motor Company and its affiliates. The transferor and Ford Credit have agreed to jointly and severally indemnify the underwriters against some of their liabilities including civil liabilities under the Securities Act of Table of Contents 1933, as amended or to contribute to payments which the underwriters may be required to make relating to those liabilities. LEGAL MATTERS Certain legal matters relating to the senior notes will be passed upon for the issuer and Ford Credit by Hurley D. Smith, Esq., Secretary Corporate Counsel of Ford Credit, and for the underwriters by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York. Certain federal income tax and other matters will be passed upon for the issuer by Skadden, Arps, Slate, Meagher Flom LLP. Certain Michigan income tax and other matters will be passed upon for the issuer by Mr. Hurley D. Smith, Esq., Secretary Corporate Counsel of Ford Credit. Mr. Smith is a full-time employee of Ford Credit and he owns and holds options to purchase shares of Common Stock of Ford Motor Company. Skadden, Arps, Slate, Meagher Flom LLP has from time to time represented Ford Motor Company and Ford Credit in connection with specified transactions.
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+Table of Contents RED CARPET LEASE PORTFOLIO Residual Value Analysis Three Months Ended March 31, Calendar Year Table of Contents rulings, judicial decisions and other applicable authorities in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. There can be no assurance that the Internal Revenue Service will not challenge the conclusions reached in this section, and no ruling from the IRS has been or will be sought on any of the issues discussed below. This summary does not purport to deal with all aspects of federal income taxation that may be relevant to the beneficial owners of the senior notes , as we refer to them as senior note owners in this section and the next section in light of their personal investment circumstances. Nor does this summary purport to deal with any specific type, except for some limited discussions of particular topics, of senior note owners subject to special treatment under the federal income tax laws. For example, the specific federal income tax consequences for financial institutions, broker-dealers, life insurance companies and tax-exempt organizations are not discussed here. This information is directed to senior note owners who hold the senior notes as capital assets within the meaning of Section 1221 of the Code and not to note owners who hold the senior notes in connection with a conversion transaction within the meaning of Code section 1258. General Tax characterization of the senior notes, the titling companies, the transferor and the issuer. In the opinion of Skadden, Arps, Slate, Meagher Flom LLP, the special tax counsel to Ford Credit, subject to the assumptions and qualifications contained in the opinion, for federal income tax purposes under existing law: the senior notes will be treated as debt; and none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation. This opinion is based on the assumption, among other things, that the senior notes, the subordinated notes and the lease trust certificates will be issued under the terms of the basic documents and that those terms will be complied with, and further, on the assumption that the titling companies either have not elected to be taxed as corporations or have rescinded such election. These opinions are based on the assumption, among other things, that the senior notes, the subordinated notes and the lease trust certificates will be issued under the terms of the basic documents and that these terms will be complied with. Stated interest. Stated interest on the senior notes will be taxable as ordinary income for federal income tax purposes when received or accrued according to a senior note owner s method of tax accounting. Original Issue Discount. A senior note will be treated as issued with original issue discount ( OID ) if the excess of the senior note s stated redemption price at maturity over its issue price equals or exceeds a de minimis amount equal to 1/4 of 1 percent of the senior note s stated redemption price at maturity multiplied by the number of complete years, based on the anticipated weighted average life of a senior note, to its maturity. Any amount not treated as OID because it is de minimis OID must be included in income as principal payments are received on the senior notes in the proportion that each payment bears to the original principal balance of the senior note. In general, OID, if any, will equal the difference between the stated redemption price at maturity of a senior note and its issue price. A holder of a senior note must include OID in gross income as ordinary interest income as it accrues under a method taking into account an Table of Contents economic accrual of the discount. In general, OID must be included in income before the cash representing that income is received. The issue price of a senior note will generally be the initial offering price at which a substantial amount of the senior notes are sold. The issuer intends to treat the issue price as including, in addition, the amount paid by the senior noteholder for accrued interest that relates to a period before the closing date. The stated redemption price at maturity generally will equal the principal amount of the senior note. The holder of a senior note issued with OID must include in gross income for each taxable year the OID accrued for each day during its taxable year on which it holds the senior note. The daily portions are determined by calculating the OID for the accrual period and then allocating to each day a proportionate portion of the OID that accrued during the accrual period. The issuer intends to report OID, if any, on the basis of an accrual period that corresponds to the interval between payment dates. OID, if any, on the senior notes will be computed by taking into account the anticipated rate of prepayments assumed in pricing the senior notes, which will be % ABS, a prepayment model which assumes a constant percentage of the original number of leases in a pool prepay each month. The effect of this method is to increase the rate at which a senior noteholder includes OID in income to take into account prepayments on the leases at a rate that exceeds the anticipated rate of prepayments, and to decrease, but not below zero, for any period the rate at which a senior noteholder includes OID in income to take into account prepayments on the leases at a rate that is slower than the anticipated rate of prepayments. Although OID will be reported to senior noteholders based on the anticipated rate of prepayments, no representation is made to senior noteholders that leases will be prepaid at that rate or at any other rate. A holder of a senior note that acquires the senior note for an amount that exceeds its stated redemption price will not include any OID in gross income. A subsequent holder who purchases a senior note for an amount that exceeds its adjusted issue price will be entitled, as will an initial holder who pays more than a senior note s issue price, to reduce the amount of OID included in income in each period by the amount of OID multiplied by a fraction, whose numerator is: the purchaser s adjusted basis in the senior note immediately after purchase of that senior note, minus the adjusted issue price of the senior note; and whose denominator is: all amounts remaining to be paid on the senior note after the purchase date, except qualified stated interest, minus the adjusted issue price of the senior note. Market Discount. The senior notes, whether or not issued with OID, will be subject to the market discount rules of Section 1276 of the Code. In general, these rules provide that if the senior note owner purchases a senior note at a market discount that is, discount from its stated redemption price at maturity or, if the senior notes were issued with OID, its original issue price plus any accrued original issue discount, that exceeds a de minimis amount specified in the Code and thereafter, if the senior note owner recognizes gain upon a disposition or if he receives payments of principal, the senior note owner s income from the senior notes will be taxed as ordinary interest income for the lesser amount of: the gain or principal payment; or the accrued market discount. Table of Contents Generally, market discount may be accrued either on a ratable or a constant yield method, taking into account the Prepayment Assumption. Limitations imposed by the Code intended to match deductions with the taxation of income may defer deductions for interest on indebtedness incurred or continued, or short-sale expenses incurred, to purchase or carry a senior note with accrued market discount. A senior note owner may elect to include market discount in gross income as it accrues and, if the senior note owner makes that election, is exempt from this rule. Any market discount election will apply to all debt instruments acquired by the taxpayer on or after the first day of the first taxable year to which that election applies. Total Accrual Election. A senior note owner may elect to include in gross income all interest that accrues on a senior note using the constant-yield method described above under Original Issue Discount, with modifications described below. For purposes of this election, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium described below under Amortizable Bond Premium or acquisition premium. This election will generally apply only to the senior note for which it is made and may not be revoked without the consent of the IRS. Senior note owners should consult their own tax advisors as to the effect in their circumstances of making this election. Amortizable Bond Premium. In general, if a senior note owner purchases a senior note at a premium that is, an amount in excess of the amount payable upon the maturity of the senior note the senior note owner will be considered to have purchased the senior note with amortizable bond premium equal to the amount of the excess. That senior note owner may elect to amortize the bond premium as an offset to interest income and not as a separate deduction item as it accrues under a constant-yield method over the remaining term of the senior note. The senior note owner s tax basis in the senior note will be reduced by the amount of the amortized bond premium. Any amortization election: shall apply to all debt instruments, except instruments the interest on which is excludible from gross income, held by the senior note owner at the beginning of the first taxable year for which the election applies or thereafter acquired; and is irrevocable without the consent of the IRS. Bond premium on a senior note held by a senior note owner who does not elect to amortize the premium will decrease the gain or increase the loss otherwise recognized on the disposition of the senior note. Disposition of Senior Notes. A senior note owner s adjusted tax basis in a senior note will be its cost, increased by the amount of any OID, market discount, acquisition discount and gain previously included in income with respect to the senior note, and reduced by the amount of any payment on the senior note that is not qualified stated interest and the amount of bond premium previously amortized with respect to the senior note. A senior note owner will generally recognize gain or loss on the sale or retirement of a senior note equal to the difference between the amount realized on the sale or retirement and the tax basis of the senior note. That gain or loss will be capital gain or loss, except to the extent attributable to accrued but unpaid interest or as described above under Market Discount, and will be long-term capital gain or loss if the senior note was held for more than one year. Waivers and Amendments The indenture trustee permits the senior noteholders to waive an event of default under the indenture in some circumstances upon a vote of the requisite percentage of senior noteholders. This waiver, if it were to continue for a period that exceeds two years and any additional period Table of Contents during which the senior noteholders conduct good faith negotiations, or certain amendments to the terms of the senior notes, would be treated for federal income tax purposes as a constructive exchange by a senior noteholder of the senior notes for new notes, upon which gain or loss would be recognized. See Description of the Senior Notes Indenture for a description of the events of default under the indenture. Tax Consequences to Foreign Investors The following information describes the U.S. federal income tax treatment of investors that are not U.S. persons, which are any persons except: citizens or residents of the United States; corporations, partnerships or other entities treated as corporations or partnerships for United States federal income tax purposes organized in or under the laws of the United States, any state or the District of Columbia, unless, in the case of a partnership or entity treated as a partnership, Treasury regulations provide otherwise; estates whose income is includible in gross income for U.S. federal income tax purposes, regardless of its source; or trusts if a U.S. court is able to exercise primary supervision over the administration of the trusts and one or more U.S. persons has authority to control all substantial decisions of the trust. Interest paid or accrued to a non-U.S. person that is not effectively connected with the conduct of a trade or business within the United States by the non-U.S. person generally (1) will be considered portfolio interest and (2) will not be subject to U.S. federal income tax and withholding tax, as long as the non-U.S. person: is not actually or constructively a 10 percent shareholder of the issuer or a controlled foreign corporation with respect to which the issuer is a related person within the meaning of the Code; and provides an appropriate statement, signed under penalties of perjury, certifying that the beneficial owner of a senior note is a non-U.S. person and providing that non-U.S. person s name and address. If the information provided in this statement changes, the non-U.S. person must so inform the indenture trustee within 30 days of the change. The statement generally must be provided in the year a payment occurs or in either of the two preceding years. If the interest were not portfolio interest, then it would be subject to U.S. federal income and withholding tax at a rate of 30 percent unless reduced or eliminated under an applicable income tax treaty. Any capital gain realized on the sale or other taxable disposition of a senior note by a non-U.S. person will be exempt from U.S. federal income and withholding tax, only if: the gain is not effectively connected with the conduct of a trade or business in the United States by the non-U.S. person; and in the case of an individual non-U.S. person, the non-U.S. person is not present in the United States for 183 days or more in the taxable year and several other requirements are met. If the interest, gain or income on a senior note held by a non-U.S. person is effectively connected with the conduct of a trade or business in the United States by the non-U.S. person, the beneficial owner of a senior note, although exempt from the withholding tax previously discussed if a duly executed Form 4224 is furnished, generally will be subject to U.S. federal income tax on the interest, gain or income at regular federal income tax rates. In addition, if the Table of Contents non-U.S. person is a foreign corporation, it may be subject to a branch profits tax under the Code equal to 30 percent of its effectively connected earnings and profits for the taxable year, as adjusted for specified items, unless it qualified for a lower rate under an applicable tax treaty. Recent Treasury regulations could affect the procedures to be followed by a non-U.S. person in complying with the United States federal withholding, backup withholding, and information reporting rules. The regulations will generally be effective for payments made after December 31, 2001. Prospective investors are advised to consult their own tax advisors regarding the effect, if any, of the tax regulations on the purchase, ownership and disposition of the senior notes. MATERIAL STATE INCOME TAX CONSEQUENCES Because of the variation in each state s income tax laws, it is impossible to predict tax consequences to senior note owners in all states. Described below is a summary of Michigan and Delaware state income tax consequences of the purchase, ownership and disposition of the senior notes. This discussion is based upon current law, administrative rulings, judicial decisions and other applicable authorities in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. There can be no assurance that state income tax authorities in these states will not challenge the conclusions reached in this prospectus, and no ruling from state income tax authorities has been or will be sought on any of the issues discussed below. Senior note owners are urged to consult their own tax advisors concerning state tax consequences arising out of the purchase, ownership and disposition of senior notes. Michigan. In general, state tax laws conform to federal income tax principles, and partnerships, grantor trusts and mere security devices are not subject to tax at the entity level. The State of Michigan, however, imposes a single business tax on corporations, partnerships and other entities doing business in Michigan. Because the administrative agent is headquartered in Michigan, tax authorities in Michigan may attempt to assert that each of the titling companies, the transferor or the issuer is subject to an entity level tax. Tax authorities of Michigan have issued a bulletin stating that Michigan will follow the federal entity classification rules, in which case, none of the titling companies, the transferror or the issuer will be subject to the single business tax at the entity level. However, the bulletin is not a legally binding authority in Michigan and counsel to Ford Credit cannot affirmatively opine that none of these entities will be subject to the Michigan single business tax at the entity level. While counsel to Ford Credit believes that the laws of Michigan support the position taken by the tax authorities in the bulletin, the position set forth in the bulletin may change or may be found to be inapplicable to the titling companies, the transferor or the issuer. Assuming that the senior notes will be treated as debt for federal income tax purposes, in the opinion of Hurley D. Smith, Esq., Secretary and Corporate Counsel of Ford Credit: the senior notes will be treated as debt for Michigan income tax and single business tax purposes; and senior note owners not otherwise subject to taxation in Michigan would not become subject to taxation in Michigan solely because of a senior note owner s ownership of a senior note. Assuming further that the lease trust certificates except the lease trust certificates retained by the transferor will be treated as debt for federal income tax purposes and that none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation for federal income tax purposes, in the opinion of Hurley D. Smith, Esq., none of the titling companies, the transferor or the issuer should be subject to Michigan income tax and single business tax at the entity level. Table of Contents Delaware. The transferor has been organized as a Delaware business trust. In the opinion of Skadden, Arps, Slate, Meagher Flom LLP, special tax counsel, assuming that the senior notes are treated as debt for federal income tax purposes, the senior notes will be treated as debt for Delaware state income tax purposes. Assuming further that none of the titling companies, the transferor or the issuer will be classified as an association, or publicly traded partnership, taxable as a corporation for federal income tax purposes, none of them will be subject to Delaware state income tax at the entity level. Further, in the opinion of the special tax counsel to Ford Credit, senior note owners not otherwise subject to taxation in Delaware would not become subject to taxation in Delaware solely because of a senior note owner s ownership of a senior note. * * * The federal and state tax discussions described above: are included for general information only; do not purport to address the applicability of state tax laws except the treatment of the trusts and the senior note owners under the laws of Michigan and Delaware; and may not be applicable depending upon a senior note owner s particular tax situation. Prospective purchasers should consult their tax advisors with respect to the tax consequences to them of the purchase, ownership and disposition of senior notes, including the tax consequences under state, local, foreign and other tax laws and the possible effects of changes in federal or other tax laws. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended, and the Code impose requirements on Plans and on persons who are fiduciaries of Plans. In accordance with ERISA s general fiduciary standards, before investing in securities, a Plan fiduciary should determine, among other factors, whether the investment: is permitted under the governing Plan; is appropriate for the Plan in view of its overall investment policy and the composition and diversification of its portfolio; and is prudent considering the factors discussed in this prospectus. ERISA and the Code prohibit some transactions involving assets of a Plan and persons who are parties in interest under ERISA or disqualified persons under the Code. Prohibited transactions may generate excise taxes and other liabilities. A fiduciary of any Plan should carefully review with its legal and other advisors whether the purchase or holding of any senior notes of the issuer could give rise to a transaction prohibited or otherwise impermissible under ERISA or the Code. Prohibited Transaction Considerations Whether or not an investment in the senior notes will give rise to a transaction prohibited or otherwise impermissible under ERISA or the Code will depend on the structure of the issuer. Transactions involving the issuer might be deemed to constitute prohibited transactions under ERISA and the Code if assets of the issuer were deemed to be assets of a Plan investing in securities issued by the issuer. Under a regulation, 29 C.F.R. Section 2510.3-101, issued by the United States Department of Labor referred to in this section as plan assets regulations the assets of the issuer would be treated as assets of a Plan for purposes of Table of Contents ERISA and the Code if the Plan acquires an equity interest in the issuer and none of the exceptions contained in the plan assets regulation is applicable. An equity interest is defined under the plan assets regulation as an interest other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Under the plan assets regulation, if a Plan invests in an equity interest of an entity that is neither a publicly offered security nor a security issued by an investment company registered under the Investment Company Act of 1940, the Plan s assets are deemed to include both the equity interest itself and an undivided interest in each of the entity s underlying assets, unless it is established that the entity is an operating company or that equity participation by Benefit Plan Investors is not significant. Equity participation in an entity by Benefit Plan Investors is significant on any date if immediately after the most recent acquisition of any equity interest in the entity, 25% or more of the value of any class of equity interest in the entity is held by Benefit Plan Investors. The purchase of senior notes by a Plan may give rise to potential prohibited transactions, and all prospective investors should review the discussion in this prospectus with their legal advisors. Investment in Senior Notes The transferor believes that the senior notes of the issuer should be treated as indebtedness without substantial equity features for purposes of the plan assets regulation. However, regardless of whether the senior notes of the issuer are treated as an equity interest for the plan assets regulation purposes, the acquisition or holding of the senior notes by or on behalf of a Plan could be considered to give rise to a prohibited transaction if the issuer, the trustee of the issuer, the trustee of the transferor, the indenture trustee, the FCTT trustee, the FCMTT trustees, the FCAL administrator, the FCALM administrator, any holder of the lease trust certificates of the issuer or any of their respective affiliates, is or becomes a party in interest or a disqualified person with respect to that Plan. In those circumstances, some exemptions from the prohibited transaction rules could be applicable depending on the type and circumstances of the Plan fiduciary making the decision to acquire a senior note. There are five class exemptions issued by the Department of Labor that could apply in the event of a prohibited transaction. These Department of Labor Prohibited Transaction Class Exemptions apply to: plan asset transactions determined by independent qualified professional asset managers (PTE 84-14); certain transactions involving bank collective investment funds (PTE 91-38); certain transactions involving insurance company pooled separate accounts (PTE 90-1); certain transactions involving insurance company general accounts (PTE 95-60); and plan asset transactions determined by in-house asset manager (PTE 96-23). It should be noted, however, that even if the conditions specified in one or more of these exemptions are met, the scope of relief provided by these exemptions may not necessarily cover all acts that might be construed as prohibited transactions. Special Considerations Applicable to Insurance Company General Accounts Moreover, based on the reasoning of the United States Supreme Court in John Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company s general account may be deemed to include assets of the Plans investing in the general account, such as through the purchase of an annuity contract, and the insurance company might be Table of Contents treated as a party in interest with respect to a Plan by virtue of that investment. Any purchaser that is an insurance company using the assets of an insurance company general account should note that the Small Business Job Protection Act of 1996 added new Section 401(c) of ERISA relating to the status of the assets of insurance company general accounts under ERISA and Section 4975 of the Code. Under Section 401(c), the Department of Labor issued final regulations effective January 5, 2000 with respect to insurance policies issued on or before December 31, 1998 that are supported by an insurer s general account. As a result of these regulations, assets of an insurance company general account will not be treated as plan assets for purposes of the fiduciary responsibility provisions of ERISA and Section 4975 of the Code to the extent the assets relate to contracts issued to employee benefit plans on or before December 31, 1998 and the insurer satisfies various conditions. Section 401(c) also provides that, except in the case of avoidance of these final regulations and actions brought by the Secretary of Labor relating to breaches of fiduciary duties that also constitute breaches of state or federal criminal law, until the date that is 18 months after these final regulations issued by the Department of Labor become final, no liability under the fiduciary responsibility and prohibited transaction provisions of ERISA and Section 4975 of the Code may result on the basis of a claim that the assets of the general account of an insurance company constitute the plan assets of any Plan. The plan asset status of insurance company separate accounts is unaffected by new Section 401(c) of ERISA, and separate account assets continue to be treated as the plan assets of any Plan invested in a separate account. Plans Not Subject to ERISA or the Code Some employee benefit plans, such as governmental plans and some church plans, each of which is defined in ERISA, are not subject to the prohibited transaction provisions of ERISA and Section 4975 of the Code. Accordingly, assets of those plans may, subject to the provisions of any other applicable federal and state law, be invested in securities of the issuer without regard to the factors described in this prospectus. It should be noted, however, that any of those plans that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction rules provided in Section 503 of the Code. General Investment Considerations Prospective investors who are Benefit Plan Investors should consult with their legal advisors concerning the impact of ERISA and the Code and the potential consequences of making an investment in any securities of the issuer with respect to those investors specific circumstances. Moreover, each Plan fiduciary should take into account, among other considerations: whether the fiduciary has the authority to make the investment; the composition of the Plan s portfolio relating to diversification by type of asset; the Plan s funding objectives; the tax effects of the investment; and whether under the general fiduciary standards of investment prudence and diversification an investment in any securities of the issuer is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan s investment portfolio. The closing of the sale of the senior notes is conditioned on the closing of the issuance of the subordinated notes and the issuance and sale of the lease trust certificates. The indenture trustee may, from time to time, invest the funds in the collection account, the payahead account, the cash collateral account, the payment account and the lease trust distribution account in Permitted Investments acquired from the underwriters. In the ordinary course of business, the underwriters and their affiliates have engaged and may engage in investment banking and commercial banking transactions with Ford Motor Company and its affiliates. The transferor and Ford Credit have agreed to jointly and severally indemnify the underwriters against some of their liabilities including civil liabilities under the Securities Act of Table of Contents 1933, as amended or to contribute to payments which the underwriters may be required to make relating to those liabilities. LEGAL MATTERS Certain legal matters relating to the senior notes will be passed upon for the issuer and Ford Credit by Hurley D. Smith, Esq., Secretary Corporate Counsel of Ford Credit, and for the underwriters by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York. Certain federal income tax and other matters will be passed upon for the issuer by Skadden, Arps, Slate, Meagher Flom LLP. Certain Michigan income tax and other matters will be passed upon for the issuer by Mr. Hurley D. Smith, Esq., Secretary Corporate Counsel of Ford Credit. Mr. Smith is a full-time employee of Ford Credit and he owns and holds options to purchase shares of Common Stock of Ford Motor Company. Skadden, Arps, Slate, Meagher Flom LLP has from time to time represented Ford Motor Company and Ford Credit in connection with specified transactions.
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+LEGAL MATTERS The validity of the securities offered hereby will be passed on for Westlinks by Gowling Lafleur Henderson LLP of Calgary, Alberta. Members of Gowling Lafleur Henderson LLP own 480 shares of common stock of Westlinks. Legal matters in connection with this offering will be passed on for Prima Terra Capital, Division of Merit Capital Associates, Inc., by Reed Smith LLP, Newark, New Jersey, and for Spencer Edwards, Inc. by the Law Office of Gary A. Agron of Englewood, Colorado.
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+++ b/parsed_sections/legal_matters/2000/CIK0001117740_tbc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the preferred securities offered hereby, and certain matters relating to United States federal income tax consequences of the offering, are being passed upon for the Corporation and the Trust by Haskell Slaughter & Young, L.L.C., Birmingham, Alabama. As of the date of this prospectus, representatives of Haskell, Slaughter & Young, L.L.C. owned shares of Corporation common stock. Bingham Dana LLP, Hartford, Connecticut, will pass upon certain matters relating to Connecticut law for the Trust. Certain legal matters will be passed upon for the underwriters by Ritchie & Rediker, L.L.C., Birmingham, Alabama. As of the date of this prospectus, representatives of Ritchie & Rediker, L.L.C. owed shares of Corporation common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001118148_american_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001118148_american_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4e8b09ff27161584850d4f619f3af81694b92a53
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001118148_american_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters with respect to the common stock being offered by this prospectus will be passed on for APCapital by Dykema Gossett PLLC, Detroit, Michigan. The underwriters are represented by Sidley & Austin, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001119307_newpower_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001119307_newpower_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..acd9a80e421ead03b61cb2e708fa8a09dc0d7bce
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001119307_newpower_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this prospectus will be passed on for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters relating to the common stock offered by this prospectus will be passed on for the underwriters by Andrews & Kurth L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001119691_adexa-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001119691_adexa-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d2aaaafdd22cf15fef34b054a89fe5aeec17a1de
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001119691_adexa-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California will pass upon the validity of the common stock in this offering for Adexa. Simpson Thacher & Bartlett, New York, New York, will pass upon legal matters concerning this offering for the underwriters. As of the date of this prospectus, some members and employees of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP beneficially owned an aggregate of 14,518 shares of our stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001119866_epoch_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001119866_epoch_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..41aa61b8fcdd14c4c98aad34b1cd10ac6c21bc8d
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001119866_epoch_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Optical Equipment NETS, will be passed upon for Epoch Securities, Inc., as the initial depositor and as the representative of the several underwriters, by Brown & Wood LLP, New York, New York. Brown & Wood LLP, New York, New York, as special U.S. tax counsel to the Optical Equipment NETS Trust, also will render an opinion regarding the material federal income tax consequences relating to the Optical Equipment NETS.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001120122_brience_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001120122_brience_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9810db5e601db5a7e2ae34d4ec98923fcb81d671
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001120122_brience_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for us by Hogan & Hartson L.L.P., Washington, D.C. Various legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001120295_ixia_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001120295_ixia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ed5ee4c18aaac29817d3ec2dc866c2a67375b7cc
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001120295_ixia_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Bryan Cave LLP, Santa Monica, California, will pass upon the validity of our common stock and certain other legal matters related to this offering. Ronald W. Buckly, who is of counsel to Bryan Cave LLP, is our Corporate Secretary and beneficially owns 898,000 shares of our outstanding common stock, 84,375 of which are subject to vesting requirements related to his continuing to serve as our Corporate Secretary. Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, will pass upon certain legal matters in connection with this offering for the underwriters. In addition, several members and employees of Bryan Cave LLP have expressed an interest in purchasing a total of approximately 6,500 shares of our common stock in this offering through our directed share program.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001120344_procurenet_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001120344_procurenet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..77664a88a80fabc2ff546188e2b1da8d6d00906e
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001120344_procurenet_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Debevoise & Plimpton, New York, New York. Certain legal matters will be passed upon for the underwriters by Paul, Hastings, Janofsky & Walker LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001122062_telect-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001122062_telect-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..68fcb99e4d8ea80b6514fb10c8a60895fcf2b150
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001122062_telect-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby and certain other legal matters in connection with the offering will be passed upon for Telect by Paine, Hamblen, Coffin, Brooke & Miller LLP, Spokane, Washington. Certain additional legal matters in connection with the offering will be passed upon for Telect by Gray Cary Ware & Freidenrich LLP, Seattle, Washington, and certain legal matters in connection with the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Kirkland, Washington. As of the date of this prospectus, partners of Paine, Hamblen, Coffin, Brooke & Miller LLP beneficially own an aggregate of 7,760 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001122795_kroll_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001122795_kroll_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8e00dde6512ed783577c5894ff0bf62cfc7d6a33
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001122795_kroll_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the KRCS common stock covered by this prospectus will be passed upon for us by Kramer Levin Naftalis & Frankel LLP, in New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001122832_combimatri_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001122832_combimatri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cd7d79f5834ba39a9f6d22a8c690d9f589d78161
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001122832_combimatri_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Various legal matters with respect to the validity of the common stock offered by this prospectus will be passed upon for us by Bracewell & Patterson, L.L.P., Houston, Texas. Some of the legal matters relating to our intellectual property will be passed upon by Howrey, Simon, Arnold & White LLP., Menlo Park, California. Other legal matters relating to our intellectual property will be passed upon by Jeffrey B. Oster, our Senior Vice President of Intellectual Property and Associate General Counsel. Mr. Oster owns unvested options to purchase 160,000 shares of our common stock at a purchase price of $9.00 per share. Various legal matters relating to the offering will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001123333_specialty_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001123333_specialty_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a77953f1fdd761b8f8d999186a9ec971d8b08642
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001123333_specialty_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Specialty by Brobeck, Phleger & Harrison LLP, Los Angeles, California. Certain legal matters will be passed upon for the underwriters by Debevoise & Plimpton, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001124073_mcms-inc_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001124073_mcms-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..378e813c58cdb091cf565df71ca77dec05befbe4
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001124073_mcms-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Kirkland & Ellis, New York, New York. Some partners of Kirkland & Ellis are partners in Randolph Street Partners, which owns 58,824 shares of Class A common stock. Legal matters will be passed upon for the underwriters by Willkie Farr & Gallagher, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001124135_centurion_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001124135_centurion_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..45a785501e36989af64495c70551d8fb3a86d60b
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001124135_centurion_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Kirkland & Ellis, New York, New York. Certain legal matters will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001124161_interconti_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001124161_interconti_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..17115efb818bcd796340fe67529e91a886c5efe3
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001124161_interconti_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Baker & McKenzie, Miami, Florida, will pass upon the validity of the issuance of the common shares that we are offering by this prospectus. Clifford Chance Rogers & Wells LLP, New York, New York will pass upon certain legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CIK0001129985_direct_legal_matters.txt b/parsed_sections/legal_matters/2000/CIK0001129985_direct_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6534da328c212a83cf34a7dae5f5729957d6d4b8
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CIK0001129985_direct_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Quarles Brady Streich Lang LLP, Phoenix, Arizona. Certain legal matters relating to the offering will be passed upon for the underwriters by Bryan Cave LLP, Phoenix, Arizona.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/CRL_charles_legal_matters.txt b/parsed_sections/legal_matters/2000/CRL_charles_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8cae423bd2c2341bfaea82d8a42a170f8ef58744
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/CRL_charles_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock offered hereby will be passed upon for us by Ropes & Gray, Boston, Massachusetts. Certain legal matters will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York. Davis Polk & Wardwell has also represented us from time to time.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/EXEEL_expand_legal_matters.txt b/parsed_sections/legal_matters/2000/EXEEL_expand_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3b2b9c3f0b194cfbceac57f041d0426e11760ed7
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/EXEEL_expand_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the common stock offered hereby has been passed upon for Chesapeake by Winstead Sechrest & Minick P.C., Dallas, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/IBN_icici_legal_matters.txt b/parsed_sections/legal_matters/2000/IBN_icici_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d5829eede3d3f57f6129d3b98ede2e1ff84302cb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/IBN_icici_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs offered by us in this prospectus will be passed upon for us by Davis Polk & Wardwell, our United States counsel, and for the underwriters by Shearman & Sterling, US counsel to the underwriters. The validity of the equity shares represented by the ADSs and certain other Indian legal matters will be passed upon by Amarchand & Mangaldas & Suresh A. Shroff & Co., our Indian counsel, and by Bhaishankar Kanga & Girdharlal, Indian counsel to the underwriters. Davis Polk & Wardwell may rely upon Amarchand & Mangaldas & Suresh A. Shroff & Co. and Shearman & Sterling may rely upon Bhaishankar Kanga & Girdharlal with respect to all matters of Indian law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/JKHY_jack_legal_matters.txt b/parsed_sections/legal_matters/2000/JKHY_jack_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6104b121469187bc94add5803f5733b36074c723
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/JKHY_jack_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed on for Jack Henry & Associates, Inc. by Shughart Thomson & Kilroy, P.C. of Kansas City, Missouri. Certain legal matters will be passed on for the underwriters by Brown & Wood LLP of New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/LPSN_liveperson_legal_matters.txt b/parsed_sections/legal_matters/2000/LPSN_liveperson_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cc552fef159997ea243462c81d3b6846b7ac2e83
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/LPSN_liveperson_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Brobeck, Phleger & Harrison LLP, New York, New York. A partner of Brobeck, Phleger & Harrison LLP is the brother of our Chief Operating Officer. Attorneys at Brobeck, Phleger & Harrison LLP have indicated an interest in purchasing an aggregate of up to 4,900 shares of common stock in this offering as part of the shares reserved by the underwriters referred to in "Underwriting--Reserved Shares." Certain legal matters in connection with the offering will be passed upon for the underwriters by Davis Polk & Wardwell.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/LXRX_lexicon_legal_matters.txt b/parsed_sections/legal_matters/2000/LXRX_lexicon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..946296d42bd80c2d84d0c7343fa830f5d6e20cdb
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/LXRX_lexicon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Andrews & Kurth L.L.P., Houston, Texas. Legal matters in connection with the offering will be passed upon for the underwriters by Cahill Gordon & Reindel, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/NYMXF_nymox_legal_matters.txt b/parsed_sections/legal_matters/2000/NYMXF_nymox_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8050d5b5930dd2ad85fdcb8b062d9ff31e4620ec
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/NYMXF_nymox_legal_matters.txt
@@ -0,0 +1 @@
+CERTAIN LEGAL MATTERS The validity of the common shares offered hereby will be passed upon for Nymox by Foley & Lardner, 3000 K Street, N.W., Washington, DC 20007. Foley & Lardner will rely as to all matters of Canadian laws on the opinion of Stikeman Elliott, 1155 Rene Levesque Blvd. W., Montreal, QC H3B 3V2. EXPERTS The financial statements of Nymox as at December 31, 1998 and 1997 for each of the years in the three year period ended December 31, 1998 included in this prospectus and in the registration statement have been audited by KPMG, independent auditors, and are included in this prospectus and in this registration statement in reliance upon such report, and upon the authority of KPMG as experts in accounting and auditing.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/PXLW_pixelworks_legal_matters.txt b/parsed_sections/legal_matters/2000/PXLW_pixelworks_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..76b5a07b93ed8e9d51f25293c7df6ef2ffe0ffe5
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/PXLW_pixelworks_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby and certain other legal matters relating to the offering are being passed upon for us by Ater Wynne LLP, Portland, Oregon. Certain legal matters relating to the offering are being passed upon for the underwriters by Brown & Wood LLP, San Francisco, California. Brown & Wood LLP may rely on Ater Wynne LLP as to matters of Oregon law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/SGMO_sangamo_legal_matters.txt b/parsed_sections/legal_matters/2000/SGMO_sangamo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a45ae2d5614d8730ca75b00d81f1eecbd3b75fd0
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/SGMO_sangamo_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Francisco, California. John W. Larson, one of our directors, is a senior partner of Brobeck, Phleger & Harrison LLP and beneficially owns an aggregate of 474,460 shares of our common stock. Latham & Watkins is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/SRPT_sarepta_legal_matters.txt b/parsed_sections/legal_matters/2000/SRPT_sarepta_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8d3b48d6931ef656be52bc9e80d31be45a225727
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/SRPT_sarepta_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Ater Wynne LLP, Portland, Oregon, our counsel. Certain legal matters will be passed upon for the underwriters by Weiss Jensen Ellis & Howard, P.C., Portland, Oregon, counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/TDY_teledyne_legal_matters.txt b/parsed_sections/legal_matters/2000/TDY_teledyne_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3d850ab2b6b9cdcbe8c1868ef0a2ed76973ea9ec
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/TDY_teledyne_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Kirkpatrick & Lockhart LLP, Pittsburgh, Pennsylvania. O'Melveny & Myers LLP, Los Angeles, California, is acting as counsel for the underwriters in connection with certain legal matters relating to the sale of the common stock offered hereby.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/TTMI_ttm_legal_matters.txt b/parsed_sections/legal_matters/2000/TTMI_ttm_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2d36d0c1ce1a5417c65195adc392692fb9644a57
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/TTMI_ttm_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock to be issued by us and sold by the selling stockholders in this offering will be passed upon for us by Karr Tuttle Campbell P.S., Seattle, Washington. Other legal matters in connection with this offering will be passed upon for us by Shearman & Sterling, Menlo Park, California. Legal matters in connection with this offering will be passed upon for the underwriters by O'Melveny & Myers LLP, San Francisco, California. As of the date of this prospectus, Shearman & Sterling beneficially owns an aggregate of 76,000 shares of our common stock through TC Circuits, L.L.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2000/UTSI_utstarcom_legal_matters.txt b/parsed_sections/legal_matters/2000/UTSI_utstarcom_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..30b46774cdf80fc26d5e3cae2153d44218d3326a
--- /dev/null
+++ b/parsed_sections/legal_matters/2000/UTSI_utstarcom_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for UTStarcom by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Carmen C. Chang, an associate at Wilson Sonsini Goodrich & Rosati, serves as our Assistant Secretary. Legal matters relating to the laws in China are being passed upon for UTStarcom by Jun He Law Offices, Beijing, China. The validity of the common stock offered by this prospectus will be passed upon for the underwriters by Shearman & Sterling, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/ATEC_alphatec_legal_matters.txt b/parsed_sections/legal_matters/2006/ATEC_alphatec_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fdce8021a887b1080e8273e9a337c23dad88186b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/ATEC_alphatec_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the validity of the issuance of the common stock offered us in this offering will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. As of the date of this prospectus, a member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. owns an aggregate of 1.25 preferred units and 15 common units in HealthpointCapital, LLC, which has a 25% ownership interest in HGP, LLC, which is the general partner of, and has a 20% profits interest in, HealthpointCapital. Upon the completion of this offering, HealthpointCapital will own 38.0% of the outstanding common stock of Alphatec Holdings, or 36.5% if the underwriters' over-allotment option is exercised in full. Certain legal matters in connection with this offering will be passed upon for the underwriters by Clifford Chance US LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000003982_allis_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000003982_allis_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f93bc907b3db418c985e6280958d88aa56f2ed54
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000003982_allis_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS" --> LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Andrews Kurth LLP, Houston, Texas, our counsel. Certain legal matters in connection with the offering will be passed upon for the underwriters by Shearman Sterling LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000033073_viskase_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000033073_viskase_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..904d39e678ef8dbf8be5d788ebeea765e6910bb8
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000033073_viskase_legal_matters.txt
@@ -0,0 +1,230 @@
+LEGAL
+ MATTERS
+
+ 
+
+ The validity of the rights and the common stock issuable upon
+ exercise of the rights will be passed upon for the Company by
+ Jenner Block LLP, Chicago, Illinois.
+
+ 
+
+ 84
+
+ 
+
+ 
+
+ EXPERTS
+
+ 
+
+ The financial statements included in this prospectus have been
+ so included in reliance on the report of Grant Thornton LLP,
+ independent registered accounting firm, given on the authority
+ of said firm as experts in auditing and accounting.
+
+ 
+
+ 85
+
+ 
+
+ 
+
+ FORWARD-LOOKING
+ STATEMENTS
+
+ 
+
+ This prospectus includes forward-looking statements. 
+ Forward-looking statements are those that do not relate solely
+ to historical fact. These statements relate to future events or
+ our future financial performance and implicate known and unknown
+ risks, uncertainties and other factors that may cause the actual
+ results, performances or levels of activity of our business or
+ our industry to be materially different from that expressed or
+ implied by any such forward-looking statements. They include,
+ but are not limited to, any statement that may predict,
+ forecast, indicate or imply future results, performance,
+ achievements or events. In some cases, you can identify
+ forward-looking statements by use of words such as
+ believe, anticipate, expect, 
+ estimate, intend, project, 
+ plan, will, would, 
+ could, predict, propose, 
+ potential, may or words or phrases of
+ similar meaning. Statements concerning our financial position,
+ business strategy and measures to implement that strategy,
+ including changes to operations, competitive strengths, goals,
+ plans, references to future success and other similar matters
+ are forward-looking statements. Forward-looking statements may
+ relate to, among other things:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ our ability to meet liquidity requirements and to fund necessary
+ capital expenditures;
+
+ 
+
+ 
+ 
+
+ 
+ the strength of demand for our products, prices for our products
+ and changes in overall demand;
+
+ 
+
+ 
+ 
+
+ 
+ assessment of market and industry conditions and changes in the
+ relative market shares of industry participants;
+
+ 
+
+ 
+ 
+
+ 
+ consumption patterns and consumer preferences;
+
+ 
+
+ 
+ 
+
+ 
+ the effects of competition;
+
+ 
+
+ 
+ 
+
+ 
+ our ability to realize operating improvements and anticipated
+ cost savings, including with respect to the planned termination
+ of certain postretirement medical and pension benefits and our
+ finishing operations restructuring;
+
+ 
+
+ 
+ 
+
+ 
+ pending or future legal proceedings and regulatory matters,
+ including but not limited to proceedings, claims or problems
+ related to environmental issues, or the impact of any adverse
+ outcome of any currently pending or future litigation on our tax
+ liabilities or the adequacy of our reserves;
+
+ 
+
+ 
+ 
+
+ 
+ general economic conditions and their effect on our business;
+
+ 
+
+ 
+ 
+
+ 
+ changes in the cost or availability of raw materials and changes
+ in other costs;
+
+ 
+
+ 
+ 
+
+ 
+ pricing pressures for our products;
+
+ 
+
+ 
+ 
+
+ 
+ the cost of and compliance with environmental laws and other
+ governmental regulations;
+
+ 
+
+ 
+ 
+
+ 
+ our results of operations for future periods;
+
+ 
+
+ 
+ 
+
+ 
+ our anticipated capital expenditures;
+
+ 
+
+ 
+ 
+
+ 
+ the timing and cost of our finishing operations restructuring;
+
+ 
+
+ 
+ 
+
+ 
+ our ability to pay, and our intentions with respect to the
+ payment of, dividends on shares of our capital stock;
+
+ 
+
+ 
+ 
+
+ 
+ our ability to protect our intellectual property; and
+
+ 
+
+ 
+ 
+
+ 
+ our strategy for the future, including opportunities that may be
+ presented to
+ and/or
+ pursued by us.
+
+ 
+
+ These forward-looking statements are not guarantees of future
+ performance. Forward-looking statements are based on
+ management s expectations that involve risks and
+ uncertainties, including, but not limited to, economic,
+ competitive, governmental and technological factors outside of
+ our control, that may cause actual results to differ materially
+ from trends, plans or expectations set forth in the
+ forward-looking statements. These risks and uncertainties may
+ include those discussed in
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000090721_pervasip_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000090721_pervasip_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d649fecc256c132d43711e0a38565122b19ea41e
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000090721_pervasip_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the issuance of the shares offered in this prospectus will be passed upon for us by Pryor Cashman Sherman & Flynn LLP, New York, New York 10022. Pryor Cashman Sherman & Flynn LLP holds options to purchase 25,000 shares of our common stock at an exercise prices ranging from $0.10 to $0.97 per share. In addition, a member of Pryor Cashman Sherman & Flynn LLP holds 208,000 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000310316_canargo_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000310316_canargo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..059235c7aedf6f75e74f11b87234ef790d0b53bb
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000310316_canargo_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Satterlee Stephens Burke & Burke LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000313395_txco_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000313395_txco_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c1fbbc2557c7350cc0dfb3e8a6991acb91e1f29c
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000313395_txco_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of common stock offered hereby will be passed upon for us by Jenkens & Gilchrist, a Professional Corporation, Austin, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000313563_graybar_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000313563_graybar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5c4c6faa4ff4017f76e2c153dfcdebd7eeb40e08
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000313563_graybar_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Matters of New York law relating to the validity of the Voting Trust Interests will be passed upon by Winston & Strawn LLP, 200 Park Avenue, New York, New York 10166, counsel for the Company and the Voting Trustees.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000353482_viragen_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000353482_viragen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..31dd8ad2eb903fc50d2f0fa274ae311799b215da
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000353482_viragen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Schneider Weinberger & Beilly LLP will pass upon the validity of the issuance of the units covered by this prospectus. Blank Rome LLP has served as counsel to the underwriter in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000713002_flow_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000713002_flow_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b02f50d714c1ccd9b99257de9004578d067057ac
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000713002_flow_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Preston Gates & Ellis LLP, Seattle, Washington, will pass upon the validity of the common stock offered hereby. Partners of Preston Gates & Ellis LLP hold an aggregate of 3,300 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000722617_medical_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000722617_medical_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3ce87418a32d7fc4e497cc6a720e1a2f4ded820b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000722617_medical_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Warrants and the shares of common stock offered hereby will be passed upon for us by Foley & Lardner LLP, San Diego, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000748015_sealy-corp_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000748015_sealy-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8fc00738baef029db260dd77cbeeddfc3c2f5817
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000748015_sealy-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered hereby and other legal matters will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. Certain legal matters relating to this offering will be passed upon for the underwriters by Latham & Watkins LLP, New York, New York. Certain partners of Simpson Thacher & Bartlett LLP and Latham & Watkins LLP, members of their respective families, related persons and others have an indirect interest, through limited partnerships that are investors in the KKR Millennium GP LLC, in less than 1% of Sealy Corporation's common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000757011_usg-corp_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000757011_usg-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9391f34b90512ec15f0363abd3b6d83ee961a091
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000757011_usg-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Jones Day, Chicago, Illinois, will render an opinion regarding whether the shares of common stock into which the rights are exercisable will be validly issued. Richards, Layton & Finger, PA, Wilmington, Delaware, will render an opinion regarding whether the rights offered in the rights offering are our binding obligations. Material U.S. federal income tax consequences of the rights offering also will be passed upon by Jones Day, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000768957_plitt_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000768957_plitt_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000768957_plitt_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000772263_nitches_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000772263_nitches_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3c32f58093337ee8a6ab974e4fc31dce43955ba6
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000772263_nitches_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares offered under the prospectus has been passed upon for Nitches, Inc. by Duane Morris LLP, San Diego, California. Attorneys of Duane Morris do not have a substantial interest in the Company as of the date of this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000775351_quest_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000775351_quest_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4f34c9427393f42bdeb48c0ebc5d734b38ceaa47
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000775351_quest_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered by this prospectus is being passed upon by Schreck Brignone, Las Vegas, Nevada.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000820067_summit_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000820067_summit_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6d410ceda6ad82de6e6c39c09b506029cf760684
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000820067_summit_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon for us by Powell Goldstein LLP, Atlanta, Georgia. Certain legal matters in connection with this offering will be passed upon for the underwriter by Alston & Bird LLP, Atlanta, Georgia.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000836937_upd_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000836937_upd_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..64dd11235ea70c3cae0d135e46ded8774d0919a8
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000836937_upd_legal_matters.txt
@@ -0,0 +1,4447 @@
+LEGAL MATTERS
+
+ 
+
+Certain legal matters have been passed upon for us
+by Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona.
+
+ 
+
+EXPERTS
+
+ 
+
+Our consolidated financial statements included in
+our Annual Report on Form l0-KSB for the fiscal years ended June 30,
+2005, 2004 and 2003 have been audited by Semple & Cooper LLP,
+independent auditors, as set forth in their report thereon included therein and
+incorporated herein by reference. Such financial statements have been
+incorporated herein by reference, in reliance upon such reports given on the
+authority of such firm as experts in accounting and auditing.
+
+ 
+
+40
+
+ 
+
+FINANCIAL STATEMENTS
+
+ 
+
+Our audited consolidated financial statements
+included in our Annual Report on Form l0-KSB for the fiscal year ended June 30,
+2005, and our unaudited consolidated financial statements included in our
+Quarterly Reports on Form l0-QSB for the quarters ended September 30,
+2005, December 31, 2005, March 31, 2006 (as amended), are
+incorporated herein by reference. 
+
+ 
+
+41
+
+ 
+
+ 
+
+ 
+
+ 
+
+5,437,214 Shares
+
+ 
+
+ 
+
+Common Stock
+
+ 
+
+ 
+
+PROSPECTUS
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+August , 2006 
+
+ 
+
+ 
+
+Dealer Prospectus Delivery Obligation
+
+ 
+
+Until ,
+2006, all dealers that effect transactions in these securities, whether or not
+participating in this offering, may be required to deliver a prospectus. This
+is in addition to the dealers obligation to deliver a prospectus when acting
+as underwriters and with respect to their unsold allotments or subscriptions.
+
+ 
+
+ 
+
+ 
+
+PART II TO FORM S-2
+
+INFORMATION NOT REQUIRED IN THE PROSPECTUS
+
+ 
+
+ITEM
+13. OTHER EXPENSES OF
+ISSUANCE AND DISTRIBUTION
+
+ 
+
+The
+following table sets forth our estimated costs and expenses in connection with
+the offering other than commissions and discounts, if any.
+
+ 
+
+ 
+ 
+ SEC Registration Fee
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 353.00
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Legal Fees and Expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 7,500.00
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accounting Fees and Expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 3,000.00
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Printing and Engraving Expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 5,000.00
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Miscellaneous
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 5,000.00
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Total
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 20,853.00
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ITEM
+14. INDEMNIFICATION OF DIRECTORS
+AND OFFICERS
+
+ 
+
+Articles
+11 and 12 of our Articles of Incorporation provide as follows:
+
+ 
+
+1. To the fullest extent permitted by
+the laws of the State of Nevada, as the same exist or may hereinafter be
+amended, no director or officer of the Corporation shall be personally liable
+to the Corporation or its shareholders for monetary damages for breach of
+fiduciary duty as a director or officer, provided, however, that nothing
+contained herein shall eliminate or limit the liability of a director or
+officer of the Corporation to the extent provided by applicable
+laws(i) for acts or omissions which involve intentional misconduct, fraud
+or knowing violation of law or (ii) for authorizing the payment of
+dividends in violation of Nevada Revised Statutes Section 78.300. The
+limitation of liability provided herein shall continue after a director or
+officer has ceased to occupy such position as to acts or omissions occurring
+during such director s or officer s term or terms of office. No repeal,
+amendment or modification of this Article, whether direct or indirect, shall
+eliminate or reduce its effect with respect to any act or omission of a
+director or officer of the Corporation occurring prior to such repeal,
+amendment or modification.
+
+ 
+
+2. The Corporation shall indemnify,
+defend and hold harmless any person who incurs expenses, claims, damages or
+liability by reason of the fact that he or she is, or was, an officer,
+director, employee or agent of the Corporation, to the fullest extent allowed
+under Nevada law.
+
+ 
+
+ITEM
+15. RECENT SALES OF
+UNREGISTERED SECURITIES
+
+ 
+
+Set
+forth below is information regarding securities sold by us since January 1,
+2002 which were not registered under the Securities Act.
+
+ 
+
+In March 2003, the Company issued 47,797 shares of common stock to
+certain resellers of the Company s products pursuant to an incentive sales
+program. The program established the grant of common stock based on the
+achievement of certain sales levels during the period September 1, 2002 to
+December 31, 2002. The Company did not receive any funds in consideration for
+the issuance of the common stock. We issued these shares in a
+transaction exempt from registration under Section 4(2) of the Securities
+Act.
+
+ 
+
+In August 2003, the Company completed a private placement of 1,303,000
+shares of common stock at a price of $0.42 per share. The Company received net
+proceeds of $519,897 and has used those funds primarily for additional sales
+and engineering resources. We issued these shares in a transaction
+exempt from registration under Section 4(2) of the Securities Act.
+
+ 
+
+II-1
+
+ 
+
+In November 2003, the Company completed a private placement of
+1,433,999 shares of common stock at a price of $0.75 per share. The Company
+received net proceeds of $967,950 and is using those funds primarily for
+additional sales and engineering resources. We issued these shares in a
+transaction exempt from registration under Section 4(2) of the Securities
+Act.
+
+ 
+
+In November 2003 the Company issued 143,400 warrants to brokers in
+connection with a private placement of common stock of the Company. The
+exercise price of the warrants is $.90 per share and is exercisable through
+November 2006. We issued these warrants in a transaction exempt from
+registration under Section 4(2) of the Securities Act.
+
+ 
+
+In
+March 2004, the Company consummated a private placement pursuant to which the
+Company issued a $2,000,000 principal amount secured convertible term note due
+March 22, 2007, together with a common stock purchase warrant entitling the holder
+to purchase 280,000 shares of common stock. The note and the warrant were sold
+to a single accredited investor , as such term is defined in the rules
+promulgated under the Securities Act, Laurus Master Fund, Ltd., for a purchase
+price of $2,000,000. The principal and unpaid interest on the note are
+convertible into shares of the Company s common stock at an original fixed
+conversion price of $1.17 per share, which was based on the weighted average
+price of the Company s common stock for the twenty trading days immediately
+prior to the issuance of the note. Such conversion price is subject to
+anti-dilution adjustments based on the occurrence of certain corporate events. The
+note provides for monthly payments of interest at the prime rate, which is subject
+to reduction if the market price of our common stock exceeds certain designated
+thresholds. Under the terms of the note, if the average price of the stock for
+the five trading days preceding a scheduled payment is 10% greater than the
+fixed conversion price, the scheduled payment is paid by the conversion of
+common stock. If the scheduled payment is not made with common stock, the
+payment is made with cash. In June 2005, the Company amended the conversion
+price of the note. The conversion price on the first $300,000 of the note was
+reduced to $0.50 per share and the conversion price on the remainder of the
+note was reduced to $0.65 per share. The warrant entitles the holder thereof to
+purchase, at any time through March 22, 2011, 200,000 shares of the Company s
+common stock at a price of $1.29 per share; 40,000 shares of the Company s
+common stock at a price of $1.35 per share; and 40,000 shares of the Company s
+common stock at a price of $1.40 per share. We issued the note and the warrant
+in a transaction exempt from registration under Section 4(2) of the
+Securities Act. 
+
+ 
+
+The
+private placement of the note and the warrant with Laurus in March 2004 was
+facilitated by The Oberon Group, LLC (Oberon) in consideration for which Oberon
+was paid an advisory fee of $150,000, and granted a warrant to purchase, at any
+time through March 22, 2007, 136,364 shares of the Company s common stock at a
+per share price of $1.10. We issued the warrant in a transaction exempt from
+registration under Section 4(2) of the Securities Act.
+
+ 
+
+In
+April 2004, the Company entered into a subordinated note agreement with a
+shareholder and existing debt holder. Under the terms of the agreement, an
+existing term note was refinanced as a five year term note with monthly
+principal and interest payments at 15%. In consideration for agreeing to
+subordinate repayment of the note to the Laurus note, we issued 25,000 shares
+of restricted common stock to the holder of the subordinated note. We issued
+these shares in a transaction exempt from registration under Section 4(2)
+of the Securities Act.
+
+ 
+
+In
+June 2005, we entered into a security agreement with Laurus that provided that
+we may borrow from time to time revolving loans up to $1,500,000 subject to a
+borrowing base calculation based on our eligible accounts receivable. Borrowings
+under the revolving facility, evidenced by notes, accrue interest at the prime
+rate payable monthly. Pursuant to the terms of the Agreement, Laurus shall have
+the right at any time until the maturity date, or during an event of default,
+to convert all or any portion of the outstanding notes into fully paid
+restricted shares of our common stock at a fixed conversion price of $0.65. The
+principal amount of all outstanding loans together with any accrued and unpaid
+interest is due as of June 23, 2008. We also issued Laurus a common stock
+purchase warrant entitling the holder to purchase 210,000 shares of common
+stock, at any time through June 23, 2012, as follows: 150,000 shares of at a price of $0.72 per
+share; 30,000 shares at a price of $0.75 per share; and 30,000 shares at a
+price of $0.78 per share. We issued the notes and the warrant in a transaction
+exempt from registration under Section 4(2) of the Securities Act.
+
+ 
+
+The
+private placement of the credit facility and the warrant with Laurus in June
+2005 was facilitated by Oberon in consideration for which we agreed to pay
+Oberon an advisory fee of $112,500, and granted Oberon a 
+
+ 
+
+II-2
+
+ 
+
+warrant
+to purchase, at any time through June 23, 2008, 173,077 shares of the Company s
+common stock at a per share price of $0.65. In January 2006, Oberon agreed to
+accept one-half of its advisory fee, or $56,250, in shares of our common stock,
+at a per share price determined by the average price at which our common stock
+trades in the five days following the date on which this registration statement
+is declared effective. We issued the warrant, and will issue the shares, in
+transactions exempt from registration under Section 4(2) of the Securities
+Act.
+
+ 
+
+In January 2006, we entered into a security and purchase
+agreement with Laurus to refinance our obligations to Laurus under our prior
+arrangements, and to obtain an additional $1 million in new financing. Under
+the terms of the agreement, we issued a $2 million convertible term note and a $1.5 million non-convertible revolving
+note. The term note was fully drawn, with $1,058,310 of the proceeds of the
+term note repaid in full the March 22, 2004 Laurus note. Under the revolving
+facility, we may borrow from time to time revolving loans up to $1,500,000
+subject to a borrowing base calculation based on our eligible accounts
+receivable and eligible inventory. Borrowings under the notes accrue interest
+at the prime rate plus 2%, with a 7.25% minimum interest rate, payable monthly.
+Pursuant to the terms of the Agreement, Laurus shall have the right to convert
+all or any portion of the outstanding notes into fully paid restricted shares
+of the Company s common stock at a fixed conversion price of $0.65 if
+the average market price of such stock for the five (5) days preceding the
+payment is 10% above the initial fixed conversion price of $0.65 per share. The revolving note matures on January 3, 2008
+and the term note matures on January 3, 2009. We also issued Laurus a common
+stock purchase warrant entitling the holder to purchase 140,000 shares of
+common stock, at any time through January 3, 2013, at a price of $0.65 per
+share. We issued the notes and the warrant in a transaction exempt from
+registration under Section 4(2) of the Securities Act.
+
+ 
+
+The private placement of the notes and the warrant with Laurus in
+January 2006 was facilitated by Oberon in consideration for which we agreed to
+pay Oberon an advisory fee of $70,627, payable in shares of our common stock,
+at a per share price determined by the average price at which our common stock
+trades in the five days following the date on which this registration statement
+is declared effective. We also granted Oberon a warrant to purchase, at any
+time through January 3, 2009, 108,657 shares of the Company s common stock at a
+per share price of $0.65. We issued the warrant, and will issue the
+shares, in transactions exempt from registration under Section 4(2) of the
+Securities Act.
+
+ 
+
+No
+underwriters were involved in the foregoing sales of securities. The securities
+described in the foregoing paragraphs were issued in reliance upon the
+exemption from the registration requirements of the Securities Act under
+Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
+thereunder relating to sales by an issuer not involving any public offering. The
+purchasers of our securities represented to us in connection with their
+purchase that they were accredited investors and were acquiring the shares for
+investment and not distribution, that they could bear the risks of the
+investment and could hold the securities for an indefinite period of time. The
+purchasers received written disclosures that the securities had not been
+registered under the Securities Act and that any resale must be made pursuant
+to an effective registration statement or an available exemption from such
+registration requirement. We did not engage in any general solicitation or
+advertising in connection with the sales. Unless otherwise indicated, the
+proceeds from the private offering were used for general working capital needs.
+
+ 
+
+ITEM
+16. EXHIBITS AND FINANCIAL
+STATEMENT SCHEDULES
+
+ 
+
+ 
+ 
+ Exhibit
+
+ Number 
+
+ 
+ 
+ 
+
+ 
+ 
+ Description
+
+ 
+ 
+ 
+
+ 
+ 
+ By
+
+ Reference
+
+ from
+
+ Document
+
+ 
+ 
+ 
+
+ 
+ 
+ No. in
+
+ Document
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s Articles of Incorporation
+
+ 
+ 
+ 
+
+ 
+ 
+ A
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.1 
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s Amendment to its Articles of
+ Incorporation, dated November 7, 1988
+
+ 
+ 
+ 
+
+ 
+ 
+ A
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.2 
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s Amendment to its Articles of
+ Incorporation, dated June 25, 1991
+
+ 
+ 
+ 
+
+ 
+ 
+ B
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1.2
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.3 
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s Certificate of Reverse Stock Split,
+ dated February 15, 1994 
+
+ 
+ 
+ 
+
+ 
+ 
+ C
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1.3
+
+ 
+ 
+
+ 
+
+II-3
+
+ 
+
+ 
+ 
+ Exhibit
+
+ Number
+
+ 
+ 
+ 
+
+ 
+ 
+ Description
+
+ 
+ 
+ 
+
+ 
+ 
+ By
+
+ Reference
+
+ from
+
+ Document
+
+ 
+ 
+ 
+
+ 
+ 
+ No. in
+
+ Document
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.4
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s
+ Certificate of Designation of Series A Preferred Stock, dated June 27, 1996
+
+ 
+ 
+ 
+
+ 
+ 
+ D
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1.4
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.5
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s
+ Amendment to Articles of Incorporation, dated June 25, 1996
+
+ 
+ 
+ 
+
+ 
+ 
+ D
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.15
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.6
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s
+ Certificate of Designation of Series B Preferred Stock, dated March 31, 1999
+
+ 
+ 
+ 
+
+ 
+ 
+ E
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1.6
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.7
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s
+ Amendment to Articles of Incorporation, dated October 7, 1999.
+
+ 
+ 
+ 
+
+ 
+ 
+ F
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.1.8
+
+ 
+ 
+ 
+
+ 
+ 
+ Certificate
+ of Correction to Certificate of Amendment to Articles of Incorporation of
+ Vitrix, Inc., dated June 16, 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ N
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.1.8
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 3.2
+
+ 
+ 
+ 
+
+ 
+ 
+ Amended
+ Bylaws of the Registrant
+
+ 
+ 
+ 
+
+ 
+ 
+ C
+
+ 
+ 
+ 
+
+ 
+ 
+ 3.2
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 4.1
+
+ 
+ 
+ 
+
+ 
+ 
+ Registrant s
+ Form of Common Stock Certificate
+
+ 
+ 
+ 
+
+ 
+ 
+ A
+
+ 
+ 
+ 
+
+ 
+ 
+ 4.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 5.l
+
+ 
+ 
+ 
+
+ 
+ 
+ Opinion
+ re: legality of the securities
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.6
+
+ 
+ 
+ 
+
+ 
+ 
+ 1999
+ Equity Compensation Plan
+
+ 
+ 
+ 
+
+ 
+ 
+ E
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.7
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.7.1
+
+ 
+ 
+ 
+
+ 
+ 
+ Lease
+ Agreement, dated September 3, 1999, between LAFP Phoenix, Inc., as lessor,
+ and the Registrant, as lessee.
+
+ 
+ 
+ 
+
+ 
+ 
+ F
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.7.2
+
+ 
+ 
+ 
+
+ 
+ 
+ First
+ Amendment to Office Lease Agreement, dated March 28, 2000, between LAFP
+ Phoenix, Inc., as lessor and the Registrant, as lessee.
+
+ 
+ 
+ 
+
+ 
+ 
+ G
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.8
+
+ 
+ 
+ 
+
+ 
+ 
+ Securities
+ Purchase Agreement, dated September 21, 1999, between Circle F Ventures, LLC
+ and the Registrant.
+
+ 
+ 
+ 
+
+ 
+ 
+ F
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.2
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.10
+
+ 
+ 
+ 
+
+ 
+ 
+ Merger
+ Agreement, dated March 28, 2001 by and among Vitrix, Inc., Vitrix Incorporated,
+ and Time America, Inc.
+
+ 
+ 
+ 
+
+ 
+ 
+ H
+
+ 
+ 
+ 
+
+ 
+ 
+ 2.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.12
+
+ 
+ 
+ 
+
+ 
+ 
+ Letter
+ from BDO Seidman, LLP, dated June 4, 2001, regarding its concurrence or
+ disagreement with the statements made by the registrant in the current report
+ concerning the resignation or dismissal as the registrants principal
+ accountant.
+
+ 
+ 
+ 
+
+ 
+ 
+ I
+
+ 
+ 
+ 
+
+ 
+ 
+ 16
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.13
+
+ 
+ 
+ 
+
+ 
+ 
+ Promissory
+ Note Agreement, dated September 4, 2001 between Vitrix, Inc. and Frances L.
+ Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ J
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.13
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.14
+
+ 
+ 
+ 
+
+ 
+ 
+ Security
+ Agreement dated September 4, 2001 between Vitrix, Inc. and Frances L. Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ J
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.14
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.15
+
+ 
+ 
+ 
+
+ 
+ 
+ Warrant
+ to purchase common stock agreement dated September 4, 2001 between Vitrix,
+ Inc. and Frances L. Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ J
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.15
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.16
+
+ 
+ 
+ 
+
+ 
+ 
+ Promissory
+ Note Agreement, dated March 31, 2001 between Time America, Inc. and Joseph L.
+ Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ K
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.16
+
+ 
+ 
+
+ 
+
+II-4
+
+ 
+
+ 
+ 
+ Exhibit
+
+ Number
+
+ 
+ 
+ 
+
+ 
+ 
+ Description
+
+ 
+ 
+ 
+
+ 
+ 
+ By
+
+ Reference
+
+ from
+
+ Document
+
+ 
+ 
+ 
+
+ 
+ 
+ No. in
+
+ Document
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.17
+
+ 
+ 
+ 
+
+ 
+ 
+ Revolving
+ Credit Agreement, dated November 2, 2001 between Vitrix, Inc and Joseph L.
+ Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ K
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.17
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.18
+
+ 
+ 
+ 
+
+ 
+ 
+ Securities
+ Purchase Agreement, dated March 22, 2004, among Time America, Inc. and Laurus
+ Master Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.19
+
+ 
+ 
+ 
+
+ 
+ 
+ Secured
+ Convertible Term Note, dated March 22, 2004, among Time America, Inc. and
+ Laurus Master Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.2
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.20
+
+ 
+ 
+ 
+
+ 
+ 
+ Common
+ Stock Purchase Warrant, dated March 22, 2004, issued to Laurus Master Fund,
+ Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.3
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.21
+
+ 
+ 
+ 
+
+ 
+ 
+ Security
+ Agreement, dated March 22, 2004, among Time America, Inc. and Laurus Master
+ Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.4
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.22
+
+ 
+ 
+ 
+
+ 
+ 
+ Subordination
+ Agreement, dated March 22, 2004, among Time America, Inc., Laurus Master
+ Fund, Ltd and Joseph and Frances Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.5
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.23
+
+ 
+ 
+ 
+
+ 
+ 
+ Registration
+ Rights Agreement, dated March 22, 2004, among Time America, Inc. and Laurus
+ Master Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.6
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.24
+
+ 
+ 
+ 
+
+ 
+ 
+ Guarantee,
+ dated March 22, 2004, issued by Time America, Inc. in favor of Laurus Master
+ Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.7
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.25
+
+ 
+ 
+ 
+
+ 
+ 
+ Stock
+ Pledge Agreement, dated March 22, 2004, among Time America, Inc. and Laurus
+ Master Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ L
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.8
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.26
+
+ 
+ 
+ 
+
+ 
+ 
+ Note
+ Purchase Agreement, dated April 16, 2004 between Time America, Inc. and
+ Frances L. Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ M
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.26
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.27
+
+ 
+ 
+ 
+
+ 
+ 
+ Promissory
+ Note Agreement, dated April 16, 2004 between Time America, Inc. and Frances
+ L. Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ M
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.27
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.28
+
+ 
+ 
+ 
+
+ 
+ 
+ Security
+ Agreement, dated April 16, 2004 between Time America, Inc. and Frances L.
+ Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ M
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.28
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.29
+
+ 
+ 
+ 
+
+ 
+ 
+ Consulting
+ Services Agreement, dated October 15, 2003, between Vitrix, Inc. and Todd P.
+ Belfer
+
+ 
+ 
+ 
+
+ 
+ 
+ N
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.29
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.30
+
+ 
+ 
+ 
+
+ 
+ 
+ Bonus
+ Plan Document with Tom Bednarik, effective as of January 1, 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ N
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.30
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.31
+
+ 
+ 
+ 
+
+ 
+ 
+ Equipment
+ Purchase, License and Services Agreement, dated as of August 29, 2005,
+ between FedEx Corporate Services, Inc. and Time America, Inc. (certain
+ portions deleted pursuant to confidential treatment)
+
+ 
+ 
+ 
+
+ 
+ 
+ N+
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.31
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.32
+
+ 
+ 
+ 
+
+ 
+ 
+ Amendment,
+ dated as of August 29, 2005, between Federal Express Corporation and Time
+ America, Inc. (certain portions deleted pursuant to confidential treatment) 
+
+ 
+ 
+ 
+
+ 
+ 
+ N+
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.32
+
+ 
+ 
+
+ 
+
+II-5
+
+ 
+
+ 
+ 
+ Exhibit
+
+ Number
+
+ 
+ 
+ 
+
+ 
+ 
+ Description
+
+ 
+ 
+ 
+
+ 
+ 
+ By
+
+ Reference
+
+ from
+
+ Document
+
+ 
+ 
+ 
+
+ 
+ 
+ No. in
+
+ Document
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.33
+
+ 
+ 
+ 
+
+ 
+ 
+ Professional
+ Services Agreement, dated as of August 29, 2005, between FedEx Corporate
+ Services, Inc. and Time America, Inc. (certain portions deleted pursuant to
+ confidential treatment)
+
+ 
+ 
+ 
+
+ 
+ 
+ N+
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.33
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.34
+
+ 
+ 
+ 
+
+ 
+ 
+ Amendment,
+ dated as of August 29, 2005, between Federal Express Corporation and Time
+ America, Inc. (certain portions deleted pursuant to confidential treatment)
+
+ 
+ 
+ 
+
+ 
+ 
+ N+
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.34
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.35
+
+ 
+ 
+ 
+
+ 
+ 
+ Letter
+ Agreement, dated February 17, 2000, between Vitrix Incorporated and Thomas S.
+ Bednarik
+
+ 
+ 
+ 
+
+ 
+ 
+ N
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.35
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.36
+
+ 
+ 
+ 
+
+ 
+ 
+ Security
+ and Purchase Agreement, dated January 3, 2006, by and among Laurus Master
+ Fund, Ltd., Time America, Inc., a Nevada corporation, Time America, Inc., an
+ Arizona corporation, and NetEdge Devices, LLC, an Arizona limited liability
+ company.
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.1
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.37
+
+ 
+ 
+ 
+
+ 
+ 
+ Secured
+ Convertible Term Note, dated January 3, 2006, made by Time America, Inc., a
+ Nevada corporation, Time America, Inc., an Arizona corporation, and NetEdge
+ Devices, LLC, an Arizona limited liability company, in favor of Laurus Master
+ Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.2
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.38
+
+ 
+ 
+ 
+
+ 
+ 
+ Secured
+ Non-Convertible Revolving Note, dated January 3, 2006, made by Time America,
+ Inc., a Nevada corporation, Time America, Inc., an Arizona corporation, and
+ NetEdge Devices, LLC, an Arizona limited liability company, in favor of
+ Laurus Master Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.3
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.39
+
+ 
+ 
+ 
+
+ 
+ 
+ Common
+ Stock Purchase Warrant, dated January 3, 2006, issued to Laurus Master Fund,
+ Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.4
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.40
+
+ 
+ 
+ 
+
+ 
+ 
+ Registration
+ Rights Agreement, dated January 3, 2006, between Time America, Inc., a Nevada
+ corporation, and Laurus Master Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.5
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.41
+
+ 
+ 
+ 
+
+ 
+ 
+ Amended
+ and Restated Subordination Agreement, dated January 3, 2006, among Time
+ America, Inc., a Nevada corporation, Time America, Inc., an Arizona
+ corporation, and NetEdge Devices, LLC, an Arizona limited liability company,
+ Laurus Master Fund, Ltd. and Joseph and Frances Simek
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.6
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.42
+
+ 
+ 
+ 
+
+ 
+ 
+ Reaffirmation
+ and Ratification Agreement, dated January 3, 2006, by and among Laurus Master
+ Fund, Ltd., Time America, Inc., a Nevada corporation, Time America, Inc., an
+ Arizona corporation, and NetEdge Devices, LLC, an Arizona limited liability
+ company.
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.7
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.43
+
+ 
+ 
+ 
+
+ 
+ 
+ Letter
+ Agreement with Oberon Securities, LLC, dated January 13, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ O
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.8
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.44
+
+ 
+ 
+ 
+
+ 
+ 
+ Amended
+ and Restated Stock Pledge Agreement, dated June 23, 2005, between Time
+ America, Inc., a Nevada corporation, and Laurus Master Fund, Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.44
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.45
+
+ 
+ 
+ 
+
+ 
+ 
+ Grant
+ of Security Interest in Patents and Trademarks, dated June 23, 2005, issued
+ by Time America, Inc., a Nevada corporation, in favor of Laurus Master Fund,
+ Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.45
+
+ 
+ 
+
+ 
+
+II-6
+
+ 
+
+ 
+ 
+ Exhibit
+
+ Number
+
+ 
+ 
+ 
+
+ 
+ 
+ Description
+
+ 
+ 
+ 
+
+ 
+ 
+ By
+
+ Reference
+
+ from
+
+ Document
+
+ 
+ 
+ 
+
+ 
+ 
+ No. in
+
+ Document
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.46
+
+ 
+ 
+ 
+
+ 
+ 
+ Common
+ Stock Purchase Warrant, dated June 23, 2005, issued to Laurus Master Fund,
+ Ltd.
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.46
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.47
+
+ 
+ 
+ 
+
+ 
+ 
+ Common
+ Stock Purchase Warrant, dated June 23, 2005, issued to Oberon Securities,
+ LLC.
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.47
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 10.48
+
+ 
+ 
+ 
+
+ 
+ 
+ Common
+ Stock Purchase Warrant, dated January 3, 2006, issued to Oberon Securities.
+ LLC
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 10.48
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 21
+
+ 
+ 
+ 
+
+ 
+ 
+ Subsidiaries
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 21
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 23.l
+
+ 
+ 
+ 
+
+ 
+ 
+ Consent
+ of Independent Auditors
+
+ 
+ 
+ 
+
+ 
+ 
+ P
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 23.2
+
+ 
+ 
+ 
+
+ 
+ 
+ Consent
+ of Squire, Sanders & Dempsey L.L.P.
+
+ 
+ 
+ 
+
+ 
+ 
+ Included
+ in Exhibit 5.1
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 24
+
+ 
+ 
+ 
+
+ 
+ 
+ Powers
+ of Attorney
+
+ 
+ 
+ 
+
+ 
+ 
+ Included
+ in Signature Page
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+* Filed herewith.
+
++ The Company has sought confidential treatment
+of portions of the referenced exhibits.
+
+A.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000840319_aphton_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000840319_aphton_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1281ff1787d1768b57acfc0d0ab9813b1f111dea
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000840319_aphton_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters relating to the offering will be passed upon for us by Akerman Senterfitt, Miami, Florida.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000847935_allion_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000847935_allion_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0b24896bf1574a84ba19e71ff658a9cb33e2f355
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000847935_allion_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Kirkland & Ellis LLP is counsel to us in connection with this offering and will issue an opinion about the legality of the shares we are offering. Certain legal matters in connection with the offering will be passed on by Nixon Peabody. Alston and Bird LLP has in the past performed, and continues to perform, certain legal services for us and our affiliates. Alston & Bird LLP is counsel to the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000852426_pw-eagle_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000852426_pw-eagle_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f0a2bfa6532739be630aa34ad116911a1fba381d
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000852426_pw-eagle_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares being offered hereby is being passed upon for us by Fredrikson & Byron, P.A. We have received certain advice from our legal counsel in connection with the matters described herein. Such legal advice is solely for our benefit and not for any shareholder or prospective investor. Purchasers of the shares offered hereby are not entitled to rely on any such advice and should not consider any such counsel to represent them or their interests. Prospective investors should consult with their own legal and other counsel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000853971_standard_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000853971_standard_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5be01ca0b23a5c10954bd91905f661715e66399f
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000853971_standard_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters relating to the validity of the common stock offered hereby will be passed upon by Stephen M. Coons, Esq., special counsel to the Company. Mr. Coons served as our Executive Vice President, our General Counsel and as a director until August 2006. Mr. Coons is the beneficial owner of 221,600 shares of common stock of the Company (of which 177,500 shares are underlying out-of-the money employee stock options).
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000879884_t-3_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000879884_t-3_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7c4e52b67896473b43963ee2e54b9b9221f78d76
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000879884_t-3_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Various legal matters, including the validity of the common stock offered by us, will be passed on for us by Porter & Hedges, L.L.P., Houston, Texas. Various legal matters will be passed on for the selling stockholder by Jones Day, Houston, Texas. Various legal matters relating to the offering will be passed on for the underwriters by Vinson & Elkins L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000888723_amc_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000888723_amc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000888723_amc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000895450_willbros_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000895450_willbros_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f505c951da244407201049a72ca5f24c63bf6c0e
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000895450_willbros_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Arias, Fabrega & Fabrega, Panama City, Panama. Certain United States federal income tax matters will be passed upon for us by our special United States tax counsel, Sidley Austin LLP, Los Angeles, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000906337_pm_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000906337_pm_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a9ba6190be38617ea832c805fae55a7cd3156a80
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000906337_pm_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Common Stock offered hereby has been passed upon for us by Holland Knight LLP, Miami, Florida. Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000915324_telular_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000915324_telular_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d172167213dcd66797f42bf8adb02ec2c689ebff
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000915324_telular_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Covington Burling LLP of Washington, D.C. has issued an opinion regarding the legality of the common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000916529_arotech_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000916529_arotech_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..070c1e718fe0f6e29b5ec4ac0e1a64c23139ede4
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000916529_arotech_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Lowenstein Sandler PC, Roseland, New Jersey will pass upon the validity of the shares of common stock offered by this prospectus for us.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000917030_mens_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000917030_mens_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c177be2a752baaf9c3d43f38150464f209994125
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000917030_mens_legal_matters.txt
@@ -0,0 +1,2283 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the notes offered hereby will be passed upon for Advanstar by Davis Polk & Wardwell, New York, New York. 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The financial statements as of December 31, 2004 and 2005 and for each of the three years in the period ended December 31, 2005 included in this
+Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing
+and accounting. 
+
+123
+
+ 
+ 
+ 
+
+WHERE YOU CAN FIND MORE INFORMATION 
+ 
+
+ We have filed with the SEC, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to our offering
+of the notes. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. You will find additional information about us and
+the notes in the registration statement. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to the company and the notes, reference
+is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are
+not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the
+registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at
+the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at
+1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration
+statement, including the exhibits and any schedules thereto. 
+
+ If
+for any reason we are not required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, we are still required under the indenture to furnish
+the holders of the notes with the information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. In addition, we have agreed that, for so long as any notes remain
+outstanding, we will furnish to the holders of the notes and to securities analysts and prospective investors, upon their request, the information required to be delivered by Rule 144A(d)(4)
+under the Securities Act. We also maintain an Internet site at http://www.advanstar.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated
+into this prospectus or the registration statement of which it forms a part. 
+
+124
+
+ 
+
+ 
+
+INDEX TO FINANCIAL STATEMENTS 
+ 
+
+ 
+
+Reports of Independent Registered Public Accounting Firm
+
+ 
+
+F-2
+
+Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Consolidated Balance Sheets as of December 31, 2004 and 2005
+
+ 
+
+F-3
+
+ 
+
+Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-4
+
+ 
+
+Consolidated Statements of Stockholder's Equity for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-5
+
+ 
+
+Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-6
+
+ 
+
+Notes to Consolidated Financial Statements
+
+ 
+
+F-7
+
+Condensed Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2005 and June 30, 2006
+
+ 
+
+F-40
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2005 and 2006
+
+ 
+
+F-41
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-42
+
+ 
+
+Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-43
+
+ 
+
+Notes to Condensed Consolidated Financial Statements (Unaudited)
+
+ 
+
+F-44
+
+F-1
+
+ 
+
+ 
+ 
+
+Report of Independent Registered Public Accounting Firm 
+ 
+
+To
+the Stockholder and Board of Directors
+
+of Advanstar Communications Inc. 
+
+ In
+our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholder's equity and of cash flows present fairly, in all
+material respects, the financial position of Advanstar Communications Inc., a wholly owned subsidiary of Advanstar, Inc., and its subsidiaries at December 31, 2005 and 2004, and
+the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United
+States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
+consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
+financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board
+(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
+examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
+evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+
+/s/ PricewaterhouseCoopers
+LLP
+
+Minneapolis, Minnesota 
+
+March 1,
+2006, except as to the seventh paragraph of Note 14, and the change in operating segments described in Notes 1, 3, 4, and 11 for which the dates are March 14, 2006
+and October 4, 2006, respectively. 
+
+F-2
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Balance Sheets 
+ 
+ December 31, 2004 and 2005 
+ 
+
+ 
+
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands, except share and per share data)
+
+ 
+
+Assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash and cash equivalents
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+Accounts receivable, net of allowance of $785 and $1,076 at December 31, 2004 and 2005
+ 
+ 
+26,699
+ 
+ 
+24,607
+ 
+
+ 
+Prepaid expenses
+ 
+ 
+6,406
+ 
+ 
+7,871
+ 
+
+ 
+Other
+ 
+ 
+2,450
+ 
+ 
+1,965
+ 
+
+ 
+Current assets of discontinued operations
+ 
+ 
+2,690
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current assets
+ 
+ 
+79,468
+ 
+ 
+81,052
+ 
+
+Due from parent
+ 
+ 
+ 
+ 
+ 
+2,232
+ 
+
+Property, plant and equipment, net
+ 
+ 
+18,717
+ 
+ 
+21,306
+ 
+
+Intangible and other assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Goodwill
+ 
+ 
+586,967
+ 
+ 
+594,982
+ 
+
+ 
+Intangibles and other, net
+ 
+ 
+91,948
+ 
+ 
+62,644
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total intangible and other assets, net
+ 
+ 
+678,915
+ 
+ 
+657,626
+ 
+
+Non-current assets of discontinued operations and assets held for sale
+ 
+ 
+135,837
+ 
+ 
+4,620
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Liabilities and Stockholder's Equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Current maturities of long-term debt
+ 
+$
+1,300
+ 
+$
+201
+ 
+
+ 
+Accounts payable
+ 
+ 
+13,451
+ 
+ 
+12,342
+ 
+
+ 
+Accrued compensation
+ 
+ 
+7,451
+ 
+ 
+7,236
+ 
+
+ 
+Other accrued expenses
+ 
+ 
+32,979
+ 
+ 
+30,758
+ 
+
+ 
+Deferred revenue
+ 
+ 
+39,282
+ 
+ 
+46,472
+ 
+
+ 
+Current liabilities of discontinued operations
+ 
+ 
+15,886
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current liabilities
+ 
+ 
+110,349
+ 
+ 
+97,009
+ 
+
+Long-term debt, net of current maturities
+ 
+ 
+612,919
+ 
+ 
+461,786
+ 
+
+Deferred income taxes
+ 
+ 
+18,250
+ 
+ 
+31,500
+ 
+
+Other long-term liabilities
+ 
+ 
+4,229
+ 
+ 
+4,933
+ 
+
+Due to parent
+ 
+ 
+2,698
+ 
+ 
+ 
+ 
+
+Long-term liabilities of discontinued operations
+ 
+ 
+3,627
+ 
+ 
+ 
+ 
+
+Commitments and contingencies (Note 10)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stockholder's equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Common stock, $.01 par value, 3,500,000 shares authorized; 1,000,000 shares issued and outstanding at December 31, 2004 and 2005
+ 
+ 
+10
+ 
+ 
+10
+ 
+
+ 
+Capital in excess of par value
+ 
+ 
+447,367
+ 
+ 
+447,367
+ 
+
+ 
+Accumulated deficit
+ 
+ 
+(292,757
+)
+ 
+(284,182
+)
+
+ 
+Accumulated other comprehensive income
+ 
+ 
+6,245
+ 
+ 
+8,413
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total stockholder's equity
+ 
+ 
+160,865
+ 
+ 
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-3
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Statements of Operations 
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands)
+
+ 
+
+Revenue
+ 
+$
+190,698
+ 
+$
+270,412
+ 
+$
+288,913
+ 
+
+Operating expenses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cost of production (excluding depreciation)
+ 
+ 
+35,292
+ 
+ 
+50,859
+ 
+ 
+56,326
+ 
+
+ 
+Selling, editorial and circulation (excluding depreciation)
+ 
+ 
+69,293
+ 
+ 
+106,771
+ 
+ 
+112,373
+ 
+
+ 
+General and administrative (excluding depreciation)
+ 
+ 
+29,654
+ 
+ 
+39,419
+ 
+ 
+40,916
+ 
+
+ 
+Restructuring charge
+ 
+ 
+2,692
+ 
+ 
+ 
+ 
+ 
+4,771
+ 
+
+ 
+Funding of affiliated dot.com company operations (Note 13)
+ 
+ 
+1,121
+ 
+ 
+3,283
+ 
+ 
+ 
+ 
+
+ 
+Amortization of intangibles
+ 
+ 
+35,841
+ 
+ 
+34,809
+ 
+ 
+29,750
+ 
+
+ 
+Depreciation
+ 
+ 
+7,689
+ 
+ 
+7,815
+ 
+ 
+8,005
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total operating expenses
+ 
+ 
+181,582
+ 
+ 
+242,956
+ 
+ 
+252,141
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Operating income
+ 
+ 
+9,116
+ 
+ 
+27,456
+ 
+ 
+36,772
+ 
+
+Other income (expense)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest expense
+ 
+ 
+(59,086
+)
+ 
+(70,974
+)
+ 
+(63,058
+)
+
+ 
+Interest income
+ 
+ 
+470
+ 
+ 
+468
+ 
+ 
+1,476
+ 
+
+ 
+Loss on extinguishment of debt (Note 6)
+ 
+ 
+(11,324
+)
+ 
+ 
+ 
+ 
+(12,581
+)
+
+ 
+Other income, net
+ 
+ 
+918
+ 
+ 
+1,251
+ 
+ 
+80
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before income taxes and cumulative effect of accounting change
+ 
+ 
+(59,906
+)
+ 
+(41,799
+)
+ 
+(37,311
+)
+
+ 
+Income tax (benefit) provision
+ 
+ 
+(6,724
+)
+ 
+6,518
+ 
+ 
+(2,732
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before cumulative effect of accounting change
+ 
+ 
+(53,182
+)
+ 
+(48,317
+)
+ 
+(34,579
+)
+
+ 
+Income (loss) from operations of discontinued businesses, net of tax (Note 4)
+ 
+ 
+3,734
+ 
+ 
+(2,846
+)
+ 
+38,536
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(Loss) income before cumulative effect of accounting change
+ 
+ 
+(49,448
+)
+ 
+(51,163
+)
+ 
+3,957
+ 
+
+ 
+Cumulative effect of accounting change (Note 13)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,618
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-4
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Stockholder's Equity
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+Common Stock
+ 
+ 
+
+ 
+ 
+
+ 
+Accumulated
+
+Other
+
+Comprehensive
+
+Income (Loss)
+ 
+ 
+
+ 
+
+ 
+
+ 
+Capital in
+
+Excess of
+
+Par Value
+ 
+Accumulated
+
+Deficit
+ 
+ 
+
+ 
+
+ 
+
+ 
+Shares
+ 
+Amount
+ 
+Total
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Balances at December 31, 2002
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+387,367
+ 
+$
+(192,146
+)
+$
+(9,078
+)
+$
+186,153
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(49,448
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,283
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,308
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(36,857
+)
+
+Contribution of capital from parent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2003
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(241,594
+)
+ 
+3,513
+ 
+ 
+209,296
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(51,163
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,587
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+145
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(48,431
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2004
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(292,757
+)
+ 
+6,245
+ 
+ 
+160,865
+ 
+
+Comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,575
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,271
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(103
+)
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+10,743
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2005
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+447,367
+ 
+$
+(284,182
+)
+$
+8,413
+ 
+$
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these consolidated financial statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Cash Flows
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Cash flows from operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+Adjustments to reconcile net loss to net cash provided by operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cumulative effect of accounting change
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(4,618
+)
+
+ 
+Impairment of goodwill
+ 
+ 
+ 
+ 
+ 
+15,570
+ 
+ 
+ 
+ 
+
+ 
+Impairment of intangible assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,272
+ 
+
+ 
+Write-off of deferred financing costs
+ 
+ 
+11,324
+ 
+ 
+ 
+ 
+ 
+3,517
+ 
+
+ 
+Depreciation and amortization
+ 
+ 
+56,603
+ 
+ 
+49,968
+ 
+ 
+40,718
+ 
+
+ 
+Gain on derivative financial instruments
+ 
+ 
+(772
+)
+ 
+(1,391
+)
+ 
+(103
+)
+
+ 
+Losses of minority interest holders
+ 
+ 
+627
+ 
+ 
+562
+ 
+ 
+566
+ 
+
+ 
+Non-cash interest expense
+ 
+ 
+3,363
+ 
+ 
+3,264
+ 
+ 
+2,843
+ 
+
+ 
+Loss (gain) on disposition of business and other
+ 
+ 
+661
+ 
+ 
+(1,179
+)
+ 
+(52,710
+)
+
+ 
+Provision for bad debts
+ 
+ 
+578
+ 
+ 
+872
+ 
+ 
+1,417
+ 
+
+ 
+Deferred income taxes
+ 
+ 
+6,990
+ 
+ 
+11,260
+ 
+ 
+13,250
+ 
+
+ 
+Changes in operating assets and liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Accounts receivable
+ 
+ 
+(365
+)
+ 
+6,190
+ 
+ 
+(224
+)
+
+ 
+ 
+Inventories
+ 
+ 
+188
+ 
+ 
+(708
+)
+ 
+507
+ 
+
+ 
+ 
+Prepaid expenses
+ 
+ 
+844
+ 
+ 
+(583
+)
+ 
+24
+ 
+
+ 
+ 
+Accounts payable and accrued expenses
+ 
+ 
+16,167
+ 
+ 
+(8,165
+)
+ 
+(1,958
+)
+
+ 
+ 
+Deferred revenue
+ 
+ 
+1,525
+ 
+ 
+(6,860
+)
+ 
+(3,926
+)
+
+ 
+ 
+Other
+ 
+ 
+(2,437
+)
+ 
+649
+ 
+ 
+(1,842
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by operating activities
+ 
+ 
+45,848
+ 
+ 
+18,286
+ 
+ 
+8,308
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from investing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Additions to property, plant and equipment
+ 
+ 
+(7,608
+)
+ 
+(8,981
+)
+ 
+(9,564
+)
+
+Acquisitions of publications and shows, net of cash acquired
+ 
+ 
+(137,728
+)
+ 
+(7,915
+)
+ 
+(15,561
+)
+
+Proceeds from sale of assets
+ 
+ 
+ 
+ 
+ 
+24,418
+ 
+ 
+174,067
+ 
+
+Acquisitions of intangibles, contingent payments, and other
+ 
+ 
+3
+ 
+ 
+(1,920
+)
+ 
+17
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash (used in) provided by investing activities
+ 
+ 
+(145,333
+)
+ 
+5,602
+ 
+ 
+148,959
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from financing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds from revolving credit loan
+ 
+ 
+21,000
+ 
+ 
+6,000
+ 
+ 
+ 
+ 
+
+Payments on revolving credit loan
+ 
+ 
+(50,100
+)
+ 
+(14,000
+)
+ 
+ 
+ 
+
+Proceeds from long-term debt
+ 
+ 
+431,050
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Payments of long-term debt
+ 
+ 
+(333,525
+)
+ 
+(3,700
+)
+ 
+(152,167
+)
+
+Capital contribution from parent
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred financing costs
+ 
+ 
+(16,962
+)
+ 
+(315
+)
+ 
+(168
+)
+
+Project grant refunds received
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+600
+ 
+
+Dividends paid to minority interest holders
+ 
+ 
+(1,227
+)
+ 
+(500
+)
+ 
+(900
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash provided by (used in) financing activities
+ 
+ 
+110,236
+ 
+ 
+(12,515
+)
+ 
+(152,635
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Effect of exchange rate changes on cash
+ 
+ 
+(407
+)
+ 
+576
+ 
+ 
+754
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net increase in cash and cash equivalents
+ 
+ 
+10,344
+ 
+ 
+11,949
+ 
+ 
+5,386
+ 
+
+Cash and cash equivalents
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning of year
+ 
+ 
+18,930
+ 
+ 
+29,274
+ 
+ 
+41,223
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+End of year
+ 
+$
+29,274
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these consolidated financial statements. 
+
+F-6
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Notes to Consolidated Financial Statements 
+ 
+ December 31, 2003, 2004 and 2005 
+ 
+
+1. Nature of Business 
+
+ The accompanying consolidated financial statements include the accounts of Advanstar Communications Inc., a wholly owned subsidiary of
+Advanstar, Inc., and its majority owned subsidiaries (collectively, "Advanstar" or the "Company"). All intercompany accounts and transactions between consolidated entities have been eliminated. 
+
+ The
+Company operates and manages shows and conferences; publishes controlled and paid circulation trade, professional and consumer periodicals; and markets a broad range of marketing,
+direct mail and database products and services. The Company's MAGIC tradeshows and Life Sciences segment (see Note 11) generated approximately 27% and 51% of total revenue in 2005. 
+
+ The
+Company has restated its consolidated financial statements and footnotes from those included in the Company's annual report on Form 10-K for the year ended December 31,
+2005, filed with the Securities and Exchange Commission on March 30, 2006, only to reflect the Company's change in operating segments as described in Note 11. 
+
+2.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000918709_act_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000918709_act_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..03ed5a24ca6ffd0366633cd0c62f49560b28da86
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000918709_act_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the issuance of shares offered hereby has been passed upon by Faegre & Benson LLP, Denver, Colorado.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0000934022_speed_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0000934022_speed_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9db98fc0a34933384f9b4f9e7b4587c4e726e512
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0000934022_speed_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offering and sale of the notes regarding the validity and enforceability of the notes are passed upon for us by Gibson, Dunn & Crutcher LLP, New York, New York. Certain other legal matters relating to the guarantee of the notes by our Nebraska subsidiary were passed upon for us by DeMars, Gordon, Olson & Zalewski, Lincoln, Nebraska.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001003464_endocare_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001003464_endocare_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..138dc702883940bc901ed801822e4267a3d7475b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001003464_endocare_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the validity of the issuance of the common stock offered hereby have been passed upon by Clint B. Davis, our General Counsel. Mr. Davis, a full-time employee of ours, holds options to purchase 250,000 shares of our common stock and 38,812.27 deferred stock units (each representing the right to receive one share of common stock in the future, subject to certain conditions). None of these options and deferred stock units will be vested or exercisable within 60 days of the date of this prospectus. The deferred stock units are subject to forfeiture if applicable performance objectives are not met.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001007330_prgx_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001007330_prgx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9f3d8947a5af9589e7e15099256a35f55e4b762e
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001007330_prgx_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the notes, preferred stock and common stock, the preferred stock issuable upon conversion of convertible notes and the common stock issuable upon conversion of the preferred stock and notes was passed upon for us by Arnall Golden Gregory LLP, 171 17th St., Suite 2100, Atlanta, Georgia.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001008848_acorda_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001008848_acorda_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9d0c549a91a6857527ac5e1efe3d8474f91b4a1b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001008848_acorda_legal_matters.txt
@@ -0,0 +1,395 @@
+LEGAL
+MATTERS
+
+The validity of the
+issuance of the shares of common stock offered hereby will be passed upon for
+us by Covington & Burling LLP, New York, New York.
+
+EXPERTS
+
+Our
+consolidated financial statements as of December 31, 2005 and 2004 and
+for the years ended December 31, 2005 and 2004, the six month period ended
+December 31, 2003 and the year ended June 30, 2003 have been incorporated by reference herein and in the registration
+statement in reliance upon the report of KPMG LLP, independent registered
+public accounting firm, incorporated by reference herein, and upon the
+authority of said firm as experts in accounting and auditing.
+
+ 28
+
+WHERE YOU CAN FIND
+MORE INFORMATION
+
+This prospectus is part of
+a registration statement on Form S-1 that we filed with the SEC. Certain
+information in the registration statement has been omitted from this prospectus
+in accordance with the rules of the SEC. We are a public company and file proxy
+statements and annual, quarterly and special reports and other information with
+the SEC. The registration statement, such reports and other information can be
+inspected and copied at the Public Reference Room of the SEC located at
+100 F Street, N.E., Washington D.C. 20549. Copies of such materials,
+including copies of all or any portion of the registration statement, can be
+obtained from the Public Reference Room of the SEC at prescribed rates. You can
+call the SEC at 1-800-SEC-0330 to obtain information on the operation of the
+Public Reference Room. Such materials may also be accessed electronically by
+means of the SEC s home page on the Internet (www.sec.gov).
+
+INCORPORATION OF
+CERTAIN DOCUMENTS BY REFERENCE
+
+The SEC allows us to incorporate
+by reference certain of our publicly-filed documents into this prospectus,
+which means that information included in those documents is considered part of
+this prospectus. We incorporate by
+reference the documents listed below and any future filings made with the SEC
+under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, until all
+the shares of common stock that are part of this offering are sold.
+
+The following
+documents filed with the SEC are incorporated by reference in this prospectus:
+
+ our
+Annual Report on Form 10-K for the year ended December 31, 2005;
+
+ our
+Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006,
+June 30, 2006 and September 30, 2006;
+
+ our
+Current Reports on Form 8-K, filed with the SEC on: March 6, 2006, March 15,
+2006, March 23, 2006, March 31, 2006, April 17, 2006, May 5, 2006, July
+12, 2006, August 4, 2006, August 7, 2006, August 17, 2006, September 21,
+2006, September 25, 2006, October 5, 2006, October 6, 2006, October 18, 2006, November 2, 2006, November 29, 2006 and December 4, 2006; and
+
+ the
+description of our common stock in our Registration Statement on Form S-1/A
+(File No. 333-128827) filed on February 9, 2006, including any
+amendment or reports filed for the purpose of updating this description.
+
+You may access our Annual Report on Form 10-K,
+Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
+any of these reports, free of charge on the SEC s website. We do not consider
+information contained on, or that can be accessed through, our website to be
+part of this prospectus.
+
+In addition, we will furnish without charge to you, on
+written or oral request, a copy of any or all of the documents incorporated by
+reference, other than exhibits to those documents. You should direct any
+requests for documents to Corporate Secretary, Acorda Therapeutics, Inc., 15
+Skyline Drive, Hawthorne, New York 10532, or call (914) 347-4300.
+
+You should rely only on the information contained in
+this prospectus, including information incorporated by reference herein. We
+have not authorized anyone to provide you with information different from that
+contained in this prospectus or any prospectus supplement. This prospectus is
+not an offer of these securities in any jurisdiction where an offer and sale is
+not permitted. The information contained in this prospectus is accurate only as
+of the date of this prospectus, regardless of the time of delivery of this
+prospectus or any sale of our common stock.
+
+ 29
+
+Part II
+
+INFORMATION NOT
+REQUIRED IN PROSPECTUS
+
+ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
+
+The
+following table sets forth the Registrant s estimated costs and expenses (other
+than underwriting discounts) payable in connection with this offering.
+
+ 
+ 
+ SEC Registration
+ Fee
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 5,061
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Nasdaq Global
+ Market Listing Fee
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 32,308
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Printing and
+ Engraving Expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 3,000
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Legal Fees and
+ Expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 60,000
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accounting Fees
+ and Expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 15,000
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Transfer Agent
+ and Registrar Fees and Expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 1,500
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Total
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 116,869
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
+
+The Registrant, is a Delaware corporation.
+Section 145 of the Delaware General Corporation Law, or the DGCL, grants
+each corporation organized thereunder the power to indemnify any person who is
+or was a director, officer, employee or agent of a corporation or enterprise,
+against expenses, attorneys fees, judgments, fines and amounts paid in
+settlement actually and reasonably incurred by him in connection with any
+threatened, pending or completed action, suit or proceeding, whether civil,
+criminal, administrative or investigative, other than an action by or in the
+right of the corporation, by reason of being or having been in any such
+capacity if he acted in good faith in a manner reasonably believed to be in or
+not opposed to the best interests of the corporation, and, with respect to any
+criminal action or proceeding, had no reasonable cause to believe his conduct
+was unlawful. 
+
+Section 102(b)(7) of the DGCL enables a
+corporation in its certificate of incorporation or an amendment thereto to
+eliminate or limit the personal liability of a director to the corporation or
+its stockholders for monetary damages for violations or the directors 
+fiduciary duty of care, except (i) for any breach of the director s duty
+of loyalty to the corporation or its stockholders, (ii) for acts or
+omissions not in good faith or which involve intentional misconduct or a
+knowing violation of law, (iii) pursuant to Section l74 of the DGCL
+(providing for liability of directors for unlawful payment of dividends or
+unlawful stock purchases or redemptions) or (iv) for any transaction from
+which a director derived an improper personal benefit.
+
+Article Seven of the Registrant s Amended and Restated
+Certificate of Incorporation (filed as Exhibit 3.1) provides that
+except as otherwise provided by the DGCL, no director of the Registrant shall
+be personally liable to the Registrant or its stockholders for monetary damages
+for breach of fiduciary duty as a director.
+
+Article Eight of the Registrant s Amended and Restated
+Certificate of Incorporation provides that, to the fullest extent permitted by
+the DGCL, the Registrant shall indemnify any current or former director or
+officer of the Registrant and may, at the discretion of the Board of Directors,
+indemnify any current or former employee or agent of the Registrant against all
+expenses (including attorneys fees) judgments, fines and amounts paid in
+settlement actually and reasonably incurred in connection with any threatened,
+pending or completed action, suit or proceeding, whether civil, criminal,
+administrative or investigative, by reason of the fact that he or she is or was
+a director or officer of the Registrant, or is or was serving as a director,
+officer, employee or agent of another corporation, partnership, joint venture,
+trust or other enterprise.
+
+ II-1
+ 
+
+Article Eight of the
+Registrant s Amended and Restated Certificate of Incorporation also provides
+that the Registrant shall advance expenses incurred by a director or officer of
+the Registrant in defending any civil, criminal, administrative or
+investigative such action, suit or proceeding in advance of the final
+disposition of such action, suit or proceeding upon receipt of an undertaking
+by or on behalf of such director or officer to repay such advances if it shall
+ultimately be determined that he is not entitled to be indemnified by the
+Registrant as authorized by Article Eight or otherwise. Additionally, if a
+claim under Article Eight of the Registrant s Amended and Restated is not paid
+in full by the Registrant within thirty days after a written claim has been
+received by the Registrant, the claimant may at any time thereafter bring suit
+against the Registrant to recover the unpaid amount of the claim, and if successful
+in whole or in part on the merits or otherwise in establishing his or her right
+to indemnification or to the advancement of expenses, the claimant shall be
+paid also the expense of prosecuting such claim.
+
+ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
+
+Between January 1, 2006 and October 31, 2006,
+we had issued 16,985 shares of common stock pursuant to Rule 701 under the
+Securities Act to a number of current and former employees at a purchase price
+of $1.56 per share for aggregate consideration of approximately $26,498.
+
+On October 6, 2006,
+we consummated a private placement under Section 4(2) of the Securities Act of 3,230,769 shares of our common stock to
+a group of accredited investors at a purchase price of $9.75 per share for
+aggregate consideration of approximately $31,499,997.
+
+ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
+
+(a) Exhibit
+Index
+
+A list of exhibits
+filed with this registration statement on Form S-1 is set forth on the
+Exhibit Index and is incorporated in this Item 16(a) by reference.
+
+(b) Financial
+Statement Schedules
+
+None
+
+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
+registration statement:
+
+(i) to include
+any prospectus required by Section 10(a)(3) of the Securities Act;
+
+(ii) to reflect
+in the prospectus any facts or events arising after the effective date of the
+registration statement (or the most recent post-effective amendment thereof)
+which, individually or in the aggregate, represent a fundamental change in the
+information set forth in the registration statement. Notwithstanding the
+foregoing, any increase or decrease in volume of securities offered (if the
+total dollar value of securities offered would not exceed that which was
+registered) and any deviation from the low or high end of the estimated maximum
+offering range may be reflected in the form of prospectus filed with the
+Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
+and price represent no more than 20 percent change in the maximum aggregate
+offering price set forth in the Calculation of Registration Fee table in the
+effective registration statement;; and
+
+ II-2
+ 
+
+(iii) to include
+any material information with respect to the
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001017156_steakhouse_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001017156_steakhouse_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..27766647dc44c4aa88b02ccde3e1017aae32d7a4
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001017156_steakhouse_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered by this prospectus has been passed upon for us by Littman Krooks LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001022345_mariner_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001022345_mariner_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8c140850a447b87d8f6325579d0a8189b4a2a73a
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001022345_mariner_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Mariner common stock offered pursuant to this prospectus will be passed upon by Baker Botts L.L.P. Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001030058_worldgate_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001030058_worldgate_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..171271b85f59944f3a84a926048e91a3ea3583d7
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001030058_worldgate_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001032045_national_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001032045_national_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001032045_national_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001035985_dobson_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001035985_dobson_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..21c5eb20cd68e568547d368e60dc4673233eba4a
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001035985_dobson_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the Debentures and the Class A common stock issuable upon conversion of the Debentures will be passed upon for us by Mayer, Brown, Rowe Maw LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001040593_carrizo_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001040593_carrizo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a7712d89a353b8d525728807be76f95ffd95f34d
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001040593_carrizo_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters Certain legal matters in connection with the common stock offered by this prospectus will be passed on for us by our outside counsel, Baker Botts L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001040973_mediabay_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001040973_mediabay_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2dbf5ce4dd027ad617ec401e96b6cf1ef4c78b5
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001040973_mediabay_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the shares of common stock offered hereby was passed upon for MediaBay, Inc. by Blank Rome LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001057725_neff-corp_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001057725_neff-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c582c2dbdd76f0009b2e0b77aae9921f809f58d8
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001057725_neff-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby is being passed upon for us by Latham & Watkins LLP, New York, New York. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York. Certain partners of Latham & Watkins LLP, members of their families, related persons and others have an indirect interest in less than 1% of our common stock through investments in a limited partnership that, in turn, has an investment in a fund affiliated with Odyssey.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001062771_advanstar_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001062771_advanstar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c177be2a752baaf9c3d43f38150464f209994125
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001062771_advanstar_legal_matters.txt
@@ -0,0 +1,2283 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the notes offered hereby will be passed upon for Advanstar by Davis Polk & Wardwell, New York, New York. 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The financial statements as of December 31, 2004 and 2005 and for each of the three years in the period ended December 31, 2005 included in this
+Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing
+and accounting. 
+
+123
+
+ 
+ 
+ 
+
+WHERE YOU CAN FIND MORE INFORMATION 
+ 
+
+ We have filed with the SEC, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to our offering
+of the notes. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. You will find additional information about us and
+the notes in the registration statement. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to the company and the notes, reference
+is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are
+not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the
+registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at
+the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at
+1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration
+statement, including the exhibits and any schedules thereto. 
+
+ If
+for any reason we are not required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, we are still required under the indenture to furnish
+the holders of the notes with the information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. In addition, we have agreed that, for so long as any notes remain
+outstanding, we will furnish to the holders of the notes and to securities analysts and prospective investors, upon their request, the information required to be delivered by Rule 144A(d)(4)
+under the Securities Act. We also maintain an Internet site at http://www.advanstar.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated
+into this prospectus or the registration statement of which it forms a part. 
+
+124
+
+ 
+
+ 
+
+INDEX TO FINANCIAL STATEMENTS 
+ 
+
+ 
+
+Reports of Independent Registered Public Accounting Firm
+
+ 
+
+F-2
+
+Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Consolidated Balance Sheets as of December 31, 2004 and 2005
+
+ 
+
+F-3
+
+ 
+
+Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-4
+
+ 
+
+Consolidated Statements of Stockholder's Equity for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-5
+
+ 
+
+Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-6
+
+ 
+
+Notes to Consolidated Financial Statements
+
+ 
+
+F-7
+
+Condensed Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2005 and June 30, 2006
+
+ 
+
+F-40
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2005 and 2006
+
+ 
+
+F-41
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-42
+
+ 
+
+Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-43
+
+ 
+
+Notes to Condensed Consolidated Financial Statements (Unaudited)
+
+ 
+
+F-44
+
+F-1
+
+ 
+
+ 
+ 
+
+Report of Independent Registered Public Accounting Firm 
+ 
+
+To
+the Stockholder and Board of Directors
+
+of Advanstar Communications Inc. 
+
+ In
+our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholder's equity and of cash flows present fairly, in all
+material respects, the financial position of Advanstar Communications Inc., a wholly owned subsidiary of Advanstar, Inc., and its subsidiaries at December 31, 2005 and 2004, and
+the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United
+States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
+consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
+financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board
+(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
+examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
+evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+
+/s/ PricewaterhouseCoopers
+LLP
+
+Minneapolis, Minnesota 
+
+March 1,
+2006, except as to the seventh paragraph of Note 14, and the change in operating segments described in Notes 1, 3, 4, and 11 for which the dates are March 14, 2006
+and October 4, 2006, respectively. 
+
+F-2
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Balance Sheets 
+ 
+ December 31, 2004 and 2005 
+ 
+
+ 
+
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands, except share and per share data)
+
+ 
+
+Assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash and cash equivalents
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+Accounts receivable, net of allowance of $785 and $1,076 at December 31, 2004 and 2005
+ 
+ 
+26,699
+ 
+ 
+24,607
+ 
+
+ 
+Prepaid expenses
+ 
+ 
+6,406
+ 
+ 
+7,871
+ 
+
+ 
+Other
+ 
+ 
+2,450
+ 
+ 
+1,965
+ 
+
+ 
+Current assets of discontinued operations
+ 
+ 
+2,690
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current assets
+ 
+ 
+79,468
+ 
+ 
+81,052
+ 
+
+Due from parent
+ 
+ 
+ 
+ 
+ 
+2,232
+ 
+
+Property, plant and equipment, net
+ 
+ 
+18,717
+ 
+ 
+21,306
+ 
+
+Intangible and other assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Goodwill
+ 
+ 
+586,967
+ 
+ 
+594,982
+ 
+
+ 
+Intangibles and other, net
+ 
+ 
+91,948
+ 
+ 
+62,644
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total intangible and other assets, net
+ 
+ 
+678,915
+ 
+ 
+657,626
+ 
+
+Non-current assets of discontinued operations and assets held for sale
+ 
+ 
+135,837
+ 
+ 
+4,620
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Liabilities and Stockholder's Equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Current maturities of long-term debt
+ 
+$
+1,300
+ 
+$
+201
+ 
+
+ 
+Accounts payable
+ 
+ 
+13,451
+ 
+ 
+12,342
+ 
+
+ 
+Accrued compensation
+ 
+ 
+7,451
+ 
+ 
+7,236
+ 
+
+ 
+Other accrued expenses
+ 
+ 
+32,979
+ 
+ 
+30,758
+ 
+
+ 
+Deferred revenue
+ 
+ 
+39,282
+ 
+ 
+46,472
+ 
+
+ 
+Current liabilities of discontinued operations
+ 
+ 
+15,886
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current liabilities
+ 
+ 
+110,349
+ 
+ 
+97,009
+ 
+
+Long-term debt, net of current maturities
+ 
+ 
+612,919
+ 
+ 
+461,786
+ 
+
+Deferred income taxes
+ 
+ 
+18,250
+ 
+ 
+31,500
+ 
+
+Other long-term liabilities
+ 
+ 
+4,229
+ 
+ 
+4,933
+ 
+
+Due to parent
+ 
+ 
+2,698
+ 
+ 
+ 
+ 
+
+Long-term liabilities of discontinued operations
+ 
+ 
+3,627
+ 
+ 
+ 
+ 
+
+Commitments and contingencies (Note 10)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stockholder's equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Common stock, $.01 par value, 3,500,000 shares authorized; 1,000,000 shares issued and outstanding at December 31, 2004 and 2005
+ 
+ 
+10
+ 
+ 
+10
+ 
+
+ 
+Capital in excess of par value
+ 
+ 
+447,367
+ 
+ 
+447,367
+ 
+
+ 
+Accumulated deficit
+ 
+ 
+(292,757
+)
+ 
+(284,182
+)
+
+ 
+Accumulated other comprehensive income
+ 
+ 
+6,245
+ 
+ 
+8,413
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total stockholder's equity
+ 
+ 
+160,865
+ 
+ 
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-3
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Statements of Operations 
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands)
+
+ 
+
+Revenue
+ 
+$
+190,698
+ 
+$
+270,412
+ 
+$
+288,913
+ 
+
+Operating expenses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cost of production (excluding depreciation)
+ 
+ 
+35,292
+ 
+ 
+50,859
+ 
+ 
+56,326
+ 
+
+ 
+Selling, editorial and circulation (excluding depreciation)
+ 
+ 
+69,293
+ 
+ 
+106,771
+ 
+ 
+112,373
+ 
+
+ 
+General and administrative (excluding depreciation)
+ 
+ 
+29,654
+ 
+ 
+39,419
+ 
+ 
+40,916
+ 
+
+ 
+Restructuring charge
+ 
+ 
+2,692
+ 
+ 
+ 
+ 
+ 
+4,771
+ 
+
+ 
+Funding of affiliated dot.com company operations (Note 13)
+ 
+ 
+1,121
+ 
+ 
+3,283
+ 
+ 
+ 
+ 
+
+ 
+Amortization of intangibles
+ 
+ 
+35,841
+ 
+ 
+34,809
+ 
+ 
+29,750
+ 
+
+ 
+Depreciation
+ 
+ 
+7,689
+ 
+ 
+7,815
+ 
+ 
+8,005
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total operating expenses
+ 
+ 
+181,582
+ 
+ 
+242,956
+ 
+ 
+252,141
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Operating income
+ 
+ 
+9,116
+ 
+ 
+27,456
+ 
+ 
+36,772
+ 
+
+Other income (expense)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest expense
+ 
+ 
+(59,086
+)
+ 
+(70,974
+)
+ 
+(63,058
+)
+
+ 
+Interest income
+ 
+ 
+470
+ 
+ 
+468
+ 
+ 
+1,476
+ 
+
+ 
+Loss on extinguishment of debt (Note 6)
+ 
+ 
+(11,324
+)
+ 
+ 
+ 
+ 
+(12,581
+)
+
+ 
+Other income, net
+ 
+ 
+918
+ 
+ 
+1,251
+ 
+ 
+80
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before income taxes and cumulative effect of accounting change
+ 
+ 
+(59,906
+)
+ 
+(41,799
+)
+ 
+(37,311
+)
+
+ 
+Income tax (benefit) provision
+ 
+ 
+(6,724
+)
+ 
+6,518
+ 
+ 
+(2,732
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before cumulative effect of accounting change
+ 
+ 
+(53,182
+)
+ 
+(48,317
+)
+ 
+(34,579
+)
+
+ 
+Income (loss) from operations of discontinued businesses, net of tax (Note 4)
+ 
+ 
+3,734
+ 
+ 
+(2,846
+)
+ 
+38,536
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(Loss) income before cumulative effect of accounting change
+ 
+ 
+(49,448
+)
+ 
+(51,163
+)
+ 
+3,957
+ 
+
+ 
+Cumulative effect of accounting change (Note 13)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,618
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-4
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Stockholder's Equity
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+Common Stock
+ 
+ 
+
+ 
+ 
+
+ 
+Accumulated
+
+Other
+
+Comprehensive
+
+Income (Loss)
+ 
+ 
+
+ 
+
+ 
+
+ 
+Capital in
+
+Excess of
+
+Par Value
+ 
+Accumulated
+
+Deficit
+ 
+ 
+
+ 
+
+ 
+
+ 
+Shares
+ 
+Amount
+ 
+Total
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Balances at December 31, 2002
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+387,367
+ 
+$
+(192,146
+)
+$
+(9,078
+)
+$
+186,153
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(49,448
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,283
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,308
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(36,857
+)
+
+Contribution of capital from parent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2003
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(241,594
+)
+ 
+3,513
+ 
+ 
+209,296
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(51,163
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,587
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+145
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(48,431
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2004
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(292,757
+)
+ 
+6,245
+ 
+ 
+160,865
+ 
+
+Comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,575
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,271
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(103
+)
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+10,743
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2005
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+447,367
+ 
+$
+(284,182
+)
+$
+8,413
+ 
+$
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these consolidated financial statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Cash Flows
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Cash flows from operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+Adjustments to reconcile net loss to net cash provided by operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cumulative effect of accounting change
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(4,618
+)
+
+ 
+Impairment of goodwill
+ 
+ 
+ 
+ 
+ 
+15,570
+ 
+ 
+ 
+ 
+
+ 
+Impairment of intangible assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,272
+ 
+
+ 
+Write-off of deferred financing costs
+ 
+ 
+11,324
+ 
+ 
+ 
+ 
+ 
+3,517
+ 
+
+ 
+Depreciation and amortization
+ 
+ 
+56,603
+ 
+ 
+49,968
+ 
+ 
+40,718
+ 
+
+ 
+Gain on derivative financial instruments
+ 
+ 
+(772
+)
+ 
+(1,391
+)
+ 
+(103
+)
+
+ 
+Losses of minority interest holders
+ 
+ 
+627
+ 
+ 
+562
+ 
+ 
+566
+ 
+
+ 
+Non-cash interest expense
+ 
+ 
+3,363
+ 
+ 
+3,264
+ 
+ 
+2,843
+ 
+
+ 
+Loss (gain) on disposition of business and other
+ 
+ 
+661
+ 
+ 
+(1,179
+)
+ 
+(52,710
+)
+
+ 
+Provision for bad debts
+ 
+ 
+578
+ 
+ 
+872
+ 
+ 
+1,417
+ 
+
+ 
+Deferred income taxes
+ 
+ 
+6,990
+ 
+ 
+11,260
+ 
+ 
+13,250
+ 
+
+ 
+Changes in operating assets and liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Accounts receivable
+ 
+ 
+(365
+)
+ 
+6,190
+ 
+ 
+(224
+)
+
+ 
+ 
+Inventories
+ 
+ 
+188
+ 
+ 
+(708
+)
+ 
+507
+ 
+
+ 
+ 
+Prepaid expenses
+ 
+ 
+844
+ 
+ 
+(583
+)
+ 
+24
+ 
+
+ 
+ 
+Accounts payable and accrued expenses
+ 
+ 
+16,167
+ 
+ 
+(8,165
+)
+ 
+(1,958
+)
+
+ 
+ 
+Deferred revenue
+ 
+ 
+1,525
+ 
+ 
+(6,860
+)
+ 
+(3,926
+)
+
+ 
+ 
+Other
+ 
+ 
+(2,437
+)
+ 
+649
+ 
+ 
+(1,842
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by operating activities
+ 
+ 
+45,848
+ 
+ 
+18,286
+ 
+ 
+8,308
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from investing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Additions to property, plant and equipment
+ 
+ 
+(7,608
+)
+ 
+(8,981
+)
+ 
+(9,564
+)
+
+Acquisitions of publications and shows, net of cash acquired
+ 
+ 
+(137,728
+)
+ 
+(7,915
+)
+ 
+(15,561
+)
+
+Proceeds from sale of assets
+ 
+ 
+ 
+ 
+ 
+24,418
+ 
+ 
+174,067
+ 
+
+Acquisitions of intangibles, contingent payments, and other
+ 
+ 
+3
+ 
+ 
+(1,920
+)
+ 
+17
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash (used in) provided by investing activities
+ 
+ 
+(145,333
+)
+ 
+5,602
+ 
+ 
+148,959
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from financing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds from revolving credit loan
+ 
+ 
+21,000
+ 
+ 
+6,000
+ 
+ 
+ 
+ 
+
+Payments on revolving credit loan
+ 
+ 
+(50,100
+)
+ 
+(14,000
+)
+ 
+ 
+ 
+
+Proceeds from long-term debt
+ 
+ 
+431,050
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Payments of long-term debt
+ 
+ 
+(333,525
+)
+ 
+(3,700
+)
+ 
+(152,167
+)
+
+Capital contribution from parent
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred financing costs
+ 
+ 
+(16,962
+)
+ 
+(315
+)
+ 
+(168
+)
+
+Project grant refunds received
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+600
+ 
+
+Dividends paid to minority interest holders
+ 
+ 
+(1,227
+)
+ 
+(500
+)
+ 
+(900
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash provided by (used in) financing activities
+ 
+ 
+110,236
+ 
+ 
+(12,515
+)
+ 
+(152,635
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Effect of exchange rate changes on cash
+ 
+ 
+(407
+)
+ 
+576
+ 
+ 
+754
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net increase in cash and cash equivalents
+ 
+ 
+10,344
+ 
+ 
+11,949
+ 
+ 
+5,386
+ 
+
+Cash and cash equivalents
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning of year
+ 
+ 
+18,930
+ 
+ 
+29,274
+ 
+ 
+41,223
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+End of year
+ 
+$
+29,274
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these consolidated financial statements. 
+
+F-6
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Notes to Consolidated Financial Statements 
+ 
+ December 31, 2003, 2004 and 2005 
+ 
+
+1. Nature of Business 
+
+ The accompanying consolidated financial statements include the accounts of Advanstar Communications Inc., a wholly owned subsidiary of
+Advanstar, Inc., and its majority owned subsidiaries (collectively, "Advanstar" or the "Company"). All intercompany accounts and transactions between consolidated entities have been eliminated. 
+
+ The
+Company operates and manages shows and conferences; publishes controlled and paid circulation trade, professional and consumer periodicals; and markets a broad range of marketing,
+direct mail and database products and services. The Company's MAGIC tradeshows and Life Sciences segment (see Note 11) generated approximately 27% and 51% of total revenue in 2005. 
+
+ The
+Company has restated its consolidated financial statements and footnotes from those included in the Company's annual report on Form 10-K for the year ended December 31,
+2005, filed with the Securities and Exchange Commission on March 30, 2006, only to reflect the Company's change in operating segments as described in Note 11. 
+
+2.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001064249_applied_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001064249_applied_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c177be2a752baaf9c3d43f38150464f209994125
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001064249_applied_legal_matters.txt
@@ -0,0 +1,2283 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the notes offered hereby will be passed upon for Advanstar by Davis Polk & Wardwell, New York, New York. 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The financial statements as of December 31, 2004 and 2005 and for each of the three years in the period ended December 31, 2005 included in this
+Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing
+and accounting. 
+
+123
+
+ 
+ 
+ 
+
+WHERE YOU CAN FIND MORE INFORMATION 
+ 
+
+ We have filed with the SEC, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to our offering
+of the notes. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. You will find additional information about us and
+the notes in the registration statement. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to the company and the notes, reference
+is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are
+not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the
+registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at
+the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at
+1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration
+statement, including the exhibits and any schedules thereto. 
+
+ If
+for any reason we are not required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, we are still required under the indenture to furnish
+the holders of the notes with the information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. In addition, we have agreed that, for so long as any notes remain
+outstanding, we will furnish to the holders of the notes and to securities analysts and prospective investors, upon their request, the information required to be delivered by Rule 144A(d)(4)
+under the Securities Act. We also maintain an Internet site at http://www.advanstar.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated
+into this prospectus or the registration statement of which it forms a part. 
+
+124
+
+ 
+
+ 
+
+INDEX TO FINANCIAL STATEMENTS 
+ 
+
+ 
+
+Reports of Independent Registered Public Accounting Firm
+
+ 
+
+F-2
+
+Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Consolidated Balance Sheets as of December 31, 2004 and 2005
+
+ 
+
+F-3
+
+ 
+
+Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-4
+
+ 
+
+Consolidated Statements of Stockholder's Equity for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-5
+
+ 
+
+Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-6
+
+ 
+
+Notes to Consolidated Financial Statements
+
+ 
+
+F-7
+
+Condensed Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2005 and June 30, 2006
+
+ 
+
+F-40
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2005 and 2006
+
+ 
+
+F-41
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-42
+
+ 
+
+Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-43
+
+ 
+
+Notes to Condensed Consolidated Financial Statements (Unaudited)
+
+ 
+
+F-44
+
+F-1
+
+ 
+
+ 
+ 
+
+Report of Independent Registered Public Accounting Firm 
+ 
+
+To
+the Stockholder and Board of Directors
+
+of Advanstar Communications Inc. 
+
+ In
+our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholder's equity and of cash flows present fairly, in all
+material respects, the financial position of Advanstar Communications Inc., a wholly owned subsidiary of Advanstar, Inc., and its subsidiaries at December 31, 2005 and 2004, and
+the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United
+States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
+consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
+financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board
+(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
+examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
+evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+
+/s/ PricewaterhouseCoopers
+LLP
+
+Minneapolis, Minnesota 
+
+March 1,
+2006, except as to the seventh paragraph of Note 14, and the change in operating segments described in Notes 1, 3, 4, and 11 for which the dates are March 14, 2006
+and October 4, 2006, respectively. 
+
+F-2
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Balance Sheets 
+ 
+ December 31, 2004 and 2005 
+ 
+
+ 
+
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands, except share and per share data)
+
+ 
+
+Assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash and cash equivalents
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+Accounts receivable, net of allowance of $785 and $1,076 at December 31, 2004 and 2005
+ 
+ 
+26,699
+ 
+ 
+24,607
+ 
+
+ 
+Prepaid expenses
+ 
+ 
+6,406
+ 
+ 
+7,871
+ 
+
+ 
+Other
+ 
+ 
+2,450
+ 
+ 
+1,965
+ 
+
+ 
+Current assets of discontinued operations
+ 
+ 
+2,690
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current assets
+ 
+ 
+79,468
+ 
+ 
+81,052
+ 
+
+Due from parent
+ 
+ 
+ 
+ 
+ 
+2,232
+ 
+
+Property, plant and equipment, net
+ 
+ 
+18,717
+ 
+ 
+21,306
+ 
+
+Intangible and other assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Goodwill
+ 
+ 
+586,967
+ 
+ 
+594,982
+ 
+
+ 
+Intangibles and other, net
+ 
+ 
+91,948
+ 
+ 
+62,644
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total intangible and other assets, net
+ 
+ 
+678,915
+ 
+ 
+657,626
+ 
+
+Non-current assets of discontinued operations and assets held for sale
+ 
+ 
+135,837
+ 
+ 
+4,620
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Liabilities and Stockholder's Equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Current maturities of long-term debt
+ 
+$
+1,300
+ 
+$
+201
+ 
+
+ 
+Accounts payable
+ 
+ 
+13,451
+ 
+ 
+12,342
+ 
+
+ 
+Accrued compensation
+ 
+ 
+7,451
+ 
+ 
+7,236
+ 
+
+ 
+Other accrued expenses
+ 
+ 
+32,979
+ 
+ 
+30,758
+ 
+
+ 
+Deferred revenue
+ 
+ 
+39,282
+ 
+ 
+46,472
+ 
+
+ 
+Current liabilities of discontinued operations
+ 
+ 
+15,886
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current liabilities
+ 
+ 
+110,349
+ 
+ 
+97,009
+ 
+
+Long-term debt, net of current maturities
+ 
+ 
+612,919
+ 
+ 
+461,786
+ 
+
+Deferred income taxes
+ 
+ 
+18,250
+ 
+ 
+31,500
+ 
+
+Other long-term liabilities
+ 
+ 
+4,229
+ 
+ 
+4,933
+ 
+
+Due to parent
+ 
+ 
+2,698
+ 
+ 
+ 
+ 
+
+Long-term liabilities of discontinued operations
+ 
+ 
+3,627
+ 
+ 
+ 
+ 
+
+Commitments and contingencies (Note 10)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stockholder's equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Common stock, $.01 par value, 3,500,000 shares authorized; 1,000,000 shares issued and outstanding at December 31, 2004 and 2005
+ 
+ 
+10
+ 
+ 
+10
+ 
+
+ 
+Capital in excess of par value
+ 
+ 
+447,367
+ 
+ 
+447,367
+ 
+
+ 
+Accumulated deficit
+ 
+ 
+(292,757
+)
+ 
+(284,182
+)
+
+ 
+Accumulated other comprehensive income
+ 
+ 
+6,245
+ 
+ 
+8,413
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total stockholder's equity
+ 
+ 
+160,865
+ 
+ 
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-3
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Statements of Operations 
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands)
+
+ 
+
+Revenue
+ 
+$
+190,698
+ 
+$
+270,412
+ 
+$
+288,913
+ 
+
+Operating expenses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cost of production (excluding depreciation)
+ 
+ 
+35,292
+ 
+ 
+50,859
+ 
+ 
+56,326
+ 
+
+ 
+Selling, editorial and circulation (excluding depreciation)
+ 
+ 
+69,293
+ 
+ 
+106,771
+ 
+ 
+112,373
+ 
+
+ 
+General and administrative (excluding depreciation)
+ 
+ 
+29,654
+ 
+ 
+39,419
+ 
+ 
+40,916
+ 
+
+ 
+Restructuring charge
+ 
+ 
+2,692
+ 
+ 
+ 
+ 
+ 
+4,771
+ 
+
+ 
+Funding of affiliated dot.com company operations (Note 13)
+ 
+ 
+1,121
+ 
+ 
+3,283
+ 
+ 
+ 
+ 
+
+ 
+Amortization of intangibles
+ 
+ 
+35,841
+ 
+ 
+34,809
+ 
+ 
+29,750
+ 
+
+ 
+Depreciation
+ 
+ 
+7,689
+ 
+ 
+7,815
+ 
+ 
+8,005
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total operating expenses
+ 
+ 
+181,582
+ 
+ 
+242,956
+ 
+ 
+252,141
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Operating income
+ 
+ 
+9,116
+ 
+ 
+27,456
+ 
+ 
+36,772
+ 
+
+Other income (expense)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest expense
+ 
+ 
+(59,086
+)
+ 
+(70,974
+)
+ 
+(63,058
+)
+
+ 
+Interest income
+ 
+ 
+470
+ 
+ 
+468
+ 
+ 
+1,476
+ 
+
+ 
+Loss on extinguishment of debt (Note 6)
+ 
+ 
+(11,324
+)
+ 
+ 
+ 
+ 
+(12,581
+)
+
+ 
+Other income, net
+ 
+ 
+918
+ 
+ 
+1,251
+ 
+ 
+80
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before income taxes and cumulative effect of accounting change
+ 
+ 
+(59,906
+)
+ 
+(41,799
+)
+ 
+(37,311
+)
+
+ 
+Income tax (benefit) provision
+ 
+ 
+(6,724
+)
+ 
+6,518
+ 
+ 
+(2,732
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before cumulative effect of accounting change
+ 
+ 
+(53,182
+)
+ 
+(48,317
+)
+ 
+(34,579
+)
+
+ 
+Income (loss) from operations of discontinued businesses, net of tax (Note 4)
+ 
+ 
+3,734
+ 
+ 
+(2,846
+)
+ 
+38,536
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(Loss) income before cumulative effect of accounting change
+ 
+ 
+(49,448
+)
+ 
+(51,163
+)
+ 
+3,957
+ 
+
+ 
+Cumulative effect of accounting change (Note 13)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,618
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-4
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Stockholder's Equity
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+Common Stock
+ 
+ 
+
+ 
+ 
+
+ 
+Accumulated
+
+Other
+
+Comprehensive
+
+Income (Loss)
+ 
+ 
+
+ 
+
+ 
+
+ 
+Capital in
+
+Excess of
+
+Par Value
+ 
+Accumulated
+
+Deficit
+ 
+ 
+
+ 
+
+ 
+
+ 
+Shares
+ 
+Amount
+ 
+Total
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Balances at December 31, 2002
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+387,367
+ 
+$
+(192,146
+)
+$
+(9,078
+)
+$
+186,153
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(49,448
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,283
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,308
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(36,857
+)
+
+Contribution of capital from parent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2003
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(241,594
+)
+ 
+3,513
+ 
+ 
+209,296
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(51,163
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,587
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+145
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(48,431
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2004
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(292,757
+)
+ 
+6,245
+ 
+ 
+160,865
+ 
+
+Comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,575
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,271
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(103
+)
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+10,743
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2005
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+447,367
+ 
+$
+(284,182
+)
+$
+8,413
+ 
+$
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these consolidated financial statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Cash Flows
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Cash flows from operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+Adjustments to reconcile net loss to net cash provided by operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cumulative effect of accounting change
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(4,618
+)
+
+ 
+Impairment of goodwill
+ 
+ 
+ 
+ 
+ 
+15,570
+ 
+ 
+ 
+ 
+
+ 
+Impairment of intangible assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,272
+ 
+
+ 
+Write-off of deferred financing costs
+ 
+ 
+11,324
+ 
+ 
+ 
+ 
+ 
+3,517
+ 
+
+ 
+Depreciation and amortization
+ 
+ 
+56,603
+ 
+ 
+49,968
+ 
+ 
+40,718
+ 
+
+ 
+Gain on derivative financial instruments
+ 
+ 
+(772
+)
+ 
+(1,391
+)
+ 
+(103
+)
+
+ 
+Losses of minority interest holders
+ 
+ 
+627
+ 
+ 
+562
+ 
+ 
+566
+ 
+
+ 
+Non-cash interest expense
+ 
+ 
+3,363
+ 
+ 
+3,264
+ 
+ 
+2,843
+ 
+
+ 
+Loss (gain) on disposition of business and other
+ 
+ 
+661
+ 
+ 
+(1,179
+)
+ 
+(52,710
+)
+
+ 
+Provision for bad debts
+ 
+ 
+578
+ 
+ 
+872
+ 
+ 
+1,417
+ 
+
+ 
+Deferred income taxes
+ 
+ 
+6,990
+ 
+ 
+11,260
+ 
+ 
+13,250
+ 
+
+ 
+Changes in operating assets and liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Accounts receivable
+ 
+ 
+(365
+)
+ 
+6,190
+ 
+ 
+(224
+)
+
+ 
+ 
+Inventories
+ 
+ 
+188
+ 
+ 
+(708
+)
+ 
+507
+ 
+
+ 
+ 
+Prepaid expenses
+ 
+ 
+844
+ 
+ 
+(583
+)
+ 
+24
+ 
+
+ 
+ 
+Accounts payable and accrued expenses
+ 
+ 
+16,167
+ 
+ 
+(8,165
+)
+ 
+(1,958
+)
+
+ 
+ 
+Deferred revenue
+ 
+ 
+1,525
+ 
+ 
+(6,860
+)
+ 
+(3,926
+)
+
+ 
+ 
+Other
+ 
+ 
+(2,437
+)
+ 
+649
+ 
+ 
+(1,842
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by operating activities
+ 
+ 
+45,848
+ 
+ 
+18,286
+ 
+ 
+8,308
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from investing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Additions to property, plant and equipment
+ 
+ 
+(7,608
+)
+ 
+(8,981
+)
+ 
+(9,564
+)
+
+Acquisitions of publications and shows, net of cash acquired
+ 
+ 
+(137,728
+)
+ 
+(7,915
+)
+ 
+(15,561
+)
+
+Proceeds from sale of assets
+ 
+ 
+ 
+ 
+ 
+24,418
+ 
+ 
+174,067
+ 
+
+Acquisitions of intangibles, contingent payments, and other
+ 
+ 
+3
+ 
+ 
+(1,920
+)
+ 
+17
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash (used in) provided by investing activities
+ 
+ 
+(145,333
+)
+ 
+5,602
+ 
+ 
+148,959
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from financing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds from revolving credit loan
+ 
+ 
+21,000
+ 
+ 
+6,000
+ 
+ 
+ 
+ 
+
+Payments on revolving credit loan
+ 
+ 
+(50,100
+)
+ 
+(14,000
+)
+ 
+ 
+ 
+
+Proceeds from long-term debt
+ 
+ 
+431,050
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Payments of long-term debt
+ 
+ 
+(333,525
+)
+ 
+(3,700
+)
+ 
+(152,167
+)
+
+Capital contribution from parent
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred financing costs
+ 
+ 
+(16,962
+)
+ 
+(315
+)
+ 
+(168
+)
+
+Project grant refunds received
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+600
+ 
+
+Dividends paid to minority interest holders
+ 
+ 
+(1,227
+)
+ 
+(500
+)
+ 
+(900
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash provided by (used in) financing activities
+ 
+ 
+110,236
+ 
+ 
+(12,515
+)
+ 
+(152,635
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Effect of exchange rate changes on cash
+ 
+ 
+(407
+)
+ 
+576
+ 
+ 
+754
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net increase in cash and cash equivalents
+ 
+ 
+10,344
+ 
+ 
+11,949
+ 
+ 
+5,386
+ 
+
+Cash and cash equivalents
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning of year
+ 
+ 
+18,930
+ 
+ 
+29,274
+ 
+ 
+41,223
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+End of year
+ 
+$
+29,274
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these consolidated financial statements. 
+
+F-6
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Notes to Consolidated Financial Statements 
+ 
+ December 31, 2003, 2004 and 2005 
+ 
+
+1. Nature of Business 
+
+ The accompanying consolidated financial statements include the accounts of Advanstar Communications Inc., a wholly owned subsidiary of
+Advanstar, Inc., and its majority owned subsidiaries (collectively, "Advanstar" or the "Company"). All intercompany accounts and transactions between consolidated entities have been eliminated. 
+
+ The
+Company operates and manages shows and conferences; publishes controlled and paid circulation trade, professional and consumer periodicals; and markets a broad range of marketing,
+direct mail and database products and services. The Company's MAGIC tradeshows and Life Sciences segment (see Note 11) generated approximately 27% and 51% of total revenue in 2005. 
+
+ The
+Company has restated its consolidated financial statements and footnotes from those included in the Company's annual report on Form 10-K for the year ended December 31,
+2005, filed with the Securities and Exchange Commission on March 30, 2006, only to reflect the Company's change in operating segments as described in Note 11. 
+
+2.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001068152_american_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001068152_american_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9db98fc0a34933384f9b4f9e7b4587c4e726e512
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001068152_american_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offering and sale of the notes regarding the validity and enforceability of the notes are passed upon for us by Gibson, Dunn & Crutcher LLP, New York, New York. Certain other legal matters relating to the guarantee of the notes by our Nebraska subsidiary were passed upon for us by DeMars, Gordon, Olson & Zalewski, Lincoln, Nebraska.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001071941_arcadia_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001071941_arcadia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6c3ddd2711d48546abd824bcc379b88cf73834aa
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001071941_arcadia_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Common Stock will be passed upon by Marquis Aurbach, Attorneys at Law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001072702_asiamart_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001072702_asiamart_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e1c9733cfb549524593607eeb825e9e007a1a605
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001072702_asiamart_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Richardson & Patel LLP has rendered an opinion regarding the legality of the issuance of the shares of common stock being registered in this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001087325_st_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001087325_st_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..169d231a7933244f7c0308c0559e0dacc86e5fc9
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001087325_st_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Wilson Sonsini Goodrich Rosati, Professional Corporation, Palo Alto, California. Latham Watkins LLP, Menlo Park, California, is counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001095276_tigrent_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001095276_tigrent_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d92b89624b5b7c7a8eb1d3c0abc0eeb985a86583
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001095276_tigrent_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by the Law Office of Gary A. Agron, Greenwood Village, Colorado. Mr. Agron owns 207,816 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001097070_buy-com_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001097070_buy-com_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..468bc248338474275b199d548489ba8111ec5fca
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001097070_buy-com_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Dorsey & Whitney LLP, Irvine, California. Legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Heller Ehrman LLP, San Diego, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001098016_genius_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001098016_genius_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..63774afa3c2554bbf2fdfcb20636bf37dc6574b8
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001098016_genius_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered hereby will be passed upon for us by Morrison & Foerster LLP, Los Angeles, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001104332_oasys_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001104332_oasys_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4947539acc44fded50cedeabda3e183b10c23a2d
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001104332_oasys_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters in connection with the common stock offered hereby have been passed upon for Summus by Donald T. Locke, Summus Chief Financial Officer and General Counsel. Mr. Locke will opine that (1) the shares of common stock underlying the warrants, when such shares are duly delivered against payment as provided in the warrants and (2) the shares of common stock underlying the Senior Convertible Debt, when converted into Summus common stock in accordance with their terms, shall all be validly issued, fully paid, and non-assessable. Mr. Locke owns 18,462 shares of Summus common stock; warrants to purchase another 33,334 shares of common stock, and options to purchase 331,817 shares of Summus common stock (of which 157,706 are vested).
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001105018_nymex_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001105018_nymex_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f476fef329502d402b233c0c4a5e205b23cf18f3
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001105018_nymex_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Certain legal matters with respect to the common stock offered by this prospectus will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP and Christopher Bowen, Esq., General Counsel, Chief Administrative Officer and Secretary of the Company. Mr. Bowen, upon consummation of this offering, will beneficially own stock options and restricted stock units exercisable for 75,000 and 8,000 shares of our common stock, respectively. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell. Certain legal matters related to the selling stockholders will be passed upon by Sidley Austin LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001107216_orchid_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001107216_orchid_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..df0c08dcf6632116a01e51f116369b92d2b224c2
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001107216_orchid_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered in this prospectus has been passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. Members of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and certain members of their families and trusts for their benefit own an aggregate of 11,473 shares of our common stock and options to purchase 784 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001109189_basic_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001109189_basic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7a2320bb39f5fb8cba599a5ffe7370f289671329
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001109189_basic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock distributed by the distributing holders under this prospectus will be passed upon for us by Andrews Kurth LLP, Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001115896_galveston_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001115896_galveston_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001115896_galveston_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001115897_galveston_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001115897_galveston_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001115897_galveston_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001127534_cantor_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001127534_cantor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..62e5c399392003d0bc42edf7045c7131fb162d5a
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001127534_cantor_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters, including the validity of the YUPS, will be passed upon for Cantor Fitzgerald & Co., the sponsor, and the trust by Morgan, Lewis & Bockius LLP. Morgan, Lewis & Bockius LLP, as special U.S. tax counsel to the trust, also will render an opinion regarding the material federal income tax consequences relating to the YUPS.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001143799_medicor_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001143799_medicor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7646280386fca5459a9a143d6072d4105a0987ec
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001143799_medicor_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed upon for us by Clifford Chance US LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001157564_small_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001157564_small_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f2f710bce0e97c5666c55694f187797d0590030e
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001157564_small_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for us by Troy & Gould P.C. David L. Ficksman, a member of Troy & Gould P.C., beneficially owns 37,726 shares of Small World Kids.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001163710_reliastar_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001163710_reliastar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..024b310bf3a71816f7cb175df8102cce867aafff
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001163710_reliastar_legal_matters.txt
@@ -0,0 +1,40824 @@
+___________________
+
+ 
+
+FORM 10-K
+
+ 
+
+ 
+ 
+ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
+
+ 
+
+For the fiscal year ended December 31, 2005
+
+ 
+
+Commission file number: 333-114338
+
+ 
+ 
+
+ 
+ 
+ 
+RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
+ 
+
+(Exact name of registrant as specified in its charter)
+
+ 
+ 
+
+ 
+ 
+ New York
+
+(State or other jurisdiction of incorporation or organization)
+
+ 
+
+1000 Woodbury Road, Suite 208, Woodbury, New York
+
+(Address of principal executive offices)
+
+ 
+ 
+ 
+ 53-0242530
+
+(IRS employer identification no.)
+
+ 
+
+11797
+
+(Zip code)
+
+ 
+ 
+
+ 
+ 
+ Registrant's telephone number, including area code (516) 682-8700
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Former name, former address and former fiscal year, if changed since last report
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Securities registered pursuant to Section 12(b) of the Act: None
+
+Securities registered pursuant to Section 12(g) of the Act: None
+
+ 
+
+Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
+
+ 
+
+Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
+
+ 
+
+Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
+registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
+
+ 
+
+Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form
+10-K. Yes x No o
+
+ 
+
+Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).
+
+Large accelerated filer o Accelerated filer o Non-accelerated filer x
+
+ 
+
+Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
+
+ 
+
+State the aggregate market value of the voting and non-voting common equity held by non-affiliates: N/A
+
+ 
+
+APPLICABLE ONLY TO CORPORATE ISSUERS:
+
+ 
+
+Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 1,377,863 shares of Common Stock, $2 par value, as of March 23, 2006,
+authorized, issued and outstanding, all of which were directly owned by ReliaStar Life Insurance Company.
+
+ 
+
+NOTE: WHEREAS RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).
+ 
+
+ 
+
+ 
+
+1
+
+ 
+
+ 
+
+ 
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Annual Report on Form 10-K
+
+For the Year Ended December 31, 2005
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ TABLE OF CONTENTS
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Form 10-K
+
+Item No. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Page
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ PART I
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Item 1.
+ 
+ 
+ Business**
+ 
+ 
+ 3
+ 
+
+ 
+ 
+ Item 1A.
+ 
+ 
+ Risk Factors
+ 
+ 
+ 12
+ 
+
+ 
+ 
+ Item 1B.
+ 
+ 
+ Unresolved Staff Comments****
+ 
+ 
+ 18
+ 
+
+ 
+ 
+ Item 2.
+ 
+ 
+ Properties**
+ 
+ 
+ 18
+ 
+
+ 
+ 
+ Item 3.
+ 
+ 
+ Legal Proceedings
+ 
+ 
+ 19
+ 
+
+ 
+ 
+ Item 4.
+ 
+ 
+ Submission of Matters to a Vote of Security Holders*
+ 
+ 
+ 19
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ PART II
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Item 5.
+ 
+ 
+ Market for Registrant s Common Equity, Related Stockholder 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Matters and Issuer Purchases of Equity Securities
+ 
+ 
+ 20
+ 
+
+ 
+ 
+ Item 6.
+ 
+ 
+ Selected Financial Data***
+ 
+ 
+ 21
+ 
+
+ 
+ 
+ Item 7.
+ 
+ 
+ Management s Narrative Analysis of the Results of Operations and 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Financial Condition**
+ 
+ 
+ 22
+ 
+
+ 
+ 
+ Item 7A.
+ 
+ 
+ Quantitative and Qualitative Disclosures About Market Risk
+ 
+ 
+ 57
+ 
+
+ 
+ 
+ Item 8.
+ 
+ 
+ Financial Statements and Supplementary Data
+ 
+ 
+ 61
+ 
+
+ 
+ 
+ Item 9.
+ 
+ 
+ Changes in and Disagreements with Accountants on Accounting and
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Financial Disclosure
+ 
+ 
+ 115
+ 
+
+ 
+ 
+ Item 9A.
+ 
+ 
+ Controls and Procedures
+ 
+ 
+ 115
+ 
+
+ 
+ 
+ Item 9B.
+ 
+ 
+ Other Information
+ 
+ 
+ 115
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ PART III
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Item 10.
+ 
+ 
+ Directors and Executive Officers of the Registrant*
+ 
+ 
+ 116
+ 
+
+ 
+ 
+ Item 11.
+ 
+ 
+ Executive Compensation*
+ 
+ 
+ 116
+ 
+
+ 
+ 
+ Item 12.
+ 
+ 
+ Security Ownership of Certain Beneficial Owners and Management
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ and Related Stockholder Matters*
+ 
+ 
+ 116
+ 
+
+ 
+ 
+ Item 13.
+ 
+ 
+ Certain Relationships and Related Transactions*
+ 
+ 
+ 116
+ 
+
+ 
+ 
+ Item 14.
+ 
+ 
+ Principal Accounting Fees and Services
+ 
+ 
+ 117
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ PART IV
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Item 15.
+ 
+ 
+ Exhibits, Financial Statement Schedules
+ 
+ 
+ 119
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Index to Financial Statement Schedules
+ 
+ 
+ 123
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Signatures
+ 
+ 
+ 127
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ * Item omitted pursuant to General Instruction I(2) of Form 10-K, except as to Part III, Item 10 with respect to compliance with Sections 406 
+
+and 407 of the Sarbanes Oxley Act of 2002.
+
+** Item prepared in accordance with General Instruction I(2) of Form 10-K.
+
+*** Although item may be omitted pursuant to General Instruction I(2) of Form 10-K, the Company has provided certain disclosure under this Item.
+
+**** Item omitted as registrant is neither an accelerated filer nor a well-known seasoned issuer.
+ 
+
+ 
+
+2
+
+ 
+
+ 
+
+ 
+
+PART I
+
+ 
+
+ 
+ 
+ Item 1.
+ 
+ 
+ Business
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ (Dollar amounts in millions, unless otherwise stated)
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Organization of Business
+
+ 
+
+ReliaStar Life Insurance Company of New York ("RLNY" or the "Company," as appropriate) is a stock life insurance company domiciled in the State of New York and provides financial products and services in the United States. RLNY is authorized to conduct its insurance business in the District of Columbia and all states.
+
+ 
+
+RLNY is a direct, wholly-owned subsidiary of ReliaStar Life Insurance Company ("ReliaStar Life" or Parent ), which is a direct, wholly-owned subsidiary of Lion Connecticut Holdings Inc. ("Lion"), a Connecticut holding and management company. Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"). ING is a global financial services holding company based in The Netherlands, with American Depository Shares listed on the New York Stock Exchange under the symbol "ING".
+
+ 
+
+Description of Business
+
+ 
+
+The Company principally provides and distributes life insurance and related financial services products, including individual life insurance and annuities, and group life, and health products and services. The Company s strategy is to offer a wide variety of products and services designed to address customers needs for financial security, especially tax-advantaged savings for retirement and protection in the event of death. 
+
+ 
+
+The Company has one operating segment, ING U.S. Financial Services, which offers the products described below.
+
+ 
+
+Products and Services, Strategy, Method of Distribution, and Principal Markets
+
+ 
+
+Individual Life Insurance and Annuities: The Company believes longer life expectancies, an aging population, and growing concern over the stability and availability of the Social Security system have made retirement planning a priority for many Americans. The target market for the Company s individual annuity and life products is primarily individuals that represent the upper half of the mass affluent consumer market.
+
+ 
+
+The Company offers a wide range of individual life insurance products, including term, universal life, second-to-die universal life, variable universal life, and fixed and variable annuities, through a network of independent agents and financial professionals. These products are marketed to individual customers who prefer to purchase insurance and investment products from a personal financial adviser. These products target middle and upper-income families and niche markets, including small-business owners. 
+
+ 
+
+ 
+
+3
+
+ 
+
+ 
+
+ 
+
+Variable universal life insurance policies and variable annuity products contain alternative investment options (generally mutual funds) and policy values which will vary based upon the investment returns of the fund(s) selected by the policyholder/contractowner.
+
+ 
+
+Variable universal life and fixed universal life insurance products represent a significant portion of the individual life insurance premium volume. In addition to alternative investment options, these products provide certain benefits associated with traditional life insurance, such as death benefits and cash values. Fixed universal life policies provide for guaranteed levels of insurance protection and minimum interest rate guarantees. Interest-sensitive products provide for interest crediting rates which may be adjusted periodically, subject to minimum guaranteed rates as set forth in policyholder contracts. Adjustments are made to the crediting rates on interest-sensitive products based upon a variety of factors, including investment performance, market interest rates, and competitive factors. Profits recognized on interest-sensitive products are affected by mortality
+experience, the margin between interest rates earned on investments and interest credited to policyholders, as well as capital gains and losses on investments, persistency, and expenses. 
+
+ 
+
+The variable annuities offered by the Company are long-term savings vehicles in which contractowner deposits are recorded and primarily maintained in separate accounts established for the Company and registered with the Securities and Exchange Commission ( SEC ) as a unit investment trust. Variable annuities issued by the Company are a combination of variable and fixed deferred annuity options under which some or all of the premiums may be allocated by the contractowner to a fixed account available under the contract.
+
+ 
+
+The Company sells variable annuity contracts that offer one or more of the following guaranteed death benefits and living benefits:
+
+ 
+
+Guaranteed Minimum Death Benefits ( GMDBs ): The Company has offered the following guaranteed death benefits:
+
+ 
+
+ 
+ 
+ Standard - Guarantees that, upon the death of the annuitant, the death benefit will be no less than the premiums paid by the contractowner, net of any contract withdrawals.
+ 
+
+ 
+ 
+ Ratchet - Guarantees that, upon the death of the annuitant, the death benefit will be no less than the greater of (1) Standard or (2) the maximum contract anniversary value of the variable annuity.
+ 
+
+ 
+
+4
+
+ 
+
+ 
+
+ 
+
+Guaranteed Living Benefits: The Company offers the following guaranteed living benefits:
+
+ 
+
+ 
+ 
+ Guaranteed Minimum Income Benefit ( GMIB ) - Guarantees a minimum income payout, exercisable each contract anniversary on or after the 10th rider anniversary. 
+ 
+
+ 
+ 
+ Guaranteed Minimum Withdrawal Benefit ( GMWB ) - Guarantees that annual withdrawals of up to 7% of eligible premiums may be made until eligible premiums previously paid by the contractowner are returned, regardless of account value performance. 
+ 
+
+ 
+ 
+ Guaranteed Minimum Accumulation Benefit ( GMAB ) Guarantees that the account value will be at least 100% of the premiums paid by the contractowner after 10 years (GMAB10).
+ 
+
+ 
+
+Variable annuity contracts containing guaranteed death and living benefits expose the Company to equity risk. An increase in the value of the equity markets may increase account values for these contracts, thereby decreasing the Company s risk associated with the GMDBs, GMIBs, GMABs, and GMWBs. A decrease in the equity markets may cause a decrease in the account values, thereby increasing the possibility that the Company may be required to pay amounts to customers due to guaranteed death or living benefits.
+
+ 
+
+The Company discourages premature surrenders of interest-sensitive products through contractual surrender charges and the adjustment of interest crediting rates. The policies and annuities sold contain provisions which allow the contractowner or policyholder to withdraw or surrender their contracts under defined circumstances. These contracts generally contain provisions which apply penalties or otherwise limit the ability of contractowners and policyholders to make such withdrawals or surrenders. The interest rates that the Company might be required to credit under their interest-sensitive insurance products to forestall surrenders, particularly in a time of rapidly rising market interest rates, could have an adverse effect on operating income.
+
+ 
+
+The individual life insurance business is subject to risks in the event that the Company's mortality experience deviates from the assumptions used in establishing its premium rates.
+
+ 
+
+Group Life and Health Products: The Company targets the sale of employee benefits products and related financial services to medium and large corporate employers and affinity groups. Additionally, the Company sells individual and payroll-deduction products to employees of its corporate clients. Principal products include group and individual life insurance and non-medical group insurance products.
+
+ 
+
+ 
+
+5
+
+ 
+
+ 
+
+ 
+
+Group life and disability insurance and employee benefit related services are offered by the Company. 
+
+ 
+
+ 
+ 
+ Employee benefits products are marketed through major brokerage operations and through direct sales to employers.
+ 
+
+ 
+ 
+ Group term life insurance is marketed to employer groups in the Company s target market. Premiums for these policies are based largely upon the experience of the Company, and in some instances, on the experience of the particular group policyholder. The primary risks related to this line of business include deviations from expected mortality, expenses, and investment income. The Company seeks to control the mortality risk through reinsurance treaties.
+ 
+
+ 
+ 
+ The Company also markets group disability income insurance. This coverage compensates employees for loss of income due to sickness or injury. The profitability of this business is affected by morbidity experience and the investment return on assets supporting the policy reserves.
+ 
+
+ 
+
+The Company markets individual life insurance policies to employees at the worksite and to members of affinity groups. The products delivered to these markets include universal life insurance policies, whole life insurance policies, and individual term life policies.
+
+ 
+
+The Company also markets medical stop loss coverage to employer sponsors of self-funded employee health benefit plans. Prior to 2003, the Company marketed individual cancer policies to employees at the worksite as well.
+
+ 
+
+Group Annuities: The Company has offered deferred group annuity contracts primarily to small businesses. Currently, the Company is not actively marketing these contracts. Deferred group annuity contracts include programs offered to qualified and nonqualified deferred compensation plans that package administrative and record-keeping services along with a variety of investment options, including affiliated and nonaffiliated mutual funds and variable and fixed investment options.
+
+ 
+
+Group annuity contracts contain variable and/or fixed investment options. Variable options generally provide for full assumption by the customer of investment risks. Assets supporting variable annuity options are held in separate accounts that invest in mutual funds managed and/or distributed by RLNY, its affiliates, or unaffiliated entities. Variable separate account investment income and realized capital gains and losses are not reflected in the Statements of Operations. 
+
+ 
+
+Fixed options are fully-guaranteed . Fully-guaranteed fixed options provide guarantees on investment return, maturity values, and, if applicable, benefit payments.
+
+ 
+
+ 
+
+6
+
+ 
+
+ 
+
+ 
+
+Assets Under Management
+
+ 
+
+A substantial portion of the Company s fees or other charges and margins are based on general and separate account assets under management ( AUM ). General account AUM represents assets in which the Company bears the investment risk. Separate account AUM represent assets in which the contractowners bear the investment risk. AUM is principally affected by net deposits (i.e., life and annuity premiums, less surrenders) and investment performance (i.e., interest credited to customer accounts for fixed options or market performance for variable options). The general and separate account AUM that supported fixed and variable products and policy loans was as follows at December 31, 2005 and 2004.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ Fixed products
+ 
+ 
+ $
+ 
+ 
+ 1,798.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,732.7 
+ 
+
+ 
+ 
+ Variable products
+ 
+ 
+ 
+ 
+ 
+ 678.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 570.0 
+ 
+
+ 
+ 
+ Policy loans
+ 
+ 
+ 
+ 
+ 
+ 93.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 90.9 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,570.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,393.6 
+ 
+
+ 
+
+Competition
+
+ 
+
+The businesses in which the Company engages are highly competitive. The products compete in marketplaces characterized by a large number of competitors with similar products. Competition is based largely upon the crediting rates under the policies, the credit and claims paying ratings of competing insurers, name recognition, the commission structures of competing insurers, and the levels of service afforded distributors. Competing investment opportunities are also made available by mutual funds, banks, and other financial intermediaries, many of which have greater resources than the Company. The products are not generally eligible for legal protection from being copied by others, and capital is the most significant barrier to entry by new competitors. 
+
+ 
+
+Group life insurance is a homogeneous product sold in a highly competitive market. The Company s competitors include all of the largest insurers doing business in the United States. 
+
+ 
+
+Reserves
+
+ 
+
+The Company records as liabilities actuarially-determined reserves that are calculated to meet the Company s future obligations under its universal, variable and traditional life policies, fixed and variable annuity contracts, accident and health policies, supplemental contracts, and miscellaneous supplemental benefits and riders. Generally, reserves are calculated using mortality and withdrawal rate assumptions based on relevant Company experience and are periodically reviewed against both industry standards and experience. 
+
+ 
+
+ 
+
+7
+
+ 
+
+ 
+
+ 
+
+Reserves for universal life products are equal to cumulative deposits, less withdrawals and charges, plus credited interest thereon. In addition, the Company holds reserves as required by Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts ( SOP 03-1 ), for certain products with anticipated losses in later policy durations. The Company also holds unearned revenue reserves related to contractual charges deemed to be earned in future periods. Reserves for traditional life insurance contracts represent the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums. 
+
+ 
+
+Reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts are equal to cumulative deposits, less charges and withdrawals, plus credited interest thereon. Reserve interest rates vary by product up to 8.0% for the years 2005, 2004, and 2003.
+
+ 
+
+Reserves for immediate annuities with life contingent payout benefits are computed on the basis of assumed interest discount rates, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by annuity plan type, year of issue, and policy duration. For the years 2005, 2004, and 2003, reserve interest discount rates range from 4.8% to 8.8%.
+
+ 
+
+As discussed above under Products and Services, Strategy, Method of Distribution, and Principal Markets, the Company established reserves for the guaranteed death benefits included in variable annuities.
+
+ 
+
+As of December 31, 2005, RLNY s $2,457.2 of reserves (general and separate account before reinsurance) and deposit-type funds were comprised of each type of the following products:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amount
+ 
+ 
+ 
+ 
+ 
+ % of Total
+ 
+
+ 
+ 
+ Variable and fixed life
+ 
+ 
+ $
+ 
+ 
+ 850.3 
+ 
+ 
+ 
+ 
+ 
+ 34.6%
+ 
+
+ 
+ 
+ Variable and fixed annuity
+ 
+ 
+ 
+ 
+ 
+ 738.9 
+ 
+ 
+ 
+ 
+ 
+ 30.1%
+ 
+
+ 
+ 
+ Group life and health
+ 
+ 
+ 
+ 
+ 
+ 528.2 
+ 
+ 
+ 
+ 
+ 
+ 21.5%
+ 
+
+ 
+ 
+ Group annuity
+ 
+ 
+ 
+ 
+ 
+ 339.8 
+ 
+ 
+ 
+ 
+ 
+ 13.8%
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,457.2 
+ 
+ 
+ 
+ 
+ 
+ 100.0%
+ 
+
+ 
+
+Reinsurance Arrangements
+
+ 
+
+The Company utilizes indemnity reinsurance agreements to reduce its exposure to large losses from its life and annuity insurance businesses. Reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the Company s primary liability as the direct insurer of the risks. The Company s retention limit is $0.3 per insurable life for individual retail coverage. For group coverage and individual payroll deduction coverage, the retention limits are $0.8 and $0.5, respectively, per life with per occurrence limitations, subject to certain maximums. Reinsurance treaties are structured as yearly renewable term, coinsurance, or modified coinsurance. The Company currently has a concentration of reinsurance with ReliaStar Life. At December 31, 2005 and 2004, the Company had $17.9 and $9.1, respectively,
+of reserves ceded under the reinsurance agreements with its parent, representing 17.8% and 10.8%, respectively, of the total Reinsurance recoverable.
+
+ 
+
+8
+
+ 
+
+ 
+
+ 
+
+The Company evaluates the financial strength of potential reinsurers and continually monitors the financial strength and credit ratings of its reinsurers. Only those reinsurance recoverable balances deemed probable of recovery are reflected as assets on the Company s Balance Sheets.
+
+ 
+
+Investment Overview and Strategy
+
+ 
+
+The Company s investment strategy focuses on diversification by asset class. The Company seeks to achieve economic diversification while reducing overall credit risk and liquidity risk. In addition, the Company seeks to mitigate the impact of cash flow variability from embedded options within certain investment products, such as convexity risk on collateralized mortgage obligations and call options. The investment management function is centralized under ING Investment Management LLC, an affiliate of the Company, pursuant to an investment advisory agreement. Separate portfolios are established for groups of products with similar liability characteristics within the Company.
+
+ 
+
+The Company s general account invests primarily in fixed maturity investments, including publicly issued bonds (including government bonds), privately placed notes and bonds, mortgage-backed securities, and asset-backed securities. The primary investment strategy is to optimize the risk-adjusted return through superior asset selection predicated on a developed relative value approach, credit research and monitoring, superior management of interest rate risk, and active exploration into new investment product opportunities. Investments are purchased when market returns, adjusted for risk and expenses, are sufficient to profitably support growth of the liability block of business. In addition, assets and liabilities are analyzed and reported for internal management purposes on an option-adjusted basis. The level of required capital of given transactions is a primary factor in
+determining relative value among different investment and liability alternatives, within the scope of each product type s objective. An active review of existing holdings identifies specific assets that could be effectively traded in order to enhance the risk-adjusted returns of the portfolio, while minimizing adverse tax and accounting impacts. The Company strives to maintain a portfolio weighted average asset quality rating of A based on Standard & Poor s ( S&P ) ratings classifications. The weighted average excludes mortgage loans but includes mortgage-backed securities which are reported with bonds.
+
+ 
+
+Ratings
+
+ 
+
+On December 15, 2004, S&P reaffirmed its AA (Very Strong) counterparty credit and financial strength rating of ING s primary U.S. insurance operating companies ( ING U.S. ), including the Company. S&P also on this date revised the outlook on the core insurance operating companies from negative to stable, reflecting ING s commercial position and diversification, financial flexibility, reduced capital leverage, and improved profitability. The outlook revisions recognize ING s progress in setting a more focused and decisive strategic direction and implementing more integrated financial management across banking and insurance. There has been no change in S&P s rating of ING U.S., including the Company.
+
+ 
+
+9
+
+ 
+
+ 
+
+ 
+
+On May 6, 2005, Moody s Investor s Service, Inc. ( Moody s ) issued a credit opinion affirming the financial strength rating of ING U.S., including the Company, of Aa3 (Excellent) with a stable outlook. The rating is based on the strong implicit support and financial strength of the parent company, ING. Furthermore, Moody s noted that ING U.S. has built a leading market share in the domestic individual life insurance, annuity, and retirement plan businesses. ING U.S. enjoys product diversity, further enhancing its credit profile through the use of these multiple distribution channels.
+
+ 
+
+On February 24, 2006, A.M. Best Company, Inc. ( A.M. Best ) reaffirmed the financial strength rating of A+ (Superior) of ING U.S., including the Company, while revising its outlook from negative to stable. A.M. Best has also affirmed and assigned issuer credit ratings of aa- to the same entities.
+
+ 
+
+Regulation
+
+ 
+
+The Company s operations are subject to comprehensive regulation throughout the United States. The laws of the various jurisdictions establish supervisory agencies, including the state insurance departments, with broad authority to grant licenses to transact business and regulate many aspects of the products and services offered by the Company, as well as solvency and reserve adequacy. Many agencies also regulate the investment activities of insurance companies on the basis of quality, diversification, and other quantitative criteria. The Company s operations and accounts are subject to examination at regular intervals by certain of these regulators. 
+
+ 
+
+Operations conducted by the Company are subject to regulation by various state insurance departments in the states where the Company conducts business, in particular the insurance department of its state of domicile, New York. Among other matters, these agencies may regulate premium rates, trade practices, agent licensing, policy forms, underwriting and claims practices, and the maximum interest rates that can be charged on policy loans.
+
+ 
+
+The SEC, the National Association of Securities Dealers ( NASD ) and, to a lesser extent, the states, regulate sales and investment management activities and operations of the Company. Generally, the Company s variable life and variable annuity products and certain of its fixed annuities are registered as securities with the SEC. Regulations of the SEC, Department of Labor, and Internal Revenue Service also impact certain of the Company s annuity, life insurance and other investment and retirement products. These products may involve separate accounts and mutual funds registered under the Investment Company Act of 1940. The Company also provides a variety of products and services to employee benefit plans that are covered by the Employee Retirement Income Security Act of 1974.
+
+ 
+
+ 
+
+10
+
+ 
+
+ 
+
+ 
+
+Insurance Holding Company Laws
+
+ 
+
+A number of states regulate affiliated groups of insurers such as the Company under holding company statutes. These laws, among other things, place certain restrictions on transactions between affiliates such as dividends and other distributions that may be paid to the Company s parent corporation.
+
+ 
+
+Insurance Company Guaranty Fund Assessments
+
+ 
+
+Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations, generally based on the amount of premiums companies collect in that state. 
+
+ 
+
+The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Association and the amount of premiums written in each state. The Company has estimated this liability to be $0.3 as of December 31, 2005 and 2004, and has recorded a reserve. The Company has also recorded an asset of $0.2 as of December 31, 2005 and 2004, for future credits to premium taxes for assessments already paid.
+
+ 
+
+For information regarding certain other potential regulatory changes related to the Company s businesses, see Item 1A. Risk Factors.
+
+ 
+
+Employees and Other Shared Services
+
+ 
+
+The Company had 83 employees as of December 31, 2005, primarily focused on managing the product distribution, marketing, customer service, and product and financial management of the Company. The Company also utilizes services provided by ING North America Insurance Corporation and other affiliates. These services include underwriting and new business processing, actuarial, risk management, human resources, investment management, finance, information technology, and legal and compliance services. The affiliated companies are reimbursed for the Company s use of various services and facilities under a variety of intercompany agreements.
+
+ 
+
+ 
+
+11
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 1A.
+ 
+ 
+ Risk Factors
+ 
+
+ 
+
+In addition to the normal risks of business, the Company is subject to significant risks and uncertainties, including those which are described below.
+
+ 
+
+Changes in underwriting and actual experience could materially affect profitability
+
+ 
+
+The Company prices its products based on long-term assumptions regarding investment returns, mortality, morbidity, persistency, and operating costs. Management establishes target returns for each product based upon these factors and the average amount of regulatory and rating agency capital that the Company must hold to support in-force contracts. The Company monitors and manages pricing and sales mix to achieve target returns. Profitability from a new business emerges over a period of years, depending on the nature and life of the product, and is subject to variability as actual results may differ from pricing assumptions.
+
+ 
+
+The Company s profitability depends on the following:
+
+ 
+
+ 
+ 
+ Adequacy of investment margins; 
+ 
+
+ 
+ 
+ Management of market and credit risks associated with investments; 
+ 
+
+ 
+ 
+ Ability to maintain premiums and contract charges at a level adequate to cover mortality and morbidity benefits; 
+ 
+
+ 
+ 
+ Adequacy of contract charges on variable contracts to cover the cost of product features; 
+ 
+
+ 
+ 
+ Persistency of policies to ensure recovery of acquisition expenses; and 
+ 
+
+ 
+ 
+ Management of operating costs and expenses within anticipated pricing allowances. 
+ 
+
+ 
+
+Changes in reserve estimates may reduce profitability
+
+ 
+
+The Company establishes reserves based upon estimates of how much the Company will pay for future benefits and claims. The Company calculates reserves based on many assumptions and estimates including future investment yields, mortality, morbidity, policy terminations, and expenses. The assumptions and estimates used in connection with the reserve estimation process are inherently uncertain. The Company periodically reviews the adequacy of reserves. However, the Company cannot determine with precision the amounts that the Company will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level assumed prior to payment of benefits or claims. If actual experience differs significantly from assumptions or estimates, reserves may not be adequate. As a result, the Company would incur a charge to earnings
+in the quarter in which the reserves are increased. 
+
+ 
+
+ 
+
+12
+
+ 
+
+ 
+
+ 
+
+Efforts to reduce the impact of interest rate changes on profitability and financial condition may not be effective
+
+ 
+
+Changes in interest rates may negatively affect the Company s attempts to maintain profitable spreads between the amounts earned on its general account investments and the amounts paid under its annuity and insurance contracts. 
+
+ 
+
+As interest rates rise, life insurance surrenders and fixed annuity contract surrenders and withdrawals may increase as policyholders and contractholders seek higher returns. To raise the cash necessary to fund such surrenders and withdrawals, the Company may need to sell investments at capital losses. An increase in contract surrenders and withdrawals may also require the Company to accelerate amortization of deferred policy acquisition costs relating to such contracts, further reducing profits.
+
+ 
+
+As interest rates decline, borrowers may prepay or redeem mortgages and bonds with embedded call options that are owned as investments by the Company. This may force the Company to reinvest the proceeds at lower interest rates. In addition, some of the Company s annuity products contain minimum interest rate guarantees that limit the Company s ability to lower interest rates credited to contractowners in response to lower investment returns. A decrease in the difference between earned investment income and the interest credited to contractowners further reduces profits.
+
+ 
+
+The Company s investment portfolio is subject to risks that may reduce the value of invested assets and adversely affect sales, profitability, and investment returns credited to contractowners
+
+ 
+
+The Company s investment portfolio is subject to several risks, including the following:
+
+ 
+
+ 
+ 
+ An increase in defaults or delinquency in investment portfolios;
+ 
+
+ 
+ 
+ Greater difficulty selling privately placed and certain asset-backed fixed maturity securities and commercial mortgage loans at attractive prices and in a timely manner, as both are less liquid than publicly traded fixed maturity securities;
+ 
+
+ 
+ 
+ Borrower prepayment or redemption, prior to maturity, of mortgages that back mortgage-backed securities and bonds with embedded call options could force the Company to reinvest proceeds at lower interest rates;
+ 
+
+ 
+ 
+ An increase in environmental liability exposure from the Company s commercial mortgage loan portfolio; and
+ 
+
+ 
+ 
+ Losses in the commercial mortgage loan portfolio as a result of economic downturns or natural disasters
+ 
+
+ 
+
+ 
+
+13
+
+ 
+
+ 
+
+ 
+
+The continued threat of terrorism and ongoing military and other actions may result in decreases in the Company s net income, revenue and assets under management and may adversely affect the Company s investment portfolio
+
+ 
+
+The continued threat of terrorism within the U.S. and abroad and the ongoing military and other actions and heightened security measures in response to these types of threats may cause significant volatility in global financial markets, loss of life, disruptions to commerce and reduce economic activity. These consequences could have an adverse effect on the value of the assets in the Company s investment portfolio, business operations and financial results. Terrorist attacks also could disrupt the Company s operations centers in the U.S., or could cause higher than expected death claims at a group client location. As a result, it is possible that any, or a combination of all, of these factors may have an adverse impact on the Company s business operations and financial results.
+
+ 
+
+A downgrade in the Company s ratings may negatively affect profitability and financial condition
+
+ 
+
+Ratings are an important factor in establishing the competitive position of insurance companies. A downgrade, or the potential for a downgrade, of any of the Company s ratings may lead to lower fee income as follows: 
+
+ 
+
+ 
+ 
+ Increase number of interest-sensitive life and annuity contract surrenders and withdrawals and case/policy lapses;
+ 
+
+ 
+ 
+ Termination of relationships with broker-dealers, banks, agents, wholesalers, and other distributors of products and services; and 
+ 
+
+ 
+ 
+ Reduction of new product sales.
+ 
+
+ 
+
+The Company cannot predict what actions rating organizations may take, or what actions it may be required to take in response to the actions of rating organizations, which could adversely affect the Company. Rating organizations assign ratings based upon several factors, including the following: 
+
+ 
+
+ 
+ 
+ Statutory capital; 
+ 
+
+ 
+ 
+ Risk of investment portfolio; 
+ 
+
+ 
+ 
+ Economic trends affecting the financial services industry;
+ 
+
+ 
+ 
+ Changes in models and formulas used by rating organizations to assess the financial strength of a rated company; 
+ 
+
+ 
+ 
+ The rated company s internal circumstances; and
+ 
+
+ 
+ 
+ Other circumstances outside the rated company s control. 
+ 
+
+ 
+
+ 
+
+14
+
+ 
+
+ 
+
+ 
+
+The continued availability of capital may affect the ability to grow
+
+ 
+
+The Company has, from time to time, required capital to increase its reserves associated with growth from product sales. Although the Company believes it has sufficient capital to fund its immediate growth and capital needs, the amount of capital required and available can vary due to a variety of circumstances that may not be predictable, foreseeable, or within its control. A lack of sufficient capital could hinder the Company s ability to grow.
+
+ 
+
+A loss of key product distribution relationships could materially affect sales
+
+ 
+
+The Company distributes certain products under agreements with other members of the financial services industry that are not affiliated with the Company. Termination of one or more of these agreements due to, for example, a change in control of one of the distributors, could reduce sales.
+
+ 
+
+Competition could negatively affect the ability to maintain or increase profitability
+
+ 
+
+The insurance industry is intensely competitive. The Company competes based on factors including the following:
+
+ 
+
+ 
+ 
+ Name recognition and reputation;
+ 
+
+ 
+ 
+ Service;
+ 
+
+ 
+ 
+ Investment performance;
+ 
+
+ 
+ 
+ Product features;
+ 
+
+ 
+ 
+ Price;
+ 
+
+ 
+ 
+ Perceived financial strength; and
+ 
+
+ 
+ 
+ Claims paying and credit ratings.
+ 
+
+ 
+
+The Company s competitors include insurers, broker-dealers, financial advisors, asset managers, and other financial institutions, which may, for example, have greater market share, offer a broader range of products, or have higher claims-paying or credit ratings than the Company.
+
+ 
+
+In recent years, there has been substantial consolidation among companies in the financial services industry resulting in increased competition from large, well-capitalized financial services firms. Many of these firms also have been able to increase their distribution systems through mergers or contractual arrangements. Furthermore, larger competitors may lower operating costs and have an ability to absorb greater risk, while maintaining financial strength ratings, allowing them to price products more competitively. The Company expects consolidation to continue and perhaps accelerate in the future, increasing competitive pressure. 
+
+ 
+
+ 
+
+15
+
+ 
+
+ 
+
+ 
+
+Changes in federal income tax law could make some products less attractive to contractowners and increase tax costs
+
+ 
+
+The Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA ) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 contain provisions that will, over time, significantly lower individual tax rates. This decrease will reduce the benefits of deferral on the build-up of value of annuities and life insurance products. EGTRRA also includes provisions that will eliminate, over time, estate, gift, and generation-skipping taxes and partially eliminate the step-up in basis rule applicable to property held in a decedent s estate. Many of these provisions expire in 2008 and 2010. The Bush Administration, however, has proposed that many of the rate reductions and tax-favored savings initiatives be made permanent. Although the Company cannot predict the overall effect on product sales, some of these tax law changes could hinder sales and result in the increased
+surrender of insurance and annuity products.
+
+ 
+
+Litigation may adversely affect profitability and financial condition
+
+ 
+
+The Company is, and may be in the future, subject to legal actions in the ordinary course of insurance, investment management and other business operations. These legal actions may include proceedings relating to aspects of businesses and operations that are specific to the Company, and proceedings that are typical of the businesses in which the Company operates. Some of these proceedings may be brought on behalf of a class. Plaintiffs may seek large or indeterminate amounts of damage, including compensatory, liquidated, treble and/or punitive damages. Given the large or indeterminate amounts sometimes sought, and the inherent unpredictability of litigation, it is possible that an adverse outcome could, from time to time, have an adverse effect on the Company s results of operation or cash flows in particular quarterly or annual periods.
+
+ 
+
+Changes in regulation in the United States and recent regulatory investigations may reduce profitability
+
+ 
+
+The Company s insurance and securities business is subject to comprehensive state and federal regulation and supervision throughout the United States. The primary purpose of state regulation is to protect contractowners, and not necessarily to protect creditors and investors. State insurance regulators, state attorneys general, the National Association of Insurance Commissioners, the SEC, and the NASD continually reexamine existing laws and regulations and may impose changes in the future. Changes in legislation and administrative policies in areas such as employee benefit plan regulation, financial services regulation, and federal taxation, could lessen the competitive advantages of certain of the Company s products, result in the surrender of existing contracts and policies, increase cost, or reduce new product sales, thus reducing the Company s profitability.
+
+ 
+
+ 
+
+16
+
+ 
+
+ 
+
+ 
+
+Since 2002, the insurance industry has become the focus of increased regulatory scrutiny as various state and federal governmental agencies and self-regulatory organizations conduct inquiries and investigations into the products and practices of the financial services industries. These initiatives currently focus on areas such as, inappropriate trading of fund shares; revenue sharing and directed brokerage; sales and marketing practices; suitability; arrangements with service providers; pricing; compensation and sales incentives; potential conflicts of interest; potential anti-competitive activity; reinsurance; specific product types (including group annuities and indexed annuities); and adequacy of disclosure. It is likely that the scope of these industry investigations will become broader before they conclude.
+
+ 
+
+In some cases, this regulatory scrutiny has led to new proposed legislation and regulation that could significantly affect the financial services industry, including businesses in which the Company is engaged, or has resulted in regulatory penalties, and litigation. At this time, the Company does not believe that any of this regulatory scrutiny will have a material adverse affect on it. However, the Company cannot guarantee that new laws, regulations and other regulatory action aimed at the business practices under scrutiny would not adversely affect its business. The adoption of new laws and regulations, enforcement action or litigation, whether or not involving the Company, could influence the manner in which the Company distributes its products and adversely impact profitability.
+
+ 
+
+Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect profitability and financial condition
+
+ 
+
+The Company s financial statements are subject to the application of generally accepted accounting principles, or GAAP, which is periodically revised and/or expanded. Accordingly, the Company is required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board. The adoption of new or revised accounting standards could change the Company s current accounting treatment and have a material adverse effect on timing and/or amount of its reported profitability and financial condition. 
+
+ 
+
+Reinsurance subjects the Company to the credit risk of reinsurers and may not be adequate to protect against losses arising from ceded reinsurance
+
+ 
+
+The collectibility of reinsurance recoverables is subject to uncertainty arising from a number of factors, including whether the insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of the reinsurance treaty or contract. The Company s inability to collect a material recovery from a reinsurer could have a material adverse effect on profitability and financial condition.
+
+ 
+
+ 
+
+17
+
+ 
+
+ 
+
+ 
+
+Reinsurance may be unavailable at historical levels and prices, which may limit the ability to sell new business
+
+ 
+
+Market conditions beyond the Company s control determine the availability and cost of reinsurance. No assurances can be made that reinsurance will remain available to the Company to the same extent and on the same terms and rates as are currently available. If the Company were unable to maintain the current level of reinsurance at prices that are acceptable, the Company would either have to accept an increase in the liability exposure, reduce sales, or seek other alternatives.
+
+ 
+
+A failure of the Company s operating systems or a compromise of their security could adversely affect the Company s results of operation and financial condition.
+
+ 
+
+The Company is highly dependent on automated systems to record and process Company and customer transactions. The Company may experience a failure of its operating systems or a compromise of their security due to technical system flaws, clerical or record-keeping errors, or tampering or manipulation of those systems by employees or unauthorized third parties. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, natural disasters, acts of terrorism, epidemics, computer viruses and electrical/telecommunications outages). All of these risks are also applicable where the Company relies on outside vendors to provide services to it and its customers. Operating system failures or disruptions or the compromise of their security could subject the Company to regulatory sanctions, or other
+claims, harm the Company s reputation, interrupt the Company s operations and adversely affect the Company s business, results of operation or financial condition.
+
+ 
+
+ 
+
+ 
+ 
+ Item 1B.
+ 
+ 
+ Unresolved Staff Comments
+ 
+
+ 
+
+Omitted as registrant is neither an accelerated filer nor a well-known seasoned issuer.
+
+ 
+
+ 
+
+ 
+ 
+ Item 2.
+ 
+ 
+ Properties
+ 
+
+ 
+
+The Company s home office is located at 1000 Woodbury Road, Suite 208, Woodbury, NY 11797. All Company office space is leased or subleased by the Company or its other affiliates. The Company pays substantially all expenses associated with its leased and subleased office properties. Affiliates within ING s U.S. operations provide the Company with various management, finance, investment management, and other administrative services, from facilities located at 5780 Powers Ferry Road, N.W., Atlanta, Georgia 30327-4390. Affiliates also provide the Company with product development, sales, marketing, customer service, and other administrative services from facilities located in Minneapolis, Minnesota, West Chester, Pennsylvania, and Minot, North Dakota. The affiliated companies are reimbursed for the Company s use of these services and facilities under intercompany agreements.
+
+ 
+
+ 
+
+18
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 3.
+ 
+ 
+ Legal Proceedings
+ 
+
+ 
+
+The Company is involved in threatened or pending lawsuits/arbitrations, arising from the normal conduct of business. Due to the climate in insurance and business litigation/arbitration, suits against the Company sometimes include claims for substantial compensatory, consequential, or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits/arbitrations in light of existing insurance, reinsurance and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company s operations or financial position.
+
+ 
+
+ 
+
+ 
+ 
+ Item 4.
+ 
+ 
+ Submission of Matters to a Vote of Security Holders
+ 
+
+ 
+
+Omitted pursuant to General Instruction I (2)(c) of Form 10-K.
+
+ 
+
+ 
+
+19
+
+ 
+
+ 
+
+ 
+
+PART II
+
+ 
+
+ 
+ 
+ Item 5.
+ 
+ 
+ Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
+ 
+
+(Dollar amounts in millions, unless otherwise stated)
+
+ 
+
+There is no public trading market for the Company s common stock. Since October 1, 2003, all of the Company s outstanding common stock is owned by its parent ReliaStar Life, which is a wholly-owned subsidiary of Lion. All of the outstanding common stock of Lion is owned by ING America Insurance Holdings, Inc. ( ING AIH ), whose ultimate parent is ING. Prior to October 1, 2003, the Company s outstanding shares were owned by Security-Connecticut Life Insurance Company.
+
+ 
+
+The Company s ability to pay dividends to its parent is subject to the prior notice/ approval of the insurance regulatory authorities of the State of New York for payment of any dividend, which, when combined with other dividends paid within the calendar year, exceeds the lesser of (1) ten percent (10%) of the Company s statutory surplus at prior year end or (2) the Company s prior year statutory net gain from operations, not including realized capital gains. 
+
+ 
+
+The Company paid $20.8, $27.2, and $25.5, in dividends on its common stock to its Parent during 2005, 2004, and 2003, respectively.
+
+ 
+
+The Company did not receive capital contributions in 2005, 2004, and 2003.
+
+ 
+
+ 
+
+20
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 6.
+ 
+ 
+ Selected Financial Data
+ 
+
+(Dollar amounts in millions, unless otherwise stated)
+
+ 
+
+ 
+ 
+ RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
+ 
+
+ 
+ 
+ 3-YEAR SUMMARY OF SELECTED FINANCIAL DATA
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ OPERATING RESULTS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Net investment income
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 116.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 120.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 122.5 
+ 
+
+ 
+ 
+ Fee income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 101.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 99.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 98.3 
+ 
+
+ 
+ 
+ Premiums
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 78.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 66.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 63.5 
+ 
+
+ 
+ 
+ Net realized capital gains
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.6 
+ 
+
+ 
+ 
+ Total revenue
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 305.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 296.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 295.2 
+ 
+
+ 
+ 
+ Interest credited and other benefits to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ policyholders/contractowners 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 182.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 189.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 148.0 
+ 
+
+ 
+ 
+ Amortization of deferred policy acquisition
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ costs and value of business acquired
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30.9 
+ 
+
+ 
+ 
+ Income before cumulative effect of 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ change in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 53.9 
+ 
+
+ 
+ 
+ Cumulative effect of change in accounting
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ principle, net of tax
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 31.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 53.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ FINANCIAL POSITION
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total investments
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,040.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,090.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,035.8 
+ 
+
+ 
+ 
+ Assets held in separate accounts
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 513.8 
+ 
+
+ 
+ 
+ Total assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3,066.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,972.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,826.3 
+ 
+
+ 
+ 
+ Future policy benefits and claims reserves
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,803.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,772.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,677.2 
+ 
+
+ 
+ 
+ Liabilities related to separate accounts
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 513.8 
+ 
+
+ 
+ 
+ Total shareholder's equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 437.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 451.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 454.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ ASSETS UNDER MANAGEMENT
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Fixed products
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,798.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,732.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,652.6 
+ 
+
+ 
+ 
+ Variable products
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 678.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 570.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 540.6 
+ 
+
+ 
+ 
+ Policy loans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 93.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 90.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 86.6 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,570.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,393.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,279.8 
+ 
+
+ 
+
+ 
+
+21
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 7. 
+ 
+ 
+ Management s Narrative Analysis of the Results of Operations and Financial Condition
+ 
+
+(Dollar amounts in millions, unless otherwise stated)
+
+ 
+
+Overview
+
+ 
+
+The following narrative analysis presents a review of the results of operations of ReliaStar Life Insurance Company of New York ( RLNY or the Company, as appropriate) for each of the three years ended December 31, 2005, 2004, and 2003 and the financial condition as of December 31, 2005 and 2004. This item should be read in its entirety and in conjunction with the selected financial data, financial statements and related notes, and other supplemental data which can be found under Part II, Item 6 and Item 8 contained herein. 
+
+ 
+
+Forward-Looking Information/Risk Factors
+
+ 
+
+In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission ( SEC ). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as expect, anticipate, believe, or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company s beliefs concerning future levels of sales and redemptions of the
+Company s products, investment spreads and yields, or the earnings and profitability of the Company s activities. 
+
+ 
+
+Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company s control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments, including, but not limited to the following: (1) changes in underwriting and actual experience could materially affect profitability; (2) changes in reserve estimates may reduce profitability; (3) efforts to reduce the impact of interest rate changes on profitability and financial
+condition may not be effective; (4) the Company s investment portfolio is subject to risks that may reduce the value of invested assets and adversely affect sales, profitability, and investment returns credited to contractowners; (5) the continued threat of terrorism and ongoing military and other actions may result in decreases in the Company s net income, revenue, and assets under management and may adversely affect the Company s investment portfolio; (6) a downgrade in the Company s ratings may negatively affect profitability and financial condition; (7) the continued availability of capital may affect the ability to grow; 
+
+ 
+
+22
+
+ 
+
+ 
+
+(8) a loss of key product distribution relationships could materially affect sales; (9) competition could negatively affect the ability to maintain or increase profitability; (10) changes in federal income tax law could make some products less attractive to contractowners and increase tax costs; (11) litigation may adversely affect profitability and financial condition; (12) changes in regulation in the United States and recent regulatory investigations may reduce profitability; (13) changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect profitability and financial condition; (14) reinsurance subjects the Company to the credit risk of reinsurers and may not be adequate to protect against losses arising from ceded reinsurance; (15) reinsurance may be unavailable at historical levels and prices, which may
+limit the ability to sell new business; and (16) failure of the Company s operating systems or a compromise of their security could adversely affect the Company s results of operation and financial condition. Investors are also directed to consider the other risks and uncertainties discussed in Items 1A., 7. and 7A. contained herein and in other documents filed by the Company with the SEC. Except as may be required by the federal securities laws, the Company disclaims any obligation to update forward-looking information.
+
+ 
+
+Basis of Presentation
+
+ 
+
+RLNY is a stock life insurance company domiciled in the State of New York and provides financial products and services in the United States. RLNY is authorized to conduct its insurance business in the District of Columbia and all states.
+
+ 
+
+RLNY is a direct, wholly-owned subsidiary of ReliaStar Life Insurance Company ( ReliaStar Life or Parent ), which is a direct, wholly-owned subsidiary of Lion Connecticut Holdings Inc. ( Lion ), a Connecticut holding and management company. Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ( ING ). ING is a global financial services holding company based in The Netherlands, with American Depository Shares listed on the New York Stock Exchange under the symbol "ING".
+
+ 
+
+Until October 1, 2003, the Company was a wholly-owned subsidiary of Security-Connecticut Life Insurance Company ( Security-Connecticut Life ), a Minnesota domiciled insurance company, which provided financial products and services in the United States. Effective October 1, 2003, Security-Connecticut merged with and into ReliaStar Life.
+
+ 
+
+The Company has one operating segment, ING U.S. Financial Services.
+
+ 
+
+ 
+
+23
+
+ 
+
+ 
+
+ 
+
+Critical Accounting Policies
+
+ 
+
+General
+
+ 
+
+The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends, and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time.
+
+ 
+
+The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability: reserves, valuation of investments and other-than-temporary impairments, and amortization of deferred acquisition costs ( DAC ) and value of business acquired ( VOBA ). In developing these estimates, management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements.
+
+ 
+
+Reserves
+
+ 
+
+The Company establishes and carries actuarially-determined reserves that are calculated to meet its future obligations. Generally, reserves are calculated using mortality and withdrawal rate assumptions based on relevant Company experience and are periodically reviewed against both industry standards and experience. Changes in, or deviations from, the assumptions used can significantly affect the Company s reserve levels and related future operations.
+
+ 
+
+Future policy benefits and claims reserves include reserves for universal and traditional life insurance contracts, deferred annuities and immediate annuities with and without life contingent payouts.
+
+ 
+
+Reserves for universal and variable life products are equal to cumulative deposits, less withdrawals and charges, plus credited interest thereon. Unearned revenue reserves represent contractual charges deemed to be earned in future periods. Reserves for traditional life insurance contracts represent the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums.
+
+ 
+
+ 
+
+24
+
+ 
+
+ 
+
+ 
+
+Unpaid claims and claim expenses for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported.
+
+ 
+
+Reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts are equal to cumulative deposits, less charges and withdrawals, plus credited interest thereon. Reserve interest rates vary by product up to 8.0% for 2005, 2004, and 2003.
+
+ 
+
+Reserves for immediate annuities with life contingent payout benefits are computed on the basis of assumed interest discount rate, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by annuity plan type, year of issue, and policy duration. For 2005, 2004, and 2003, reserve interest discount rates ranged from 4.8% to 8.8%.
+
+ 
+
+Reserves for equity indexed annuities are computed in accordance with Statement of Financial Accounting Standards ( FAS ) No. 97 Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from
+the Sale of Investments ( FAS No. 97 ) and FAS No. 133 Accounting for Derivative Instruments and Hedging Activities ( FAS No. 133 ). Accordingly, the aggregate initial liability is equal to the deposit received (plus a bonus, if applicable), and is split into a host component and an embedded derivative component. Thereafter, the host liability accumulates at a set interest rate, and the embedded derivative liability is recognized at fair value, with the change in fair value recorded in the Statements of Operations.
+
+ 
+
+Under Statement of Position ( SOP ) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts ( SOP 03-1 ), the Company calculates additional liabilities ( SOP 03-1 reserves ) for certain guaranteed benefits and for universal life products with certain patterns of cost of insurance charges and certain other fees. The SOP 03-1 reserve recognizes the portion of contract assessments received in early years used to compensate the insurer for services provided in later years.
+
+ 
+
+The SOP 03-1 reserve for life insurance products is calculated using the same assumptions used in the determination of estimated gross profits, according to which, deferred acquisition costs are amortized. The Company calculates a benefit ratio for each block of business subject to SOP 03-1, and calculates an SOP 03-1 reserve by accumulating amounts equal to the benefit ratio multiplied by the assessments for each period, reduced by excess death benefits during the period. The SOP 03-1 reserve is accumulated at interest rates using the contract-credited rate for the period. The calculated reserve includes a provision for universal life contracts with patterns of cost of insurance charges that produce losses in later policy years.
+
+ 
+
+ 
+
+25
+
+ 
+
+ 
+
+ 
+
+The SOP 03-1 reserve for annuities with GMDBs is determined each period by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used to adjust the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. 
+
+ 
+
+The annuities with guaranteed minimum accumulation benefits ( GMABs ) and with guaranteed minimum withdrawal benefit ( GMWBs ) where the guarantee does not involve life contingency are considered to be derivatives under FAS No. 133. The additional liabilities for these guarantees are recognized at fair value with changes in fair value recorded in the Statements of Operations.
+
+ 
+
+The SOP 03-1 reserve for the guaranteed minimum income benefits ( GMIB ) and GMWBs where the guarantee involves life contingency, is determined each period by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if the actual experience or other evidence suggests that earlier assumptions should be revised. In addition, the calculation of the GMIB and GMWB liability assumes dynamic surrenders and dynamic annuitization reflecting the extent to which the benefit, at the time of payment, has a positive value.
+
+ 
+
+Valuation of Investments and Other-Than-Temporary Impairments
+
+ 
+
+All of the Company s fixed maturity and equity securities are currently designated as available-for-sale. Available-for-sale securities are reported at fair value and unrealized gains and losses on these securities are included directly in Shareholder s equity, after adjustment for related changes in DAC, VOBA, and deferred income taxes.
+
+ 
+
+Fair values for the Company s investments, primarily fixed maturities, are generally obtained from independent pricing services or broker-dealer quotations. Fair values for privately placed bonds are determined using a matrix-based model. The matrix-based model considers the level of risk-free interest rates, current corporate spreads, the credit quality of the issuer, and cash flow characteristics of the security. The fair values for equity securities are based on quoted market prices. For equity securities not actively traded, estimated fair values are based upon values of issues of comparable yield and quality or conversion value, where applicable.
+
+ 
+
+ 
+
+26
+
+ 
+
+ 
+
+ 
+
+The Company s accounting policy requires that a decline in the value of an investment below its amortized cost basis be assessed to determine if the decline is other-than-temporary. If so, the investment is deemed to be other-than-temporarily impaired, and a charge is recorded in Net realized capital gains (losses) equal to the difference between fair value and the amortized cost basis of the investment. The fair value of the other-than-temporarily impaired investment becomes its new cost basis. 
+
+ 
+
+The evaluation of other-than-temporary impairments included in the Company s general account is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include the length of time and extent to which the fair value has been less than amortized cost, the issuer s financial condition or near-term prospects, future economic conditions and market forecasts, and the Company s intent and ability to retain the investment for a period of time sufficient to allow for recovery in fair value.
+
+ 
+
+In addition, the Company invests in structured securities that meet the criteria of Emerging Issues Task Force ( EITF ) Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ( EITF 99-20 ). Under EITF 99-20, a determination of the required impairment is based on the analyses discussed in the preceding paragraph, as well as, credit risk and the possibility of significant prepayment risk that restricts the Company s ability to recover the investment. An impairment is recognized if the fair value of the security is less than amortized cost and there has been an adverse change in cash flow since the last remeasurement date. 
+
+ 
+
+Amortization of Deferred Acquisition Costs and Value of Business Acquired
+
+ 
+
+DAC represent policy acquisition costs that have been capitalized and are subject to amortization. Such costs consist principally of certain commissions, underwriting, contract issuance, and agency expenses, related to the production of new and renewal business.
+
+ 
+
+VOBA represents the outstanding value of in force business capitalized in purchase accounting when the Company was acquired and is subject to amortization. The value is based on the present value of estimated profits embedded in the Company s contracts.
+
+ 
+
+FAS No. 60, Accounting and Reporting by Insurance Enterprises ( FAS No. 60 ), applies to traditional life insurance products, primarily whole life and term life insurance contracts. Under FAS No. 60, DAC and VOBA are amortized over the premium payment period, in proportion to the premium revenue recognized.
+
+ 
+
+ 
+
+27
+
+ 
+
+ 
+
+ 
+
+FAS No. 97 applies to universal life and investment-type products, such as fixed and variable deferred annuities. Under FAS No. 97, DAC and VOBA are amortized, with interest, over the life of the related contracts in relation to the present value of estimated future gross profits from investment, mortality, and expense margins, plus surrender charges. 
+
+ 
+
+Changes in assumptions can have a significant impact on DAC and VOBA balances and amortization rates. Several assumptions are considered significant in the estimation of future gross profits associated with variable universal life and variable deferred annuity products. One of the most significant assumptions involved in the estimation of future gross profits is the assumed return associated with the variable account performance. To reflect the volatility in the equity markets, this assumption involves a combination of near-term expectations and long-term assumptions regarding market performance. The overall return on the variable account is dependent on multiple factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds, as well as equity sector weightings. Other significant assumptions include surrender and lapse rates, estimated interest
+spread, and estimated mortality.
+
+ 
+
+Due to the relative size and sensitivity to minor changes in underlying assumptions of DAC and VOBA balances, the Company performs a quarterly and annual analyses of DAC and VOBA. The DAC and VOBA balances are also evaluated for recoverability.
+
+ 
+
+At each evaluation date, actual historical gross profits are reflected, and estimated future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated profit requires that the amortization rate be revised ( unlocking ), retroactively to the date of the policy or contract issuance. The cumulative unlocking is recognized as a component of current period amortization. In general, sustained increases in investment, mortality, and expense margins, and thus estimated future profits, lower the rate of amortization. However, sustained decreases in investment, mortality, and expense margins, and thus estimated future profits, increase the rate of amortization.
+
+ 
+
+For interest rate and equity sensitivity and related effects on DAC and VOBA, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
+
+ 
+
+ 
+
+28
+
+ 
+
+ 
+
+ 
+
+Results of Operations
+
+ 
+
+Overview
+
+ 
+
+The Company principally provides and distributes life insurance and related financial services products, including individual life insurance and annuities, group life and health products and services. The Company s strategy is to offer a wide variety of products and services designed to address customers needs for financial security, especially tax-advantaged savings for retirement and protection in the event of death.
+
+ 
+
+The Company derives its revenue primarily from: a) investment income earned on the investment of fixed assets under management ( AUM ); b) fee income consisting of mortality, expense, and surrender charges on universal life, variable life and annuity products; and c) premiums on individual term life, group life, and health insurance products. The Company s expenses consist mainly of a) interest credited on annuity and life insurance products; b) claims paid on term life insurance, universal life, and variable universal life policies, as well as benefits paid on health insurance policies; c) other policy maintenance and general business expenses; and d) amortization of DAC and VOBA.
+
+ 
+
+Economic Analysis
+
+ 
+
+The current economic environment presents challenges and opportunities for the Company and the insurance industry. The Company s sales and financial results continue to be affected by economic trends.
+
+ 
+
+On the positive side, the improved equity market performance has presented opportunities for life insurers, because fee revenue from variable annuities has a direct correlation with equity market performance. Also, variable annuity product demand has grown with consumer demand for equity investments.
+
+ 
+
+On the negative side, the interest rates remained historically low, which put pressure on interest spreads as declining investment portfolio yields drew closer to minimum crediting rates guarantees on certain products. Furthermore, the market in 2005 experienced a flat yield curve, with negligible extra yield on a 10-year bond versus a five-year bond. This flat yield curve hurt the competitiveness of fixed annuities as compared to other short-term instruments.
+
+ 
+
+ 
+
+29
+
+ 
+
+ 
+
+ 
+
+Year ended December 31, 2005 compared to year ended December 31, 2004 
+
+ 
+
+The Company s results of operations for the year ended December 31, 2005, and changes therein, were primarily impacted by the change in reinsurance and higher sales of certain group products partially offset by larger operating expenses. In 2005, the Company also experienced reduced policyholder/contractowner benefits expenses, lower DAC and VOBA amortization, and a decline in investment income. In addition, the improved performance of equity markets had a favorable effect on sales of variable annuity products and on the value of the Company s variable AUM. However, the rising interest rates reduced the average fixed AUM and resulted in lower gains recognized on the sale of fixed maturities and lower investment yields. 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Year Ended December 31,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $ Increase
+ 
+ 
+ 
+ 
+ 
+ % Increase
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Decrease)
+ 
+ 
+ 
+ 
+ 
+ (Decrease)
+ 
+
+ 
+ 
+ Revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net investment income
+ 
+ 
+ $
+ 
+ 
+ 116.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 120.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (4.0)
+ 
+ 
+ 
+ 
+ 
+ (3.3)%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Fee income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 101.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 99.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.4 
+ 
+ 
+ 
+ 
+ 
+ 2.4%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Premiums
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 78.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 66.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 11.7 
+ 
+ 
+ 
+ 
+ 
+ 17.6%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net realized capital gains
+ 
+ 
+ 
+ 
+ 
+ 9.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 2.2%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.4)
+ 
+ 
+ 
+ 
+ 
+ (57.1)%
+ 
+
+ 
+ 
+ Total revenue
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 305.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 296.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.9 
+ 
+ 
+ 
+ 
+ 
+ 3.3%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Benefits and expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Interest credited and other benefits to 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ policyholders/contractowners
+ 
+ 
+ 
+ 
+ 
+ 182.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 189.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (7.0)
+ 
+ 
+ 
+ 
+ 
+ (3.7)%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Operating expenses
+ 
+ 
+ 
+ 
+ 
+ 61.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 49.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 12.1 
+ 
+ 
+ 
+ 
+ 
+ 24.4%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization of deferred policy acquisition 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ costs and value of business acquired
+ 
+ 
+ 
+ 
+ 
+ 7.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2.1)
+ 
+ 
+ 
+ 
+ 
+ (22.3)%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Interest expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ NM
+ 
+
+ 
+ 
+ Total benefits and expenses
+ 
+ 
+ 
+ 
+ 
+ 251.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 248.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.1 
+ 
+ 
+ 
+ 
+ 
+ 1.2%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Income before income taxes and cumulative 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ effect of change in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 54.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 47.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.8 
+ 
+ 
+ 
+ 
+ 
+ 14.3%
+ 
+
+ 
+ 
+ Income tax expense
+ 
+ 
+ 
+ 
+ 
+ 17.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 4.8%
+ 
+
+ 
+ 
+ Income before cumulative effect 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ of change in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.0 
+ 
+ 
+ 
+ 
+ 
+ 19.5%
+ 
+
+ 
+ 
+ Cumulative effect of change in 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ accounting principle, net of tax
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.8)
+ 
+ 
+ 
+ 
+ 
+ NM
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 31.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 5.2 
+ 
+ 
+ 
+ 
+ 
+ 16.5%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Effective tax rate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 32.1%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35.0%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ NM - Not meaningful.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+30
+
+ 
+
+ 
+
+ 
+
+Revenues
+
+ 
+
+The growth in total revenue during 2005 was primarily driven by change in reinsurance and higher sales of certain group products and an increase in variable AUM, partially offset by lower investment yields. Premiums increased largely due to the elimination of ceded premiums on discontinued group products and the growth of group stop-loss product sales. 
+
+ 
+
+The rise in Fee income for 2005 resulted from the increase in variable AUM due to higher sales of variable annuity products and favorable equity market returns.
+
+ 
+
+The positive impact of increased revenues was partially offset by a decrease in Net investment income. The decline in Net investment income is primarily due to lower investment yields experienced in 2005 due to the continuing low interest rate environment. In addition, the rise of short-term borrowing rates resulted in higher investment expenses related to securities lending agreements during the last two quarters of 2005.
+
+ 
+
+Benefits and Expenses
+
+ 
+
+Total benefits and expenses increased during 2005, largely due to an increase in Operating expenses, partially offset by a decrease in Interest credited and other benefits to policyholders/contractowners.
+
+ 
+
+The increase in Operating expenses is mainly related to a higher spending associated with employee benefits costs, sales and marketing expenses, information technology and other strategic projects. Also, in 2005 the Company experienced a lower percentage of commission deferrals on life and employee benefits products. 
+
+ 
+
+Interest credited and other benefits to policyholders/contractowners decreased due to the revision of the assumptions related to reinsurance cash flows which resulted in higher future expected reinsurance recoveries in the last quarter of 2005. In addition, the lower volume of claims and smaller average claim size were experienced in 2005 in association with individual life products. These favorable results, however, were partially offset by unfavorable experience on group life and health insurance products, and increases in reserves related to the growth of individual stop loss block of business during 2005 and the release of ceded reserves on discontinued group products. 
+
+ 
+
+ 
+
+31
+
+ 
+
+ 
+
+ 
+
+Amortization of DAC and VOBA decreased as a result of (a) deceleration of amortization rates for certain individual life insurance products in 2005 due to changes in assumptions of future gross profits, and (b) lower sales and actual gross profits in 2005 on certain individual life insurance products partially offset by higher 2005 actual gross profits on certain annuity and group insurance products.
+
+ 
+
+Income Tax and Cumulative Effect of Change in Accounting Principle
+
+ 
+
+While Income tax expense did not fluctuate significantly during 2005 compared to 2004, the decrease in the effective tax rate reflects non-recurring favorable adjustments to the 2005 tax provision due to a reduction in the tax liability as a result of the completion of the Internal Revenue Service ( IRS ) examination of the Company returns through tax year 2001.
+
+ 
+
+The Cumulative effect of change in accounting principle for 2004 is related to the adoption of SOP 03-1, and Technical Practice Aid 6300.05 - 6300.08, Q&As Related to the Implementation of SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounting (the TPA ). (See Recently Adopted Accounting Standards below for further information.)
+
+ 
+
+ 
+
+32
+
+ 
+
+ 
+
+ 
+
+Year ended December 31, 2004 compared to year ended December 31, 2003
+
+ 
+
+The Company s results of operations for the year ended December 31, 2004, and changes therein, were primarily impacted by higher mortality costs, increased operating expenses, and an increase in interest rates. The increase in interest rates reduced the value of invested assets and resulted in lower gains realized on the sale of fixed maturities.
+
+ 
+
+The increase in benefits and expenses was partially offset by the decrease in Amortization of DAC and VOBA and higher Premiums and Fee income. In addition, the rise in equity markets had a favorable effect on sales of variable products and on the value of the Company s variable AUM.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Year Ended December 31,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $ Increase
+ 
+ 
+ 
+ 
+ 
+ % Increase
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Decrease)
+ 
+ 
+ 
+ 
+ 
+ (Decrease)
+ 
+
+ 
+ 
+ Revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net investment income
+ 
+ 
+ $
+ 
+ 
+ 120.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 122.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (1.9)
+ 
+ 
+ 
+ 
+ 
+ (1.6)%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Fee income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 99.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 98.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 0.8%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Premiums
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 66.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 63.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.8 
+ 
+ 
+ 
+ 
+ 
+ 4.4%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net realized capital gains
+ 
+ 
+ 
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.3)
+ 
+ 
+ 
+ 
+ 
+ (12.3)%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ NM
+ 
+
+ 
+ 
+ Total revenue
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 296.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 295.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 0.3%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Benefits and expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Interest credited and other benefits to 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ policyholders/contractowners
+ 
+ 
+ 
+ 
+ 
+ 189.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 148.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 41.6 
+ 
+ 
+ 
+ 
+ 
+ 28.1%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Operating expenses
+ 
+ 
+ 
+ 
+ 
+ 49.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 36.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 13.5 
+ 
+ 
+ 
+ 
+ 
+ 37.4%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization of deferred policy acquisition 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ costs and value of business acquired
+ 
+ 
+ 
+ 
+ 
+ 9.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (21.5)
+ 
+ 
+ 
+ 
+ 
+ (69.6)%
+ 
+
+ 
+ 
+ Total benefits and expenses
+ 
+ 
+ 
+ 
+ 
+ 248.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 215.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 33.6 
+ 
+ 
+ 
+ 
+ 
+ 15.6%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Income before income taxes and cumulative 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ effect of change in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 47.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 80.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (32.8)
+ 
+ 
+ 
+ 
+ 
+ (40.9)%
+ 
+
+ 
+ 
+ Income tax expense
+ 
+ 
+ 
+ 
+ 
+ 16.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 26.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (9.7)
+ 
+ 
+ 
+ 
+ 
+ (36.9)%
+ 
+
+ 
+ 
+ Income before cumulative effect of change 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 30.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 53.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (23.1)
+ 
+ 
+ 
+ 
+ 
+ (42.9)%
+ 
+
+ 
+ 
+ Cumulative effect of change in accounting 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ principle, net of tax
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ NM
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 31.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 53.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (22.3)
+ 
+ 
+ 
+ 
+ 
+ (41.4)%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Effective tax rate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35.0%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 32.8%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ NM - Not meaningful.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+33
+
+ 
+
+ 
+
+ 
+
+Revenues
+
+ 
+
+The increase in total revenue was mainly due to an increase in Premiums, which resulted from higher sales of group annual term and stop loss products. In addition, Fee income increased, mainly due to a rise of variable AUM associated with favorable equity markets. Also, cost of insurance charges were higher during 2004 compared to 2003. 
+
+ 
+
+These favorable results were partially offset by decreases in Net investment income and Net realized capital gains. The increase in long-term interest rates resulted in the reduction of gains recognized on the sale of fixed maturities. Although interest rates increased in 2004, rates remained historically low, which continued to drive down the yields on fixed maturities and mortgage loans in 2004.
+
+ 
+
+Benefits and Expenses
+
+ 
+
+Total benefits and expenses increased during 2004, largely due to increases in Interest credited and other benefits to policyholders/contractowners and Operating expenses, partially offset by a decrease in Amortization of DAC and VOBA.
+
+ 
+
+The significant increase in Interest credited and other benefits to policyholders/contractowners resulted from large claims filed in 2004, one of which was not reinsured. Operating expenses were also higher in 2004, which reflects the general growth of the group business and lower level of deferrals. 
+
+ 
+
+This increase in expenses was partially offset by the reduction in Amortization of DAC and VOBA, primarily due to a change in the Company s amortization rate as a result of assumption changes related to mortality, lapse, expense, interest amounts, and portfolio return, as well as modeling improvements. These assumption changes resulted in a decrease in amortization in 2004 and an increase in amortization in 2003. In addition, there was no amortization recognized for the group annuity products in 2004 as a result of the write-off of related DAC and VOBA in 2003.
+
+ 
+
+Income Tax and Cumulative Effect of Change in Accounting Principle
+
+ 
+
+The decrease in Income tax expense during 2004 largely reflects the increase in benefits and expenses, as noted above. In addition, the 2003 effective tax rate was lower than the 2004 effective tax rate due to the refinement of deferred tax balances during 2003.
+
+ 
+
+The Cumulative effect of change in accounting principle for 2004 is related to the adoption of SOP 03-1 and the TPA, as noted above.
+
+ 
+
+34
+
+ 
+
+ 
+
+ 
+
+Financial Condition
+
+ 
+
+Investments
+
+ 
+
+Investment Strategy
+
+ 
+
+The Company s investment strategy focuses on diversification by asset class. The Company seeks to achieve economic diversification while reducing overall credit risk and liquidity risk. In addition, the Company seeks to mitigate the impact of cash flow variability from embedded options within certain investment products, such as convexity risk on collateralized mortgage obligations and call options. The investment management function is centralized under ING Investment Management LLC, an affiliate of the Company, pursuant to an investment advisory agreement. Separate portfolios are established for groups of products with similar liability characteristics within the Company.
+
+ 
+
+The Company s general account invests primarily in fixed maturity investments, including publicly issued bonds (including government bonds), privately placed notes and bonds, mortgage-backed securities, and asset-backed securities. The primary investment strategy is to optimize the risk-adjusted return through superior asset selection predicated on a developed relative value approach, credit research and monitoring, superior management of interest rate risk, and active exploration into new investment product opportunities. Investments are purchased when market returns, adjusted for risk and expenses, are sufficient to profitably support growth of the liability block of business. In addition, assets and liabilities are analyzed and reported for internal management purposes on an option-adjusted basis. The level of required capital of given transactions is a primary factor in
+determining relative value among different investment and liability alternatives, within the scope of each product type s objective. An active review of existing holdings identifies specific assets that could be effectively traded in order to enhance the risk-adjusted returns of the portfolio, while minimizing adverse tax and accounting impacts. The Company strives to maintain a portfolio weighted average asset quality rating of A based on Standard & Poor s ( S&P ) ratings classifications. The weighted average excludes mortgage loans but includes mortgage-backed securities which are reported with bonds.
+
+ 
+
+ 
+
+35
+
+ 
+
+ 
+
+ 
+
+Portfolio Composition
+
+ 
+
+The following table presents the investment portfolio at December 31, 2005 and 2004.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Carrying Value
+ 
+ 
+ 
+ 
+ 
+ %
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Carrying Value
+ 
+ 
+ 
+ 
+ 
+ %
+ 
+
+ 
+ 
+ Fixed maturities, including 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ securities pledged
+ 
+ 
+ $
+ 
+ 
+ 1,727.0 
+ 
+ 
+ 
+ 
+ 
+ 84.6%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,761.6 
+ 
+ 
+ 
+ 
+ 
+ 84.3%
+ 
+
+ 
+ 
+ Equity securities
+ 
+ 
+ 
+ 
+ 
+ 4.5 
+ 
+ 
+ 
+ 
+ 
+ 0.2%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.6 
+ 
+ 
+ 
+ 
+ 
+ 0.4%
+ 
+
+ 
+ 
+ Mortgage loans on real estate
+ 
+ 
+ 
+ 
+ 
+ 191.0 
+ 
+ 
+ 
+ 
+ 
+ 9.4%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 213.0 
+ 
+ 
+ 
+ 
+ 
+ 10.2%
+ 
+
+ 
+ 
+ Policy loans
+ 
+ 
+ 
+ 
+ 
+ 93.4 
+ 
+ 
+ 
+ 
+ 
+ 4.6%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 90.9 
+ 
+ 
+ 
+ 
+ 
+ 4.3%
+ 
+
+ 
+ 
+ Short-term investments
+ 
+ 
+ 
+ 
+ 
+ 5.0 
+ 
+ 
+ 
+ 
+ 
+ 0.2%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 0.0%
+ 
+
+ 
+ 
+ Other investments
+ 
+ 
+ 
+ 
+ 
+ 19.9 
+ 
+ 
+ 
+ 
+ 
+ 1.0%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.0 
+ 
+ 
+ 
+ 
+ 
+ 0.8%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,040.8 
+ 
+ 
+ 
+ 
+ 
+ 100.0%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,090.1 
+ 
+ 
+ 
+ 
+ 
+ 100.0%
+ 
+
+ 
+
+Fixed Maturities
+
+ 
+
+Fixed maturities, available-for-sale, as of December 31, 2005, were as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gains
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Losses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+
+ 
+ 
+ Fixed maturities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. government and government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ agencies and authorities
+ 
+ 
+ $
+ 
+ 
+ 35.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 35.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ State, municipalities, and political
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ subdivisions
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. corporate securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Public utilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 170.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 172.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other corporate securities
+ 
+ 
+ 
+ 
+ 
+ 612.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 14.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 8.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 618.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total U.S. corporate securities
+ 
+ 
+ 
+ 
+ 
+ 783.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 18.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 11.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 790.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Foreign securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 177.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 176.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total foreign securities
+ 
+ 
+ 
+ 
+ 
+ 195.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 194.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Residential mortgage-backed securities
+ 
+ 
+ 
+ 
+ 
+ 410.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 404.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Commercial mortgaged-backed securities
+ 
+ 
+ 
+ 
+ 
+ 188.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 189.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other asset-backed securities
+ 
+ 
+ 
+ 
+ 
+ 112.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 112.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total fixed maturities, including fixed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 1,727.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 27.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 27.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,727.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Less: fixed maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 118.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 115.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total fixed maturities
+ 
+ 
+ $
+ 
+ 
+ 1,608.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 27.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 23.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,611.9 
+ 
+
+ 
+
+36
+
+ 
+
+ 
+
+ 
+
+Fixed maturities, available-for-sale, as of December 31, 2004, were as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gains
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Losses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+
+ 
+ 
+ Fixed maturities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. government and government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ agencies and authorities
+ 
+ 
+ $
+ 
+ 
+ 56.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 56.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ State, municipalities, and political
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ subdivisions
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. corporate securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Public utilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 154.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 161.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other corporate securities
+ 
+ 
+ 
+ 
+ 
+ 695.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 728.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total U.S. corporate securities
+ 
+ 
+ 
+ 
+ 
+ 849.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 43.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 889.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Foreign securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 168.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 172.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total foreign securities
+ 
+ 
+ 
+ 
+ 
+ 196.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 201.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Residential mortgage-backed securities
+ 
+ 
+ 
+ 
+ 
+ 373.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 373.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Commercial mortgaged-backed securities
+ 
+ 
+ 
+ 
+ 
+ 119.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 8.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 126.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other asset-backed securities
+ 
+ 
+ 
+ 
+ 
+ 107.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 112.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total fixed maturities, including fixed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 1,702.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 68.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,761.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Less: fixed maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 149.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 148.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total fixed maturities
+ 
+ 
+ $
+ 
+ 
+ 1,553.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 68.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 8.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,613.1 
+ 
+
+ 
+
+It is management s objective that the portfolio of fixed maturities be of high quality and be well diversified by market sector. The fixed maturities in the Company s portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. The average quality rating of the Company's fixed maturities portfolio was AA- and A+ at December 31, 2005 and 2004, respectively. Ratings are calculated using a rating hierarchy that considers S&P, Moody s, and internal ratings.
+
+ 
+
+ 
+
+37
+
+ 
+
+ 
+
+ 
+
+Total fixed maturities by quality rating category including fixed maturities pledged to creditors, were as follows at December 31, 2005 and 2004:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+ 
+ 
+ 
+ 
+ % of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+ 
+ 
+ 
+ 
+ % of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+
+ 
+ 
+ AAA
+ 
+ 
+ $
+ 
+ 
+ 730.7 
+ 
+ 
+ 
+ 
+ 
+ 42.3%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 670.6 
+ 
+ 
+ 
+ 
+ 
+ 38.1%
+ 
+
+ 
+ 
+ AA
+ 
+ 
+ 
+ 
+ 
+ 85.0 
+ 
+ 
+ 
+ 
+ 
+ 4.9%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 94.3 
+ 
+ 
+ 
+ 
+ 
+ 5.4%
+ 
+
+ 
+ 
+ A
+ 
+ 
+ 
+ 
+ 
+ 412.6 
+ 
+ 
+ 
+ 
+ 
+ 23.9%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 408.7 
+ 
+ 
+ 
+ 
+ 
+ 23.2%
+ 
+
+ 
+ 
+ BBB
+ 
+ 
+ 
+ 
+ 
+ 439.8 
+ 
+ 
+ 
+ 
+ 
+ 25.5%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 513.4 
+ 
+ 
+ 
+ 
+ 
+ 29.1%
+ 
+
+ 
+ 
+ BB
+ 
+ 
+ 
+ 
+ 
+ 50.8 
+ 
+ 
+ 
+ 
+ 
+ 2.9%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 59.9 
+ 
+ 
+ 
+ 
+ 
+ 3.4%
+ 
+
+ 
+ 
+ B and below
+ 
+ 
+ 
+ 
+ 
+ 8.1 
+ 
+ 
+ 
+ 
+ 
+ 0.5%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 14.7 
+ 
+ 
+ 
+ 
+ 
+ 0.8%
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,727.0 
+ 
+ 
+ 
+ 
+ 
+ 100.0%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,761.6 
+ 
+ 
+ 
+ 
+ 
+ 100.0%
+ 
+
+ 
+
+96.6% and 95.8% of the fixed maturities were invested in securities rated BBB and above (Investment Grade) at December 31, 2005 and 2004, respectively.
+
+ 
+
+Fixed maturities rated BB and below (Below Investment Grade) may have speculative characteristics, and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturities.
+
+ 
+
+Total fixed maturities by market sector, including fixed maturities pledged to creditors, were as follows at December 31, 2005 and 2004:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+ 
+ 
+ 
+ 
+ % of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+ 
+ 
+ 
+ 
+ % of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+
+ 
+ 
+ U.S. corporate, state, and municipalities
+ 
+ 
+ $
+ 
+ 
+ 792.1 
+ 
+ 
+ 
+ 
+ 
+ 45.8%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 891.2 
+ 
+ 
+ 
+ 
+ 
+ 50.6%
+ 
+
+ 
+ 
+ Residential mortgage-backed
+ 
+ 
+ 
+ 
+ 
+ 404.0 
+ 
+ 
+ 
+ 
+ 
+ 23.4%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 373.9 
+ 
+ 
+ 
+ 
+ 
+ 21.2%
+ 
+
+ 
+ 
+ Foreign(1)
+ 
+ 
+ 
+ 
+ 
+ 194.0 
+ 
+ 
+ 
+ 
+ 
+ 11.2%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 201.1 
+ 
+ 
+ 
+ 
+ 
+ 11.4%
+ 
+
+ 
+ 
+ Commercial mortgage-backed
+ 
+ 
+ 
+ 
+ 
+ 189.2 
+ 
+ 
+ 
+ 
+ 
+ 11.0%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 126.9 
+ 
+ 
+ 
+ 
+ 
+ 7.2%
+ 
+
+ 
+ 
+ Other asset-backed
+ 
+ 
+ 
+ 
+ 
+ 112.2 
+ 
+ 
+ 
+ 
+ 
+ 6.5%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 112.1 
+ 
+ 
+ 
+ 
+ 
+ 6.4%
+ 
+
+ 
+ 
+ U.S. Treasuries/Agencies
+ 
+ 
+ 
+ 
+ 
+ 35.5 
+ 
+ 
+ 
+ 
+ 
+ 2.1%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 56.4 
+ 
+ 
+ 
+ 
+ 
+ 3.2%
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,727.0 
+ 
+ 
+ 
+ 
+ 
+ 100.0%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,761.6 
+ 
+ 
+ 
+ 
+ 
+ 100.0%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ (1)
+ 
+ 
+ Primarily U.S. dollar denominated
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+38
+
+ 
+
+ 
+
+ 
+
+The amortized cost and fair value of fixed maturities as of December 31, 2005 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+
+ 
+ 
+ Due to mature:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ One year or less
+ 
+ 
+ $
+ 
+ 
+ 51.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 52.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ After one year through five years
+ 
+ 
+ 
+ 
+ 
+ 412.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 415.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ After five years through ten years
+ 
+ 
+ 
+ 
+ 
+ 350.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 349.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ After ten years
+ 
+ 
+ 
+ 
+ 
+ 199.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 204.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Mortgage-backed securities
+ 
+ 
+ 
+ 
+ 
+ 599.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 593.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other asset-backed securities
+ 
+ 
+ 
+ 
+ 
+ 112.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 112.2 
+ 
+
+ 
+ 
+ Less: fixed maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 118.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 115.1 
+ 
+
+ 
+ 
+ Fixed maturities, excluding fixed maturities pledged
+ 
+ 
+ $
+ 
+ 
+ 1,608.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,611.9 
+ 
+
+ 
+
+The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company s shareholder s equity at December 31, 2005 or 2004.
+
+ 
+
+At December 31, 2005 and 2004, fixed maturities with fair values of $2.8 and $6.0, respectively, were on deposit as required by regulatory authorities.
+
+ 
+
+Mortgage Loans
+
+ 
+
+Mortgage loans, primarily commercial mortgage loans, totaled $191.0 and $213.0 at December 31, 2005 and 2004, respectively. These loans are reported at amortized cost, less impairment writedowns. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to either the present value of expected cash flows from the loan, discounted at the loan s effective interest rate, or fair value of the collateral. If the loan is in foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell. The carrying value of the impaired loans is reduced by establishing a permanent write down charged to realized loss. At
+December 31, 2005 and 2004, the Company had no allowance for mortgage loan credit losses. The properties collateralizing mortgage loans are geographically dispersed throughout the United States, with the largest concentration of 22.5% of properties in California at December 31, 2005.
+
+ 
+
+Unrealized Losses 
+
+ 
+
+Fixed maturities, including securities pledged to creditors, comprise 84.6% and 84.3% of the Company s total investment portfolio at December 31, 2005 and 2004, respectively. Unrealized losses related to fixed maturities are analyzed in detail in the following tables.
+
+ 
+
+ 
+
+39
+
+ 
+
+ 
+
+ 
+
+Unrealized losses in fixed maturities, including securities pledged to creditors, for Investment Grade ( IG ) and Below Investment Grade ( BIG ) securities by duration were as follows at December 31, 2005 and 2004:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ % of IG
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ % of IG
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ % of IG
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ % of IG
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ IG
+ 
+ 
+ 
+ 
+ 
+ and BIG
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ BIG
+ 
+ 
+ 
+ 
+ 
+ and BIG
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ IG
+ 
+ 
+ 
+ 
+ 
+ and BIG
+ 
+ 
+ 
+ 
+ 
+ BIG
+ 
+ 
+ 
+ 
+ 
+ and BIG
+ 
+
+ 
+ 
+ Less than six months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ below amortized cost
+ 
+ 
+ $
+ 
+ 
+ 10.4 
+ 
+ 
+ 
+ 
+ 
+ 38.3%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ 1.5%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ 28.1%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 0.0%
+ 
+
+ 
+ 
+ More than six months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ and less than twelve
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months below 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ amortized cost
+ 
+ 
+ 
+ 
+ 
+ 6.5 
+ 
+ 
+ 
+ 
+ 
+ 24.0%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 0.4%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.5 
+ 
+ 
+ 
+ 
+ 
+ 26.0%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 0.0%
+ 
+
+ 
+ 
+ More than twelve months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ below amortized cost
+ 
+ 
+ 
+ 
+ 
+ 9.6 
+ 
+ 
+ 
+ 
+ 
+ 35.4%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 0.4%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.0 
+ 
+ 
+ 
+ 
+ 
+ 31.3%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.4 
+ 
+ 
+ 
+ 
+ 
+ 14.6%
+ 
+
+ 
+ 
+ Total unrealized loss
+ 
+ 
+ $
+ 
+ 
+ 26.5 
+ 
+ 
+ 
+ 
+ 
+ 97.7%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.6 
+ 
+ 
+ 
+ 
+ 
+ 2.3%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 8.2 
+ 
+ 
+ 
+ 
+ 
+ 85.4%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.4 
+ 
+ 
+ 
+ 
+ 
+ 14.6%
+ 
+
+ 
+
+Unrealized losses in fixed maturities at December 31, 2005 and 2004, were related to interest rate movement or spread widening and to mortgage and other asset-backed securities. Mortgage and asset-backed securities include U.S. government backed securities, principal protected securities, and structured securities, which did not have an adverse change in cash flows. The following table summarizes the unrealized losses by duration and reason, along with the fair value of fixed maturities, including fixed maturities pledged to creditors, in unrealized loss position at December 31, 2005 and 2004:
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ More than 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Six Months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Less than
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ and less than
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ More than
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Six Months 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Twelve Months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Twelve Months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Interest rate or spread widening
+ 
+ 
+ $
+ 
+ 
+ 5.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 3.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 7.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 16.2 
+ 
+
+ 
+ 
+ Mortgage and other asset-backed 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.9 
+ 
+
+ 
+ 
+ Total unrealized loss
+ 
+ 
+ $
+ 
+ 
+ 10.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 27.1 
+ 
+
+ 
+ 
+ Fair value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 547.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 261.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 246.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,054.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Interest rate or spread widening
+ 
+ 
+ $
+ 
+ 
+ 1.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 3.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.1 
+ 
+
+ 
+ 
+ Mortgage and other asset-backed 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.5 
+ 
+
+ 
+ 
+ Total unrealized loss
+ 
+ 
+ $
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 4.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.6 
+ 
+
+ 
+ 
+ Fair value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 335.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 131.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 78.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 545.8 
+ 
+
+ 
+
+ 
+
+40
+
+ 
+
+ 
+
+ 
+
+Unrealized losses in fixed maturities, including securities pledged to creditors, by market sector and duration were as follows at December 31, 2005 and 2004:
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ U.S.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Corporate,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Residential
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Commercial
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ U.S.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ State and
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Mortgage-
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Mortgage-
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Treasuries/
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Asset-
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Municipalities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Backed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Backed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Foreign
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Agencies
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Backed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Less than six 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months below
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ amortized cost
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 3.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 4.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 10.8 
+ 
+
+ 
+ 
+ More than six 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months and less 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ than twelve
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months below
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ amortized cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.6 
+ 
+
+ 
+ 
+ More than twelve 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months below
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ amortized cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.7 
+ 
+
+ 
+ 
+ Total unrealized loss
+ 
+ 
+ $
+ 
+ 
+ 11.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 7.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 4.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 27.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Less than six 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months below
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ amortized cost
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.7 
+ 
+
+ 
+ 
+ More than six 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months and less 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ than twelve
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months below
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ amortized cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.5 
+ 
+
+ 
+ 
+ More than twelve 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ months below
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ amortized cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.4 
+ 
+
+ 
+ 
+ Total unrealized loss
+ 
+ 
+ $
+ 
+ 
+ 3.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.6 
+ 
+
+ 
+
+Of the unrealized losses aged more than twelve months, the average market value of the related fixed maturities is 96% of the average book value as of December 31, 2005. In addition, this category includes 100 securities, which have an average quality rating of A. No other-than-temporary impairment loss was considered necessary for these fixed maturities as of December 31, 2005.
+
+ 
+
+Overall, there has been an increase in unrealized losses from December 31, 2004 to December 31, 2005. This increase is largely caused by an increase in prevailing market interest rates, which tends to have a negative market value impact on fixed maturity securities. In accordance with the Financial Accounting Standards Board ( FASB ) Staff Position ( FSP ) FAS No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ( FSP FAS No. 115-1 ), the Company considers the negative market impact of the interest rate changes, in addition to credit related items, when performing other-than-temporary 
+
+ 
+
+41
+
+ 
+
+ 
+
+impairment testing. As part of this testing, the Company determines whether or not it has the ability and intent to retain the investments for a period of time sufficient to allow for recovery in fair value.
+
+ 
+
+Other-Than-Temporary-Impairments
+
+ 
+
+The Company analyzes the general account investments to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Management considers the length of the time and the extent to which the fair value has been less than amortized cost, the issuer s financial condition and near-term prospects, future economic conditions and market forecasts, and the Company s intent and ability to retain the investment for a period of time sufficient to allow for recovery in fair value. If it is probable that all amounts due according to the contractual terms of an investment will not be collected, an other-than-temporary impairment is considered to have occurred. 
+
+ 
+
+In addition, the Company invests in asset-backed securities. Determination of the required impairment is based on the analyses discussed in the preceding paragraph, as well as, credit risk and the possibility of significant prepayment risk that restricts the Company s ability to recover the investment. An impairment is recognized if the market value of the security is less than book value and there has been an adverse change in cash flow since the last remeasurement date.
+
+ 
+
+When a decline in fair value is determined to be other-than-temporary, the individual security is written down to fair value, and the loss is accounted for as a change in Net realized capital gains (losses).
+
+ 
+
+The following table identifies the Company s other-than-temporary impairments by type for the years ended December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+
+ 
+ 
+ U.S. Corporate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+
+ 
+ 
+ Residential mortgage-
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ backed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Foreign(1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ U.S. Treasuries/Agencies
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Equity securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+
+ 
+ 
+ Limited partnerships
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Other asset-backed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.0 
+ 
+ 
+ 
+ 
+ 
+ 6 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.9 
+ 
+ 
+ 
+ 
+ 
+ 3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 4.8 
+ 
+ 
+ 
+ 
+ 
+ 9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ (1) Primarily U.S. Dollar denominated
+ 
+ 
+ * Less than $0.1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+42
+
+ 
+
+ 
+
+ 
+
+The above schedule includes $0.4 in anticipated disposition write-downs related to investments that the Company does not have the intent and ability to retain for a period of time sufficient to allow for recovery in fair value, based upon the implementation of FSP FAS No. 115-1. The following table summarizes these write-downs recognized by type for the year ended December 31, 2005:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+
+ 
+ 
+ U.S. corporate
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+
+ 
+ 
+ Residential mortgage-backed
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+
+ 
+ 
+ U.S. Treasuries/Agencies
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ * Less than $0.1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturity securities or cost for equity securities. In certain situations new factors such as negative developments and subsequent credit deterioration can subsequently change the Company s previous intent to continue holding a security.
+
+ 
+
+Because of rising interest rates, continued asset-liability management strategies and ongoing comprehensive reviews of the Company s portfolios, changes were made in the fourth quarter of 2005 to the Company s strategic asset allocations. In addition, the Company also pursued yield enhancement strategies. These changes primarily resulted in anticipated disposition write-downs totaling $0.4 of certain securities with unrealized loss positions due to a change in intent as to whether to hold these securities until recovery.
+
+ 
+
+Net Realized Capital Gains and Losses
+
+ 
+
+Net realized capital gains (losses) are comprised of the difference between the carrying value of investments and proceeds from sale, maturity, and redemption, as well as losses incurred due to the other-than-temporary impairment of investments, and changes in fair value of derivatives. Net realized capital gains (losses) on investments for the years ended December 31, 2005, 2004, and 2003, were as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Fixed maturities, available-for-sale
+ 
+ 
+ $
+ 
+ 
+ 7.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 10.2 
+ 
+
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.1)
+ 
+
+ 
+ 
+ Derivatives
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+
+ 
+ 
+ Pretax net realized capital gains 
+ 
+ 
+ $
+ 
+ 
+ 9.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 10.6 
+ 
+
+ 
+ 
+ After-tax net realized capital gains 
+ 
+ 
+ $
+ 
+ 
+ 6.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.9 
+ 
+
+ 
+
+ 
+
+43
+
+ 
+
+ 
+
+ 
+
+Liquidity and Capital Resources
+
+ 
+
+Liquidity is the ability of the Company to generate sufficient cash flows to meet the cash requirements of operating, investing, and financing activities.
+
+ 
+
+Sources and Uses of Liquidity
+
+ 
+
+The Company s principal sources of liquidity are premiums and product charges, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance, and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest and premium credits, investment purchases, repayment of debt, and contract maturities, withdrawals, and surrenders.
+
+ 
+
+The Company s liquidity position is managed by maintaining adequate levels of liquid assets, such as cash or cash equivalents and short-term investments. Asset/liability management is integrated into many aspects of the Company s operations, including investment decisions, product development, and determination of crediting rates. As part of the risk management process, different economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine that existing assets are adequate to meet projected liability cash flows. Key variables in the modeling process include interest rates, anticipated contractowner or policyholder behavior, and variable separate account performance. Contractowners and policyholders bear the investment risk related to variable insurance products, subject to the minimum guaranteed death and living
+benefits included in these contracts. 
+
+ 
+
+The fixed account liabilities are supported by a general account portfolio principally composed of fixed rate investments with matching duration characteristics that can generate predictable, steady rates of return. The portfolio management strategy for the fixed account considers the assets available-for-sale. This strategy enables the Company to respond to changes in market interest rates, prepayment risk, relative values of asset sectors and individual securities and loans, credit quality outlook, and other relevant factors. The objective of portfolio management is to maximize returns, taking into account interest rate and credit risk, as well as other risks. The Company s asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change.
+
+ 
+
+ 
+
+44
+
+ 
+
+ 
+
+ 
+
+Additional sources of liquidity include borrowing facilities to meet short-term cash requirements that arise in the ordinary course of business. The Company maintains the following agreements: 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ A reciprocal loan agreement with ING America Insurance Holdings, Inc. ( ING AIH ), an affiliate, whereby either party can borrow from the other up to 5% of the Company s statutory admitted assets as of the prior December 31. The Company had no balances receivable or payable with ING AIH at December 31, 2005 and 2004. 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ A $30.0 uncommitted, perpetual revolving note facility with the Bank of New York. At December 31, 2005 and 2004, the Company had no amounts outstanding under the revolving loan facility. 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ A $30.0 uncommitted line-of-credit agreement with PNC Bank, effective December 19, 2005. Borrowings are guaranteed by ING AIH, with maximum aggregate borrowings outstanding at any time to ING AIH and its affiliates of $75.0. As of December 31, 2005, the Company had no amounts outstanding under the line-of-credit agreement.
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Prior to September 30, 2005, the Company also maintained a $30.0 uncommitted, revolving note facility with SunTrust Bank, Atlanta. At December 31, 2004, the Company had a $2.3 balance payable under this facility. 
+ 
+
+ 
+
+Management believes that these sources of liquidity are adequate to meet the Company s short-term cash obligations.
+
+ 
+
+Capital Contributions and Dividends
+
+ 
+
+The Company paid $20.8, $27.2, and $25.5 in dividends on its common stock during 2005, 2004, and 2003, respectively, to its parent.
+
+ 
+
+The Company did not receive any capital contributions during 2005, 2004, and 2003, from its parent.
+
+ 
+
+Separate Accounts
+
+ 
+
+Separate account assets and liabilities generally represent funds maintained to meet specific investment objectives of contractowners and policyholders who bear the investment risk, subject, in limited cases, to minimum guaranteed rates. Investment income and investment gains and losses generally accrue directly to such contractowners and policyholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company.
+
+ 
+
+Separate account assets supporting variable options under variable annuity and variable universal life contracts are invested, as designated by the contractowner, policyholder, or participant (who bears the investment risk subject, in limited cases, to minimum guaranteed rates) under a contract in shares of mutual funds that are managed by the Company or its affiliates, or in other selected mutual funds not managed by the Company or its affiliates. 
+
+ 
+
+ 
+
+45
+
+ 
+
+ 
+
+ 
+
+Variable annuity and variable universal life deposits are allocated to various subaccounts established within the separate account. Each subaccount represents a different investment option in which the contractowner may allocate deposits. The account value of a variable annuity or variable universal life contract is equal to the aggregate value of the subaccounts selected by the contractowner (including the value allocated to any fixed account) less fees and expenses. The Company offers investment options for its variable annuity and variable universal life contracts covering a wide range of investment styles, including large, mid and small cap equity funds, as well as fixed income alternatives. Therefore, unlike fixed annuities, under variable annuity and variable universal life contracts, contractowners bear the risk of investment gains and losses associated with the selected
+investment allocation. The Company, however, offers certain guaranteed death and living benefits (described below) under which it bears specific risks associated with these benefits. Many of the variable annuity contracts issued by the Company are combination contracts offering both variable and fixed options under which some or all of the deposits may be allocated by the contractowner to a fixed account available under the contract. 
+
+ 
+
+The Company s major source of income from variable annuities is the base contract mortality fees, expense fees, and guaranteed living and death benefit rider fees charged to the customer, less the cost of administering the product, as well as the cost of providing for the guaranteed living and death benefits.
+
+ 
+
+Minimum Guarantees
+
+ 
+
+Variable annuity contracts containing guaranteed death benefits expose the Company to equity risk. An increase in the value of the equity markets may increase account values for these contracts, thereby decreasing the Company s risk associated with the GMDBs, GMIBs, GMABs, and GMWBs. A decrease in the equity markets may cause a decrease in the account values, thereby increasing the possibility that the Company may be required to pay amounts to customers due to guaranteed death benefits.
+
+ 
+
+The Company sells variable annuity contracts that offer one or more of the following guaranteed death benefits and living benefits:
+
+ 
+
+Guaranteed Minimum Death Benefits ( GMDBs ): The Company has offered the following guaranteed death benefits:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Standard - Guarantees that, upon the death of the annuitant, the death benefit will be no less than the premiums paid by the contractowner, net of any contract withdrawals.
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Ratchet - Guarantees that, upon the death of the annuitant, the death benefit will be no less than the greater of (1) Standard or (2) the maximum contract anniversary value of the variable annuity.
+ 
+
+ 
+
+The liability associated with this benefit is recorded in accordance with the provisions of SOP 03-1.
+
+ 
+
+ 
+
+46
+
+ 
+
+ 
+
+ 
+
+Guaranteed Living Benefits: The Company offers the following guaranteed living benefits:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Guaranteed Minimum Income Benefit ( GMIB ) - Guarantees a minimum income payout, exercisable each contract anniversary on or after the 10th rider anniversary. 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Guaranteed Minimum Withdrawal Benefit ( GMWB ) - Guarantees that annual withdrawals of up to 7% of eligible premiums may be made until eligible premiums previously paid by the contractowner, are returned, regardless of account value performance. 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Guaranteed Minimum Accumulation Benefit ( GMAB ) - Guarantees that the account value will be at least 100% of the premiums paid by the contractowner after 10 years (GMAB10).
+ 
+
+ 
+
+For GMIBs, the liability is recorded in accordance with the provisions of SOP 03-1. For GMWBs and GMABs, the liability is held at fair value in accordance with FAS No. 133.
+
+ 
+
+Reinsurance Recoverable
+
+ 
+
+The Company utilizes reinsurance agreements to reduce its exposure to large losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverable balances deemed probable of recovery are reflected as assets on the Balance Sheets. 
+
+ 
+
+Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
+
+ 
+
+Through the normal course of investment operations, the Company commits to either purchase or sell securities, commercial mortgage loans, or money market instruments, at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either a higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. At December 31, 2005, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $10.2, $0.7 of which was with related parties. At December 31, 2004, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $15.4, $1.2 of which was with related parties. During 2005 and 2004, $0.5 and $1.4, respectively, was funded to related parties under off-balance sheet commitments.
+
+ 
+
+In the third quarter of 2005, the Company purchased a 3-year credit-linked note arrangement, whereby the Company agreed to reimburse the guaranteed party upon payment default of the referenced obligation. Upon such default, the Company reimburses the guaranteed party for the loss under the reference obligation, and the Company receives that reference obligation in settlement. The Company can then recover any losses under the agreement by sale or collection of the received reference obligation. As of December 31, 2005, the maximum potential future exposure to the Company under the guarantee was $3.0.
+
+ 
+
+47
+
+ 
+
+ 
+
+ 
+
+As of December 31, 2005, the Company had certain contractual obligations due over a period of time as summarized in the following table.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Payments Due by Period
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Less than
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ More than
+ 
+
+ 
+ 
+ Contractual Obligations
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1 Year
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1-3 Years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3-5 Years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5 Years
+ 
+
+ 
+ 
+ Operating lease obligations(1)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Purchase obligations(2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Reserves for insurance obligations(3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,721.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 123.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 207.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 192.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,198.3 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,731.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 133.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 207.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 192.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,198.3 
+ 
+
+ 
+
+ 
+ 
+ (1)
+ 
+ 
+ Operating lease obligations relate to the rental of office space under various non-cancelable operating lease agreements, the longest term of which expires in 2010.
+ 
+
+ 
+
+ 
+ 
+ (2)
+ 
+ 
+ Purchase obligations consist primarily of commitments to purchase investments during 2006. These obligations may occur any time within one year. However, the exact timing of funding these commitments cannot be estimated.
+ 
+
+ 
+
+ 
+ 
+ (3)
+ 
+ 
+ Reserves for insurance obligations consist of actuarially-determined amounts required for the Company to meet its future obligations under its universal and traditional life policies, fixed and variable annuity contracts, accident and health policies, supplemental contracts, and miscellaneous supplemental benefits and riders.
+ 
+
+ 
+
+Repurchase Agreements
+
+ 
+
+The Company engages in dollar repurchase agreements ( dollar rolls ) and repurchase agreements to increase its return on investments and improve liquidity. These transactions involve a sale of securities and an agreement to repurchase substantially the same securities as those sold. Company policies require a minimum of 95% of the fair value of securities pledged under dollar rolls and repurchase agreement transactions to be maintained as collateral. Cash collateral received is invested in fixed maturities and the offsetting collateral liability is included in Borrowed money on the Balance Sheets. At December 31, 2005 and 2004, the carrying value of the securities pledged in dollar rolls and repurchase agreement transactions was $98.4 and $100.7, respectively. The carrying value of the securities pledged in dollar rolls and repurchase agreement transactions is
+included in Securities pledged on the Balance Sheets. The repurchase obligation related to dollar rolls and repurchase agreements totaled $97.7 and $100.4 at December 31, 2005 and 2004, respectively. The repurchase obligation related to dollar rolls and repurchase agreements is included in Borrowed money on the Balance Sheets.
+
+ 
+
+ 
+
+48
+
+ 
+
+ 
+
+ 
+
+The Company also enters into reverse repurchase agreements. These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased. Company policies require a minimum of 102% of the fair value of securities pledged under reverse repurchase agreements to be pledged as collateral. At December 31, 2005 and 2004, the carrying value of the securities in reverse repurchase agreements was $4.1 and $32.0, respectively. Reverse repurchase agreements are included in Cash and cash equivalents on the Balance Sheets.
+
+ 
+
+The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company s exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments, an amount that was not material at December 31, 2005. The Company believes the counterparties to the dollar roll, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is immaterial.
+
+ 
+
+Securities Lending
+
+ 
+
+The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned domestic securities. The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company s guidelines to generate additional income. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the fair value of the loaned securities fluctuates.
+
+ 
+
+Risk-Based Capital
+
+ 
+
+The National Association of Insurance Commissioners ( NAIC ) risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to monitor the capitalization of insurance companies based upon the type and mixture of risks inherent in a company s operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. The Company has complied with the NAIC s risk-based capital reporting requirements. Amounts reported indicate that as of December 31, 2005, the Company has total adjusted capital above all required capital levels.
+
+ 
+
+ 
+
+49
+
+ 
+
+ 
+
+ 
+
+Recently Adopted Accounting Standards
+
+ 
+
+(See Organization and Significant Accounting Policies footnote to the financial statements for further information.)
+
+ 
+
+The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments
+
+ 
+
+In March 2004, EITF reached a final consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments ( EITF 03-1 ) adopting a three-step impairment model for securities within its scope. The three-step model is applied on a security-by-security basis as follows:
+
+ 
+
+ 
+ 
+ Step 1:
+ 
+ 
+ Determine whether an investment is impaired. An investment is impaired if the fair value of the investment is less than its cost basis.
+ 
+
+ 
+ 
+ Step 2:
+ 
+ 
+ Evaluate whether an impairment is other-than-temporary.
+ 
+
+ 
+ 
+ Step 3:
+ 
+ 
+ If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment s cost and its fair value.
+ 
+
+ 
+
+On September 30, 2004, the FASB issued FASB Staff Position No. EITF Issue 03-1-1 Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ( FSP EITF 03-1-1 ), which delayed the EITF 03-1 original effective date of July 1, 2004 related to steps two and three of the impairment model introduced. 
+
+ 
+
+On November 3, 2005, the FASB issued FSP FAS No. 115-1 that replaces the impairment evaluation guidance of EITF 03-1. 
+
+ 
+
+FSP FAS No. 115-1 addresses the determination of when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In addition, it includes considerations for accounting subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporarily impaired. FSP FAS No. 115-1 further clarifies that an impairment loss should be recognized no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made. FSP FAS No. 115-1 references existing guidance on other-than-temporary impairments.
+
+ 
+
+FSP FAS No. 115-1 is effective for reporting periods beginning after December 15, 2005, and was implemented by the Company during the fourth quarter of 2005. The Company recognized impairment losses of $0.4 for the year ended December 31, 2005, related to investments that the Company does not have the intent and ability to retain for a period of time sufficient to allow for recovery in fair value. 
+
+ 
+
+ 
+
+50
+
+ 
+
+ 
+
+ 
+
+Share-Based Payment
+
+ 
+
+In December 2004, FASB issued FAS No. 123 (revised 2004), "Share-Based Payment" ("FAS No. 123R"), which requires all share-based payments to employees be recognized in the financial statements based upon the fair value. FAS No. 123R was effective at the beginning of the first interim or annual period beginning after June 15, 2005 for registrants. FAS No. 123R provides two transition methods, modified-prospective and modified-retrospective.
+
+ 
+
+The modified-prospective method recognizes the grant-date fair value of compensation for new awards granted after the effective date and unvested awards beginning in the fiscal period in which the recognition provision are first applied. Prior periods are not restated. The modified-retrospective method permits entities to restate prior periods by recognizing the compensation cost based on amounts previously reported in the pro forma footnote disclosure as required under FAS No. 123, Accounting for Stock-Based Compensation ( FAS No. 123 ).
+
+ 
+
+The Company early adopted the provisions of FAS No. 123R on January 1, 2005, using the modified-prospective method. Under the modified-prospective method, compensation cost recognized in 2005 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2005, based on the grant date fair value estimated in accordance with the original provision of FAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2005, based on the grant date fair value in accordance with the provisions of FAS No. 123R. Results for prior periods are not restated. Prior to January 1, 2005, the Company applied the intrinsic value-based provisions set forth in Accounting Principles Board ( APB ) Opinion No. 25, Accounting for Stock Issued to Employees ( APB No. 25 ), and related
+Interpretations, as permitted by FAS No. 123. No stock based employee compensation cost was recognized in the Statement of Operations during 2004 and 2003, as all options granted during the year had an exercise price equal to the market value of the underlying common stock on the date of grant. All shares granted during 2005 and 2004 were those of ING, the Company s ultimate parent. As a result of adopting FAS No. 123R, the Company s net income for the year ended December 31, 2005, was $0.2 lower than if it had continued to account for share-based payments under APB No. 25. The fair value of shares granted during 2005 was $0.2 as of December 31, 2005, and will be expensed over a vesting period of 3 years. Prior to the adoption of FAS No. 123R, no modifications were made to outstanding options, and there were no significant changes to valuation methodologies as a result of the adoption of FAS No. 123R.
+
+ 
+
+ 
+
+51
+
+ 
+
+ 
+
+ 
+
+Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts
+
+ 
+
+The Company adopted SOP 03-1, on January 1, 2004. SOP 03-1 established several new accounting and disclosure requirements for certain nontraditional long-duration contracts and for separate accounts including, among other things, a requirement that assets and liabilities of separate account arrangements that do not meet certain criteria be accounted for as general account assets and liabilities, and the revenues and expenses related to such arrangements be consolidated with the respective line items in the Statements of Operations. In addition, SOP 03-1 requires additional liabilities be established for certain guaranteed death benefits and for products with certain patterns of cost of insurance charges. In addition, sales inducements provided to contractowners and policyholders must be recognized on the balance sheet separately from deferred acquisition costs and amortized as a
+component of benefits expense using methodology and assumptions consistent with those used for amortization of deferred policy acquisition costs.
+
+ 
+
+The Company evaluated all requirements of SOP 03-1 and determined that it is affected by SOP 03-1 s requirements to account for certain separate account arrangements as general account arrangements, to establish additional liabilities for certain guaranteed benefits and for products with patterns of cost of insurance charges resulting in losses in later policy durations from the insurance benefit function, and to defer, amortize, and recognize separately, sales inducements to contractowners and policyholders. Upon adoption of SOP 03-1 on January 1, 2004, the Company recognized a cumulative effect of a change in accounting principle of $(10.8), before tax or $(7.0), net of $3.8 of income taxes. In addition, requirements for certain separate account arrangements that do not meet the established criteria for separate asset and liability recognition are applicable to the Company,
+however, the Company s policies on separate account assets and liabilities have historically been, and continue to be, in conformity with the requirements newly established.
+
+ 
+
+In the fourth quarter of 2004, the cumulative effect of a change in accounting principle was revised due to the implementation of the TPA.
+
+ 
+
+The TPA, which was approved in September 2004, provided additional guidance regarding certain implicit assessments that may be used in testing of the base mortality function on contracts, which is performed to determine whether additional liabilities are required in conjunction with SOP 03-1. In addition, the TPA provided additional guidance surrounding the allowed level of aggregation of additional liabilities determined under SOP 03-1. While the TPA was implemented during the fourth quarter of 2004, the TPA was retroactive to the original implementation date of SOP 03-1, January 1, 2004, and was reported as an adjustment to the SOP 03-1 cumulative effect change in accounting principle. The adoption of the TPA resulted in an adjustment of the Company s cumulative effect change in accounting principle by $7.8, net of $4.2 of income tax.
+
+ 
+
+ 
+
+52
+
+ 
+
+ 
+
+ 
+
+The implementation of SOP 03-1 raised questions regarding the interpretation of the requirements of FAS No. 97, concerning when it is appropriate to record an unearned revenue liability related to the insurance benefit function. To clarify its position, the FASB issued FASB Staff Position No. FAS 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability ( FSP FAS 97-1 ), effective for fiscal periods beginning subsequent to the date the guidance was issued, June 18, 2004. The Company adopted FSP FAS 97-1 on July 1, 2004. The adoption of FSP FAS 97-1 did not have an impact on the Company s financial position, results of
+operations, or cash flows.
+
+ 
+
+New Accounting Pronouncements
+
+ 
+
+Accounting for Certain Hybrid Financial Instruments
+
+ 
+
+In February 2006, the FASB issued FAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140 ( FAS No. 155 ), which permits the application of fair value accounting to certain hybrid financial instruments in their entirety if they contain embedded derivatives that would otherwise require bifurcation under FAS No. 133. Under this approach, changes in fair value would be recognized currently in earnings. In addition, FAS No. 155 does the following:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Clarifies which interest-only strips and principal-only strips are not subject to derivative accounting under FAS No. 133;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Requires that interests in securitized financial assets be analyzed to identify interests that are freestanding derivatives or that are hybrid instruments that contain embedded derivatives requiring bifurcation;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Allows a qualifying special-purpose entity to hold derivative financial instruments that pertain to beneficial interests, other than another derivative financial instrument.
+ 
+
+ 
+
+FAS No. 155 is effective for all instruments acquired, issued, or subject to a remeasurement event, occurring after the beginning of the first fiscal year that commences after September 15, 2006. The Company is in the process of determining the impact of FAS No. 155.
+
+ 
+
+ 
+
+53
+
+ 
+
+ 
+
+ 
+
+Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts
+
+ 
+
+In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts ( SOP 05-1 ), which states that when an internal replacement transaction results in a substantially changed contract, the unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets, related to the replaced contract should not be deferred in connection with the new contract. Contract modifications that meet various conditions defined by SOP 05-1 and result in a new contract that is substantially unchanged from the replaced contract, however, should be accounted for as a continuation of the replaced contract.
+
+ 
+
+SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverage, that occur by the exchange of a contract for a new contract, by amendment, endorsement, or rider, to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 applies to internal replacements made primarily to contracts defined by FAS No. 60 as short-duration and long-duration insurance contracts, and by FAS No. 97 as investment contracts.
+
+ 
+
+SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company is in the process of determining the impact of adoption of SOP 05-1.
+
+ 
+
+Legislative Initiatives
+
+ 
+
+Legislative proposals which have been or are being considered by Congress include repealing the estate tax, reducing the taxation on annuity benefits, expanding private pension plan incentives, changing the tax treatment of insurance products relative to other financial products, and changing life insurance company taxation. Some of these proposals, if enacted, could have a material adverse effect on life insurance, annuity, and other retirement savings product sales, while others could have a material beneficial effect. Certain recommendations made in late 2005 by the President s Tax Advisory Panel on Federal Tax Reform could adversely affect the market for some life insurance and annuity products if enacted by Congress. However, there are no indications at the present time that Congress will enact fundamental tax reforms in 2006, or that it has a favorable view of the Tax
+Panel s recommendations regarding tax-preferred savings.
+
+ 
+
+ 
+
+54
+
+ 
+
+ 
+
+ 
+
+Other Regulatory Matters
+
+ 
+
+Regulatory Matters
+
+ 
+
+As with many financial services companies, the Company and its affiliates have received informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the financial services industry. In each case, the Company and its affiliates have been and are providing full cooperation.
+
+ 
+
+Investment Product Regulatory Issues
+
+ 
+
+Since 2002, there has been increased governmental and regulatory activity relating to mutual funds and variable insurance products. This activity has primarily focused on inappropriate trading of fund shares; revenue sharing and directed brokerage; compensation; sales practices, suitability, and supervision; arrangements with service providers; pricing; compliance and controls; adequacy of disclosure; and document retention. 
+
+ 
+
+In addition to responding to governmental and regulatory requests on fund trading issues, ING management, on its own initiative, conducted, through special counsel and a national accounting firm, an extensive internal review of mutual fund trading in ING insurance, retirement, and mutual fund products. The goal of this review was to identify any instances of inappropriate trading in those products by third parties or by ING investment professionals and other ING personnel. 
+
+ 
+
+The internal review identified several isolated arrangements allowing third parties to engage in frequent trading of mutual funds within the variable insurance and mutual fund products of certain affiliates of the Company, and identified other circumstances where frequent trading occurred despite measures taken by ING intended to combat market timing. Each of the arrangements has been terminated and disclosed to regulators, to the independent trustees of ING Funds (U.S.) and in Company reports previously filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended.
+
+ 
+
+In September 2005, an affiliate of the Company, ING Fund Distributors, LLC ( IFD ) and one of its registered persons settled an administrative proceeding with the National Association of Securities Dealers ( NASD ) in connection with frequent trading arrangements. IFD neither admitted nor denied the allegations or findings and consented to certain monetary and non-monetary sanctions. IFD s settlement of this administrative proceeding is not material to the Company.
+
+ 
+
+ 
+
+55
+
+ 
+
+ 
+
+ 
+
+Other regulators, including the SEC and the New York Attorney General, are also likely to take some action with respect to certain ING affiliates before concluding their investigations relating to fund trading. The potential outcome of such action is difficult to predict but could subject certain affiliates to adverse consequences, including, but not limited to, settlement payments, penalties, and other financial liability. It is not currently anticipated, however, that the actual outcome of any such action will have a material adverse effect on ING or ING s U.S.-based operations, including the Company.
+
+ 
+
+ING has agreed to indemnify and hold harmless the ING Funds from all damages resulting from wrongful conduct by ING or its employees or from ING s internal investigation, any investigations conducted by any governmental or self-regulatory agencies, litigation or other formal proceedings, including any proceedings by the SEC. Management reported to the ING Funds Board that ING management believes that the total amount of any indemnification obligations will not be material to ING or ING s U.S.-based operations, including the Company.
+
+ 
+
+Insurance and Other Regulatory Matters
+
+ 
+
+The New York Attorney General and other federal and state regulators are also conducting broad inquiries and investigations involving the insurance industry. These initiatives currently focus on, among other things, compensation and other sales incentives; potential conflicts of interest; potential anti-competitive activity; reinsurance; marketing practices; specific product types (including group annuities and indexed annuities); and disclosure. It is likely that the scope of these industry investigations will further broaden before they conclude. The Company and certain of its U.S. affiliates have received formal and informal requests in connection with such investigations, and are cooperating fully with each request for information.
+
+ 
+
+These initiatives may result in new legislation and regulation that could significantly affect the financial services industry, including businesses in which the Company is engaged.
+
+ 
+
+In light of these and other developments, U.S. affiliates of ING, including the Company, periodically review whether modifications to their business practices are appropriate. 
+
+ 
+
+For further discussion of the risks to the Company as a result of possible changes in U.S. regulation and recent regulatory inquiries, see Part I, Item 1A. Risk Factors.
+
+ 
+
+ 
+
+56
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 7A.
+ 
+ 
+ Quantitative and Qualitative Disclosures About Market Risk
+ 
+
+(Dollar amounts in millions, unless otherwise stated)
+
+ 
+
+Asset/liability management is integrated into many aspects of the Company s operations, including investment decisions, product development, and determination of crediting rates. As part of the risk management process, different economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine that existing assets are adequate to meet projected liability cash flows. Key variables in the modeling process include interest rates, anticipated contractowner or policyholder behavior, and variable separate account performance. Contractowners and policyholders bear the majority of the investment risk related to variable insurance products, subject to the minimum guaranteed death and living benefits included in these contracts.
+
+ 
+
+The fixed account liabilities are supported by a general account portfolio principally composed of fixed rate investments with matching duration characteristics that can generate predictable, steady rates of return. The portfolio management strategy for the fixed account considers the assets available-for-sale. This enables the Company to respond to changes in market interest rates, prepayment risk, relative values of asset sectors and individual securities and loans, credit quality outlook, and other relevant factors. The objective of portfolio management is to maximize returns, taking into account interest rate and credit risk, as well as other risks. The Company s asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. 
+
+ 
+
+Term life products for employee benefits are short term in nature, with some longer term claim reserves. Cash flow testing and additional sensitivity testing with varying mortality, morbidity, and expense levels, provide assurance that the existing assets are adequate to meet projected liability cash flows.
+
+ 
+
+For universal life products, cash flow testing of higher mortality, surrender, and expense levels than expected indicate that solvency is not impaired by reasonable variations in these risks. The current difference between the charges to the policies for cost of insurance and expenses and the guaranteed maximums allows some margin for adverse experience. Crediting rates are also changed regularly to reflect changes in the portfolio.
+
+ 
+
+On the basis of these analyses, management believes there is currently no material solvency risk to the Company.
+
+ 
+
+ 
+
+57
+
+ 
+
+ 
+
+ 
+
+Interest Rate Risk 
+
+ 
+
+The Company defines interest rate risk as the risk of an economic loss due to adverse changes in interest rates. This risk arises from the Company s primary activity of investing premiums from interest-sensitive life insurance and fixed annuity business in interest-sensitive assets and carrying these funds as interest-sensitive liabilities. The Company manages the interest rate risk in its assets relative to the interest rate risk in its liabilities. The current product portfolio also includes products where interest rate risks are entirely or partially passed on to the contractowner/policyholder, thereby reducing the Company s exposure to interest rate movements. Changes in interest rates can impact present and future earnings, the level of new sales, surrenders, or withdrawals. 
+
+ 
+
+The following schedule demonstrates the potential changes in the 2005 earnings from an instantaneous parallel increase/decrease in interest rates of 1% on December 31, 2005. These changes to income could relate to future investment income, interest paid to contractowners and policyholders, market-value adjustments, amortization of deferred acquisition costs ( DAC ) and value of business acquired ( VOBA ), renewal premiums, or any other net income item that would be affected by interest rate changes. The effect of interest rate changes is different by product. In addition, the Company has estimated the impact to December 31 Shareholder s equity from the same instantaneous change in interest rates. The effect on shareholder s equity includes the impact of interest rate fluctuations on income, unrealized gains or losses on available-for-sale securities and
+DAC and VOBA adjustments for unrealized holding gains or losses on available-for-sale securities.
+
+ 
+
+Interest rate sensitivity and effect on Net income and Shareholder s equity:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Shareholder's
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on Net
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Equity as of 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Income for 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Increase of 1%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.6
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (5.7)
+ 
+
+ 
+ 
+ Decrease of 1%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (7.7)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5
+ 
+
+ 
+
+The above analysis includes the following changes in DAC/VOBA related to an instantaneous parallel increase/decrease in interest rates.
+
+ 
+
+ 
+
+58
+
+ 
+
+ 
+
+ 
+
+Interest rate sensitivity and effect on DAC and VOBA:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on Net
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ DAC/VOBA
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ DAC/VOBA
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Assets as of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization for
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Increase of 1%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.3
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 13.6
+ 
+
+ 
+ 
+ Decrease of 1%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (5.7)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (19.7)
+ 
+
+ 
+
+Equity Market Risk
+
+ 
+
+The Company s operations are significantly influenced by changes in the equity markets. The Company s profitability depends largely on the amount of assets under management, which is primarily driven by the level of sales, equity market appreciation and depreciation, and the persistency of the in force block of business.
+
+ 
+
+Prolonged and precipitous declines in the equity markets can have a significant impact on the Company s operations. As a result, sales of variable products may decline and surrender activity may increase, as customer sentiment towards the equity market turns negative. Lower AUM will have a negative impact on the Company s financial results, primarily due to lower fee income on variable and indexed annuities. Furthermore, the Company may experience a reduction in profit margins if a significant portion of the assets held in the variable annuity separate account move to the general account and the Company is unable to earn an acceptable investment spread, particularly in light of the low interest rate environment and the presence of contractually guaranteed interest credited rates.
+
+ 
+
+In addition, prolonged declines in the equity market may also decrease the Company s expectations of future gross profits, which are utilized to determine the amount of DAC and VOBA to be amortized in a given financial statement period. A significant decrease in the Company s estimated gross profits would require the Company to accelerate the amount of DAC and VOBA amortization in a given period, potentially causing a material adverse deviation in the period s Net income. 
+
+ 
+
+The following schedule demonstrates the potential changes in the 2005 earnings resulting from an instantaneous increase/decrease in equity markets of 10% on December 31, 2005. These changes to income could relate to future fee income, unrealized or realized gains and losses, amortization of DAC and VOBA, sales levels, or any other net income item that would be affected by a substantial change to equity markets. In addition, the Company has estimated the impact to Shareholder s equity as of December 31, 2005 from the same instantaneous change in equity markets. The effect on shareholder s equity includes the impact of equity markets fluctuations on income, unrealized gains on losses on available-for-sale securities and DAC and VOBA adjustments for unrealized holding gains or losses on available-for-sale securities.
+
+ 
+
+ 
+
+59
+
+ 
+
+ 
+
+ 
+
+Equity sensitivity and effect on Net income and Shareholder s equity
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Shareholder's
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on Net
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Equity as of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Income for
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Increase of 10%
+ 
+ 
+ $
+ 
+ 
+ 0.6
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.6
+ 
+
+ 
+ 
+ Decrease of 10%
+ 
+ 
+ 
+ 
+ 
+ (0.6)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.6)
+ 
+
+ 
+
+The above analysis includes the following changes in DAC and VOBA related to an instantaneous increase/decrease in equity markets.
+
+ 
+
+Equity sensitivity and effect on DAC and VOBA:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Effect on
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ DAC/VOBA
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ DAC/VOBA
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Asset as of 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization for
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Increase of 10%
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (0.4)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.4
+ 
+
+ 
+ 
+ Decrease of 10%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.5)
+ 
+
+ 
+
+ 
+
+ 
+
+60
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 8. 
+ 
+ 
+ Financial Statements and Supplementary Data
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Index to Financial Statements
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Page
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Report of Independent Registered Public Accounting Firm
+ 
+ 
+ 62
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Financial Statements:
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Statements of Operations for the years ended
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ December 31, 2005, 2004, and 2003
+ 
+ 
+ 63
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Balance Sheets as of December 31, 2005 and 2004
+ 
+ 
+ 64
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Statements of Changes in Shareholder's Equity for the years ended
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ December 31, 2005, 2004, and 2003
+ 
+ 
+ 66
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Statements of Cash Flows for the years ended
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ December 31, 2005, 2004, and 2003
+ 
+ 
+ 67
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Notes to Financial Statements
+ 
+ 
+ 69
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Report of Independent Registered Public Accounting Firm
+
+ 
+
+The Board of Directors
+
+ReliaStar Life Insurance Company of New York
+
+ 
+
+We have audited the accompanying balance sheets of ReliaStar Life Insurance Company of New York as of December 31, 2005 and 2004, and the related statements of operations, changes in shareholder s equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits.
+
+ 
+
+We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
+made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
+
+ 
+
+In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ReliaStar Life Insurance Company of New York as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. 
+
+ 
+
+As discussed in Note 1 to the financial statements, the Company changed the accounting principle for certain non-traditional long duration contracts and for separate accounts effective January 1, 2004. As discussed in Note 16 to the financial statements, the Company restated certain amounts presented in the statements of cash flows related to the settlement of investment securities for the years ended December 31, 2004 and 2003.
+
+ 
+
+ 
+
+ 
+ 
+ /s/ Ernst & Young LLP
+ 
+
+ 
+
+Atlanta, Georgia
+
+March 24, 2006
+
+ 
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+ 
+
+Statements of Operations
+
+(In millions)
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Year Ended December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Revenue:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net investment income
+ 
+ 
+ $
+ 
+ 
+ 116.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 120.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 122.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Fee income
+ 
+ 
+ 
+ 
+ 
+ 101.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 99.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 98.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Premiums
+ 
+ 
+ 
+ 
+ 
+ 78.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 66.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 63.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net realized capital gains
+ 
+ 
+ 
+ 
+ 
+ 9.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other income
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+
+ 
+ 
+ Total revenue
+ 
+ 
+ 
+ 
+ 
+ 305.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 296.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 295.2 
+ 
+
+ 
+ 
+ Benefits and expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Interest credited and other benefits 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ to policyholders/contractowners
+ 
+ 
+ 
+ 
+ 
+ 182.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 189.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 148.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Operating expenses
+ 
+ 
+ 
+ 
+ 
+ 61.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 49.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 36.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization of deferred policy acquisition costs 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ and value of business acquired
+ 
+ 
+ 
+ 
+ 
+ 7.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Interest expense
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Total benefits and expenses
+ 
+ 
+ 
+ 
+ 
+ 251.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 248.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 215.0 
+ 
+
+ 
+ 
+ Income before income taxes and cumulative effect
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ of change in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 54.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 47.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 80.2 
+ 
+
+ 
+ 
+ Income tax expense
+ 
+ 
+ 
+ 
+ 
+ 17.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 26.3 
+ 
+
+ 
+ 
+ Income before cumulative effect of change
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 53.9 
+ 
+
+ 
+ 
+ Cumulative effect of change in accounting 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ principle, net of tax
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ $
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 31.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 53.9 
+ 
+
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these financial statements.
+
+ 
+
+63
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+ 
+
+Balance Sheets
+
+(In millions, except share data)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ As of December 31, 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ Assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Investments:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Fixed maturities, available-for-sale, at fair value 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (amortized cost of $1,608.4 at 2005 and $1,553.2 at 2004)
+ 
+ 
+ $
+ 
+ 
+ 1,611.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,613.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Equity securities, available-for-sale, at fair value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (cost of $4.8 at 2005 and $6.9 at 2004)
+ 
+ 
+ 
+ 
+ 
+ 4.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Mortgage loans on real estate
+ 
+ 
+ 
+ 
+ 
+ 191.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 213.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Policy loans
+ 
+ 
+ 
+ 
+ 
+ 93.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 90.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Short-term investments
+ 
+ 
+ 
+ 
+ 
+ 5.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other investments
+ 
+ 
+ 
+ 
+ 
+ 19.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Securities pledged 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (amortized cost of $118.6 at 2005 and $149.7 at 2004)
+ 
+ 
+ 
+ 
+ 
+ 115.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 148.5 
+ 
+
+ 
+ 
+ Total investments
+ 
+ 
+ 
+ 
+ 
+ 2,040.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,090.1 
+ 
+
+ 
+ 
+ Cash and cash equivalents
+ 
+ 
+ 
+ 
+ 
+ 41.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 33.5 
+ 
+
+ 
+ 
+ Short-term investments under securities loan agreement
+ 
+ 
+ 
+ 
+ 
+ 17.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 49.0 
+ 
+
+ 
+ 
+ Accrued investment income
+ 
+ 
+ 
+ 
+ 
+ 18.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 19.2 
+ 
+
+ 
+ 
+ Receivable for securities sold
+ 
+ 
+ 
+ 
+ 
+ 3.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Premiums receivable
+ 
+ 
+ 
+ 
+ 
+ 8.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.1 
+ 
+
+ 
+ 
+ Reinsurance recoverable
+ 
+ 
+ 
+ 
+ 
+ 100.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 84.2 
+ 
+
+ 
+ 
+ Deferred policy acquisition costs
+ 
+ 
+ 
+ 
+ 
+ 92.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 77.7 
+ 
+
+ 
+ 
+ Value of business acquired
+ 
+ 
+ 
+ 
+ 
+ 43.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 33.7 
+ 
+
+ 
+ 
+ Due from affiliates
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+
+ 
+ 
+ Deferred income taxes 
+ 
+ 
+ 
+ 
+ 
+ 39.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 32.5 
+ 
+
+ 
+ 
+ Other assets
+ 
+ 
+ 
+ 
+ 
+ 7.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.1 
+ 
+
+ 
+ 
+ Assets held in separate accounts
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+
+ 
+ 
+ Total assets
+ 
+ 
+ $
+ 
+ 
+ 3,066.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,972.4 
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these financial statements. 
+
+ 
+
+64
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+ 
+
+Balance Sheets
+
+(In millions, except share data)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ As of December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ Liabilities and Shareholder's Equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Future policy benefits and claims reserves
+ 
+ 
+ $
+ 
+ 
+ 1,803.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,772.5 
+ 
+
+ 
+ 
+ Payable for securities purchased
+ 
+ 
+ 
+ 
+ 
+ 4.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Payable under securities loan agreement
+ 
+ 
+ 
+ 
+ 
+ 17.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 49.0 
+ 
+
+ 
+ 
+ Borrowed money
+ 
+ 
+ 
+ 
+ 
+ 97.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 100.4 
+ 
+
+ 
+ 
+ Notes payable
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.3 
+ 
+
+ 
+ 
+ Due to affiliates
+ 
+ 
+ 
+ 
+ 
+ 11.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.3 
+ 
+
+ 
+ 
+ Current income taxes
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.2 
+ 
+
+ 
+ 
+ Other liabilities
+ 
+ 
+ 
+ 
+ 
+ 40.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 37.4 
+ 
+
+ 
+ 
+ Liabilities related to separate accounts
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+
+ 
+ 
+ Total liabilities
+ 
+ 
+ 
+ 
+ 
+ 2,629.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,520.8 
+ 
+
+ 
+ 
+ Shareholder's equity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Common stock (1,377,863 shares authorized, issued 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ and outstanding; $2 per share value)
+ 
+ 
+ 
+ 
+ 
+ 2.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Additional paid-in capital
+ 
+ 
+ 
+ 
+ 
+ 1,152.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,172.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Accumulated other comprehensive (loss) income
+ 
+ 
+ 
+ 
+ 
+ (0.4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 29.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Retained earnings (deficit)
+ 
+ 
+ 
+ 
+ 
+ (716.7)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (753.5)
+ 
+
+ 
+ 
+ Total shareholder's equity
+ 
+ 
+ 
+ 
+ 
+ 437.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 451.6 
+ 
+
+ 
+ 
+ Total liabilities and shareholder's equity
+ 
+ 
+ $
+ 
+ 
+ 3,066.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2,972.4 
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these financial statements. 
+
+ 
+
+65
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+ 
+
+Statements of Changes in Shareholder s Equity
+
+(In millions)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Accumulated
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Additional
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Retained
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Common
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Paid-In
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Comprehensive
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Earnings
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Shareholder's
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Stock
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Capital
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Income (Loss)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Deficit)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Equity
+ 
+
+ 
+ 
+ Balance at December 31, 2002
+ 
+ 
+ $
+ 
+ 
+ 2.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,225.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 35.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (838.0)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 425.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Comprehensive income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 53.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 53.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other comprehensive income,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ net of tax:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Change in net unrealized gain 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (loss) on securities ($0.8 pretax)
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 54.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Dividends paid
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (25.5)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (25.5)
+ 
+
+ 
+ 
+ Balance at December 31, 2003
+ 
+ 
+ 
+ 
+ 
+ 2.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,200.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (784.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 454.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Comprehensive income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 31.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 31.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other comprehensive loss,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ net of tax:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Change in net unrealized gain 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (loss) on securities ($(11.7) pretax)
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (7.4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (7.4)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 24.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Dividends paid
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (27.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (27.2)
+ 
+
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.0)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Balance at December 31, 2004
+ 
+ 
+ 
+ 
+ 
+ 2.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,172.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 29.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (753.5)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 451.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Comprehensive income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 36.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other comprehensive loss,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ net of tax:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Change in net unrealized gain 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (loss) on securities ($(45.6) pretax)
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (30.0)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (30.0)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Dividends paid
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (20.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (20.8)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Employee share-based payments
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+
+ 
+ 
+ Balance at December 31, 2005
+ 
+ 
+ $
+ 
+ 
+ 2.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,152.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (0.4)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (716.7)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 437.9 
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these financial statements. 
+
+ 
+
+66
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+ 
+
+Statements of Cash Flows
+
+(In millions)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Year Ended December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Restated)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Restated)
+ 
+
+ 
+ 
+ Cash Flows from Operating Activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net income
+ 
+ 
+ $
+ 
+ 
+ 36.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 31.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 53.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Adjustments to reconcile net income to 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ net cash provided by operating activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Capitalization of deferred policy acquisition costs, 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ value of business acquired, and sales inducements
+ 
+ 
+ 
+ 
+ 
+ (18.5)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (18.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (28.1)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization of deferred policy acquisition costs,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ value of business acquired, and sales inducements
+ 
+ 
+ 
+ 
+ 
+ 7.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Future policy benefits, claims reserves, and
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ interest credited
+ 
+ 
+ 
+ 
+ 
+ 13.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 58.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Net realized capital gains
+ 
+ 
+ 
+ 
+ 
+ (9.5)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (9.3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (10.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Change in:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Reinsurance recoverable
+ 
+ 
+ 
+ 
+ 
+ (16.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (19.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (18.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other receivables and asset accruals
+ 
+ 
+ 
+ 
+ 
+ (0.7)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.1)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Due to/from affiliates
+ 
+ 
+ 
+ 
+ 
+ 7.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (6.2)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other payables and accruals
+ 
+ 
+ 
+ 
+ 
+ (13.0)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (7.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (22.5)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 11.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.0 
+ 
+
+ 
+ 
+ Net cash provided by operating activities
+ 
+ 
+ 
+ 
+ 
+ 18.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 65.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 12.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Cash Flows from Investing Activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Proceeds from the sale, maturity, or redemption of:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fixed maturities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ 2,221.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,495.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2,761.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ 2.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Mortgage loans on real estate
+ 
+ 
+ 
+ 
+ 
+ 37.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 24.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 44.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Acquisition of:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fixed maturities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ (2,237.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2,531.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2,879.3)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ (0.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Mortgage loans on real estate
+ 
+ 
+ 
+ 
+ 
+ (14.6)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (27.3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (10.0)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Short-term investments
+ 
+ 
+ 
+ 
+ 
+ (5.3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (5.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (8.5)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2.6)
+ 
+
+ 
+ 
+ Net cash used for investing activities
+ 
+ 
+ 
+ 
+ 
+ (2.5)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (47.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (85.4)
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these financial statements. 
+
+ 
+
+67
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+ 
+
+Statements of Cash Flows
+
+(In millions)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Year Ended December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Restated)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Restated)
+ 
+
+ 
+ 
+ Cash Flows from Financing Activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deposits received for investment contracts
+ 
+ 
+ $
+ 
+ 
+ 220.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 217.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 186.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Maturities and withdrawals from investment contracts
+ 
+ 
+ 
+ 
+ 
+ (202.6)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (186.9)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (162.5)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Short-term loans
+ 
+ 
+ 
+ 
+ 
+ (5.0)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Dividends to parent
+ 
+ 
+ 
+ 
+ 
+ (20.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (27.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (25.5)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Net cash (used for) provided by financing activities
+ 
+ 
+ 
+ 
+ 
+ (7.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 27.2 
+ 
+
+ 
+ 
+ Net increase (decrease) in cash and cash equivalents
+ 
+ 
+ 
+ 
+ 
+ 8.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 23.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (45.5)
+ 
+
+ 
+ 
+ Cash and cash equivalents, beginning of year
+ 
+ 
+ 
+ 
+ 
+ 33.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 56.0 
+ 
+
+ 
+ 
+ Cash and cash equivalents, end of year
+ 
+ 
+ 
+ 
+ 
+ 41.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 33.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.5 
+ 
+
+ 
+ 
+ Supplemental cash flow information:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Income taxes paid, net
+ 
+ 
+ $
+ 
+ 
+ 25.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 29.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Interest paid
+ 
+ 
+ $
+ 
+ 
+ 3.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.9 
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these financial statements. 
+
+ 
+
+68
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 1.
+ 
+ 
+ Organization and Significant Accounting Policies
+ 
+
+ 
+ 
+ 
+ 
+ Basis of Presentation
+ 
+ 
+ 
+
+ 
+
+ReliaStar Life Insurance Company of New York ( RLNY or the Company, as appropriate) is a stock life insurance company domiciled in the State of New York and provides financial products and services in the United States. RLNY is authorized to conduct its insurance business in the District of Columbia and all states.
+
+ 
+
+RLNY is a direct, wholly-owned subsidiary of ReliaStar Life Insurance Company ( ReliaStar Life or Parent ), which is a direct, wholly-owned subsidiary of Lion Connecticut Holdings Inc. ( Lion ), a Connecticut holding and management company. Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ( ING ). ING is a global financial services holding company based in The Netherlands, with American Depository Shares listed on the New York Stock Exchange under the symbol "ING".
+
+ 
+
+Until October 1, 2003, the Company was a wholly-owned subsidiary of Security-Connecticut Life Insurance Company ( Security-Connecticut Life ), a Minnesota domiciled insurance company, which provided financial products and services in the United States. Effective October 1, 2003, Security-Connecticut merged with and into ReliaStar Life.
+
+ 
+
+Description of Business
+
+ 
+
+The Company principally provides and distributes life insurance and related financial services products, including individual life insurance and annuities, group life and health products and services. The Company s strategy is to offer a wide variety of products and services designed to address customers needs for financial security, especially tax-advantaged savings for retirement and protection in the event of death. 
+
+ 
+
+The Company has one operating segment, ING U.S. Financial Services.
+
+ 
+
+69
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Recently Adopted Accounting Standards
+
+ 
+
+The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments
+
+ 
+
+In March 2004, the Emerging Issues Task Force ( EITF ) reached a final consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments ( EITF 03-1 ) adopting a three-step impairment model for securities within its scope. The three-step model is applied on a security-by-security basis as follows:
+
+ 
+
+ 
+ 
+ Step 1:
+ 
+ 
+ Determine whether an investment is impaired. An investment is impaired if the fair value of the investment is less than its cost basis.
+ 
+
+ 
+ 
+ Step 2:
+ 
+ 
+ Evaluate whether an impairment is other-than-temporary.
+ 
+
+ 
+ 
+ Step 3:
+ 
+ 
+ If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment s cost and its fair value.
+ 
+
+ 
+
+On September 30, 2004, the Financial Accounting Standards Board ( FASB ) issued FASB Staff Position ( FSP ) No. EITF Issue 03-1-1 Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ( FSP EITF 03-1-1 ), which delayed the EITF 03-1 original effective date of July 1, 2004 related to steps two and three of the impairment model introduced. 
+
+ 
+
+On November 3, 2005, the FASB issued FSP Statement of Financial Accounting Standard ( FAS ) No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ( FSP FAS No. 115-1 ). FSP FAS No. 115-1 replaces the impairment evaluation guidance of EITF 03-1.
+
+ 
+
+FSP FAS No. 115-1 addresses the determination of when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In addition, it includes considerations for accounting subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporarily impaired. FSP FAS No. 115-1 further clarifies that an impairment loss should be recognized no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made. FSP FAS No. 115-1 references existing guidance on other-than-temporary impairments.
+
+ 
+
+ 
+
+70
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+FSP FAS No. 115-1 is effective for reporting periods beginning after December 15, 2005, and was implemented by the Company during the fourth quarter of 2005. The Company recognized impairment losses of $0.4 for the year ended December 31, 2005, related to investments that the Company does not have the intent and ability to retain for a period of time sufficient to allow for recovery in fair value.
+
+ 
+
+Investor s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights
+
+In June 2005, the EITF reached a consensus on EITF Issue No. 04-5, "Investor's Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights" ("EITF 04-5"), which states that the general partner in a limited partnership should presume that it controls and, thus, should consolidate the limited partnership, unless the limited partners have either (a) substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (b) substantive participating rights. EITF 04-5 applies to limited partnerships that are not variable interest entities under FASB Interpretation No. 46R: "Consolidation of Variable Interest Entities" ("FIN 46R"). EITF 04-5 was effective immediately for all new limited partnerships formed and for existing limited partnerships for which partnership
+agreements are modified after June 29, 2005, and is effective for all other limited partnerships at the commencement of the first reporting period beginning after December 15, 2005.
+
+ 
+
+EITF 04-5 had no impact on RLNY as of December 31, 2005, as the Company's investments in limited partnerships are generally considered variable interest entities and are accounted for using the cost or equity methods of accounting since the Company is not the primary beneficiary. Investments in limited partnerships are included in Other investments on the Balance Sheets.
+
+ 
+
+Share-Based Payment
+
+ 
+
+In December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based Payment" ("FAS No. 123R"), which requires all share-based payments to employees be recognized in the financial statements based upon the fair value. FAS No. 123R was effective at the beginning of the first interim or annual period beginning after June 15, 2005 for registrants. FAS No. 123R provides two transition methods, modified-prospective and modified-retrospective.
+
+ 
+
+The modified-prospective method recognizes the grant-date fair value of compensation for new awards granted after the effective date and unvested awards beginning in the fiscal period in which the recognition provision are first applied. Prior periods are not restated. The modified-retrospective method permits entities to restate prior periods by recognizing the compensation cost based on amounts previously reported in the pro forma footnote disclosure as required under FAS No. 123, Accounting for Stock-Based Compensation ( FAS No. 123 ).
+
+ 
+
+71
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The Company early adopted the provisions of FAS No. 123R on January 1, 2005, using the modified-prospective method. Under the modified-prospective method, compensation cost recognized in 2005 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2005, based on the grant date fair value estimated in accordance with the original provision of FAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2005, based on the grant date fair value in accordance with the provisions of FAS No. 123R. Results for prior periods are not restated. Prior to January 1, 2005, the Company applied the intrinsic value-based provisions set forth in Accounting Principles Board ( APB ) Opinion No. 25, Accounting for Stock Issued to Employees ( APB No. 25 ), and related
+Interpretations, as permitted by FAS No. 123. No stock based employee compensation cost was recognized in the Statement of Operations during 2004 and 2003, as all options granted during the year had an exercise price equal to the market value of the underlying common stock on the date of grant. All shares granted during 2005 and 2004 were those of ING, the Company s ultimate parent. As a result of adopting FAS No. 123R, the Company s net income for the year ended December 31, 2005, was $0.2 lower than if it had continued to account for share-based payments under APB No. 25. The fair value of shares granted during 2005 was $0.2 as of December 31, 2005, and will be expensed over a vesting period of 3 years. Prior to the adoption of FAS No. 123R, no modifications were made to outstanding options, and there were no significant changes to valuation methodologies as a result of the adoption of FAS No. 123R.
+
+ 
+
+Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts
+
+The Company adopted Statement of Position ( SOP ) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts ( SOP 03-1 ), on January 1, 2004. SOP 03-1 established several new accounting and disclosure requirements for certain nontraditional long-duration contracts and for separate accounts including, among other things, a requirement that assets and liabilities of separate account arrangements that do not meet certain criteria be accounted for as general account assets and liabilities, and the revenues and expenses related to such arrangements be consolidated with the respective line items in the Statements of Operations. In addition, SOP 03-1 requires additional liabilities be established for certain guaranteed death benefits and for products with certain patterns of cost of
+insurance charges. In addition, sales inducements provided to contractowners and policyholders must be recognized on the balance sheet separately from deferred acquisition costs and amortized as a component of benefits expense using methodology and assumptions consistent with those used for amortization of deferred policy acquisition costs.
+
+ 
+
+72
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The Company evaluated all requirements of SOP 03-1 and determined that it is affected by SOP 03-1 s requirements to account for certain separate account arrangements as general account arrangements, to establish additional liabilities for certain guaranteed benefits and for products with patterns of cost of insurance charges resulting in losses in later policy durations from the insurance benefit function, and to defer, amortize, and recognize separately, sales inducements to contractowners and policyholders. Upon adoption of SOP 03-1 on January 1, 2004, the Company recognized a cumulative effect of a change in accounting principle of $(10.8), before tax or $(7.0), net of $3.8 of income taxes. In addition, requirements for certain separate account arrangements that do not meet the established criteria for separate asset and liability recognition are applicable to the Company,
+however, the Company s policies on separate account assets and liabilities have historically been, and continue to be, in conformity with the requirements newly established.
+
+ 
+
+In the fourth quarter of 2004, the cumulative effect of a change in accounting principle was revised due to the implementation of Technical Practice Aid 6300.05 6300.08, Q&As Related to the Implementation of SOP 03-1, Accounting and Reporting by Insurance Enterprises, for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (the TPA ).
+
+ 
+
+The TPA, which was approved in September 2004, provided additional guidance regarding certain implicit assessments that may be used in testing of the base mortality function on contracts, which is performed to determine whether additional liabilities are required in conjunction with SOP 03-1. In addition, the TPA provided additional guidance surrounding the allowed level of aggregation of additional liabilities determined under SOP 03-1. While the TPA was implemented during the fourth quarter of 2004, the TPA was retroactive to the original implementation date of SOP 03-1, January 1, 2004, and was reported as an adjustment to the SOP 03-1 cumulative effect change in accounting principle. The adoption of the TPA resulted in an adjustment of the Company s cumulative effect change in accounting principle by $7.8, net of $4.2 of income tax.
+
+ 
+
+The implementation of SOP 03-1 raised questions regarding the interpretation of the requirements of FAS No. 97 Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments ( FAS No. 97 ), concerning when it is appropriate to record an unearned revenue liability related to the insurance benefit function. To clarify its position, the FASB issued FASB Staff Position No. FAS 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability ( FSP FAS 97-1 ), effective for fiscal periods beginning subsequent to the date the guidance was 
+
+ 
+
+73
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+issued, June 18, 2004. The Company adopted FSP FAS 97-1 on July 1, 2004. The adoption of FSP FAS 97-1 did not have an impact on the Company s financial position, results of operations, or cash flows.
+
+ 
+
+Variable Interest Entities
+
+In January 2003, the FASB issued FASB Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ( FIN 46 ). In December 2003, the FASB issued FIN 46R to make certain technical revision and address certain implementation issues that had arisen. FIN 46R provides a new framework for identifying Variable Interest Entities ( VIEs ) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements.
+
+ 
+
+In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.
+
+ 
+
+FIN 46R requires a VIE to be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE s activities, is entitled to receive a majority of the VIE s residual returns (if no party absorbs a majority of the VIE s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE s assets, liabilities, and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46R also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest.
+
+ 
+
+The adoption of FIN 46R had no impact on the Company s financial statements. The Company holds investments in VIEs in the form of private placement securities, structured securities, securitization transactions, and limited partnerships with an aggregate fair value of $799.0 and $643.6 as of December 31, 2005 and 2004, respectively. These VIEs are held by the Company for investment purposes. Consolidation of these investments in the Company s financial statements is not required as the Company is not the primary beneficiary for any of these VIEs. Book value as of December 31, 2005 and 2004 of $801.9 and $628.8, respectively, represents the maximum exposure to loss on the investment in VIEs. In addition, the Company may be exposed to the loss of asset management fees it receives for some of these structures.
+
+ 
+
+74
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+New Accounting Pronouncements
+
+ 
+
+Accounting for Certain Hybrid Financial Instruments
+
+ 
+
+In February 2006, the FASB issued FAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140 ( FAS No. 155 ), which permits the application of fair value accounting to certain hybrid financial instruments in their entirety if they contain embedded derivatives that would otherwise require bifurcation under FAS No. 133 Accounting for Derivative Instruments and Hedging Activities ( FAS No. 133 ). Under this approach, changes in fair value would be recognized currently in earnings. In addition, FAS No. 155 does the following:
+
+ 
+
+ 
+ 
+ Clarifies which interest-only strips and principal-only strips are not subject to derivative accounting under FAS No. 133;
+ 
+
+ 
+ 
+ Requires that interests in securitized financial assets be analyzed to identify interests that are freestanding derivatives or that are hybrid instruments that contain embedded derivatives requiring bifurcation;
+ 
+
+ 
+ 
+ Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and
+ 
+
+ 
+ 
+ Allows a qualifying special-purpose entity to hold derivative financial instruments that pertain to beneficial interests, other than another derivative financial instrument.
+ 
+
+ 
+
+FAS No. 155 is effective for all instruments acquired, issued, or subject to a remeasurement event, occurring after the beginning of the first fiscal year that commences after September 15, 2006. The Company is in the process of determining the impact of FAS No. 155.
+
+ 
+
+Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts
+
+ 
+
+In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts ( SOP 05-1 ), which states that when an internal replacement transaction results in a substantially changed contract, the unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets, related to the replaced contract should not be deferred in connection with the new contract. Contract modifications that meet various conditions defined by SOP 05-1 and result in a new contract that is substantially unchanged from the replaced contract, however, should be accounted for as a continuation of the replaced contract.
+
+ 
+
+ 
+
+75
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverage, that occur by the exchange of a contract for a new contract, by amendment, endorsement, or rider, to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 applies to internal replacements made primarily to contracts defined by FAS No. 60, Accounting and Reporting by Insurance Enterprises ( FAS No. 60 ), as short-duration and long-duration insurance contracts, and by FAS No. 97, as investment contracts.
+
+ 
+
+SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company is in the process of determining the impact of adoption of SOP 05-1.
+
+ 
+
+Use of Estimates
+
+ 
+
+The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates.
+
+ 
+
+Reclassifications
+
+ 
+
+Certain reclassifications have been made to prior year financial information to conform to the current year classifications (see Reclassifications and Changes to Prior Year Presentation footnote).
+
+ 
+
+Cash and Cash Equivalents
+
+ 
+
+Cash and cash equivalents include cash on hand, money market instruments, and other debt issues with a maturity of 90 days or less when purchased.
+
+ 
+
+Investments
+
+ 
+
+All of the Company s fixed maturity and equity securities are currently designated as available-for-sale. Available-for-sale securities are reported at fair value and unrealized gains and losses on these securities are included directly in Shareholder s equity, after adjustment for related changes in deferred acquisition costs ( DAC ), value of business acquired ( VOBA ), and deferred income taxes.
+
+ 
+
+ 
+
+76
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Other-Than-Temporary Impairments
+
+The Company analyzes the general account investments to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Management considers the length of the time and the extent to which the fair value has been less than amortized cost, the issuer s financial condition and near-term prospects, future economic conditions and market forecasts, and the Company s intent and ability to retain the investment for a period of time sufficient to allow for recovery in fair value. If it is probable that all amounts due according to the contractual terms of a debt security will not be collected, an other-than-temporary impairment is considered to have occurred.
+
+ 
+
+In addition, the Company invests in structured securities that meet the criteria of EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ( EITF 99-20). Under EITF Issue No. 99-20, a further determination of the required impairment is based on credit risk and the possibility of significant prepayment risk that restricts the Company s ability to recover the investment. 
+
+ 
+
+When a decline in fair value is determined to be other-than-temporary, the individual security is written down to fair value, and the loss is accounted for as a change in Net realized capital gains (losses).
+
+ 
+
+Purchases and Sales
+
+Purchases and sales of fixed maturities and equity securities, excluding private placements, are recorded on the trade date. Purchases and sales of private placements and mortgage loans are recorded on the closing date.
+
+ 
+
+Valuation
+
+Fair values for fixed maturities are obtained from independent pricing services or broker-dealer quotations. Fair values for privately placed bonds are determined using a matrix-based model. The matrix-based model considers the level of risk-free interest rates, current corporate spreads, the credit quality of the issuer, and cash flow characteristics of the security. The fair values for equity securities are based on quoted market prices. For equity securities not actively traded, estimated fair values are based upon values of issues of comparable yield and quality or conversion value, where applicable.
+
+ 
+
+ 
+
+77
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Mortgage loans on real estate are reported at amortized cost, less impairment write-downs. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to either the present value of expected cash flows from the loan, discounted at the loan s effective interest rate, or fair value of the collateral. If the loan is in foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell. The carrying value of the impaired loans is reduced by establishing a permanent write-down charged to realized loss. At December 31, 2005 and 2004, the Company had no allowance for mortgage loan credit losses.
+
+ 
+
+Policy loans are carried at unpaid principal balances.
+
+ 
+
+Short-term investments, consisting primarily of money market instruments and other fixed maturity issues purchased with an original maturity of 91 days to one year, are considered available-for-sale and are carried at fair value, which approximates amortized cost. 
+
+ 
+
+Derivative instruments are reported at fair value using the Company s derivative accounting system. The system uses key financial data, such as yield curves, exchange rates, Standards & Poor s ( S&P ) 500 Index prices, and London Inter Bank Offering Rates, which are obtained from third party sources and uploaded into the system. Embedded derivative instruments are reported at fair value based upon internally established valuations that are consistent with external valuation models or market quotations. Guaranteed minimum withdrawals benefits ( GMWBs ) without life contingency and guaranteed minimum accumulation benefits ( GMABs ) represent an embedded derivative liability in the variable annuity contract that is required to be reported separately from the host variable annuity contract. The option component of an equity indexed annuity
+also represents an embedded derivative. These embedded derivatives and swap contracts reinsuring cost of insurance charges are carried at fair value based on actuarial assumptions related to projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning contractowner behavior. 
+
+ 
+
+Repurchase Agreements
+
+The Company engages in dollar repurchase agreements ( dollar rolls ) and repurchase agreements to increase the return on instruments and improve liquidity. These transactions involve a sale of securities and an agreement to repurchase substantially the same securities as those sold. Company policies require a minimum of 95% of the fair value of securities pledged under dollar rolls and repurchase agreement transactions to be maintained as collateral. Cash collateral received is invested in fixed maturities, and the carrying value of the securities pledged in dollar rolls and repurchase agreement 
+
+ 
+
+78
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+transactions is included in Securities pledged on the Balance Sheets. The repurchase obligation related to dollar rolls and repurchase agreements is included in Borrowed money on the Balance Sheets.
+
+ 
+
+The Company also enters into reverse repurchase agreements. These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased. Company policies require a minimum of 102% of the fair value of securities pledged under reverse repurchase agreements to be pledged as collateral. Reverse repurchase agreements are included in Cash and cash equivalents on the Balance Sheets.
+
+ 
+
+Securities Lending
+
+The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned domestic securities. The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company s guidelines to generate additional income. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the fair value of the loaned securities fluctuates.
+
+ 
+
+Derivatives
+
+ 
+
+The Company s use of derivatives is limited mainly to hedging purposes to reduce the Company s exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, and market risk. Generally, derivatives are not accounted for using hedge accounting treatment under FAS No. 133, as the Company has not historically sought hedge accounting treatment. 
+
+ 
+
+The Company may enter into interest rate, equity market credit, default, total return, and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index or pool. The Company also may purchase options and futures on equity indexes to reduce and manage risks associated with its annuity products. Open derivative investment contracts are included in Other investments or Other liabilities, as appropriate, on the Balance Sheets. The derivative contracts with insurance enterprises are included in Other assets on the Balance Sheets. Changes in the fair value of such derivatives are recorded in Net realized capital gains (losses) in the Statements of Operations.
+
+ 
+
+ 
+
+79
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The Company also has issued certain retail annuity products that contain embedded derivatives whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short- or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads.
+
+ 
+
+Embedded derivatives within retail annuity products are included in Future policy benefits and claims reserves on the Balance Sheets and the changes in the fair value are recorded in Interest credited and other benefits to policyholders/contractowners in the Statements of Operations.
+
+ 
+
+Deferred Policy Acquisition Costs and Value of Business Acquired
+
+ 
+
+DAC represents policy acquisition costs that have been capitalized and are subject to amortization. Such costs consist principally of certain commissions, underwriting, contract issuance, and agency expenses, related to the production of new and renewal business.
+
+ 
+
+VOBA represents the outstanding value of in force business capitalized in purchase accounting when the Company was acquired and is subject to amortization. The value is based on the present value of estimated profits embedded in the Company s contracts.
+
+ 
+
+FAS No. 60 applies to traditional life insurance products, primarily whole life and term life insurance contracts. Under FAS No. 60, DAC and VOBA are amortized over the premium payment period, in proportion to the premium revenue recognized.
+
+ 
+
+FAS No. 97 applies to universal life and investment-type products, such as fixed and variable deferred annuities. Under FAS No. 97, DAC and VOBA are amortized, with interest, over the life of the related contracts in relation to the present value of estimated future gross profits from investment, mortality, and expense margins, plus surrender charges.
+
+ 
+
+For FAS No. 97 products, changes in assumptions can have a significant impact on DAC and VOBA balances and amortization rates. Several assumptions are considered significant in the estimation of future gross profits associated with variable universal life and variable deferred annuity products. One of the most significant assumptions involved in the estimation of future gross profits is the assumed return associated with the variable account performance. To reflect the volatility in the equity markets, this assumption involves a combination of near-term expectations and long-term assumptions regarding market performance. The overall return on the variable account is dependent on multiple factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds, as well as equity sector weightings. Other significant assumptions include surrender and lapse
+rates, estimated interest spread, and estimated mortality.
+
+ 
+
+80
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Due to the relative size and sensitivity to minor changes in underlying assumptions of DAC and VOBA balances, the Company performs a quarterly and annual analyses of DAC and VOBA for the annuity and life businesses, respectively. The DAC and VOBA balances are evaluated for recoverability.
+
+ 
+
+At each evaluation date, actual historical gross profits are reflected and estimated future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated profit requires that the amortization rate be revised ( unlocking ), retroactively to the date of the policy or contract issuance. The cumulative prior period adjustment is recognized as a component of current period amortization. In general, sustained increases in investment, mortality, and expense margins, and thus estimated future profits, lower the rate of amortization. However, sustained decreases in investment, mortality, and expense margins, and thus estimated future profits, increase the rate of amortization.
+
+ 
+
+Reserves
+
+ 
+
+The Company establishes and carries actuarially-determined reserves that are calculated to meet its future obligations. Generally, reserves are calculated using mortality and withdrawal rate assumptions based on relevant Company experience and are periodically reviewed against both industry standards and experience. Changes in or deviations from the assumptions used can significantly affect the Company s reserve levels and related future operations. 
+
+ 
+
+Future policy benefits and claims reserves include reserves for universal and traditional life insurance contracts, deferred annuities and immediate annuities with and without life contingent payouts.
+
+ 
+
+Reserves for universal life and variable products are equal to cumulative deposits, less withdrawals and charges, plus credited interest thereon. Unearned revenue reserves represent contractual charges deemed to be earned in future periods. Reserves for traditional life insurance contracts represent the present value of future benefits to be paid to or on behalf of contractowners and related expenses less the present value of future net premiums.
+
+ 
+
+Unpaid claims and claim expenses for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported.
+
+ 
+
+Reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts are equal to cumulative deposits, less charges and withdrawals, plus credited interest thereon. Reserve interest rates vary by product up to 8.0% for 2005, 2004, and 2003.
+
+ 
+
+81
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Reserves for immediate annuities with life contingent payout benefits are computed on the basis of assumed interest discount rate, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by annuity plan type, year of issue, and policy duration. For 2005, 2004, and 2003, reserve interest discount rates ranged from 4.8% to 8.8%.
+
+ 
+
+Reserves for equity indexed annuities are computed in accordance with FAS No. 97 and FAS No. 133. Accordingly, the aggregate initial liability is equal to the deposit received (plus a bonus, if applicable), and is split into a host component, and an embedded derivative component. Thereafter, the host liability accumulates at a set interest rate, and the embedded derivative liability is recognized at fair value, with the change in fair value reported in the Statements of Operations.
+
+ 
+
+Under SOP 03-1, the Company calculates additional liabilities ( SOP 03-1 reserves ) for certain guaranteed benefits and for universal life products with certain patterns of cost of insurance charges and certain other fees. The SOP 03-1 reserve recognizes the portion of contract assessments received in early years used to compensate the insurer for services provided in later years.
+
+ 
+
+The SOP 03-1 reserve for life insurance products is calculated using the same assumptions used in the determination of estimated gross profits, according to which, deferred acquisition costs are amortized. The Company calculates a benefit ratio for each block of business subject to SOP 03-1, and calculates an SOP 03-1 reserve by accumulating amounts equal to the benefit ratio multiplied by the assessments for each period, reduced by excess death benefits during the period. The SOP 03-1 reserve is accumulated at interest rates using the contract-credited rate for the period. The calculated reserve includes a provision for universal life contracts with patterns of cost of insurance charges that produce losses in later policy years.
+
+ 
+
+The SOP 03-1 reserve for annuities with guaranteed minimum death benefits ( GMDBs ) is determined each period by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used to adjust the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. 
+
+ 
+
+The annuities with GMABs and with GMWBs where the guarantee does not involve life contingency are considered to be derivatives under FAS No. 133. The additional liabilities for these guarantees are recognized at fair value in the Statements of Operations.
+
+ 
+
+ 
+
+82
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The SOP 03-1 reserve for the guaranteed minimum income benefits ( GMIB ) and GMWBs where the guarantee involves life contingency, is determined each period by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if the actual experience or other evidence suggests that earlier assumptions should be revised. In addition, the calculation of the GMIB and GMWB liability assumes dynamic surrenders and dynamic annuitization reflecting the extent to which the benefit, at the time of payment, has a positive value.
+
+ 
+
+Sales Inducements
+
+Sales inducements represent benefits paid to contractowners and policyholders for a specified period that are incremental to the amounts the Company credits on similar contracts and are higher than the contracts expected ongoing crediting rates for periods after the inducement. As of January 1, 2004, such amounts are reported separately from DAC on the Balance Sheets in accordance with SOP 03-1. Beginning in 2004, sales inducements are amortized as a component of Interest credited and other benefits to contractowners using methodology and assumptions consistent with those used for amortization of DAC. Sales inducements are recorded in Other assets on the Balance Sheets.
+
+ 
+
+Revenue Recognition
+
+ 
+
+For universal life and certain annuity contracts, charges assessed against contractowners and policyholders funds for the cost of insurance, surrender, expenses, and other fees are recorded as revenue as charges are assessed. Other amounts received for these contracts are reflected as deposits and are not recorded as a premium or revenue. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. When annuity payments with life contingencies begin under contracts that were initially investment contracts, the accumulated balance in the account is treated as a single premium for the purchase of an annuity and reflected in both Premiums and Interest credited and other benefits to policyholders/contractowners in the Statements of Operations.
+
+ 
+
+Premiums on the Statements of Operations primarily represent amounts received under traditional life insurance policies.
+
+ 
+
+Separate Accounts 
+
+ 
+
+Separate account assets and liabilities generally represent funds maintained to meet specific investment objectives of contractowners and policyholders who bear the 
+
+ 
+
+83
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+investment risk, subject, in limited cases, to certain minimum guarantees. Investment income and investment gains and losses generally accrue directly to such contractowners and policyholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company.
+
+ 
+
+Separate account assets supporting variable options under universal life and variable annuity contracts are invested, as designated by the contractowner, policyholder, or participant under a contract in shares of mutual funds which are managed by the Company or its affiliates, or in other selected mutual funds not managed by the Company or its affiliates.
+
+ 
+
+Separate account assets and liabilities are carried at fair value and shown as separate captions in the Balance Sheets. Deposits, investment income, and net realized and unrealized capital gains and losses, of the separate accounts, however, are not reflected in the Statements of Operations (with the exception of realized and unrealized capital gains and losses on the assets supporting the guaranteed interest option). The Statements of Cash Flows do not reflect investment activity of the separate accounts.
+
+ 
+
+Assets and liabilities of separate account arrangements that do not meet the criteria in SOP 03-1 for separate presentation in the Balance Sheets (primarily guaranteed interest options), and revenue and expenses related to such arrangements, are consolidated in the Statements of Operations with the general account beginning January 1, 2004, in accordance with the SOP 03-1 requirements. At December 31, 2005 and 2004, unrealized gains/losses, on assets supporting a guaranteed interest option were minimal and are reflected in Stockholder s equity.
+
+ 
+
+Reinsurance
+
+ 
+
+The Company utilizes reinsurance agreements to reduce its exposure to losses from its life insurance and annuity business. Reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the Company s primary liability as direct insurer of the risks. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial strength and credit rating of its reinsurers. Only those reinsurance recoverable balances deemed probable of recovery are reflected as assets on the Company s Balance Sheets. 
+
+ 
+
+Income Taxes 
+
+ 
+
+The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. Deferred income tax expenses/benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities.
+
+ 
+
+ 
+
+84
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 2.
+ 
+ 
+ Investments
+ 
+
+Fixed Maturities and Equity Securities
+
+ 
+
+Fixed maturities and equity securities, available-for-sale, as of December 31, 2005, were as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gains
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Losses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+
+ 
+ 
+ Fixed maturities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. government and government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ agencies and authorities
+ 
+ 
+ $
+ 
+ 
+ 35.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 35.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ State, municipalities, and political
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ subdivisions
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. corporate securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Public utilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 170.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 172.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other corporate securities
+ 
+ 
+ 
+ 
+ 
+ 612.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 14.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 8.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 618.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total U.S. corporate securities
+ 
+ 
+ 
+ 
+ 
+ 783.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 18.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 11.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 790.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Foreign securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 177.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 176.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total foreign securities
+ 
+ 
+ 
+ 
+ 
+ 195.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 194.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Residential mortgage-backed securities
+ 
+ 
+ 
+ 
+ 
+ 410.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 404.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Commercial mortgaged-backed securities
+ 
+ 
+ 
+ 
+ 
+ 188.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 189.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other asset-backed securities
+ 
+ 
+ 
+ 
+ 
+ 112.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 112.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total fixed maturities, including fixed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 1,727.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 27.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 27.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,727.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Less: fixed maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 118.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 115.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total fixed maturities
+ 
+ 
+ 
+ 
+ 
+ 1,608.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 27.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 23.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,611.9 
+ 
+
+ 
+ 
+ Equity securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total investments, available-for-sale
+ 
+ 
+ $
+ 
+ 
+ 1,613.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 27.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 24.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,616.4 
+ 
+
+ 
+
+85
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Fixed maturities and equity securities, available-for-sale, as of December 31, 2004, were as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gross
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Unrealized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Gains
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Losses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+
+ 
+ 
+ Fixed maturities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. government and government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ agencies and authorities
+ 
+ 
+ $
+ 
+ 
+ 56.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 56.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ State, municipalities, and political subdivisions
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ U.S. corporate securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Public utilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 154.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 161.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other corporate securities
+ 
+ 
+ 
+ 
+ 
+ 695.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 728.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total U.S. corporate securities
+ 
+ 
+ 
+ 
+ 
+ 849.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 43.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 889.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Foreign securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Government
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 168.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 172.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total foreign securities
+ 
+ 
+ 
+ 
+ 
+ 196.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 201.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Residential mortgage-backed securities
+ 
+ 
+ 
+ 
+ 
+ 373.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 373.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Commercial mortgaged-backed securities
+ 
+ 
+ 
+ 
+ 
+ 119.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 8.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 126.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other asset-backed securities
+ 
+ 
+ 
+ 
+ 
+ 107.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 112.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Total fixed maturities, including fixed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 1,702.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 68.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,761.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Less: fixed maturities pledged
+ 
+ 
+ 
+ 
+ 
+ 149.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 148.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total fixed maturities
+ 
+ 
+ 
+ 
+ 
+ 1,553.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 68.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 8.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,613.1 
+ 
+
+ 
+ 
+ Equity securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total investments, available-for-sale
+ 
+ 
+ $
+ 
+ 
+ 1,560.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 68.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 8.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,620.7 
+ 
+
+ 
+
+At December 31, 2005 and 2004, net unrealized (depreciation) appreciation was $(0.3) and $59.4, respectively, on total fixed maturities, including fixed maturities pledged to creditors, and equity securities.
+
+ 
+
+ 
+
+86
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Unrealized losses in fixed maturities at December 31, 2005 and 2004, were related to interest rate movement or spread widening and to mortgage and other asset-backed securities. Mortgage and asset-backed securities include U.S. government backed securities, principal protected securities, and structured securities, which did not have an adverse change in cash flows. The following table summarizes the unrealized losses by duration and reason, along with the fair value of fixed maturities, including fixed maturities pledged to creditors, in unrealized loss position at December 31, 2005 and 2004.
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ More than 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Six Months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Less than
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ and less than
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ More than
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Six Months 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Twelve Months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Twelve Months
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Interest rate or spread widening
+ 
+ 
+ $
+ 
+ 
+ 5.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 3.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 7.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 16.2 
+ 
+
+ 
+ 
+ Mortgage and other asset-backed 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.9 
+ 
+
+ 
+ 
+ Total unrealized loss
+ 
+ 
+ $
+ 
+ 
+ 10.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 27.1 
+ 
+
+ 
+ 
+ Fair value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 547.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 261.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 246.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,054.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Interest rate or spread widening
+ 
+ 
+ $
+ 
+ 
+ 1.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 3.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.1 
+ 
+
+ 
+ 
+ Mortgage and other asset-backed 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.5 
+ 
+
+ 
+ 
+ Total unrealized loss
+ 
+ 
+ $
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 4.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.6 
+ 
+
+ 
+ 
+ Fair value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 335.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 131.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 78.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 545.8 
+ 
+
+ 
+
+Of the unrealized losses aged more than twelve months, the average market value of the related fixed maturities is 96% of the average book value at December 31, 2005. In addition, this category includes 100 securities, which have an average quality rating of A. No other-than-temporary impairment loss was considered necessary for these fixed maturities as of December 31, 2005.
+
+ 
+
+ 
+
+87
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Overall, there has been an increase in unrealized losses from December 31, 2004 to December 31, 2005. This increase is largely caused by an increase in prevailing market interest rates, which tends to have a negative market value impact on fixed maturity securities. In accordance with FSP FAS No. 115-1, the Company considers the negative market impact of the interest rate changes, in addition to credit related items, when performing other-than-temporary impairment testing. As part of this testing, the Company determines whether or not it has the ability and intent to retain the investments for a period of time sufficient to allow for recovery in fair value.
+
+ 
+
+The amortized cost and fair value of total fixed maturities as of December 31, 2005, are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortized
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+
+ 
+ 
+ Due to mature:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ One year or less
+ 
+ 
+ $
+ 
+ 
+ 51.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 52.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ After one year through five years
+ 
+ 
+ 
+ 
+ 
+ 412.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 415.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ After five years through ten years
+ 
+ 
+ 
+ 
+ 
+ 350.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 349.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ After ten years
+ 
+ 
+ 
+ 
+ 
+ 199.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 204.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Mortgage-backed securities
+ 
+ 
+ 
+ 
+ 
+ 599.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 593.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other asset-backed securities
+ 
+ 
+ 
+ 
+ 
+ 112.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 112.2 
+ 
+
+ 
+ 
+ Less: fixed maturities pledged 
+ 
+ 
+ 
+ 
+ 
+ 118.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 115.1 
+ 
+
+ 
+ 
+ Fixed maturities, excluding fixed maturities pledged
+ 
+ 
+ $
+ 
+ 
+ 1,608.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,611.9 
+ 
+
+ 
+
+The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company s shareholder s equity at December 31, 2005.
+
+ 
+
+At December 31, 2005 and 2004, fixed maturities with fair values of $2.8 and $6.0, respectively, were on deposit as required by regulatory authorities. 
+
+ 
+
+Repurchase Agreements
+
+ 
+
+The Company engages in dollar repurchase agreements ( dollar rolls ) and repurchase agreements. At December 31, 2005 and 2004, the carrying value of the securities pledged in dollar rolls and repurchase agreement transactions was $98.4 and $100.7, respectively. The repurchase obligation related to dollar rolls and repurchase agreements totaled $97.7 and $100.4 at December 31, 2005 and 2004, respectively. 
+
+ 
+
+ 
+
+88
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The Company also engages in reverse repurchase agreements. At December 31, 2005 and 2004, the carrying value of the securities in reverse repurchase agreements was $4.1 and $32.0, respectively.
+
+ 
+
+The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company s exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments, an amount that was not material at December 31, 2005 and 2004. The Company believes the counterparties to the dollar roll, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is immaterial.
+
+ 
+
+Other-Than-Temporary Impairments
+
+ 
+
+The following table identifies the Company s other-than-temporary impairments by type for the years ended December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+
+ 
+ 
+ U.S. corporate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.7 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+
+ 
+ 
+ Residential mortgage-
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ backed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Foreign(1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ U.S. Treasuries/Agencies
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Equity securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+
+ 
+ 
+ Limited partnerships
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Other asset-backed
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.0 
+ 
+ 
+ 
+ 
+ 
+ 6 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.9 
+ 
+ 
+ 
+ 
+ 
+ 3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 4.8 
+ 
+ 
+ 
+ 
+ 
+ 9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ (1) Primarily U.S. Dollar denominated
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ * Less than $0.1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+89
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The above schedule includes $0.4 in anticipated disposition write-downs related to investments that the Company does not have the intent and ability to retain for a period of time sufficient to allow for recovery in fair value, based upon the implementation of FSP FAS No. 115-1. The following table summarizes these write-downs recognized by type for the year ended December 31, 2005:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ No. of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Impairment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Securities
+ 
+
+ 
+ 
+ U.S. corporate
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+
+ 
+ 
+ Residential mortgage-backed
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+
+ 
+ 
+ U.S. Treasuries/Agencies
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ * 
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ * Less than $0.1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturity securities or cost for equity securities. In certain situations new factors such as negative developments and subsequent credit deterioration can subsequently change the Company s previous intent to continue holding a security. 
+
+ 
+
+Because of rising interest rates, continued asset-liability management strategies and on-going comprehensive reviews of the Company s portfolios, changes were made in the fourth quarter of 2005 to the Company s strategic asset allocations. In addition, the Company also pursued yield enhancement strategies. These changes primarily resulted in anticipated disposition write-downs totaling $0.4 of certain securities with unrealized loss positions due to a change in intent as to whether to hold these securities until recovery. 
+
+ 
+
+The remaining fair value of investments with other-than-temporary impairments at December 31, 2005 and 2004 was $10.4 and $4.0, respectively.
+
+ 
+
+ 
+
+90
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Net Investment Income
+
+ 
+
+Sources of Net investment income were as follows for the years ended December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Fixed maturities, available-for-sale
+ 
+ 
+ $
+ 
+ 
+ 97.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 98.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 101.8 
+ 
+
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+
+ 
+ 
+ Mortgage loans on real estate
+ 
+ 
+ 
+ 
+ 
+ 15.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 18.7 
+ 
+
+ 
+ 
+ Policy loans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.8 
+ 
+
+ 
+ 
+ Short-term investments and 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ cash equivalents
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.2)
+ 
+
+ 
+ 
+ Gross investment income
+ 
+ 
+ 
+ 
+ 
+ 122.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 123.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 126.0 
+ 
+
+ 
+ 
+ Less: investment expenses
+ 
+ 
+ 
+ 
+ 
+ (5.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2.9)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (3.5)
+ 
+
+ 
+ 
+ Net investment income
+ 
+ 
+ $
+ 
+ 
+ 116.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 120.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 122.5 
+ 
+
+ 
+
+Net Realized Capital Gains and Losses
+
+ 
+
+Net realized capital gains (losses) are comprised of the difference between the carrying value of investments and proceeds from sale, maturity, and redemption, as well as losses incurred due to the other-than-temporary impairment of investments, and changes in fair value of derivatives. Net realized capital gains (losses) on investments for the years ended December 31, 2005, 2004, and 2003 were as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Fixed maturities, available-for-sale
+ 
+ 
+ $
+ 
+ 
+ 7.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 10.2 
+ 
+
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.1)
+ 
+
+ 
+ 
+ Derivatives
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+
+ 
+ 
+ Pretax realized capital gains
+ 
+ 
+ $
+ 
+ 
+ 9.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 10.6 
+ 
+
+ 
+ 
+ After-tax realized capital gains
+ 
+ 
+ $
+ 
+ 
+ 6.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.9 
+ 
+
+ 
+
+Proceeds from the sale of fixed maturities and equity securities, available-for-sale, and the related gross gains and losses were as follows for the years ended December 31, 2005, 2004, and 2003.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Proceeds on sales
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,076.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,300.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,677.2 
+ 
+
+ 
+ 
+ Gross gains
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 18.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 14.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 23.7 
+ 
+
+ 
+ 
+ Gross losses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 13.5 
+ 
+
+ 
+
+ 
+
+ 
+
+91
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 3.
+ 
+ 
+ Financial Instruments
+ 
+
+Estimated Fair Value
+
+ 
+
+The following disclosures are made in accordance with the requirements of FAS No. 107, Disclosures about Fair Value of Financial Instruments ( FAS No. 107 ). FAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument.
+
+ 
+
+FAS No. 107 excludes certain financial instruments, including insurance contracts and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
+
+ 
+
+The following methods and assumptions were used by the Company in estimating the fair value of the following financial instruments:
+
+ 
+
+Fixed maturities, available-for-sale: The fair values for the actively traded marketable bonds are determined based upon the quoted market prices or dealer quotes. The fair values for marketable bonds without an active market are obtained through several commercial pricing services which provide the estimated fair values. Fair values of privately placed bonds are determined using a matrix-based pricing model. The model considers the current level of risk-free interest rates, current corporate spreads, the credit quality of the issuer, and cash flow characteristics of the security. Also considered are factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees, and the Company's evaluation of the borrower's ability to compete in their relevant market. Using this data, the model
+generates estimated market values which the Company considers reflective of the fair value of each privately placed bond.
+
+ 
+
+Equity securities, available-for-sale: Fair values of these securities are based upon quoted market value. For equity securities not actively traded, estimated fair values are based upon values of issues of comparable yield and quality or conversion price, where applicable.
+
+ 
+
+ 
+
+92
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Mortgage loans on real estate: The fair values for mortgage loans on real estate are estimated using discounted cash flow analyses and rates currently being offered in the marketplace for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations.
+
+ 
+
+Cash and cash equivalents, Short-term investments, Short-term investments under securities loan agreement, and Policy loans: The carrying amounts for these assets approximate the assets' fair values. 
+
+ 
+
+Assets held in separate accounts: Assets held in separate accounts are reported at the quoted fair values of the individual securities in the separate accounts.
+
+ 
+
+Other financial instruments reported as assets: The carrying amounts for these financial instruments (primarily limited partnerships) approximate the fair value of the assets. 
+
+ 
+
+Investment contract liabilities (included in Future policy benefits and claims reserves)
+
+ 
+
+Deferred annuities: Fair value is estimated to be the amount payable on demand at the reporting date, as those investment contracts have no defined maturity and are similar to a deposit liability. The amount payable at the reporting date is calculated as the account balance, less applicable surrender charges.
+
+ 
+
+Supplementary contracts without life contingencies and immediate annuities: Fair value is estimated using discounted cash flow analyses. The discount rate is based upon Treasury rates plus a pricing margin.
+
+ 
+
+Other investment contracts: The carrying amounts for these financial instruments, which includes retirement plan deposits, approximate the liabilities' fair value.
+
+ 
+
+Liabilities related to separate accounts: Liabilities related to separate accounts are reported at full account value in the Company s Balance Sheets. Estimated fair values of separate account liabilities are equal to their carrying amount.
+
+ 
+
+ 
+
+93
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The carrying values and estimated fair values of certain of the Company s financial instruments at December 31, 2005 and 2004, were as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Carrying
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Carrying
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Value
+ 
+
+ 
+ 
+ Assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Fixed maturities, available-for-sale, 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ including securities pledged
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,727.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,727.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,761.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1,761.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Mortgage loans on real estate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 191.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 199.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 213.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 231.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Policy loans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 93.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 93.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 90.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 90.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Cash, cash equivalents, Short-term 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ investments, and Short-term investments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ under securities loan agreement
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 63.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 63.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 82.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 82.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other investments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 19.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 19.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Assets held in separate accounts
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+
+ 
+ 
+ Liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Investment contract liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Deferred annuities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 373.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 369.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 379.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 377.6 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Supplementary contracts and
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ immediate annuities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 40.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 40.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 31.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 31.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Liabilities related to separate accounts
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 653.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 537.7 
+ 
+
+ 
+
+Fair value estimates are made at a specific point in time, based on available market information and judgments about various financial instruments, such as estimates of timing and amounts of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating the Company s management of interest rate, price, and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above.
+
+ 
+
+ 
+
+94
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Derivative Financial Instruments
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Notional Amount
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fair Value
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ Options
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ S&P Options are used to hedge against an increase 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ in the S&P Index. Such increase may result in 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ increased payments to contract holders of equity 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ indexed annuity contracts, and the options offset 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ this increased expense. Both the options and
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ the embedded derivative reserve are carried at fair
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ value. The change in value of the options are 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ recorded in Net realized capital gains (losses);
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ the change in value of the embedded derivative
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ is recorded in Interest credited and other benefits
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ to policyholders/contractowners.
+ 
+ 
+ $
+ 
+ 
+ 24.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 8.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Swaps
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ The swap contracts with insurance enterprises are 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ used to reinsure cost of insurance charges on certain 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ life products. Swaps represent contracts that require 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ the exchange of cash flows at regular interim periods, 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ typically monthly or quarterly.
+ 
+ 
+ 
+ 
+ 
+ N/A*
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ N/A*
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 2.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Embedded Derivatives
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ The Company also has issued certain retail annuity 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ products that contain embedded derivatives whose 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ market value is at least partially determined by, 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ among other things, levels of or changes in domestic 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ and/or foreign interest rates (short- or long-term), 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ exchange rates, prepayment rates, equity rates, 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ or credit ratings/spreads. 
+ 
+ 
+ 
+ 
+ 
+ N/A*
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ N/A*
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 3.2
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ *N/A - not applicable.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+95
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 4.
+ 
+ 
+ Deferred Policy Acquisition Cost and Value of Business Acquired
+ 
+
+Activity for the years ended December 31, 2005, 2004, and 2003, within DAC, was as follows:
+
+ 
+
+ 
+ 
+ Balance at January 1, 2003
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 61.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deferrals of commissions and expenses 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 23.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (11.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Interest accrued at 4% - 7%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net amortization included in the Statements of Operations
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (8.4)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Change in unrealized gains and losses on available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.6)
+ 
+
+ 
+ 
+ Balance at December 31, 2003
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 74.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deferrals of commissions and expenses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 14.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (13.5)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Interest accrued at 4% - 7%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net amortization included in the Statements of Operations
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (9.7)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Change in unrealized gains and losses on available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Implementation of SOP and TPA
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.6)
+ 
+
+ 
+ 
+ Balance at December 31, 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 77.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deferral of commissions and expenses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (7.7)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Interest accrued at 4% - 7%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net amortization included in the Statements of Operations
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (3.7)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Change in unrealized gains and losses on available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.4 
+ 
+
+ 
+ 
+ Balance at December 31, 2005
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 92.7 
+ 
+
+ 
+
+The estimated amount of DAC to be amortized, net of interest, is $4.5, $4.8 $5.0, $5.3, and $4.7, for the years 2006, 2007, 2008, 2009, and 2010, respectively. Actual amortization incurred during these years may vary as assumptions are modified to incorporate actual results.
+
+ 
+
+ 
+
+96
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Activity for the years ended December 31, 2005, 2004, and 2003, within VOBA, was as follows:
+
+ 
+
+ 
+ 
+ Balance at January 1, 2003
+ 
+ 
+ $
+ 
+ 
+ 48.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deferrals of commissions and expenses
+ 
+ 
+ 
+ 
+ 
+ 4.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (26.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Interest accrued at 7%
+ 
+ 
+ 
+ 
+ 
+ 4.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net amortization included in the Statements of Operations
+ 
+ 
+ 
+ 
+ 
+ (22.5)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Change in unrealized gains and losses on available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ 6.0 
+ 
+
+ 
+ 
+ Balance at December 31, 2003
+ 
+ 
+ 
+ 
+ 
+ 36.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deferrals of commissions and expenses
+ 
+ 
+ 
+ 
+ 
+ 3.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (2.5)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Interest accrued at 5% - 7%
+ 
+ 
+ 
+ 
+ 
+ 2.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net amortization included in the Statements of Operations
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Change in unrealized gains and losses on available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ 3.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Implementation of SOP and TPA
+ 
+ 
+ 
+ 
+ 
+ (10.2)
+ 
+
+ 
+ 
+ Balance at December 31, 2004
+ 
+ 
+ 
+ 
+ 
+ 33.7 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deferral of commissions and expenses
+ 
+ 
+ 
+ 
+ 
+ 0.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Amortization:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Amortization
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (5.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Interest accrued at 5% - 7%
+ 
+ 
+ 
+ 
+ 
+ 2.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net amortization included in the Statements of Operations
+ 
+ 
+ 
+ 
+ 
+ (3.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Change in unrealized gains and losses on available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ 12.7 
+ 
+
+ 
+ 
+ Balance at December 31, 2005
+ 
+ 
+ $
+ 
+ 
+ 43.3 
+ 
+
+ 
+
+The estimated amount of VOBA to be amortized, net of interest, is $3.7, $3.0, $2.8, $2.8, and $2.6, for the years 2006, 2007, 2008, 2009, and 2010, respectively. Actual amortization incurred during these years may vary as assumptions are modified to incorporate actual results.
+
+ 
+
+Analysis of DAC/VOBA Life Products
+
+As part of the regular analysis of DAC/VOBA, at the end of each of the years ended December 31, 2005, 2004, and 2003, the Company unlocked its long-term rate of return assumptions due to assumption changes that may include mortality, lapse, expense and interest amounts and portfolio return. The impact of unlocking on the amortization of DAC/VOBA before tax was a decrease of $2.0, in 2005, a decrease of $9.8, in 2004, and an increase of $5.5, in 2003.
+
+ 
+
+ 
+
+97
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Analysis of DAC/VOBA Annuity Products
+
+As a part of the regular analysis of DAC\VOBA, at the end of the third quarter of 2005 the Company unlocked its long-term rate of return assumptions. The Company reset long-term assumptions for the separate account returns from 8.5% to 8.125% (gross before fund management fees, mortality, expense, and other policy charges) as of September 30, 2005, reflecting a blended return of equity and other sub-accounts. However, actual equity market experience was very close to long-term assumptions, and no material change to the rate of DAC\VOBA amortization in 2005 was associated with such experience. Actual variable annuity contractowner withdrawal rates have been slower than long-term assumptions. Correspondingly, at the end of the third quarter of 2005, the Company revised its assumptions regarding policyholder withdrawal
+behavior for some of its variable annuity contracts in-force. The total unlocking associated with withdrawal behavior for 2005, resulting from both the change in assumptions at September 30, 2005 and from preceding differences of actual withdrawal experience from assumptions in place, was a deceleration of $0.2.
+
+ 
+
+The actual separate account return exhibited by the variable funds associated with the Company s liabilities in 2004 exceeded the long-term assumption, thereby producing deceleration of DAC/VOBA amortization of $0.1 for the year ended December 31, 2004.
+
+ 
+
+During 2003, the Company reset long-term assumptions for the separate account returns from 9.0% to 8.5% (gross before fund management fees, mortality, expense, and other policy charges) reflecting a blended return of equity and other sub-accounts. The 2004 unlocking adjustment was driven by this change in the separate account returns assumption along with other prospective assumption changes. For the year ended December 31, 2003, the Company recorded an acceleration of DAC/VOBA amortization totaling $5.4.
+
+ 
+
+Analysis of DAC/VOBA Group Products
+
+ 
+
+In the last quarter of 2005, the Company revised its long-term assumptions associated with group products earned rates from 6.0% to 5.5%. The decrease in earned rates led to lower anticipated margins on these products. The negative effect of reduced margins was largely off-set by lower expected credited rates. The change in assumptions resulted in acceleration of DAC/VOBA amortization of $0.1 for the year ended December 31, 2005. The Company did not unlock its DAC/VOBA assumptions related to group products during 2004 and 2003.
+
+ 
+
+ 
+
+98
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 5.
+ 
+ 
+ Dividend Restrictions and Shareholder s Equity
+ 
+
+The Company s ability to pay dividends to its parent is subject to the prior notice/approval of the insurance regulatory authorities of the State of New York for payment of any dividend, which, when combined with other dividends paid within the calendar year, exceeds the lesser of (1) ten percent (10%) of the Company s statutory surplus at prior year end or (2) the Company s prior year statutory net gain from operations, not including realized capital gains. 
+
+ 
+
+The Company paid $20.8, $27.2 and $25.5, in dividends on its common stock to its parent during 2005, 2004, and 2003, respectively.
+
+ 
+
+The Insurance Department of the State of New York (the Department ), recognizes as net income, capital, and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted by the Department, which differ in certain respects from accounting principles generally accepted in the United States. Statutory net gain from operations, excluding realized capital gains and losses was $36.0, $21.0, and $42.8, for the years ended December 31, 2005, 2004, and 2003, respectively. Statutory capital and surplus $282.9 and $260.9 at December 31, 2005 and 2004, respectively. 
+
+ 
+
+As of December 31, 2005, the Company did not utilize any statutory accounting practices that are not prescribed by state regulatory authorities that, individually or in the aggregate, materially affect statutory capital and surplus. 
+
+ 
+
+ 
+
+ 
+ 
+ 6.
+ 
+ 
+ Additional Insurance Benefits and Minimum Guarantees
+ 
+
+Under SOP 03-1, the Company calculates SOP 03-1 reserves for certain guaranteed benefits and for universal life products with certain patterns of cost of insurance charges and certain other fees. 
+
+ 
+
+The Company tests its universal life FAS 97 products to determine the presence of tail losses, which would indicate the need to calculate and report an additional liability under SOP 03-1. Tail losses could arise from cost-of-insurance charges in later policy years that are inadequate to cover the cost of excess death benefits, the presence of secondary guarantees, or both. The Company tests for the presence of significant tail losses using the anticipated profit streams under a range of scenarios. If the product fails the test, as indicated by material tail losses, then an SOP 03-1 reserve is calculated, and the product is subject to SOP 03-1 going forward. In addition, SOP 03-1 reserves are calculated in cases where the product passes the SOP 03-1 test (i.e. significant tail losses are not present), but the product contains a secondary guarantee.
+
+ 
+
+ 
+
+99
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The additional liability for universal life products was $33.0 and $17.5 as of December 31, 2005 and 2004, respectively.
+
+ 
+
+As of December 31, 2005 and 2004, the separate account liability for annuities subject to SOP 03-1 due to minimum guaranteed benefits was $0.2.
+
+ 
+
+The aggregate fair value of equity securities, including mutual funds, supporting separate accounts with additional insurance benefits and minimum investment return guarantees as of December 31, 2005 and 2004 was $321.5 and $213.9, respectively.
+
+ 
+
+ 
+
+ 
+ 
+ 7.
+ 
+ 
+ Sales Inducements
+ 
+
+During the year ended December 31, 2005, the Company capitalized and amortized $0.7 and $0.1, respectively, of sales inducements. During the year ended December 31, 2004, the Company capitalized and amortized $1.1 and $0.4, respectively, of sales inducements. The unamortized balance of capitalized sales inducements, net of unrealized gains (losses), was $1.9 and $1.3 as of December 31, 2005 and 2004, respectively.
+
+ 
+
+ 
+
+ 
+ 
+ 8.
+ 
+ 
+ Unpaid Accident and Health Claims
+ 
+
+The change in the liability for unpaid accident and health claims and claim adjustment expenses is as follows for the years ended December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Balance at January 1
+ 
+ 
+ $
+ 
+ 
+ 12.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 14.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 20.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Less: Reinsurance recoverable
+ 
+ 
+ 
+ 
+ 
+ 7.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.8 
+ 
+
+ 
+ 
+ Net balance at January 1
+ 
+ 
+ 
+ 
+ 
+ 5.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.6 
+ 
+
+ 
+ 
+ Incurred related to:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Current year
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Prior years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.9)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.3 
+ 
+
+ 
+ 
+ Total incurred
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 18.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.3 
+ 
+
+ 
+ 
+ Paid related to:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Current year
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 11.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Prior years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.6 
+ 
+
+ 
+ 
+ Total paid
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.6 
+ 
+
+ 
+ 
+ Net balance at December 31
+ 
+ 
+ 
+ 
+ 
+ 7.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.3 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Plus: Reinsurance recoverables
+ 
+ 
+ 
+ 
+ 
+ 8.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.0 
+ 
+
+ 
+ 
+ Balance at December 31
+ 
+ 
+ $
+ 
+ 
+ 15.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 12.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 14.3 
+ 
+
+ 
+
+ 
+
+100
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The liability for unpaid accident and health claims is included in Future policy benefits and claims reserves on the Balance Sheets.
+
+ 
+
+ 
+
+ 
+ 
+ 9.
+ 
+ 
+ Income Taxes
+ 
+
+The Company files a consolidated federal income tax return with its parent, ReliaStar Life. The Company has a federal tax allocation agreement with its parent whereby the Company is charged for taxes it would have incurred were it not a member of a consolidated group and is credited for losses at the statutory federal tax rate.
+
+ 
+
+Income tax expense (benefit) included in the financial statements are as follows for the years ended December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Current tax expense:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Federal
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 8.5 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 25.0 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 20.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total current tax expense
+ 
+ 
+ 
+ 
+ 
+ 8.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 25.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 20.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Federal
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 8.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (8.4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.4 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total deferred tax expense (benefit)
+ 
+ 
+ 
+ 
+ 
+ 8.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (8.4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.4 
+ 
+
+ 
+ 
+ Total income tax expense
+ 
+ 
+ $
+ 
+ 
+ 17.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 16.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 26.3 
+ 
+
+ 
+
+Income taxes were different from the amount computed by applying the federal income tax rate to income before income taxes and cumulative effect of change in accounting principle for the following reasons for the years ended December 31, 2005, 2004, and 2003.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Income before income taxes and cumulative
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ effect of change in accounting principle
+ 
+ 
+ $
+ 
+ 
+ 54.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 47.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 80.2 
+ 
+
+ 
+ 
+ Tax rate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35%
+ 
+
+ 
+ 
+ Income tax at federal statutory rate
+ 
+ 
+ 
+ 
+ 
+ 19.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 16.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28.1 
+ 
+
+ 
+ 
+ Tax effect of:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Refinement of deferred tax balances
+ 
+ 
+ 
+ 
+ 
+ (1.4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.5)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.3)
+ 
+
+ 
+ 
+ Income tax expense
+ 
+ 
+ $
+ 
+ 
+ 17.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 16.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 26.3 
+ 
+
+ 
+
+ 
+
+101
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+The tax effects of temporary differences that give rise to Deferred tax assets and Deferred tax liabilities at December 31, 2005 and 2004 are presented below.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ Deferred tax assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Insurance reserves
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 46.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 48.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Investment losses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Legal reserve
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Premiums
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.5 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Compensation items
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.9 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total gross assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 62.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 68.3 
+ 
+
+ 
+ 
+ Deferred tax liabilities: 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Present value of future profits
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (15.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (12.3)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Deferred policy acquisition costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (6.7)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.3)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Net unrealized capital gains
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (20.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.6)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Total gross liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (23.3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (35.8)
+ 
+
+ 
+ 
+ Net deferred income tax asset
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 39.2 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 32.5 
+ 
+
+ 
+
+Net unrealized capital gains and losses are presented as a component of other comprehensive income (loss) in Shareholder s equity, net of deferred taxes.
+
+ 
+
+Under prior law, the Company was allowed to defer from taxation a portion of income. Deferred income of $11.3 was accumulated in the Policyholders Surplus Account and would only become taxable under certain conditions, which management believed to be remote. In 2004, Congress passed the American Jobs Creation Act of 2004 allowing certain tax-free distributions from the Policyholders Surplus Account during 2005 and 2006. The Company made a dividend distribution of $20.8 from the Policyholder s Surplus Account which eliminated any potential tax. 
+
+ 
+
+The Company establishes reserves for possible proposed adjustments by various taxing authorities. Management believes there are sufficient reserves provided for, or adequate defenses against, any such adjustments. 
+
+ 
+
+The Internal Revenue Service ( IRS ) has completed its examination of the Company s returns through tax year 2001. The current and prior period provisions reflect non-recurring favorable adjustments resulting from a reduction in the tax liability that no longer needs to be provided based on the results of the current IRS examination, monitoring the activities of the IRS with respect to certain issues with other taxpayers, and the merits of the positions. The IRS has commenced examination of the Company s returns for tax years 2002 and 2003. 
+
+ 
+
+ 
+
+102
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. No valuation allowance has been established at this time, as management believes the above conditions presently do not exist.
+
+ 
+
+ 
+
+ 
+ 
+ 10.
+ 
+ 
+ Benefit Plans
+ 
+
+Defined Benefit Plan
+
+ 
+
+ING North America Insurance Corporation ( ING North America ) sponsors the ING Americas Retirement Plan (the Retirement Plan ), effective as of December 31, 2001. Substantially all employees of ING North America and its subsidiaries and affiliates (excluding certain employees) are eligible to participate, including the Company s employees. The Retirement Plan is a tax-qualified defined benefit plan, the benefits of which are guaranteed (within certain specified legal limits) by the Pension Benefit Guaranty Corporation ( PBGC ). As of January 1, 2002, each participant in the Retirement Plan (except for certain specified employees) earns a benefit under a final average compensation formula. Subsequent to December 31, 2001, ING North America is responsible for all Retirement Plan liabilities. The costs allocated to the Company for its employees 
+participation in the Retirement Plan were $2.5, $1.9, and $0.9, for the years ended 2005, 2004, and 2003, respectively, and were included in Operating expenses on the Statements of Operations.
+
+ 
+
+Defined Contribution Plans
+
+ 
+
+ING North America sponsors the ING Americas Savings Plan and ESOP (the Savings Plan ). Substantially all employees of ING North America and its subsidiaries and affiliates (excluding certain employees) are eligible to participate, including the Company s employees. The Savings Plan is a tax-qualified profit sharing and stock bonus plan, which includes an employee stock ownership plan ( ESOP ) component. Savings Plan benefits are not guaranteed by the PBGC. The Savings Plan allows eligible participants to defer into the Savings Plan a specified percentage of eligible compensation on a pre-tax basis. ING North America matches such pre-tax contributions, up to a maximum of 6% of eligible compensation. All matching contributions are subject to a 4-year graded vesting schedule, although certain specified participants are subject to a 5-year graded vesting schedule. All
+contributions made to the Savings Plan are subject to certain limits imposed by applicable law. The Company matching contribution charges associated with the Savings Plan were $0.9, $0.7, and $0.3, for the years ended December 31, 2005, 2004, and 2003, respectively, and were included in Operating expenses on the Statements of Operations.
+
+ 
+
+103
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Other Benefit Plans
+
+ 
+
+In addition to providing retirement plan benefits, the Company, in conjunction with ING North America, provides certain supplemental retirement benefits to eligible employees and health care and life insurance benefits to retired employees and other eligible dependents. The supplemental retirement plan includes a non-qualified defined benefit pension plan and a non-qualified defined contribution plan, which means all benefits are payable from the general assets of the Company. The post-retirement health care plan is contributory, with retiree contribution levels adjusted annually. The life insurance plan provides a flat amount of noncontributory coverage and optional contributory coverage. No benefits charges were allocated to the Company related to all of these plans for the years ended December 31, 2005, 2004, and 2003.
+
+ 
+
+ 
+
+ 
+ 
+ 11.
+ 
+ 
+ Related Party Transactions
+ 
+
+Operating Agreements
+
+ 
+
+The Company has certain agreements whereby it incurs expenses with affiliated entities. The agreements are as follows: 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Underwriting agreement with Directed Services, Inc. ( DSI ), an affiliated broker-dealer, for the variable insurance products issued by the Company. DSI is authorized to enter into agreements with broker-dealers to distribute the Company s variable products and appoint representatives of the broker-dealers as agents. For the years ended December 31, 2005, 2004, and 2003, commission expenses were incurred in the amounts of $6.9, $2.2, and $1.3, respectively.
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Investment advisory agreement with ING Investment Management LLC ( IIM ), an affiliate, effective January 1, 2001 and amended September 1, 2004, in which IIM provides asset management, administrative and accounting services for RLNY s general account. The Company records a fee, which is paid quarterly, based on the value of the general account assets under management. For the years ended December 31, 2005, 2004, and 2003, expenses were incurred in the amounts of $2.6, $1.3, and $1.5 respectively.
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Administrative services agreement between the Company, ING North America and its U.S. insurance company affiliates dated March 1, 2003, and amended effective August 1, 2004. For the years ended December 31, 2005, 2004, and 2003, net expenses related to the agreement were incurred in the amount of $39.6, $34.5, and $18.5, respectively.
+ 
+
+ 
+
+ 
+
+104
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Management and service contracts and all cost sharing arrangements with other affiliated companies are allocated in accordance with the Company s expense and cost allocation methods.
+
+ 
+
+Reinsurance Agreements 
+
+ 
+
+The Company currently has a concentration of reinsurance with ReliaStar Life. RLNY cedes life business to its parent, under two reinsurance agreements. Both agreements were put in place to reinsure amounts in excess of RLNY s stated retention and continue to accept new business on an ongoing basis. The first reinsurance agreement, effective April 1, 1984, transfers the mortality risk on a yearly-renewable-term basis on Individual Ordinary Life, Waiver of Premium Disability, and Accidental Death insurance directly issued by the Company or its predecessor. Under the second reinsurance agreement, effective January 15, 1996, ReliaStar Life coinsures all risk on level term life insurance products directly issued by the Company or its predecessor. Under both reinsurance agreements, reinsurance premiums are paid annually in advance and are accounted for and settled on a quarterly or
+more frequent basis. Payment in settlement of the reinsurance under a claim approved and paid by the Company for a life reinsured under these agreements is made by the reinsurer upon receipt of the claim papers. The reserves ceded under these agreements were $17.9 and $9.1, as of December 31, 2005 and 2004, respectively.
+
+ 
+
+Financing Agreements
+
+ 
+
+The Company maintains a reciprocal loan agreement with ING America Insurance Holdings, Inc.( ING AIH ), an affiliate, to facilitate the handling of unanticipated short-term cash requirements that arise in the ordinary course of business. Under this agreement, either party can borrow from the other up to 5% of the Company s statutory admitted assets as of the preceding December 31. Interest on any RLNY borrowing or on any ING AIH borrowing is charged at a rate which is the lowest rate among quotes from recognized U.S. commercial paper dealers for the prevailing interest rate of U.S. commercial paper available for purchase with duration equal to the duration of the borrowing under the reciprocal loan agreement. Under this agreement, the Company incurred minimal interest expense and earned no interest for the years ended December 31, 2005, 2004, and 2003. The
+Company had no balances receivable or payable with ING AIH at December 31, 2005 and 2004.
+
+ 
+
+Tax Allocation Agreement
+
+The Company files a consolidated federal income tax return with its parent, ReliaStar Life. The Company has a federal tax allocation agreement with its parent whereby the Company is charged for taxes it would have incurred were it not a member of a consolidated group and is credited for losses at the statutory tax rate.
+
+ 
+
+105
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Capital Transactions
+
+ 
+
+The Company paid $20.8, $27.2, and $25.5, in dividends on its common stock to its Parent during 2005, 2004, and 2003, respectively.
+
+ 
+
+The Company did not receive capital contributions in 2005, 2004, and 2003.
+
+ 
+
+ 
+
+ 
+ 
+ 12.
+ 
+ 
+ Financing Agreements
+ 
+
+The Company maintains a $30.0 uncommitted, perpetual revolving note facility with the Bank of New York ("BONY"). Interest on any of the Company borrowing accrues at an annual rate equal to a rate quoted by BONY to the Company for the borrowing. Under this agreement, the Company incurred minimal interest expense for the years ended December 31, 2005, 2004, and 2003. At December 31, 2005 and 2004, the Company had no amounts outstanding under the revolving loan facility.
+
+ 
+
+The Company also maintains a $30.0 uncommitted line-of-credit agreement with PNC Bank ( PNC ), effective December 19, 2005. Borrowings are guaranteed by ING AIH, with maximum aggregate borrowings outstanding at anytime to ING AIH and its affiliates of $75.0. Interest on any of the Company borrowing accrues at an annual rate equal to a rate quoted by PNC to the Company for the borrowing. Under this agreement, the Company incurred no interest expense for the year ended December 31, 2005. As December 31, 2005, the Company had no amounts outstanding under the line-of-credit agreement.
+
+ 
+
+Prior to September 30, 2005, the Company also maintained a $30.0 uncommitted revolving note facility with SunTrust Bank, Atlanta. Under the agreement, the Company incurred minimal interest expense for the years ended December 31, 2005, 2004, and 2003. At December 31, 2004, the Company had $2.3 payable under this facility.
+
+ 
+
+ 
+
+ 
+ 
+ 13.
+ 
+ 
+ Reinsurance
+ 
+
+The Company utilizes excess or quota share treaties to reduce its exposure to large losses. The Company will only retain amounts not exceeding the Company s retention limits as stated below.
+
+ 
+
+ 
+
+106
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+At December 31, 2005, the Company had reinsurance treaties with 35 unaffiliated reinsurers and 5 affiliated reinsurers covering a significant portion of the mortality risks and guaranteed death benefits under its life insurance and variable annuity contracts. The Company remains liable to the extent its reinsurers do not meet their obligations under the reinsurance agreements.
+
+ 
+
+The Company s retention limit is $0.3 per insurable life for individual retail coverage. For group coverage and individual payroll deduction coverage, the retention limits are $0.8 and $0.5, respectively, per life with per occurrence limitations, subject to certain maximums. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts and are consistent with the risk assumed. The Company obtained letters of credit for reinsurers that are not registered in the State of New York. Letters of credit totaling $2.5 were obtained from various banks, including Dresdner Bank AG, Bank of America and Royal Bank of Canada. In addition, the Company obtained
+a $10.0 letter of credit from a pool of 17 banks that provides coverage to the Company and its affiliates for the reinsurance contract with Security Life of Denver International Ltd., an affiliate.
+
+ 
+
+Reinsurance ceded in force for life mortality risks were $13,527.8 and $13,659.2 at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, net receivables were comprised of the following: 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+
+ 
+ 
+ Claims recoverable from reinsurer
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 22.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 23.8 
+ 
+
+ 
+ 
+ Payable for reinsurance premiums
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (27.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (27.6)
+ 
+
+ 
+ 
+ Reinsurance ceded
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 96.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 77.5 
+ 
+
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.5 
+ 
+
+ 
+ 
+ Total
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 100.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 84.2 
+ 
+
+ 
+
+Included in the accompanying financial statements are net policy benefit recoveries of $49.0, $20.6, and $20.0, for the years ended December 31, 2005, 2004, and 2003, respectively.
+
+ 
+
+ 
+
+107
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Premiums and Interest credited and other benefits to policyholders/contractowners included the following premiums ceded and reinsurance recoveries for the years ended December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Premiums and deposits ceded under
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ reinsurance
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 51.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 41.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 36.0 
+ 
+
+ 
+ 
+ Reinsurance recoveries
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.5)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 19.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 13.6 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 14.
+ 
+ 
+ Commitments and Contingent Liabilities
+ 
+
+Leases
+
+The Company leases its office space and certain other equipment under operating leases, the longest term of which expires in 2010.
+
+ 
+
+For the years ended December 31, 2005, 2004, and 2003, rent expense for leases was $0.2, $0.2, and $0.4, respectively. The future net minimum payments under noncancelable leases for the years ended December 31, 2006 through 2008 are estimated to be $0.1 in each year. Minimal payments are estimated for years ended December 31, 2009 and 2010, and no future net minimum payment is estimated thereafter. The Company pays substantially all expenses associated with its leased and subleased office properties. Expenses not paid directly by the Company are paid for by an affiliate and allocated back to the Company.
+
+ 
+
+Commitments
+
+Through the normal course of investment operations, the Company commits to either purchase or sell securities, commercial mortgage loans, or money market instruments, at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either a higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. At December 31, 2005, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $10.2, $0.7 of which was with related parties. At December 31, 2004, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $15.4, $1.2 of which was with related parties. During 2005 and 2004, $0.5 and $1.4, respectively, was funded to related parties under off-balance sheet commitments.
+
+ 
+
+ 
+
+108
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Financial Guarantees
+
+ 
+
+In the third quarter of 2005, the Company purchased a 3-year credit-linked note arrangement, whereby the Company agreed to reimburse the guaranteed party upon payment default of the referenced obligation. Upon such default, the Company reimburses the guaranteed party for the loss under the reference obligation, and the Company receives that reference obligation in settlement. The Company can then recover any losses under the agreement by sale or collection of the received reference obligation. As of December 31, 2005, the maximum potential future exposure to the Company under the guarantee was $3.0.
+
+ 
+
+Litigation
+
+The Company is involved in threatened or pending lawsuits/arbitrations arising from the normal conduct of business. Due to the climate in insurance and business litigation/arbitration, suits against the Company sometimes include claims for substantial compensatory, consequential, or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits/arbitrations, in light of existing insurance, reinsurance, and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company s operations or financial position.
+
+ 
+
+Other Regulatory Matters 
+
+Regulatory Matters
+
+ 
+
+As with many financial services companies, the Company and its affiliates have received informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the financial services industry. In each case, the Company and its affiliates have been and are providing full cooperation.
+
+ 
+
+Investment Product Regulatory Issues
+
+ 
+
+Since 2002, there has been increased governmental and regulatory activity relating to mutual funds and variable insurance products. This activity has primarily focused on inappropriate trading of fund shares; revenue sharing and directed brokerage; compensation; sales practices, suitability, and supervision; arrangements with service providers; pricing; compliance and controls; adequacy of disclosure; and document retention. 
+
+ 
+
+ 
+
+109
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+In addition to responding to governmental and regulatory requests on fund trading issues, ING management, on its own initiative, conducted, through special counsel and a national accounting firm, an extensive internal review of mutual fund trading in ING insurance, retirement, and mutual fund products. The goal of this review was to identify any instances of inappropriate trading in those products by third parties or by ING investment professionals and other ING personnel. 
+
+ 
+
+The internal review identified several isolated arrangements allowing third parties to engage in frequent trading of mutual funds within the variable insurance and mutual fund products of certain affiliates of the Company, and identified other circumstances where frequent trading occurred despite measures taken by ING intended to combat market timing. Each of the arrangements has been terminated and disclosed to regulators, to the independent trustees of ING Funds (U.S.) and in Company reports previously filed with the Securities and Exchange Commission ( SEC ) pursuant to the Securities Exchange Act of 1934, as amended.
+
+ 
+
+In September 2005, an affiliate of the Company, ING Fund Distributors, LLC ( IFD ), and one of its registered persons settled an administrative proceeding with the National Association of Securities Dealers ( NASD ) in connection with frequent trading arrangements. IFD neither admitted nor denied the allegations or findings and consented to certain monetary and non-monetary sanctions. IFD s settlement of this administrative proceeding is not material to the Company.
+
+ 
+
+Other regulators, including the SEC and the New York Attorney General, are also likely to take some action with respect to certain ING affiliates before concluding their investigations relating to fund trading. The potential outcome of such action is difficult to predict but could subject certain affiliates to adverse consequences, including, but not limited to, settlement payments, penalties, and other financial liability. It is not currently anticipated, however, that the actual outcome of any such action will have a material adverse effect on ING or ING s U.S.-based operations, including the Company.
+
+ 
+
+ING has agreed to indemnify and hold harmless the ING Funds from all damages resulting from wrongful conduct by ING or its employees or from ING s internal investigation, any investigations conducted by any governmental or self-regulatory agencies, litigation or other formal proceedings, including any proceedings by the SEC. Management reported to the ING Funds Board that ING management believes that the total amount of any indemnification obligations will not be material to ING or ING s U.S.-based operations, including the Company.
+
+ 
+
+ 
+
+110
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Insurance and Other Regulatory Matters
+
+ 
+
+The New York Attorney General and other federal and state regulators are also conducting broad inquiries and investigations involving the insurance industry. These initiatives currently focus on, among other things, compensation and other sales incentives; potential conflicts of interest; potential anti-competitive activity; reinsurance; marketing practices; specific product types (including group annuities and indexed annuities); and disclosure. It is likely that the scope of these industry investigations will further broaden before they conclude. The Company and certain of its U.S. affiliates of ING have received formal and informal requests in connection with such investigations, and are cooperating fully with each request for information.
+
+ 
+
+These initiatives may result in new legislation and regulation that could significantly affect the financial services industry, including businesses in which the Company is engaged.
+
+ 
+
+In light of these and other developments, U.S. affiliates of ING, including the Company, periodically review whether modifications to their business practices are appropriate. 
+
+ 
+
+ 
+
+ 
+ 
+ 15.
+ 
+ 
+ Accumulated Other Comprehensive Income (Loss)
+ 
+
+Shareholder s equity included the following components of Accumulated other comprehensive income (loss) at December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Net unrealized capital gains (losses):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Fixed maturities, available-for-sale
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 58.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 75.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ (0.3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.2)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ DAC/VOBA adjustments on, 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (14.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (17.9)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ Other investments
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (1.3)
+ 
+
+ 
+ 
+ Subtotal
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 44.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 55.8 
+ 
+
+ 
+ 
+ Less: deferred income taxes
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 15.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 20.0 
+ 
+
+ 
+ 
+ Net unrealized capital (losses) gains 
+ 
+ 
+ 
+ 
+ 
+ (0.4)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 28.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 35.8 
+ 
+
+ 
+ 
+ Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Accumulated other comprehensive 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ income (loss)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (0.4)
+ 
+ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ 29.6 
+ 
+ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ 35.8 
+ 
+
+ 
+
+ 
+
+111
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+Changes in Accumulated other comprehensive income related to changes in net unrealized capital (losses) gains on securities, including securities pledged, were as follows for the years ended December 31, 2005, 2004 and 2003.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Fixed maturities, available-for-sale
+ 
+ 
+ $
+ 
+ 
+ (58.7)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (16.5)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (3.3)
+ 
+
+ 
+ 
+ Equity securities, available-for-sale
+ 
+ 
+ 
+ 
+ 
+ (1.0)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.2)
+ 
+
+ 
+ 
+ DAC/VOBA adjustments on 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ available-for-sale securities
+ 
+ 
+ 
+ 
+ 
+ 14.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.4 
+ 
+
+ 
+ 
+ Other investments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.1)
+ 
+
+ 
+ 
+ Subtotal
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (45.6)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (11.7)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+
+ 
+ 
+ Less: deferred income taxes
+ 
+ 
+ 
+ 
+ 
+ (15.6)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (4.3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.4 
+ 
+
+ 
+ 
+ Net change in unrealized capital 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ (losses) gains 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (30.0)
+ 
+ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ (7.4)
+ 
+ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ 0.4 
+ 
+
+ 
+
+Changes in Accumulated other comprehensive income, net of DAC/VOBA and tax, related to changes in unrealized gains (losses) on securities, including securities pledged, were as follows for the years ended December 31, 2005, 2004, and 2003:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+
+ 
+ 
+ Net unrealized holding (losses) gains 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ arising the year (1)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (22.1)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (2.7)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 4.9 
+ 
+
+ 
+ 
+ Less: reclassification adjustments 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ for (losses) gains and other items
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ included in net income(2)
+ 
+ 
+ 
+ 
+ 
+ 7.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.5 
+ 
+
+ 
+ 
+ Net unrealized (losses) gains on securities
+ 
+ 
+ $
+ 
+ 
+ (30.0)
+ 
+ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ (7.4)
+ 
+ 
+ 
+ 
+ 
+ $ 
+ 
+ 
+ 0.4 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ (1)
+ 
+ 
+ Pretax unrealized holding (losses) gains arising during the year were $(33.5), $(3.5), and $7.5, for the years ended December 31, 2005, 2004, and 2003, respectively.
+ 
+
+ 
+ 
+ (2)
+ 
+ 
+ Pretax reclassification adjustments for realized gains (losses) and other items included in net income were $12.0, $7.3, and $6.9, for the years ended December 31, 2005, 2004, and 2003, respectively.
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+112
+
+ 
+
+ReliaStar Life Insurance Company of New York
+
+(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
+
+Notes to Financial Statements
+
+(Dollar amount in millions, unless otherwise stated)
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 6.
+ 
+ 
+ Reclassifications and Changes to Prior Year Presentation
+ 
+
+Statements of Cash Flows
+
+ 
+
+During 2005, certain changes were made to the Statements of Cash Flows for the years ended December 31, 2004 and 2003 to reflect the correct balances, primarily related to receivables and payables for securities. The Company has labeled the Statements of Cash Flows for the years ended December 31, 2004 and 2003 as restated. The following table summarizes the adjustments:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Previously
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Reported
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Restated
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Net cash provided by operating activities
+ 
+ 
+ $
+ 
+ 
+ 72.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ (7.0)
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 65.9 
+ 
+
+ 
+ 
+ Net cash used in investing activities
+ 
+ 
+ 
+ 
+ 
+ (54.1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (47.1)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2003
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Net cash provided by operating activities
+ 
+ 
+ $
+ 
+ 
+ 5.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 12.7 
+ 
+
+ 
+ 
+ Net cash used in investing activities
+ 
+ 
+ 
+ 
+ 
+ (78.6)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (6.8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (85.4)
+ 
+
+ 
+
+ 
+
+ 
+
+113
+
+ 
+
+ 
+
+ 
+
+QUARTERLY DATA (UNAUDITED)
+
+(Dollar amounts in millions, unless otherwise stated)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ First
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Second
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Third
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fourth
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total revenue
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 73.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 77.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 78.1 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 76.1 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Income before income taxes 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 10.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 13.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 15.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 15.0 
+ 
+
+ 
+ 
+ Income tax expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 4.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.2 
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 6.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 8.7 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 11.4 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 9.8 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ First
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Second
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Third
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Fourth
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total revenue
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 77.8 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 68.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 75.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 74.0 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Income before income taxes and
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ cumulative effect of change in accounting 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ principle
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 18.5 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2.0 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17.9 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 9.0 
+ 
+
+ 
+ 
+ Income tax expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.4 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.7 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3.2 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Income before cumulative effect of 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ change in accounting principle
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 12.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 11.6 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 5.8 
+ 
+
+ 
+ 
+ Cumulative effect of change in accounting principle,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ net of tax
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.8 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+
+ 
+ 
+ Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 12.9 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 1.3 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 11.6 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 5.8 
+ 
+
+ 
+
+ 
+
+114
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 9. 
+ 
+ 
+ Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
+ 
+
+ 
+
+None.
+
+ 
+
+ 
+
+ 
+ 
+ Item 9A.
+ 
+ 
+ Controls and Procedures
+ 
+
+ 
+
+ 
+ 
+ (a)
+ 
+ 
+ The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15e of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company s current disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in the Company s periodic SEC filings is made known to them in a timely manner.
+ 
+
+ 
+
+ 
+ 
+ (b)
+ 
+ 
+ There has not been any change in the internal controls over financial reporting of the Company that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect these internal controls.
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 9B.
+ 
+ 
+ Other Information
+ 
+
+ 
+
+None.
+
+ 
+
+115
+
+ 
+
+ 
+
+ 
+
+ 
+
+PART III
+
+ 
+
+ 
+ 
+ Item 10. 
+ 
+ 
+ Directors and Executive Officers of the Registrant
+ 
+
+ 
+
+Omitted pursuant to General Instruction I(2) of Form 10-K, except with respect to compliance with Sections 406 and 407 of the Sarbanes-Oxley Act of 2002.
+
+ 
+
+ 
+ 
+ (a)
+ 
+ 
+ Code of Ethics for Financial Professionals
+ 
+
+The Company has approved and adopted a Code of Ethics for Financial Professionals (which was filed as Exhibit 14 to the Company s Form 10-K, as filed with the SEC on March 29, 2004, File No. 333-75938), pursuant to the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. Any waiver of the Code of Ethics will be disclosed by the Company by way of a Form 8K filing.
+
+ 
+
+ 
+ 
+ (b)
+ 
+ 
+ Designation of Board Financial Expert
+ 
+
+The Company has designated Ross M. Weale, as its Board Financial Expert, pursuant to the requirements of Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Weale is an independent director.
+
+ 
+
+ 
+
+ 
+ 
+ Item 11.
+ 
+ 
+ Executive Compensation
+ 
+
+ 
+
+ 
+ 
+ Omitted pursuant to General Instruction I(2) of Form 10-K.
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 12. 
+ 
+ 
+ Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
+ 
+
+ 
+
+ 
+ 
+ Omitted pursuant to General Instruction I(2) of Form 10-K.
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 13. 
+ 
+ 
+ Certain Relationships and Related Transactions
+ 
+
+ 
+
+ 
+ 
+ Omitted pursuant to General Instruction I(2) of Form 10-K.
+ 
+
+ 
+
+ 
+
+ 
+
+116
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Item 14.
+ 
+ 
+ Principal Accountant Fees and Services
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ (Dollar amounts in millions, unless otherwise stated)
+ 
+
+ 
+
+In 2005 and 2004, Ernst & Young LLP ( Ernst & Young ) served as the principal external auditing firm for ING, including RLNY. ING subsidiaries, including RLNY, are allocated Ernst & Young fees attributable to services rendered by Ernst & Young to each subsidiary. Ernst & Young fees allocated to the Company for the years ended December 31, 2005 and 2004 are detailed below, along with a description of the services rendered by Ernst & Young to the Company:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Audit fees
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.2 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Audit-related fees
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.1 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Tax fees
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ *
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ All other fees
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.3 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $
+ 
+ 
+ 0.5 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ *Less than $0.1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Audit Fees
+
+ 
+
+Fees for audit services include fees associated with professional services rendered by the auditors for the audit of the annual financial statements of the Company and review of the Company s interim financial statements. 
+
+ 
+
+Audit-related Fees
+
+ 
+
+Audit-related fees were allocated to RLNY for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements and are not reported under the audit fee item above. These services consist primarily of the audit of SEC product filings, advice on accounting matters, and progress review on International Financial Reporting Standards and Sarbanes-Oxley projects. 
+
+ 
+
+Tax Fees
+
+ 
+
+There were minimal tax fees allocated to the Company in 2005 and 2004. Tax fees allocated to RLNY were for tax compliance, tax advice, and tax planning professional services. These services consist of tax compliance, including the review of original and amended tax returns, assistance with questions regarding tax audits, and tax planning and advisory services relating to common forms of domestic taxation (i.e., income tax and capital tax).
+
+ 
+
+ 
+
+117
+
+ 
+
+ 
+
+ 
+
+ 
+
+All Other Fees
+
+ 
+
+There were no fees allocated to the Company in 2005 and minimal fees allocated to the Company in 2004 under the category all other fees . Other fees allocated to RLNY under this category typically include fees paid for products and services other than the audit fees, audit-related fees, and tax fees described above, and consists primarily of non-recurring support and advisory services.
+
+ 
+
+Pre-approval Policies and Procedures
+
+ 
+
+RLNY has adopted the pre-approval policies and procedures of ING. Audit, audit-related, and non-audit, services provided to the Company by ING s independent auditors are pre-approved by ING s audit committee. Pursuant to ING s pre-approval policies and procedures, the ING audit committee is required to pre-approve all services provided by ING s independent auditors to ING and its majority owned legal entities, including the Company. The ING pre-approval policies and procedures distinguish four types of services: (1) audit services, (2) audit-related services, (3) non-audit services, and (4) prohibited services (as described in the Sarbanes-Oxley Act).
+
+ 
+
+The ING pre-approval procedures consist of a general pre-approval procedure and a specific pre-approval procedure. 
+
+ 
+
+General Pre-approval Procedure
+
+ 
+
+ING s audit committee pre-approves audit, audit-related, and non-audit, services to be provided by ING s external audit firms on an annual basis. The audit committee also sets the maximum annual amount for such pre-approved services. Throughout the year, ING s audit committee receives from ING s external audit firms, an overview of all services provided, including related fees and supported by sufficiently detailed information. ING s audit committee evaluates this overview retrospectively on a semi-annual basis. Additionally, ING s external audit firms and Corporate Audit Services monitor the amounts paid versus the pre-approved amounts throughout the year. 
+
+ 
+
+Specific Pre-approval Procedure
+
+ 
+
+In addition to the general pre-approval procedure, each audit-related and non-audit engagement that is expected to generate fees in excess of EUR 100,000, and all further audit-related and non-audit engagements over and above the pre-approved amounts, must be approved by the audit committee on a case-by-case basis.
+
+ 
+
+In 2005, 100% of each of the audit-related services, tax services, and all other services were pre-approved by ING s audit committee. 
+
+ 
+
+ 
+
+118
+
+ 
+
+ 
+
+ 
+
+PART IV
+
+ 
+
+ 
+ 
+ Item 15.
+ 
+ 
+ Exhibits, Financial Statement Schedules
+ 
+
+ 
+
+ 
+ 
+ (a)
+ 
+ 
+ The following documents are filed as part of this report:
+ 
+
+1. Financial statements. See Item 8 on Page 61
+
+2. Financial statement schedules. See Index to Financial Statement Schedules
+
+on Page 123
+
+Exhibits
+
+ 
+
+ 
+ 
+ 3.(i)
+ 
+ 
+ Articles of Incorporation of ReliaStar Life Insurance Company of New York ("RLNY" or "Registrant"), incorporated by reference from Exhibit 3 (a) to a Pre-Effective Amendment No. 1 of Registrant's Registration Statement on
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001166463_visicu-inc_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001166463_visicu-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4ec38b0ba7610a2ed13ab23bf0129f85cc1663bd
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001166463_visicu-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS DLA Piper Rudnick Gray Cary US LLP, Baltimore, Maryland will pass upon the validity of the common stock offered by this prospectus for us. Wilmer Cutler Pickering Hale and Dorr LLP, New York, New York is representing the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001167896_nextest_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001167896_nextest_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..629cd62cd71c7032e9f46655c001092003a24d1b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001167896_nextest_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered by this prospectus will be passed upon for us by Heller Ehrman LLP, San Francisco, California which has acted as our counsel in connection with this offering. The underwriters have been represented by Morrison & Foerster LLP, Palo Alto, California. Victor A. Hebert, a member of Heller Ehrman LLP and the corporate secretary of Nextest, beneficially owns 5,000 shares of our capital stock, on an as converted basis.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001171529_techwell_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001171529_techwell_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e27e83868bc324257be3a72c00fde2702c305cfc
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001171529_techwell_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Selected legal matters with respect to the validity of the common stock offered by this prospectus will be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP, Palo Alto, California. Selected legal matters relating to the offering will be passed upon for the underwriters by Latham & Watkins LLP, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001176316_access_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001176316_access_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5723bbac4cf3393ebeb6f47a8dd66282a08fb0ea
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001176316_access_legal_matters.txt
@@ -0,0 +1 @@
+legal matters by counsel for the underwriters and other conditions. The underwriters reserve the right to withdraw, cancel or modify this offer and to reject orders in whole or in part. LEGAL MATTERS Troutman Sanders LLP, Richmond, Virginia, will pass upon the legality of the securities offered by this prospectus for us. Certain legal matters will be passed upon for the underwriters by Nelson Mullins Riley Scarborough LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001179079_alsius_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001179079_alsius_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29819e0e4bda5986de5a97700772022f0fba2b49
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001179079_alsius_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS" --> LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Sheppard, Mullin, Richter Hampton LLP, Costa Mesa, California. A trust in which an attorney of Sheppard, Mullin, Richter Hampton LLP is a trustee beneficially owns an aggregate of 947 shares of Alsius common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Heller Ehrman LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001183276_sky_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001183276_sky_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4aa0bb26a16b607b24ed025a92a1cde93e09d5de
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001183276_sky_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The law firm of Woodburn and Wedge, Reno, Nevada has acted as our counsel by providing an opinion on the validity of the securities. EXPERTS
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198131_bridgeton_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198131_bridgeton_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198131_bridgeton_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198134_buckhead_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198134_buckhead_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198134_buckhead_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198142_cumming_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198142_cumming_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198142_cumming_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198147_diagnostic_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198147_diagnostic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198147_diagnostic_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198149_diagnostic_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198149_diagnostic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198149_diagnostic_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198153_duluth-ct_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198153_duluth-ct_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198153_duluth-ct_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198155_fort-mill_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198155_fort-mill_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198155_fort-mill_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198158_durham_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198158_durham_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198158_durham_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198161_east_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198161_east_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198161_east_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198170_hapeville_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198170_hapeville_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198170_hapeville_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198179_kirkwood_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198179_kirkwood_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198179_kirkwood_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198184_montgomery_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198184_montgomery_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198184_montgomery_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198186_birmingham_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198186_birmingham_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198186_birmingham_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198188_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198188_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198188_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198189_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198189_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198189_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198192_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198192_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198192_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198206_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198206_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198206_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198210_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198210_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198210_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198233_mq_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198233_mq_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198233_mq_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198240_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198240_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198240_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198241_asheville_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198241_asheville_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198241_asheville_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198242_bioimaging_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198242_bioimaging_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198242_bioimaging_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198244_bioimaging_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198244_bioimaging_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198244_bioimaging_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198246_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198246_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198246_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198247_cabarrus_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198247_cabarrus_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198247_cabarrus_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198249_cape-fear_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198249_cape-fear_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198249_cape-fear_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198252_chapel_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198252_chapel_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198252_chapel_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198256_dothan_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198256_dothan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198256_dothan_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198257_florida_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198257_florida_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198257_florida_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198259_grove_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198259_grove_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198259_grove_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198262_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198262_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198262_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198264_kansas_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198264_kansas_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198264_kansas_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198265_mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198265_mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198265_mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198266_lexington_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198266_lexington_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198266_lexington_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198275_northeast_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198275_northeast_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198275_northeast_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198277_occupation_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198277_occupation_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198277_occupation_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198281_simpsonvil_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198281_simpsonvil_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198281_simpsonvil_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198288_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198288_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198288_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198301_piedmont_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198301_piedmont_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198301_piedmont_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198307_piedmont_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198307_piedmont_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198307_piedmont_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198313_texas_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198313_texas_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198313_texas_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198317_west_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198317_west_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198317_west_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198318_tysons_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198318_tysons_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198318_tysons_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198319_virginia_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198319_virginia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198319_virginia_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001198322_west_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001198322_west_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001198322_west_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001202273_golfsmith_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001202273_golfsmith_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b744b8100d68acbbeb22237b19ab42dc8d5d3b24
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001202273_golfsmith_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered by this prospectus and other legal matters concerning this offering will be passed upon for us by White Case LLP, New York, New York. Various legal matters related to the sale of the common stock issued in this offering will be passed upon for the underwriters by Shearman Sterling LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001205915_vienna_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001205915_vienna_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001205915_vienna_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001205962_clayton_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001205962_clayton_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001205962_clayton_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001219169_optium_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001219169_optium_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..866ff20854f8d3143a7a1c46b2b9bddd83b16b86
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001219169_optium_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Goodwin Procter LLP, Boston, Massachusetts, will pass upon the validity of the shares of common stock offered hereby. John J. Egan III, a partner in the firm of Goodwin Procter LLP, as of September 15, 2006, beneficially owned shares of our preferred stock that will convert upon the closing of this offering into 8,081 shares of our common stock. In addition, as of September 15, 2006, Robert E. Bishop, John B. Steele and David J. Powers, also partners in the firm of Goodwin Procter LLP, each beneficially owned shares of our preferred stock that will convert upon the closing of this offering into 1,901, 1,901 and 570 shares of our common stock, respectively. Davis Polk & Wardwell, New York, New York will pass upon legal matters relating to this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001219808_brand_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001219808_brand_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5dc6cfdfcd1f8e19d77b561a56bc7502952d9918
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001219808_brand_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Mayer, Brown, Rowe & Maw LLP, New York, New York. Davis Polk & Wardwell, New York, New York will act as counsel to the underwriters. Mayer, Brown, Rowe & Maw LLP from time to time represents us, our subsidiaries and our affiliates in connection with other matters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001276591_hansen_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001276591_hansen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c52546ca87aa38f41f00d73cf9651e44287e8bc3
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001276591_hansen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, Palo Alto, California. The underwriters are being represented by Latham Watkins LLP, Costa Mesa, California. As of the date of this prospectus, GC H Investments, LLC, an entity comprised of partners and associates of Cooley Godward Kronish LLP, beneficially owns an aggregate of 22,818 shares of our common stock to be issued upon conversion of the preferred stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001277425_china_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001277425_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cc93c756301f69412d8e39d4c5b8bece01e5acb5
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001277425_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters, including the legality of the issuance of the units offered herein, are being passed upon for us by our counsel, Oswald & Yap, Irvine, California. The Law Offices of Louis E. Taubman, P.C., New York, New York will pass on certain matters related to the offer and sale of the units for the underwriters. Han Kun Law Offices will pass upon legal matters as to Chinese law for us. Walkers, Cayman Islands Attorneys at Law, will pass upon legal matters as to Cayman Islands law for us. Oswald & Yap may rely upon Han Kun Law Offices with respect to matters governed by Chinese law and upon Walkers with respect to matters governed by Cayman Islands law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001280370_medical_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001280370_medical_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2b9ec96b177e0d98d19cf7cd26f5130e494b443
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001280370_medical_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the notes and the guarantees of the 117/8% notes have been passed upon for us by O'Melveny & Myers LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001282858_coinmach_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001282858_coinmach_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d0dcd1ad371151859c27c4463bad93ed3f3aa930
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001282858_coinmach_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the Class A common stock offered hereby will be passed upon for us by Mayer, Brown, Rowe Maw LLP, and New York, New York. Certain legal matters relating to this offering will be passed upon for the underwriters by Cahill Gordon Reindel llp, New York, New York. Two members of Mayer, Brown, Rowe Maw LLP own approximately 1,035,000 common units of Holdings as of September 30, 2005.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001283794_ngtv_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001283794_ngtv_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..462051bfaa25455e259e5a05ff03d2f557bcafe2
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001283794_ngtv_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Richardson Patel LLP has given us an opinion relating to the due issuance of the units, common stock and warrants being registered. The law firm of Richardson Patel LLP, or its various principals, collectively own 76,732 shares of our common stock and warrants to purchase 25,631 shares of common stock at exercise prices ranging from $7.50 per share to $13.93 per share. We have executed a promissory note in favor of Richardson Patel LLP for the legal expenses in the principal amount of $378,000, which we have converted into Conversion Notes that will convert into units in this offering upon the same terms and conditions as the Second Bridge Notes. The units to be owned by Richardson Patel LLP are covered by this prospectus and Richardson Patel LLP is a selling security holder. Mr. Addison Adams, a partner of Richardson Patel LLP owns an option to purchase 12,915 shares of common stock at an exercise price of $2.59 per share, exercisable until October 25, 2015. Certain legal matters will be passed upon for the representative of the underwriters by Schneider Weinberger Beilly LLP, Boca Raton, Florida.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001290096_eagle_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001290096_eagle_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e29f8241b899981e3f1d81d2003b6ec4374e29b6
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001290096_eagle_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Goodwin Procter LLP, Boston, Massachusetts has passed upon the validity of the shares of common stock offered hereby. Legal matters relating to this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich Rosati, P.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001300940_contrarian_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001300940_contrarian_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0ae37ad8618f2d0c65c18ab7bd341f9645e624f6
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001300940_contrarian_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS We are not a party to any legal proceedings. Certain legal matters, including the validity of the shares being issued, will be passed upon for Contrarian by the law firm of Vial, Hamilton, Koch & Knox, LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001305409_valera_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001305409_valera_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0a988f67fdbc0e5d264cca3ae09fa046df0c04b0
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001305409_valera_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities being offered will be passed upon for us by Pepper Hamilton LLP. Certain legal matters will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher Flom LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001311538_castle_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001311538_castle_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4f41521981ef8fe0c19a8653e9434b2bac8d8cc8
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001311538_castle_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS" --> LEGAL MATTERS The validity of the common stock in this offering will be passed upon for us by Patterson Belknap Webb Tyler LLP, New York, NY. Certain legal matters in connection with this offering will be passed upon for the underwriters by Blank Rome LLP, New York, NY. John E. Schmeltzer, III, a partner in the firm of Patterson Belknap Webb Tyler LLP, owns 45,585 shares of common stock, 250 shares of series A preferred stock, 1,550 shares of series C preferred stock and is being issued 72 shares of common stock upon conversion of his series A and C preferred stock as a dividend on such shares. In addition, Mr. Schmeltzer owns $5,000 of the senior notes issued by our subsidiary, Castle Brands (USA) Corp., which we have guaranteed and warrants to purchase 125 shares of our common stock at an exercise price of $8.00 per share issued in connection with the senior notes.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001314475_spark_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001314475_spark_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e4de3c146321fe3f93bce8f98dad16e296098174
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001314475_spark_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Steptoe Johnson, London, England will pass for us as to the valid issuance under English law of the ordinary shares being offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001314552_secunda_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001314552_secunda_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1c09015c9e84dc7499eb44a0917aca8976636a6c
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001314552_secunda_legal_matters.txt
@@ -0,0 +1 @@
+On each August 1, from August 1, 2006 through August 1, 2011, we will be required to offer to purchase notes in an aggregate principal amount of US$3.8 million for cash at 100% of the principal amount of the notes, plus accrued and unpaid interest. We are subject to certain covenants, including limitations on our and certain of our subsidiaries ability to incur additional indebtedness, issue preferred stock, pay dividends to stockholders, make certain investments and sell certain assets. As security for the senior secured notes, and the revolving senior secured credit facility, we have provided a first priority lien over 11 of our vessels (as specified in the indenture), assignment of charter hire pertaining to the 11 vessels and assignment of insurance proceeds pertaining to the 11 vessels. In addition, we have provided a first priority lien over all of the outstanding capital stock of each of our subsidiaries which own one or more of the 11 vessels or related vessel assets, or charters or arranges charters for one or more of the 11 vessels. We have also provided a first priority lien over all general intangibles owned or acquired by us or any of our subsidiaries necessary, exclusively used for, and in connection with the, ownership, expansion, operation, use, maintenance or sale or other disposition of any of the 11 vessels or other vessel assets. At December 31, 2005, we were in compliance with the covenants on all of our outstanding indebtedness, however, we cannot give assurance that our future results of operations will cause us to remain in compliance in future periods. OFF-BALANCE SHEET TRANSACTIONS We do not currently have any off-balance sheet arrangements with unconsolidated entities. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following information sets forth our aggregate contractual obligations as of December 31, 2005. Total Less than 1 Year 1-3 Years 3-5 Years Thereafter (Cdn$ in thousands) Floating rate, Canadian dollar denominated loans $ 21,410 $ 2,192 $ 4,972 $ 5,900 $ 8,346 Floating rate, Canadian dollar denominated senior secured revolving credit facility(1) 26,239 26,239 Floating rate, US dollar denominated vessel acquisition term loan 9,325 3,730 3,730 1,865 Floating rate, US dollar denominated senior secured notes (excluding discount) 145,700 4,429 8,859 8,859 123,553 Equipment rental obligations(2) 1,405 443 856 On each August 1, from August 1, 2006 through August 1, 2011, we will be required to offer to purchase notes in an aggregate principal amount of US$3.8 million for cash at 100% of the principal amount of the notes, plus accrued and unpaid interest. We are subject to certain covenants, including limitations on our and certain of our subsidiaries ability to incur additional indebtedness, issue preferred stock, pay dividends to stockholders, make certain investments and sell certain assets. As security for the senior secured notes, and the revolving senior secured credit facility, we have provided a first priority lien over 11 of our vessels (as specified in the indenture), assignment of charter hire pertaining to the 11 vessels and assignment of insurance proceeds pertaining to the 11 vessels. In addition, we have provided a first priority lien over all of the outstanding capital stock of each of our subsidiaries which own one or more of the 11 vessels or related vessel assets, or charters or arranges charters for one or more of the 11 vessels. We have also provided a first priority lien over all general intangibles owned or acquired by us or any of our subsidiaries necessary, exclusively used for, and in connection with the, ownership, expansion, operation, use, maintenance or sale or other disposition of any of the 11 vessels or other vessel assets. At December 31, 2005, we were in compliance with the covenants on all of our outstanding indebtedness, however, we cannot give assurance that our future results of operations will cause us to remain in compliance in future periods. OFF-BALANCE SHEET TRANSACTIONS We do not currently have any off-balance sheet arrangements with unconsolidated entities. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following information sets forth our aggregate contractual obligations as of December 31, 2005. Total Less than 1 Year 1-3 Years 3-5 Years Thereafter (Cdn$ in thousands) Floating rate, Canadian dollar denominated loans $ 21,410 $ 2,192 $ 4,972 $ 5,900 $ 8,346 Floating rate, Canadian dollar denominated senior secured revolving credit facility(1) 26,239 26,239 Floating rate, US dollar denominated vessel acquisition term loan 9,325 3,730 3,730 1,865 Floating rate, US dollar denominated senior secured notes (excluding discount) 145,700 4,429 8,859 8,859 123,553 Equipment rental obligations(2) 1,405 443 856 Commitments (Note 18) Contingencies (Note 22) Stockholder s Equity (Deficiency) Preference stock Class A, par value $3,979.09 per share, redeemable and retractable on demand at par, non-voting, non-participating authorized 100 shares; nil issued and outstanding in 2004 and 2005 Preference stock par value $1.00 per share, redeemable and retractable on demand at $3,663.96 per share, non-voting, non-participating with cumulative dividend equal to 7% of redemption value authorized 400 shares; 400 issued and outstanding in 2004 and 2005 (Note 11) Common stock no par value, authorized 40,000 shares; 1,100 shares issued in 2005 and 2004 110 Balance at June 30, 2005 400 $ 1,100 $ Earnings (loss) from continuing operations 3,424 (3,754 ) (5,485 ) 5,062 5,649 Discontinued operations Earnings before income taxes from discontinued operations 59 192 143 (17 ) Income taxes (recovery) (23 ) (7 ) (171 ) (7 ) Net earnings (loss) $ 3,506 $ (3,555 ) $ (5,171 ) $ 5,052 $ 5,649 Table of Contents Index to Financial Statements Fiscal Year Ended June 30, 2005 Six Months Ended December 31, 2005 Pro forma data (unaudited) Pro forma interest expense $12,610 $7,127 As of December 31, 2005 Actual As Adjusted(5) (Cdn$ in thousands) Balance Sheet Data: Vessels, equipment and property (net) $ 205,679 $ Total assets 249,387 Total debt (excluding accrued interest) 200,518 Total shareholder s equity 26,715 (1) All shares and per share information have been restated to give effect to the -for-1 common share split to be effected immediately prior to the completion of this offering. (2) Excludes vessels in cold lay-up or on bareboat charter. (3) Marketed utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues other than on bareboat charter. (4) Average dayrates represent average revenue per day, based on the number of days during the period that the vessels generated revenue other than on bareboat charter. (5) Gives effect to the receipt of the net proceeds from the sale by us of common shares at the initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us. (6) Pro forma interest expense for the year ended June 30, 2005 and the six months ended December 31, 2005, has been estimated based upon the assumption that this offering was completed as of July 1, 2004 and that there were no amounts outstanding under our Senior Secured Revolving Bank Credit Facility during the year ended June 30, 2005 or the six months ended December 31, 2005. It further assumes that the issue of the senior secured notes was completed on August 26, 2004 at an amount of US $87 million, which equals the original issue amount of the senior secured notes of US$125.0 million, less the amount of senior secured notes expected to be repurchased with a portion of the proceeds from this offering of US$38 million. Amortization of costs associated with the August 26, 2004 issuance of senior secured notes has also been adjusted to reflect a US$87 million issue as opposed to an issue of US$125 million. Non-GAAP Financial Measure and Reconciliation We define EBITDA as net earnings (loss) before income taxes, interest expense, depreciation and amortization. Our definition of EBITDA may not be comparable to similarly titled measures reported by other companies. EBITDA is not a measure of performance recognized under U.S. GAAP and should not be considered in isolation or as a substitute for net earnings (loss) or cash derived from operating activities or any other indicator of our performance under U.S. GAAP. We believe EBITDA is useful to an investor in evaluating our operating performance because: it is widely used by investors in our industry to measure a company s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets and capital structure; and it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest charges from our outstanding debt) and asset base (primarily depreciation and amortization of our vessels) from our operating results. Our management uses EBITDA: as a measure of operating performance because it assists us in comparing our performance on a consistent basis by removing the impact of interest expense and depreciation and amortization from our operating results; as a measure for planning and forecasting overall expectations and for evaluating actual results against these expectations; and in communications with lenders, rating agencies and others, concerning our financial performance. The table below shows the reconciliation from EBITDA to earnings (loss) from continuing operations. Fiscal Year Ended June 30, Six Months Ended December 31, 2003 2004 2005 2004 2005 (Cdn$ in thousands) Earnings (loss) from continuing operations $ 3,424 $ (3,754 ) $ (5,485 ) $ 5,062 $ 5,649 Interest expense 7,613 8,806 17,679 7,608 10,743 Income taxes (recovery) 21 (1,580 ) (1,801 ) (843 ) 2,234 Depreciation and amortization 9,909 11,722 14,416 6,754 7,959 EBITDA $ 20,967 $ 15,194 $ 24,809 $ 18,581 $ 26,585 Table of Contents Index to Financial Statements Risk factors An investment in our common shares involves a high degree of risk. If any of the circumstances or events described below actually arises or occurs, our business, results of operations, cash flows and financial condition could be materially adversely affected. In any such case, the market price of our common shares could decline, and you may lose all or part of your investment. RISKS RELATING TO OUR BUSINESS Demand for many of our services, and the rates we can charge for those services, substantially depends on the level of activity in offshore oil and natural gas exploration, development and production, especially in eastern Canada. Our business depends on the level of activity in offshore oil and natural gas exploration, development and production and the subsea construction industry. The level of offshore oil and natural gas exploration, development and production activity has historically been volatile. Such volatility is likely to continue in the future. A decline in the levels of oil and gas exploration, development and production activity may negatively affect the demand for and rates for our offshore energy supply and support services and marine services and, as a result, negatively impact our results of operations. The level of activity may vary significantly in response to relatively minor changes in a variety of factors that are beyond our control, including: prevailing oil and natural gas prices and expectations about future prices and price volatility; the cost of exploring for, producing and delivering oil and natural gas offshore; worldwide demand for energy and other petroleum products as well as chemical products; a consolidation of oil and gas and oil service companies operating offshore; availability and rate of discovery of new oil and natural gas reserves in offshore areas; local and international political and economic conditions and policies; technological advances affecting energy exploration production and consumption; weather conditions; environmental regulation; and the ability of oil and natural gas companies to generate or otherwise obtain funds for capital requirements. During periods of low commodity prices, our customers generally reduce their capital spending budgets for offshore drilling, exploration and development. Lower levels of expenditures and activity result in a decline in the demand for our oil and gas services segment services and the rates we are able to charge for those services. Moreover, approximately 40% of our total revenues for the six months ended December 31, 2005 were attributable to our oil and gas services conducted in east coast Canada. As such, we are dependent on levels of activity in that region, which may differ from levels of activity in other regions of the world. Intense competition in our lines of business could result in reduced profitability and loss of market share for us. Contracts for our vessels are generally awarded on a competitive basis, and competition in the offshore energy support segment is intense. The most important factors determining whether a contract will be awarded include: suitability, reliability and capability of equipment; Table of Contents Index to Financial Statements Risk factors safety record; age of equipment; personnel; price; service; and reputation. Our major competitor in Canada, Maersk Supply Service, is a subsidiary of a much larger company with substantially greater financial resources and substantially larger operating staffs than we have. It may be better able to compete in making vessels available more quickly and efficiently or in constructing new vessels, meeting customers scheduling needs and withstanding the effect of downturns in the market. As a result, we could lose customers and market share to this or other competitors. We currently conduct and intend to expand international operations, which involve additional risks. We operate vessels worldwide. For the six months ended December 31, 2005, approximately 60% of our total revenues were derived from operations outside of Canada. This percentage could increase. Our operations outside Canada involve additional risks, including the possibility of: restrictive actions by foreign governments, including vessel seizure; foreign taxation and changes in foreign tax laws; limitations on repatriation of earnings; local cabotage and local ownership laws and requirements; nationalization and expropriation; redeployment costs; failure to comply with increasing national security requirements; loss of contract rights; and political instability, war and civil disturbances or other risks that may limit or disrupt markets. Our ability to compete in the international offshore oilfield services industry may be adversely affected by foreign government regulations that favor or require the awarding of contracts to local persons or that require foreign persons to employ citizens of, or purchase supplies from, a particular jurisdiction. We have a history of losses. We have incurred net losses in each of the last two fiscal years. Our ability to generate net income is influenced by a number of factors that are difficult to predict, including changes in the level of activity in offshore oil and natural gas exploration, development and production. For example, our recent history of losses is attributable in part to repositioning our fleet into the international market, expensing costs associated with moving two vessels from service to the subsea telecommunications market to service to the oil and gas construction market and general cyclical conditions affecting the offshore supply vessel market. Future losses may prevent us from implementing our growth strategy. Table of Contents Index to Financial Statements Risk factors In connection with their audit of our consolidated financial statements for the fiscal year ended June 30, 2005, our auditors have identified a material weakness in our internal controls. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, investors could lose confidence in our financial reporting, which would harm our business and the trading price of our common shares. Effective internal controls, including internal control over financial reporting and disclosure controls and procedures, are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results could be materially harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. In August 2005, our independent auditors advised our board of directors that they had identified a material weakness in our internal controls in connection with the audit of our fiscal 2005 consolidated financial statements but that such material weakness did not result in any adjustments to our financial statements. The specific material weakness related to our inadequate internal controls over routine and non-routine journal entries. Our auditors noted that our assistant controller is the only system user authorized to post adjusting journal entries, and that there is no specific independent review of these entries after posting. Our auditors also noted deficiencies in our internal controls that they did not consider to be material weaknesses. To improve our internal controls, system changes will be implemented during fiscal 2006 to effect more detailed controls over journal entries and thereby eliminate our independent auditor s material weakness assessment. The process of designing and implementing an effective system of internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments. Upon completion of this offering, we will have had only limited operating experience with the improvements we have made to date. We may not be able to implement and maintain adequate controls over our financial processes and reporting in the future, which may, in turn, require us to restate our financial statements in the future. In addition, we may discover additional past, ongoing or future weaknesses or significant deficiencies in our financial reporting system in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure also could adversely affect the results of the annual management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that will be required when the SEC s rules under Section 404 of the Sarbanes-Oxley Act of 2002 become applicable to us beginning with our Annual Report on Form 20-F for the fiscal year ending June 30, 2007 to be filed in the second calendar quarter of 2007. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could result in a lower trading price of our common shares. An increase in the supply of offshore support vessels would likely have a negative effect on charter rates for our vessels, which could reduce our earnings. Expansion of the worldwide offshore support vessel fleet would increase competition in the markets where we operate. The refurbishment of vessels taken out of service, conversion of vessels from uses Table of Contents Index to Financial Statements Risk factors other than oil and gas exploration and production support and related activities or construction of new vessels could all add vessel capacity to current worldwide levels. A significant increase in vessel capacity could lower charter rates. The loss of our vessel contracts for marine services with significant customers could have an adverse effect on our results of operations. The revenues we derive from our vessel contracts for marine services with ExxonMobil and Petro-Canada constituted approximately 50% of our total revenues for the fiscal year ended June 30, 2005 and 34.0% of our revenues for the six months ended December 31, 2005. Most of our contracts with these customers include option periods. Unless the customer chooses to exercise these options, the contract expires on the date or event stated in the contract. A decision by a customer not to renew a contract or exercise a contract option could adversely affect our business, results of operations and financial condition. The loss of one or more of our vessels that produce a significant portion of our total revenues could negatively impact our results of operations. Operating revenues attributable to each of the Bold Endurance, Thebaud Sea, Burin Sea, Mariner Sea, Trinity Sea and the Venture Sea individually represented in excess of 10% of our vessel revenues for the fiscal year ended June 30, 2005. Operating revenues attributable to the Agile, Bold Endurance, Mariner Sea and Thebaud Sea individually represented in excess of 10% of our vessel revenues for the six months ended December 31, 2005. If one or more of these vessels sustained substantial hull, mechanical or other damage, rendering them incapable of service for an extended period of time, the resulting negative financial impact on our business, results of operations and financial condition could be substantial. In addition, reduced utilization rates for any of these vessels could negatively impact our results of operations and financial condition. We currently do not have business interruption insurance that would cover the lost revenues that could result from the temporary or permanent removal of one or more of our vessels from regular service. The acquisition and conversion of vessels involve risks that could adversely affect our results of operations. From time to time, we consider possible acquisitions of vessels that complement or expand our existing operations. Our ability to continue to grow depends, in part, on the success of our vessel acquisition and conversion program. The success of this program, in turn, depends on the availability and suitability of appropriate vessels as acquisition targets, and we may suffer delay and cost overruns inherent in large construction and conversion programs. We may also face competition for the acquisition of these vessels from other companies in the shipping or marine services industries, who may be larger and have greater economic resources than we have. There can be no assurance that we will be able to successfully integrate the vessels we acquire or maintain our growth objectives in the absence of vessel acquisition opportunities. In addition, we may be unable to relocate a sufficient number of our existing crew members, or we may be unable to hire additional highly-trained crew members necessary to staff new vessels we acquire. We may be required to raise additional capital in the future if we decide to make additional vessel acquisitions or convert our existing or acquired vessels. The availability of future borrowings and access to capital markets for financing depends on prevailing market conditions and the acceptability of financing terms offered to us. There can be no assurance that sufficient financing will be available to us on acceptable terms. Substantially all of our assets are pledged as security for our debt obligations. Our credit facility, Vessel Acquisition term loan facility, Bold Endurance credit facility and senior secured notes are secured by a first priority lien on thirteen of our existing vessels and related equipment, rights and other property including related charters and on all equity interests in certain subsidiaries, Table of Contents Index to Financial Statements Risk factors including the subsidiaries that own those vessels, with the lenders under the credit facility entitled to priority on all collateral proceeds resulting from the foreclosure of any of those vessels or equity interests for application up to the amount outstanding under the credit facility. If an event of default were to result from our non-compliance with the instruments governing our debt, our assets constituting the security for such debt could be seized and sold for the benefit of our creditors. Our credit facility and the indenture governing our senior secured notes contain covenants that restrict our activities. Our credit facility and our indenture governing our senior secured notes: limit our ability to place liens on our assets; limit additional borrowings; restrict specified payments, including dividends, on shares of any class of capital stock; limit our ability to enter into specified types of business transactions, including mergers and acquisitions, transactions with affiliates and sale/leaseback transactions; and in addition, our credit facility requires us to meet specified financial tests, including maximum ratios of leverage and the maintenance of minimum EBITDA, minimum current ratio and minimum fair market value ratio. As of December 31, 2005, we exceeded our required minimum EBITDA by $5.9 million. Please read Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Senior Secured Credit Facility for additional information regarding these financial tests. These provisions could limit our future ability to pursue actions or strategies that we believe would be beneficial to our company or our shareholders or may result in default of our borrowing agreements. Our substantial indebtedness could adversely affect our financial condition and results from operations. We currently have, and following the completion of this offering will continue to have, substantial debt and debt service requirements. As of December 31, 2005, we had approximately $200.5 million of outstanding indebtedness, including US$125 million under our senior secured notes, $26.2 million under our revolving credit facility, $19.5 million under our Bold Endurance credit facility, $9.3 million under our vessel acquisition term loan facility, and $1.9 million under an equipment finance facility. As of December 31, 2005, pro forma for our indebtedness incurred since December 31, 2005, this offering and our application of the proceeds therefrom, we would have had $ million of outstanding indebtedness. Our level of indebtedness may have important consequences, including: impairing our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; requiring us to dedicate a substantial portion of our cash flow to the payment of principal and interest on our indebtedness, which reduces the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes; subjecting us to increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including our senior secured notes and our borrowings under our credit facilities; Table of Contents Index to Financial Statements Risk factors increasing the possibility of an event of default under the financial and operating covenants contained in our debt instruments; and limiting our ability to adjust to rapidly changing market conditions, reducing our ability to withstand competitive pressures and making us more vulnerable to a downturn in general economic conditions or our business than our competitors with less debt. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt, or to obtain additional financing. We cannot assure you that any such refinancing would be possible or that any additional financing could be obtained. Our inability to obtain such refinancing or financing may have a material adverse effect on us. Despite our and our subsidiaries current levels of indebtedness, we may incur substantially more debt, which could further increase the risks associated with our substantial indebtedness. Although the agreements governing our credit facility and the indenture governing our senior secured notes contain restrictions on the incurrence of additional indebtedness by us and our restricted subsidiaries, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. In addition to amounts that may be borrowed under our credit facility, the indenture governing the notes also allows us and our restricted subsidiaries to borrow significant amounts of money from other sources and places no restrictions on borrowings by our unrestricted subsidiaries. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness as defined in the relevant agreement. If new debt is added to the current debt levels, the related risks that we now face could intensify. Fluctuations in interest rates could materially affect the cost of our debt. Our senior secured notes, our revolving credit facility and our Bold Endurance credit facility bear interest at a floating rate and, therefore, are subject to fluctuations in interest rates. Interest rate fluctuations are beyond our control and there can be no assurance that interest rate fluctuations will not have a significant adverse effect on our financial performance. The instruments governing our debt contain cross default provisions that may cause all of the debt issued under such instruments to become immediately due and payable as a result of a default under an unrelated debt instrument. The indenture governing our senior secured notes contains numerous operating covenants, and our credit facility contains numerous operating covenants and requires us and our subsidiaries to meet specified financial ratios and tests. Our failure to comply with the obligations contained in the indenture governing our senior secured notes, our credit facility or other instruments governing our indebtedness could result in an event of default under the applicable instrument, which could result in the related debt and the debt issued under other instruments becoming immediately due and payable. In such event, we would need to raise funds from alternative sources, which funds may not be available to us on favorable terms, on a timely basis or at all. Alternatively, such a default could require us to sell our assets and otherwise curtail operations in order to pay our creditors. To service our indebtedness, we will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control. Our ability to make scheduled payments of principal or interest with respect to our indebtedness depends on our ability to generate cash and on our future financial results. Our ability to generate cash depends on the demand for our services, which is subject to levels of activity in offshore oil and natural gas exploration, development and production, general economic conditions, and financial, competitive, regulatory and other Table of Contents Index to Financial Statements Risk factors factors affecting our operations, many of which are beyond our control. Our operations may not generate sufficient cash flow and future borrowings may not be available to us under our credit facility or otherwise in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. For the fiscal year ended June 30, 2005, our annual interest paid was $14.4 million. For the six months ended December 31, 2005, our interest paid was $10.1 million. The consolidation or loss of companies that charter our offshore supply and support vessels could adversely affect demand for our vessels and reduce our revenues. Oil and gas companies and drilling contractors have undergone substantial consolidation in the last few years and additional consolidation is likely. Consolidation results in fewer companies to charter or contract for our vessels. Also, merger activity among both major and independent oil and natural gas companies affects exploration, development and production activity as the consolidated companies integrate operations to increase efficiency and reduce costs. Less promising exploration and development projects of a combined company may be discontinued or delayed. Such activity may result in an exploration and development budget for a combined company that is lower than the total budget of both companies before consolidation, which, in turn, could adversely affect the demand for our offshore energy support vessels and reduce our revenues. The inability to replace aging vessels could materially affect our operations. We may not be able to maintain our fleet by extending the economic life of existing vessels, or our financial resources may not be sufficient to enable us to make expenditures necessary to maintain or upgrade our vessels or to acquire or build replacement vessels. During fiscal 2005, we spent $5.0 million on capital maintenance projects and $7.0 million for the conversion of existing vessels. During the six months ended December 31, 2005, we reported $2.4 million on capital maintenance projects and $26.8 million for vessel acquisitions. In addition, we may determine that the expenses necessary to satisfy required marine certification standards are no longer economically justifiable for some of our older vessels. A resulting smaller fleet would have a material adverse effect on our financial condition and results of operations. The failure to comply with governmental regulation could materially affect our operations. We operate in a highly regulated industry, both within Canada and internationally. Governmental regulation, such as international conventions, federal, provincial and local laws and regulations in jurisdictions where our vessels operate or are registered, has a significant impact on our business. These regulations relate to worker health and safety, the manning, construction and operation of vessels and other aspects of environmental protection. Changes to any of the laws, regulations, rules or policies respecting the provision of our services could have a significant impact on our business, and there can be no assurance that we will be able to comply with any future laws, regulations, rules and policies. Our failure to comply with applicable laws, regulations, rules or policies may subject us to revocation of licenses or to civil or regulatory proceedings, including fines, injunctions, recalls or seizures, which may have a material adverse effect on our financial condition and results of operations. We also rely on licenses, permits and various other approvals issued by governmental and regulatory authorities in order to permit us to provide marine services. Any failure to renew our licenses, permits or approvals or any material alteration to the terms of such licenses, permits or approvals may have a material adverse effect on our financial condition and results of operations. Environmental, safety and other laws and regulations could increase the cost of doing business or restrict our ability to conduct our business. We are subject to a wide range of general and industry-specific environmental and other laws and regulations imposed by federal, provincial and local authorities in Canada. If we are unable to extend or Table of Contents Index to Financial Statements Risk factors renew a material approval, license or permit required by such laws, or if there is a delay in renewing any material approval, license or permit, our business, financial condition, results of operations and cash flows could be materially adversely affected. Our failure to comply with applicable environmental and safety laws and regulations, and the permit requirements related thereto, could result in civil or criminal fines or penalties or enforcement actions, any of which could result in significant capital expenditures or reduced results of operations. In addition, the failure of any of our customers to obtain necessary environmental approvals, including the completion of any necessary environmental impact assessments, could delay the commencement of new projects and, as a result, our employment for such projects. Future events such as any changes in environmental or other laws and regulations, including any new legislation that might arise as a result of the Government of Canada s ratification of the United Nations Kyoto Protocol, or any change in interpretation or enforcement of laws and regulations, may give rise to additional expenditures or liabilities. These events could have a material adverse effect on us. The modification or repeal of laws and regulations favoring Canadian vessels in Canadian coastal trade could result in additional competition. A substantial portion of our operations is conducted offshore of the east coast of Canada. Under Canadian law, in the absence of applicable exemptions from Canadian authorities, all vessels working in the Canadian offshore must be Canadian-flagged and crewed by Canadian citizens or permanent residents of Canada. Duties equal to 25% of the value of the vessel are also imposed on foreign vessels planning to operate in Canada, except vessels originating from countries that are signatories to the North American Free Trade Agreement (NAFTA) or other bilateral trade agreements under which this duty is reduced or eliminated. Additionally, stringent regulations make it costly for foreign competitors to import foreign vessels to compete in Canadian controlled markets. However, Canadian authorities may grant exemptions to the 25% duty level when there is no suitable available Canadian ship. In such cases, foreign-flagged vessels may be allowed to operate in the Canadian offshore market by paying duty only during the period that they operate in Canada. An under-supply of Canadian-flagged vessels in our principal market, as well as the liberalization or repeal of these laws and regulations, or the extension of NAFTA to additional countries or the creation or amendment of other bilateral trade agreements, could result in additional competition from vessels built in lower-cost foreign shipyards, which could have a material adverse effect on us. Our business involves hazardous activities and other risks of loss against which we may not be adequately insured. Our business is affected by a number of risks, including: harsh weather; the mechanical failure of our vessels; collisions; vessel loss or damage; cargo loss or damage; terrorism; hostilities; and work stoppages. In addition, the operation of any vessel is subject to the inherent possibility of a catastrophic marine disaster, including oil, fuel or chemical spills and other environmental mishaps, as well as other liabilities arising from owning and operating vessels. Any such event may result in the loss of revenues and increased costs and other liabilities. We may not have adequate insurance to cover these risks. Table of Contents Index to Financial Statements Risk factors We depend on attracting and retaining qualified, skilled employees to operate our business and protect our competitive advantage the loss of whom could impair our business. Our success depends in part upon our business skill. We believe that protection of our business skill depends in large part on our ability to attract and retain highly skilled and qualified personnel. Due to the reputation of our training program, the employees we train are in high demand by competitors. We may lose some of our existing employees as a result of more desirable offers of employment from our competitors. The process involved in training replacement personnel could be costly and time-consuming. Additionally, there is no assurance that we would be able to find and train comparable replacement personnel. Any inability we experience in the future to hire, train and retain a sufficient number of qualified employees could impair our ability to manage and maintain our business and to protect our expertise. Our success depends on key members of our management team, the loss of whom could disrupt our business operations. We depend to a large extent on the business experience, efforts and continued employment of our executive officers and key management personnel. The loss of services of certain key members of our management could disrupt our operations and could have a negative impact on our operating results. Insurance costs in our industry are generally escalating and no assurance can be given that affordable insurance will be available to us in the future. International marine insurers and protection and indemnity associations are susceptible to investment losses, underwriting losses and higher reinsurance costs that could cause the cost of premiums to rise substantially, resulting not only in higher premium costs but also much higher levels of deductibles and self-insurance retentions for much of our industry. Any deterioration in this insurance market could lead to even higher levels of premiums, deductibles and self-insurance, which would negatively affect our results from operations. Our insurance premium costs were $2.6 million for each of fiscal 2005 and 2004. Because we obtain some of our insurance through protection and indemnity associations, we may also be subject to calls in amounts based not only on our own claim records but also the claim records of other members of the protection and indemnity associations. We may be subject to calls in amounts based not only on our claim records but also the claim records of other members of the protection and indemnity associations through which we receive insurance coverage for tort liability, including pollution-related liability. Our payment of these calls could result in significant expense to us, which could have a material adverse effect on our business, results of operations, cash flows and financial condition. Maritime claimants could arrest our vessels, which could interrupt our cash flow. Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime or statutory lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, such a lien holder may enforce its lien by arresting a vessel. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay a significant amount of money to have the arrest lifted. In some jurisdictions, under the sister ship theory of liability, a claimant may arrest both the vessel that is subject to the claimant s lien and any associated vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert sister ship liability against one vessel in our fleet for claims relating to another vessel in our fleet. Table of Contents Index to Financial Statements Risk factors Your ability to enforce civil liabilities in Canada under U.S. securities laws may be limited. We are organized under the laws of the Province of Nova Scotia. All of our directors, controlling persons and officers named in this prospectus are residents of Canada, and a substantial portion of their assets and all of our assets are located outside the United States. It may not be possible, therefore, for you to effect service of process within the United States upon us, our directors, officers or such controlling persons. There is uncertainty as to the enforceability in Canadian courts of (1) an original action predicated solely upon U.S. federal securities laws and (2) judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws. Therefore, you may not be able to secure judgment against us, our directors, officers or such controlling persons in a Canadian court or, if successful in securing a judgment against us or them in a U.S. court, you may not be able to enforce such judgment in Canada. We are exposed to currency exchange risk, which could have a material adverse effect on us. Our operating results are sensitive to fluctuations in the exchange rate of the Canadian dollar to the U.S. dollar and British Pound, as prices for some of our services are denominated in U.S. dollars or British Pounds or linked to prices quoted in U.S. dollars or British Pounds. For the fiscal year ended June 30, 2005, 32% of our total revenues were denominated in U.S. dollars and 13% of our total revenues were denominated in British Pounds. For the six months ended December 31, 2005, 27% of our total revenues were denominated in U.S. dollars and 32% of our total revenues were denominated British Pounds. An increase in the value of the Canadian dollar relative to the U.S. dollar or British Pound, respectively, reduces the amount of revenue in Canadian dollar terms realized by us from sales made in U.S. dollars or British Pounds, respectively, which reduces our operating margin and the cash flow available to fund our operations. From June 30, 2004 to June 30, 2005, the value of the Canadian dollar relative to the U.S. dollar increased by approximately $0.12, or 9.3% and the value of the Canadian dollar relative to the British Pound increased by approximately $0.21, or 9.6%. From June 30, 2005 to December 31, 2005, the value of the Canadian dollar relative to the U.S. dollar increased by approximately $0.06 or 4.99% and the value of the Canadian dollar to the British Pound increased by approximately $0.20 or 9.1%. In addition, we are exposed to currency exchange risk on our debt and assets denominated in U.S. dollars. Since we present our financial statements in Canadian dollars, any change in the value of the Canadian dollar relative to the U.S. dollar during a given financial reporting period would result in a foreign currency loss or gain on the translation of our U.S. dollar-denominated debt and assets into Canadian dollars. Consequently, our reported earnings could fluctuate materially as a result of foreign exchange translation gains or losses. We are not currently a party to any forward foreign currency exchange contract or other similar contract that could serve to hedge our exposure to fluctuations in the U.S. dollar/Canadian dollar exchange rate. Secunda International Limited is a holding company, with no revenue generating operations of our own. Any restrictions on our subsidiaries ability to make distributions to us would materially impact our financial condition or our ability to service our obligations. Secunda International Limited is a holding company with no business operations, sources of income or assets of our own other than our ownership interests in our subsidiaries. Because all our operations are conducted by our subsidiaries, our cash flow and our ability to repay our debt that we may incur after this offering will be dependent upon cash dividends and distributions or other transfers from our Table of Contents Index to Financial Statements Risk factors subsidiaries. Payment of dividends, distributions, loans or advances by our subsidiaries to us will be subject to restrictions imposed by the current and future debt instruments of our subsidiaries. Our subsidiaries are separate and distinct legal entities. Any right that we will have to receive any assets of or distributions from any of our subsidiaries upon the bankruptcy, dissolution, liquidation or reorganization of any such subsidiary, or to realize proceeds from the sale of their assets, will be junior to the claims of that subsidiary s creditors, including trade creditors and holders of debt issued by that subsidiary. RISKS RELATED TO THIS OFFERING Future sales of our common shares may affect their market price, and the future exercise of options may depress our share price and result in immediate and substantial dilution. We cannot predict what effect, if any, future sales of our common shares, or the availability of shares for future sale, will have on the market price of our common shares. Upon completion of this offering, our existing shareholder, which is controlled by Alfred A. Smithers, our President, Chief Executive Officer and Chairman of the Board, will beneficially own of our common shares, which will be % of our outstanding common shares. We and our officers, directors and existing shareholders are subject to the lock-up agreements described in Underwriting for a period of 180 days after the date of this prospectus. After the closing of this offering, our existing shareholder will have certain demand and piggyback registration rights. In addition, following the closing of this offering, and subject to the previously described lock-up agreements, all of the shares owned by our current shareholder prior to the offering will be eligible for sale in the public market pursuant to Rule 144 under the Securities Act. Sales of substantial amounts of our common shares in the public market following our initial public offering, or the perception that such sales could occur, could adversely affect the market price of our common shares and may make it more difficult for you to sell your shares at a time and price that you deem appropriate. Please read Shares Eligible for Future Sale . Our Chief Executive Officer will beneficially own, control or have substantial influence over a majority of our common shares, giving him a controlling influence over our corporate transactions and other matters. His interests may conflict with yours, and the concentration of ownership of our common shares in one such shareholder will limit the influence of public shareholders. Our Chief Executive Officer will have the ability to exert significant influence over our board of directors and its policies. He will be able to control the outcome of shareholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in our Articles of Association and possible mergers, corporate control contests and other significant corporate transactions. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, a merger, consolidation, takeover or other business combination, which could adversely affect the market price of our common shares. Purchasers of common shares will experience immediate and substantial dilution. Based on an assumed initial public offering price of US$ per share, purchasers of our common shares in this offering will experience an immediate and substantial dilution of US$ per common share in the net tangible book value per share of common shares from the initial public offering price. In addition, our Memorandum of Association allows us to issue significant numbers of additional shares, Table of Contents Index to Financial Statements Risk factors including shares that may be issued under our long-term incentive plan. Please read Dilution for a complete description of the calculation of net tangible book value. We do not pay dividends and investors must look solely to share price appreciation for a return on their investment in us. We do not anticipate that we will pay any dividends on our common shares in the foreseeable future. In addition, as of December 31, 2005, our ability to pay dividends is restricted by the indenture governing our senior secured notes and our credit facility. Investors must rely on sales of their common shares after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common shares. There has been no active trading market for our common shares, and an active trading market may not develop. Prior to this offering, there has been no public market for our common shares. We have applied to have our common shares listed for quotation on the Nasdaq National Market. We do not know if an active trading market will develop for our common shares or how the common shares will trade in the future, which may make it more difficult for you to sell your shares. Negotiations among the underwriters, the selling shareholder and us will determine the initial public offering price, which may not be indicative of the price at which our common shares will trade following the completion of this offering. You may not be able to resell your shares at or above the initial public offering price. If our share price fluctuates after the initial offering, you could lose a significant part of your investment. In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to the operating performance of these companies. The market price of our common shares could similarly be subject to wide fluctuations in response to a number of factors, most of which we cannot control, including: changes in securities analysts recommendations and their estimates of our financial performance; the public s reaction to our press releases, announcements and our filings with the SEC and those of our competitors; fluctuations in broader stock market prices and volumes, particularly among securities of offshore oilfield services companies; changes in market valuations of similar companies; investor perception of our industry or our prospects; additions or departures of key personnel; commencement of or involvement in litigation; changes in environmental and other governmental regulations; announcements by us or our competitors of strategic alliances, significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments; variations in our quarterly results of operations or cash flows or those of other offshore oilfield services companies; revenue and operating results failing to meet the expectations of securities analysts or investors in a particular quarter; Table of Contents Index to Financial Statements Risk factors changes in our pricing policies or pricing policies of our competitors; future issuances and sales of our common shares; demand for and trading volume of our common shares; domestic and worldwide supplies and prices of and demand for natural gas and oil; and changes in general conditions in the Canadian, U.S. or world economies, financial markets or the oil and natural gas industry. Provisions in our corporate documents and Nova Scotia law could delay or prevent a change in control of us. Provisions in our Memorandum and Articles of Association and Nova Scotia law may discourage, delay or prevent a change of control, amalgamation or other acquisition or business combination involving us that our shareholders may consider favorable by: providing for a classified board of directors, with staggered three-year terms and related protective provisions; and establishing advance notice requirements for nominations for election to the board of directors and for proposing matters that can be acted on by shareholders at meetings. In addition, Nova Scotia law, which applies to us, requires approval of any amalgamation by at least 75% of the votes cast at a shareholder meeting called for that purpose and the amalgamation must also be approved by the Supreme Court of Nova Scotia. This requirement could likewise discourage, delay or prevent any such transaction. Please read Description of Our Share Capital for a further description of our corporate documents and Nova Scotia law. The realization of any of these risks and other factors beyond our control could cause the market price of our common shares to decline significantly. Table of Contents Index to Financial Statements Special note regarding forward-looking statements and industry and market data This prospectus includes forward-looking statements, including, without limitation, statements made under the sections entitled Prospectus Summary, Management s Discussion and Analysis of Financial Condition and Results of Operations and Business. We have based these forward-looking statements on our current views and assumptions about future events. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Like other businesses, we are subject to risks and other uncertainties that could cause our actual results to differ materially from any projections or that could cause other forward-looking information to prove incorrect. In addition to general economic and business risks, some of the specific risks to which our business is subject include: declines in oil or natural gas prices, which tend to cause reductions in exploration, development and production activities and, in turn, reductions in the use of offshore energy supply and support vessels and in the rates paid for their use; increased construction of new, or increased availability of existing, offshore energy support vessels suitable for use in our markets, which can cause oversupply in the market and consequent reductions in the use of our offshore energy support vessels and reductions in the rates paid for their use; international political instability, which can lead to reductions in exploration, development and production activities, particularly in less developed regions; fluctuations in weather, which can lead to declines in energy consumption and resulting declines in oil or natural gas prices; changes in laws and regulations affecting the marine transportation industry, including any possible weakening of the legal and regulatory barriers to entry in eastern Canada marine operations, which could result in increased competition from non-Canadian companies and foreign-built vessels in our Canadian offshore supply and support services; extremely adverse weather conditions, accidents, terrorist attacks or hijackings, which could disable or destroy one or more of our vessels and result in significant loss of hire and revenue; fluctuations in interest rates, which can materially affect the cost of our debt; fluctuations in foreign exchange rates, which can materially affect the cost of our debt and the results of our foreign operations; and our success at managing the risks of the foregoing. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. This prospectus includes market share, industry data and forecasts that we obtained from internal company surveys (including estimates based on our knowledge and experience in the industry in which we operate), market research, consultant surveys, publicly available information, industry publications and surveys. These sources include Infield Energy Data Analysts, Baker Hughes Incorporated, ODS-Petrodata, Inc., National Energy Board and the Canadian Association of Petroleum Producers ( CAPP ). Table of Contents Index to Financial Statements Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe such information is accurate and reliable, we have not independently verified any of the data from third-party sources cited or used for our management s industry estimates, nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our position relative to our competitors or as to market share refer to the most recent available data. Information presented here, whether in graphical, tabular or other format that is described as being provided by Infield Energy Data Analysts is drawn from Infield Systems Offshore Energy Database, a proprietary database of global offshore fields and developments. The information contained within the Offshore Energy Database is believed to be accurate, but no representation or warranty, express or implied, is made by Infield Systems Limited as to the completeness, accuracy or fairness of any information contained within it. Any information from the Offshore Energy Database relating to future activity is not a forecast or projection but an indication and assessment of known prospects based on publicly available information. Table of Contents Index to Financial Statements Use of proceeds We expect to receive net proceeds from the sale of the common shares in this offering of approximately US$ million, after deducting underwriting discounts and commissions and estimated offering expenses of US$ million. The net proceeds are based upon an assumed public offering price of US$ per common share. We will not receive any of the net proceeds from the sale of common shares by the selling shareholder. We intend to use the net proceeds from this offering: to repay US$ million in indebtedness outstanding under our senior secured revolving bank credit facility; to repay US$ million in indebtedness outstanding under our additional acquisition facility; to purchase two additional vessels at an aggregate acquisition cost of approximately US$ million; to repurchase approximately US$ million of our outstanding senior secured notes and to pay US$ million in prepayment fees and expenses related thereto; and for US$ million of general corporate purposes. As of December 31, 2005, borrowings under our senior secured revolving bank credit facility and our vessel acquisition term loan facility bore interest at rates of 6.55% and 7.625% respectively per annum and mature in 2012. We incurred an aggregate of approximately US$31 million in indebtedness under those facilities connection with: our approximately US$6.5 million acquisition of a platform supply vessel in August 2005; our approximately US$16 million acquisition of a platform supply vessel in November 2005; and certain general corporate expenditures, including the conversion of two of our vessels from telecommunications sector operations use to in oil and gas sector operations use. As of December 31, 2005, borrowings under our senior secured notes bore interest at a rate of 12.15% per annum and mature in 2012. If the underwriters exercise the over-allotment option granted by us in full, we will receive net proceeds of approximately US$ million. Dividend policy We have paid dividends on our common shares to our sole shareholder in the past, including a dividend paid to our sole shareholder in December 2005. We do not currently anticipate paying any dividends on our common shares in the foreseeable future. Instead, we currently intend to retain all future earnings to fund the development and growth of our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant. In addition, as of December 31, 2005, payments of dividends on our common shares would be restricted under the terms of our senior secured credit facility and the indenture governing our senior secured notes. Table of Contents Index to Financial Statements Capitalization The following table sets forth our capitalization as of December 31, 2005: on a consolidated historical basis; and as adjusted to give effect to (i) the issuance of common shares in this offering at an assumed offering price of US$ and the application of the net proceeds therefrom in the manner set forth under Use of proceeds and (ii) our additional indebtedness subsequent to December 31, 2005 and prior to the date hereof, consisting of approximately $ million under our senior secured credit facility and approximately $ million under our revolving acquisition credit facility. The historical data in the table is derived from and should be read in conjunction with our audited consolidated historical financial statements, including the accompanying notes, included elsewhere in this prospectus. You should also read historical data below in conjunction with Use of Proceeds and Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. As of December 31, 2005 Actual As Adjusted (Cdn$ in thousands, except share data) Cash $ 6,700 $ Long-term debt: Senior secured credit facility $ 26,239 $ Senior secured floating rate notes due 2012(1) 143,544 Bold Endurance credit facility 19,505 Equipment loan facility 1,905 Vessel acquisition term loan facility 9,325 Total long-term debt $ 200,518 $ Shareholders equity: Common shares without nominal or par value; shares authorized; shares issued and outstanding; shares issued and outstanding (as adjusted)(2) Retained earnings 26,714 Discontinued operations $ 75 $ 181 $ Discontinued operations $ 75 $ 181 $ Total shareholders equity 26,714 Total capitalization $ 227,232 $ End of year $ (6 ) $ (1) Equivalent to the US$125 million principal amount of our senior secured notes at the noon Federal Reserve Bank of New York buying rate of $1.166 = US$1.00 as of December 31, 2005. Included in this amount is $2.2 million of unamortized bond discount. (2) Common share information gives effect to the -for-1 common share split to be effected prior to the completion of this offering. Table of Contents Index to Financial Statements Dilution Purchasers of the common shares in this offering will experience immediate and substantial dilution in the net tangible book value per common share for accounting purposes. Adjusted net tangible book value per share represents the amount of the total tangible assets less our total liabilities, divided by the number of common shares outstanding. At December 31, 2005, we had an adjusted net tangible book value of $ million, or $ per common share. After giving effect to the sale of common shares in this offering at an assumed initial public offering price of US$ per share and after the deduction of underwriting discounts and commissions and estimated offering expenses, the as adjusted net tangible book value at December 31, 2005 would have been $ million or $ per share. This represents an immediate increase in such adjusted net tangible book value of $ per share to the existing shareholder and an immediate and substantial dilution of $ per share to new investors purchasing common shares in this offering. The following table illustrates this per share dilution (all $ amounts in Canadian dollars): Assumed initial public offering price per share(1) $ Adjusted net tangible book value per share as of December 31, 2005 $ Increase attributable to new public investors $ As adjusted net tangible book value per share after this offering $ Dilution in as adjusted net tangible book value per share to new investors $ (1) Equivalent to the US$ per share initial public offering price at the noon Federal Reserve Bank of New York buying rate of $ = US$1.00 as of , 2005. The following table summarizes, on the as adjusted basis set forth above as of December 31, 2005, the total number of common shares owned by the existing shareholder and to be owned by new investors, the total consideration paid, and the average price per share paid by the existing shareholder and to be paid by new investors in this offering at US$ , the mid-point of the range of the initial public offering prices set forth on the cover page of this prospectus, calculated before deduction of estimated underwriting discounts and commissions. Shares Purchased(1) Total Consideration (1) The number of shares disclosed for the existing shareholder includes shares being sold by the selling shareholder in this offering. The number of shares disclosed for the new investors includes the shares that may be purchased by the new investors from the selling shareholder in this offering. (2) The calculation of shares owned by the existing shareholder gives effect to the -for-1 common share split to be effected immediately prior to the completion of this offering. As of , there were common shares outstanding, held by one shareholder. Sales by the selling shareholder in this offering will reduce the number of common shares held by the existing shareholder to , or approximately % of the total number of common shares outstanding after this offering, and will increase the number of common shares held by new investors to , or approximately % of the total number of common shares outstanding after this offering. Table of Contents Index to Financial Statements Selected consolidated financial data The selected consolidated financial data as of June 30, 2002, 2003, 2004 and 2005 and for the five years ended on or prior to June 30, 2005 is derived from our consolidated financial statements which have been audited by our independent registered public accounting firm and prepared in accordance with U.S. GAAP. The selected consolidated financial data as of December 31, 2004 and 2005 and for the six months ended December 31, 2004 and 2005 is derived from our unaudited interim condensed consolidated financial statements included elsewhere herein. The unaudited financial statement data include, in our opinion, all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of our financial position and results of operations for these periods. Operating results for the six months ended December 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2006. The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related notes and Management s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this prospectus. Fiscal Year Ended June 30, Six Months Ended December 31, 2001 2002 2003 2004 2005 2004 2005 (Cdn $ in thousands) Statement of Earnings Data: Total revenues $ 73,415 $ 66,944 $ 62,437 $ 60,003 69,524 $ 32,006 $ 46,493 Costs and expenses Operating expenses 38,870 31,270 30,861 31,334 43,649 17,899 22,712 Depreciation and amortization 9,055 9,227 9,909 11,722 14,416 6,754 7,959 Lease expense 8,137 9,994 9,498 7,673 730 730 Capital taxes 411 364 442 471 547 264 321 General and administrative 6,133 5,386 5,439 4,831 5,241 2,543 3,431 Earnings from discontinued operations 82 199 Earnings (loss) from discontinued operations (1 ) (42 ) 82 199 Discontinued operations $ 82 $ 199 $ Discontinued operations $ 82 $ 199 $ 166,575,403 Total costs and expenses 62,606 56,241 56,149 56,031 64,583 28,190 34,423 Operating income 10,809 10,703 6,288 3,972 4,941 3,816 12,070 Minimum EBITDA (000 s) $ 23,280 $ 29,190 Minimum current ratio 1.0 x 2.0 x Maximum funded senior debt ratio 2.5 x 1.3 x Minimum fair market value ratio 200 % Corporate transaction costs 1,226 Debt breakage and deferred financing costs write-off 5,034 5,048 Interest expense 11,486 7,658 7,613 8,806 17,679 7,608 10,743 Contingencies (Note 8) Shareholder s Equity Preference stock Class A, par value $0.22 redeemable and retractable, on demand, at $10,000 per share, non-cumulative and non-participating authorized 100 shares; nil issued and outstanding Preference stock Class B, par value $0.01 redeemable and retractable, on demand at par, non-cumulative and non-participating authorized 100 shares; nil issued and outstanding Preference stock Class C, par value $1,000 redeemable and retractable at par, non-cumulative and non-participating - authorized 10,000 shares; nil and 1,010 issued and outstanding at December 31, 2005 and June 30, 2005, respectively. Common stock no par value, authorized 40,000 shares; 1,001 shares issued and outstanding (Note 6) 410 Balance at December 31, 2005 1,001 $ Commitments (Note 15) Contingencies (Note 19) Shareholder s Equity Preference stock Class A, par value $0.22 redeemable and retractable, on demand, at $10,000 per share, non-cumulative and non-participating authorized 100 shares; nil and 100 issued and outstanding in 2005 and 2004, respectively (Note 8) Preference stock Class B, par value $0.01 redeemable and retractable, on demand at par, non-cumulative and non-participating authorized 100 shares; nil and 100 issued and outstanding in 2005 and 2004, respectively (Note 8) Preference stock Class C, par value $1,000 redeemable and retractable at par, non-cumulative and non-participating authorized 10,000 shares; 1,010 issued and outstanding in 2005 and 2004 (Note 2) Common stock no par value, authorized 40,000 shares; 1,001 shares issued in 2005 and 2004 410 Balance at June 30, 2005 $ $ 1,010 $ 1,001 $ Earnings (loss) from continuing operations 5,483 4,797 3,424 (3,754 ) (5,485 ) 5,062 5,649 Commitments (Note 17) Contingencies (Note 21) Stockholder s Equity Preference stock par value $0.01, redeemable at $10,000 per share, non-cumulative and non-participating authorized 100 shares; nil outstanding in 2004 and 2005 Common stock no par value authorized 40,000 shares; 501 outstanding in 2004 and 2005 445 Balance at June 30, 2005 501 $ Discontinued operations Earnings (loss) before income taxes from discontinued operations (10 ) (68 ) 59 192 143 (17 ) Income taxes recovery (9 ) (26 ) (23 ) (7 ) (171 ) (7 ) 30,861 31,335 43,649 17,899 22,712 Depreciation and amortization by segment: Oil and gas services $ 6,255 $ 8,073 $ 12,865 $ 5,619 $ 7,500 Construction and maintenance 2,798 2,776 704 703 Corporate and other 856 873 847 431 Net earnings (loss) 5,482 4,755 $ 3,506 $ (3,555 ) $ (5,171 ) $ 5,052 $ 5,649 Weighted average basic and diluted shares outstanding (Note 15) 501 501 Earnings (loss) per share(1) From continuing operations: Basic $ $ $ $ $ $ $ Diluted $ $ $ $ $ $ $ From discontinued operations: Basic $ $ $ $ $ $ $ Diluted $ $ $ $ $ $ $ Total Basic $ $ $ $ $ $ $ Diluted $ $ $ $ $ $ $ Average shares outstanding(1) Basic Diluted Cash Flow Data: Cash derived from (applied to) operating activities $ 6,763 $ 13,756 $ 5,369 $ 9,559 $ (7,718 ) $ (5,104 ) $ 5,622 Cash derived from (applied to) investing activities 32,807 (25,903 ) (13,033 ) 2,158 (32,353 ) (28,982 ) (26,594 ) Cash derived from (applied to) financing activities (39,189 ) 9,161 7,663 (10,902 ) 42,808 35,539 24,120 Other Financial Data (unaudited): EBITDA $ 24,868 $ 20,819 $ 20,967 $ 15,194 $ 24,809 $ 18,581 $ 26,585 Capital expenditures: Expenditures for drydocking and maintenance capital 1,230 2,356 1,557 2,761 5,003 2,687 2,411 Purchase of vessels, equipment and other property and other assets 6,151 27,264 19,312 372 32,491 28,890 26,783 Other Operating Data (unaudited): Number of vessels (period end)(2) 10 11 12 11 11 11 13 Average utilization(2)(3) 85.1 % 78.6 % 78.3 % 71.6 % 80.4 % 74.7 % 91.6 % Average dayrate(2)(4) $ 19,354 $ 21,205 $ 19,703 $ 19,181 $ 19,989 $ 19,737 $ 22,016 (footnotes on following page) Table of Contents Index to Financial Statements Selected consolidated financial data Fiscal Year Ended June 30, 2005 Six Months Ended December 31, 2005 Pro forma data (unaudited) Pro forma interest expense 12,610 7,127 As of June 30, As of December 31, 2002 2003 2004 2005 2005 (Cdn$ in thousands) Balance Sheet Data(5): Vessels, equipment and property $ 141,126 $ 148,287 $ 163,140 $ 186,483 $ 205,679 Total assets 168,233 177,232 184,965 224,202 249,387 Total debt (excluding accrued interest) 110,959 119,634 135,066 183,177 200,518 Total shareholder s equity 34,707 37,813 33,858 22,786 26,715 (1) All shares and per share information have been restated to give effect to the -for-1 common share split to be effected immediately prior to the completion of this offering. (2) Excludes vessels in cold lay-up or on bareboat charter. (3) Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues other than on bareboat charter. (4) Average dayrates represent average revenue per day, based on the number of days during the period that the vessels generated revenue other than on bareboat charter. (5) Balance sheet information as of June 30, 2002, 2003 and 2004 has been adjusted to reflect the discontinued operations presentation and reclassifications we adopted in connection with the audit of our fiscal 2005 consolidated financial statements. (6) Pro forma interest expense for the year ended June 30, 2005 and the six months ended December 31, 2005, has been estimated based upon the assumption that this offering was completed as of July 1, 2004 and that there were no amounts outstanding under our Senior Secured Revolving Bank Credit Facility during the year ended June 30, 2005 or the six months ended December 31, 2005. It further assumes that the issue of the senior secured notes was completed on August 26, 2004 at an amount of US $87 million, which equals the original issue amount of the senior secured notes of US$125.0 million, less the amount of senior secured notes expected to be repurchased with a portion of the proceeds from this offering of US$38 million. Amortization of costs associated with the August 26, 2004 issuance of senior secured notes has also been adjusted to reflect a US$87 million issue as opposed to an issue of US$125 million. Non-GAAP Financial Measure and Reconciliation We define EBITDA as net earnings (loss) before income taxes, interest expense, depreciation and amortization. Our definition of EBITDA may not be comparable to similarly titled measures reported by other companies. EBITDA is not a measure of performance recognized under U.S. GAAP and should not be considered in isolation or as a substitute for net earnings (loss) or cash derived from operating activities or any other indicator of our performance under U.S. GAAP. We believe EBITDA is useful to an investor in evaluating our operating performance because: it is widely used by investors in our industry to measure a company s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets and capital structure; and it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest charges from our outstanding debt) and asset base (primarily depreciation and amortization of our vessels) from our operating results. Our management uses EBITDA: as a measure of operating performance because it assists us in comparing our performance on a consistent basis by removing the impact of interest expense and depreciation and amortization from our operating results; Table of Contents Index to Financial Statements Selected consolidated financial data as a measure for planning and forecasting overall expectations and for evaluating actual results against these expectations; and in communications with lenders, rating agencies and others, concerning our financial performance. The table below shows the reconciliation from EBITDA to earnings (loss) from continuing operations. Fiscal Year Ended June 30, Six Months Ended December 31, 2001 2002 2003 2004 2005 2004 2005 Earnings (loss) from continuing operations $ 5,483 $ 4,797 $ 3,424 $ (3,754 ) $ (5,485 ) $ 5,062 $ 5,649 Interest expense 11,486 7,658 7,613 8,806 17,679 7,608 10,743 Income taxes (recovery) (1,156 ) (863 ) 21 (1,580 ) (1,801 ) (843 ) 2,234 Depreciation and amortization 9,055 9,227 9,909 11,722 14,416 6,754 7,959 EBITDA $ 24,868 $ 20,819 $ 20,967 $ 15,194 $ 24,809 $ 18,581 $ 26,585 Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations The following management s discussion and analysis of financial condition and results of operations should be read in conjunction with the Selected Financial Data and the accompanying financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under Risk Factors and elsewhere in this prospectus. Unless otherwise indicated, all references in this discussion and analysis to dollars and $ are to, and the amounts are presented in, Canadian dollars. GENERAL We own and operate vessels that primarily provide supply and support services to the offshore oil and gas industry internationally and offshore of the east coast of Canada. Since we began operations in 1983, we have increased the size of our fleet from one to 14 vessels and have focused on our core business of providing supply, support and safety services to exploration, development and production projects as well as providing other marine services. This growth has been accomplished through strategic acquisitions and construction of new, technologically advanced vessels. In addition to serving the international markets, we are a leading provider of supply and support vessels serving the Canadian east coast offshore market. We believe that we are well-positioned to capitalize on the expected increase in global oil and gas exploration, development and production activity as a result of our strong customer relationships, harsh weather, multifunctional vessels, and the technical skills and experience of our workforce. Our vessels service offshore drilling rigs and production platforms internationally and in Canada. Platform supply vessels transport drill pipe, drilling fluids and construction materials as well as deck cargo, liquid mud, fuel and water. Anchor handling tug supply vessels have powerful engines and deck-mounted winches and are capable of towing and positioning offshore drilling rigs and barges and can perform general towing and vessel supply services. Standby safety vessels provide a means of evacuation and rescue for platform and rig personnel in the event of an emergency at an offshore installation. Our other oil and gas services vessels provide platforms from which oil and gas operators can provide services such as subsea pipe lay, accommodations, remote-operated vehicles and diving. As of December 31, 2005, we had six vessels operating offshore of the east coast of Canada, four vessels operating in the North Sea, three vessels operating in the Gulf of Mexico and one vessel under bare boat charter in the Mediterranean and offshore of Africa. In addition to vessel operations, we provide shore-based management services through an onshore logistics operations business in Canada. These services include the requisitioning, receiving, storing and transferring of all project material and providing logistical co-ordination services and supply chain management services. Our operating results are affected primarily by dayrates, fleet utilization and the number and type of vessels in our fleet. Utilization and dayrates, in turn, are influenced principally by the demand for vessel services from the exploration and production sectors of the oil and gas industry. The supply of vessels necessary to meet this fluctuating demand is related directly to current and anticipated future activity in both the drilling and production phases of the oil and gas industry as well as our access to capital to build or acquire vessels to meet the changing market requirements. Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations Operating costs are primarily a function of fleet configuration and utilization levels. The most significant direct operating costs are crew wages, maintenance and repairs, and marine insurance. We are typically able to pass fuel costs on to our customers. Short-term fluctuations in vessel utilization have little effect on direct operating costs. Consequently, direct operating costs as a percentage of revenues may vary substantially as a result of changes in dayrates and utilization. In addition to direct operating costs, charges related to depreciation of our fleet, drydock inspections, maintenance and repairs to comply with applicable regulations and certifications with various international classification societies are also incurred. Costs incurred for drydock inspection, related maintenance and regulatory compliance are capitalized and amortized over the period applicable to the next scheduled maintenance. This period generally varies from 24 to 60 months. As of December 31, 2005 and 2004, net deferred drydocking and maintenance costs were $7.0 million and $5.2 million, respectively. Under applicable maritime regulations, vessels must be drydocked twice in a five-year period for inspection and scheduled maintenance and repair. Total expenditures for drydockings may vary from quarter to quarter based on the number of drydockings and the complexity of the work performed. TRENDS ANALYSIS Market conditions in the offshore supply and support vessel industry have improved significantly in the last 24 months. Sustained high commodity prices, increased capital spending by oil and gas companies, and continued global demand for oil and gas have increased the requirements for oil and gas services, including supply and support vessels. This increase in demand has had a positive effect on utilization levels and dayrates, which have, in turn, positively impacted our revenues and are expected to continue to have a positive impact during fiscal 2006. During the fiscal year ended June 30, 2005, we redeployed several vessels both geographically and away from telecommunication industry service. In response to reduced demand for vessel services offshore of the east coast of Canada, we redeployed the Thebaud Sea and Mariner Sea to the North Sea and the Ryan Leet to the Gulf of Mexico. In addition, the Agile and the Bold Endurance, which had previously been deployed in telecommunication sector service, were redeployed to the oil and gas industry sector where demand was stronger. As a result, average dayrates have increased from approximately $18,000 during the quarter ended September 30, 2004 to over $21,000 during the quarter ended December 31, 2005. During the same periods, total fleet utilization increased from 72% to 94%. Also during the same period, we reduced the proportion of long-term charters to capitalize on the significantly rising dayrates in specific international markets. Our international revenue has increased from 20% of our total revenues during the second quarter of fiscal 2005 to almost 60% of our total revenues during the same period in fiscal 2006 as a result of our redeployment of several vessels from Canada to international markets, including our redeployment of two vessels to the North Sea and our acquisition of two vessels that have continued working in the North Sea. Three of the seven vessels working internationally can be repatriated to Canada as market conditions dictate. The combination of redeploying several vessels internationally, transitioning two vessels into the oil and gas market and improving overall market conditions has resulted in quarter over quarter revenue increases for each of the last six quarters. Our fleet achieving significant growth in revenues and operating margin for each of the three months and six months ended December 31, 2005 compared to the comparable periods in the prior year. Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations During the fiscal year ended June 30, 2005, our operating expenses as a percentage of revenue increased from the level of prior years as a result of expenses related to vessels transitioning to new markets and certain customer recovered costs. During the six months ended December 31, 2005, our operating expenses as a percentage of revenue returned to the level of the years prior to fiscal 2005 as these transition and customer recovered costs were not repeated subsequent to our fiscal year end June 30, 2005. Vessel Operating Statistics Three months ended (1) Excludes the Cabot Sea in 2003 and 2004 (sold in 2005) and the J.D. Mitchell (commenced bareboat charter during quarter ended December 31, 2005) in all periods. Prior to sale of bareboat, these vessels were in cold lay-up. (2) Includes the Scotsman Sea acquired during the three months ended September 30, 2005 and the Acadian Sea acquired during the three months ended December 31, 2005. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon the consolidated financials statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles. In other circumstances, there is a requirement to make estimates, judgments and assumptions that are believed to be reasonable based upon available information. Estimates and judgments are based upon historical experience and various other factors that we believe are reasonable based upon the available information. Actual results may differ from these estimates under different assumptions and conditions. We have provided below an expanded discussion of our more significant accounting policies, estimates and judgments. We have discussed the development, selection and disclosure of each of these with our audit committee. We believe that these accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements. See Note 2 to our fiscal 2005 consolidated financial statements for a discussion of additional accounting policies and estimates made by our management. Carrying value of vessels. Generally, we depreciate our vessels, for accounting purposes, over 20 years. In estimating the useful life of these assets, the effects of physical deterioration from operating use and other economic and regulatory factors that could impact commercial viability are considered. To date, our experience confirms that these policies are reasonable. Events or changes in circumstances in the future may result in situations in which recoverability of the carrying amount of a vessel may not be possible. Examples of events or changes in circumstances that could indicate that the recoverability of a vessel s carrying amount should be reassessed include a significant and sustained decrease in market value and current Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations period operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that anticipates continuing losses associated with a vessel. If events or changes in circumstances as set forth above indicate a vessel s carrying amount may not be recoverable, we are required to estimate the undiscounted future cash flows expected to result from use of the vessel and its eventual disposition. We estimate these future cash flows based upon historical data adjusted for our best estimate of future market performance that is based on industry trends. If the sum of the expected future cash flows is less than the carrying amount of the vessel, the recognition of an impairment loss is required. Classification certification, drydocking and maintenance costs. Our vessels are required by regulations established by Canadian and international maritime regulatory bodies to be drydocked and pass inspections after specified periods of time to maintain their operating classification. Classification society protocol requires two drydockings in a five year period. The drydocking and maintenance capital costs related to these inspections are deferred and amortized over the period to the next required inspection, which is generally 24 to 60 months. Drydocking and maintenance capital costs include costs associated with coating the vessel hull and sides, recoating cargo and fuel tanks, and performing other engine and equipment maintenance activities to keep our vessels in compliance with classification standards. As of December 31, 2005 and 2004, net deferred drydocking and maintenance costs were $7.0 million and $5.2 million, respectively. In June 2001, the Accounting Standards Executive Committee ( AcSEC ) of the American Institute of Certified Public Accountants ( AICPA ) issued an exposure draft of a proposed Statement of Position ( SOP ) entitled Accounting for Certain Costs and Activities Related to Property, Plant and Equipment. Under the proposed SOP, we would be required to expense major maintenance costs as incurred and be prohibited from deferring and amortizing the cost of major maintenance activities. Currently, the costs incurred to drydock our vessels are deferred and amortized on a straight-line basis over the period to the next drydocking, generally 24 to 60 months. At its April 14, 2004 meeting, the Financial Accounting Standards Board (FASB) voted not to clear AcSEC s proposed SOP. Income taxes. We follow the tax liability method for determining income taxes. Under this method, deferred income tax assets and liabilities are determined according to differences between their respective carrying amounts and tax bases. Deferred tax assets and liabilities are measured based on enacted tax rates and bases at the date of the financial statements for the years in which these temporary differences are expected to reverse. Adjustments to these balances are recognized in earnings as they occur. Deferred tax assets are the result of operating loss carry-forwards for tax purposes exceeding temporary timing differences, relating primarily to property and equipment and foreign exchange on long-term debt. Future taxable income and ongoing prudent and feasible tax planning strategies have been considered in assessing the need for an allowance. Currently, we have not reflected an allowance to reduce our deferred tax assets. In addition to expected higher earnings in the future, in part from our expanded fleet, we can facilitate utilization of the losses by a number of tax planning strategies including inter-group transactions, elimination of certain international structures and revising the amount of depreciation claimed for tax purposes to prevent the expiration of loss carryforwards. In the future, if we were to determine that it is more likely than not that some portion or all of the deferred tax assets will not be realized, an adjustment to the deferred tax asset would be charged to expense in the period such determination was made. Commitments and contingencies. We have contingent liabilities and future claims for which estimates of the amount of the eventual cost to liquidate these liabilities or claims have been made. These liabilities and claims may involve threatened or actual litigation where damages have not been specifically quantified but an assessment of exposure has been performed and it has been determined that no provision is required in our accounts. These estimates are necessary because the actual amounts payable, if any, to settle these claims is not known until the claims are ultimately resolved. Upon the ultimate resolution of the uncertainties surrounding estimates of contingent liabilities and future claims, the actual Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations Table of Contents Index to Financial Statements A major component of our strategy is growth. We recently acquired a platform supply vessel in each of August and November 2005 and intend to acquire two additional vessels with proceeds from this offering. While there can be no guarantee regarding the impact of these acquisitions, we expect these acquisitions, as well as the improved utilization and dayrate environment for offshore supply and support vessels, to positively impact our financial performance. We believe we currently have access to a sufficient number of Secunda-trained, experienced personnel to operate these four additional vessels. We also believe we are well-positioned to capitalize on the expected increase in the level of activity in certain strategic international regions as well as the Canadian east coast market. OUR FLEET The following table sets forth information regarding our fleet as of December 31, 2005: Name and Vessel Capability(1) Year Built/ Upgraded Conversion Cost ($ in millions) Dead Weight Tonnage Horsepower Length (ft.) Other Capabilities(2) Contract Status Platform Supply Vessel Thebaud Sea 1999/ $ 3,400 5,000 267 DP 2 AUTR Short-term charter North Sea(3) Panuke Sea 1984/2003 14.2 2,850 7,200 270 DP 1/Ice Class/ Towing Long-term charter Canada Sable Sea 1977/2001 1.6 2,774 6,000 249 Long-term charter Canada Mariner Sea 1979/2003 3.3 4,129 5,000 303 DP 1 Short-term charter North Sea Scotsman Sea 1982/ 2,901 6,760 220 Short-term charter North Sea Acadian Sea 1991/ 3,082 6,600 267 Short-term charter North Sea Anchor Handling, Tug Supply Venture Sea 1998/ 2,400 12,280 246 Short-term charter Canada Trinity Sea 1984/1999 31.4 2,853 10,000 270 Ice Class/FiFi Long-term charter Canada Burin Sea 1984/1999 31.5 2,850 10,000 270 DP 1/Ice Class/ FiFi Long-term charter Canada Hebron Sea 1975/1994 6.8 2,180 8,500 257 Ice Class Long-term charter Canada(3) Subsea Construction/Maintenance Agile 1978/1998/2004 26.6 8,250 6,420 458 DP 2 Short-term charter GOM Bold Endurance 1979/1999 23.7 8,250 6,420 458 DP 2 Long-term charter GOM Ryan Leet 1978/1993 1.2 1,364 8,000 219 DP 1/Rig Maintenance & Support/ Tug Long-term charter GOM Other J. D. Mitchell 1975/ 5,936 8,250 amount paid to settle the liabilities may differ from current estimates. Future reported financial results would be impacted by this difference between current estimates and the actual amounts paid to settle the liabilities. In addition to estimates related to litigation, other examples of liabilities requiring estimates of future exposure include contingencies arising out of acquisitions and divestitures, and additional premiums under our mutual protection and indemnity marine insurance policies. Contingent liabilities are assessed using the most recent information available regarding the nature of the exposure. This exposure may change from period to period based upon updated relevant facts and circumstances. In the recent past, our estimates for contingent liabilities have been sufficient to cover the actual amount of exposure; however, there can be no guarantee that our estimates will be sufficient to cover our actual exposure in the future. In the normal course of business we from time to time enter into agreements that require us to indemnify counterparties. One example is indemnification of our foreign lenders for changes in tax legislation that would reduce their expected cash flows. Another example is our indemnification of purchasers of our vessels for environmental claims attributable to the time we owned the vessel. These indemnity provisions are standard practice in our industry and are not generally subject to negotiation. The inclusion of the provisions does not impact the value of the transaction. Refusal by us to include the indemnity in the agreement would likely preclude completion of the transaction. Accordingly, no amounts have been allocated to consideration for the non-contingent portion of these indemnifications. OPERATING RESULTS The table below sets forth average dayrates and utilization rates for our vessels and the number of vessels owned at period end for the periods indicated. These vessels generate substantially all of our revenues and operating profit. Years Ended June 30, The following table sets forth information regarding our fleet as of December 31, 2005: Name and Vessel Capability(1) Year Built/ Rebuilt Conversion Cost (Cdn $ in millions) Dead Weight Tonnage Horsepower Length (ft.) Other Capabilities(2) Contract Status Platform Supply Vessel Thebaud Sea 1999/ 3,400 5,000 267 DP 2 AUTR Short-term charter North Sea(3) Panuke Sea 1984/2003 14.2 2,850 7,200 270 DP 1/Ice Class/ Towing Long-term charter Canada Sable Sea 1977/2001 1.6 2,774 6,000 249 Long-term charter Canada Mariner Sea 1979/2003 3.3 4,129 5,000 303 DP 1 Short-term charter North Sea Scotsman Sea 1982/ 2,901 6,760 220 Short-term charter North Sea Acadian Sea 1991/ 3,082 6,600 267 Short-term charter North Sea Anchor Handling, Tug Supply Venture Sea 1998/ $ 2,400 12,280 246 Short-term charter Canada Trinity Sea 1984/1999 31.4 2,853 10,000 270 Ice Class/FiFi Long-term charter Canada Burin Sea 1984/1999 31.5 2,850 10,000 270 DP 1/Ice Class/ FiFi Long-term charter Canada Hebron Sea 1975/1994 6.8 2,180 8,500 257 Ice Class Long-term charter Canada(3) Subsea Construction/Maintenance Agile 1978/1998/2004 26.6 8,250 6,420 458 DP 2 Short-term charter GOM Bold Endurance 1979/1999 23.7 8,250 6,420 458 DP 2 Long-term charter GOM Ryan Leet 1978/1993 1.2 1,364 8,000 219 DP 1/Rig Maintenance & Support/Tug Long-term charter GOM Other J. D. Mitchell 1975/ 5,936 8,250 Six Months ended December 31, 2003 2004 2005 2004 2005(2) Number of vessels (period end)(1) 12 11 11 11 13 Average utilization(1) 78.3 % 71.6 % 80.4 % 74.7 % 91.6 % Average dayrate(1) $ 19,703 $ 19,181 $ 19,989 $ 19,737 $ 22,016 (1) Excludes the Cabot Sea in 2003 and 2004 (sold in 2005) and the J.D. Mitchell (commenced bareboat charter during quarter ended December 31, 2005) in all periods. Prior to sale or bareboat, these vessels were in cold lay-up. (2) Includes the Scotsman Sea acquired during the three months ended September 30, 2005 and the Acadian Sea acquired during the three months ended December 31, 2005. Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations The following table sets forth summarized financial information concerning our reportable segments. See Business Our Operations and Note 14 to our fiscal 2005 consolidated financial statements and Note 7 to our December 31, 2005 financial statements for a discussion of our reportable segments. Year Ended June 30, Six Months Ended December 31, 2003 2004 2005 2004 2005 (Cdn$ in thousands) Revenues by segment: Oil and gas services $ 51,058 $ 48,250 $ 59,550 $ 24,188 $ 44,809 Construction and maintenance 9,951 9,486 7,051 6,226 Corporate and other 1,428 2,267 2,923 1,592 1,684 62,437 60,003 69,524 32,006 46,493 Operating expenses by segment: Oil and gas services $ 24,822 $ 24,434 $ 39,029 $ 15,393 $ 21,397 Construction and maintenance 4,465 4,917 1,215 745 Corporate and other 1,574 1,984 3,405 1,761 1,315 End of year $ $ (517,867 ) $ Discontinued operations $ 164 $ 397 $ Discontinued operations $ 164 $ 397 $ Earnings (loss) from continuing operations $ 3,424 $ (3,754 ) $ (5,485 ) $ 5,062 $ 5,649 Six months ended December 31, 2005 compared to six months ended December 31, 2004 Total Revenues. Total revenues were $46.5 million for the six months ended December 31, 2005, compared to $32.0 million for the six months ended December 31, 2004, an increase of $14.5 million or 45.3%. Overall utilization of the fleet during the period increased to 91.6% from 74.7% for the same period a year ago, and average dayrates increased to $22,016 per day in the six months from $19,737 for the same period in fiscal 2005. Revenues from the oil services segment were $44.8 million for the six months ended December 31, 2005, compared to $24.2 million for the six months ended December 31, 2004, an increase of $20.6 million or 85.1%. In July 2005, a vessel that had been idle throughout 80% of the six months ended December 31, 2004, commenced a charter in the Gulf of Mexico. Revenue from this charter and from the vessel during the six months ended December 31, 2005 was $6.0 million compared to $1.4 during the same period in the year prior. In addition, a vessel previously operating in the subsea telecommunications cable maintenance market completed its contract in the second quarter of fiscal 2005 and subsequently Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations transitioned to the oil and gas services market. Revenues for this vessel were $6.2 million for the six months ended December 31, 2004, and were included in the construction and maintenance segment. For the six months ended December 31, 2005, revenues for this vessel were $5.1 million and are included in the oil and gas services segment, resulting in a corresponding $5.1 million revenue increase in the oil and gas services segment for this six-month period. Revenues in the oil and gas services segment also increased as a result of three vessels, which had previously operated offshore of the east coast of Canada, operating in new locations in fiscal 2006. Two of the vessels operated in the North Sea spot market, with one having transitioned to the North Sea during the second quarter of fiscal 2005, and one vessel operated on a charter in the Gulf of Mexico during the six months ended December 31, 2005. All of these vessels experienced improved utilization and dayrates over those realized in the same period for the prior year. Revenues for these three vessels increased by $4.9 million from the six months ended December 31, 2004 to the six months ended December 31, 2005. The acquisition and deployment of a two platform supply vessels also contributed to the increase in oil and gas services segment revenue in the six months ended December 31, 2005. The addition of these vessels to the fleet, one during the first quarter and one during the second quarter of fiscal 2006, resulted in increased revenues of $3.0 million compared to $0 in fiscal 2005. Other vessels in this segment contributed an additional $3.0 million in increased revenue on a six-month over six-month basis due to improved utilization and/or average day rates. Prior to the elimination of the construction and maintenance segment as noted above, revenues from this segment were $6.2 million for the six months ended December 31, 2004 compared to $0 for the six months ended December 31, 2005, a decrease of $6.2 million. As noted above, the vessel that was operating in this segment during the first six months of fiscal 2005 completed its charter in the second quarter of fiscal 2005 and during the first and second quarters of fiscal 2006 was operating in the oil and gas services segment. Revenues from the corporate and other segment were consistent six months over six months at less than $2.0 million. Operating expenses. Total operating expenses were $22.7 million for the six months ended December 31, 2005, compared to $17.9 million for the six months ended December 31, 2004, an increase of $4.8 million or 26.8%. Operating expenses increased as a result of improved utilization during the first six months of fiscal 2006 compared to the same period in the year prior, including one vessel operating for 97% of the six months ended December 31, 2006 as opposed to 18% during the same period in the prior year. Also contributing to the increase in operating costs were additional costs on the vessel that had previously operated in the subsea telecommunications segment, resulting from the vessel s operations in the oil and gas services industry during the six month period in fiscal 2006, as opposed to the subsea telecommunications cable repair industry, and being idle during the six month period in fiscal 2005. Another factor contributing to the increase in operating costs during the six months ended December 31, 2005 was the addition of two vessels to the fleet during the first two quarters of fiscal 2006. Operating expenses for the oil and gas services segment increased to $21.4 million for the six months ended December 31, 2005 from $15.4 million for the six months ended December 31, 2004, an increase of $6.0 million or 39.0%. The inclusion of one vessel in the oil and gas segment during the first six months of fiscal 2006, as opposed to the construction and maintenance segment where it operated for the same period in the prior year, increased costs in the oil and gas services segment by $2.6 million. Another factor contributing to cost increases in this segment in fiscal 2006 was the addition of two Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations platform supply vessels to the fleet, one in the first quarter of fiscal 2006 and one in the second quarter of fiscal 2006. Total operating costs for these two vessels were $1.6 million during the six months ended December 31, 2005 compared to zero during the same six-month period in the year prior. Increased international activity in this segment during the six months ended December 31, 2005 also resulted in increased agency and brokerage costs in the amount of $1.1 million as compared to the same period in the prior year. In the international marketplace, a large proportion of contracts are negotiated through intermediaries, resulting in increased costs. In the east coast Canada market, we deal directly with our customer and there are no agency or brokerage fees paid. Operating expenses for the construction and maintenance segment decreased to $0 for the six months ended December 31, 2005 from $0.7 million for the six months ended December 31, 2004. This decrease was the result of the Bold Endurance, which operated in this segment during the first two quarters of fiscal 2005, moving to the oil and gas services segment and operating in that segment for first two quarters of fiscal 2006. Overall operating costs for this vessel increased primarily as a result of a requirement to rent particular equipment to fulfill the terms of the contract and increased crew levels required for the oil and gas services contract compared to those required for the previous subsea telecommunications cable maintenance contract. In total, costs for this vessel increased to $2.6 million for the six months ended December 31, 2005, compared to $0.7 million for the same period in the year prior, an increase of $1.9 million. Operating expenses for the corporate and other segment were $1.3 million for the six months ended December 31, 2005, compared to $1.8 million for the six months ended December 31, 2004, a decrease of $0.5 million or 27.8%. Costs in this category decreased primarily as a result of decreased shore base management expenses and costs being incurred in the first six months of fiscal 2005 to reactivate and prepare for presentation for potential charter or sale a vessel previously in cold storage. The costs related to this reactivation were not repeated during fiscal 2006. Depreciation and amortization. Depreciation and amortization was $8.0 million for the six months ended December 31, 2005, compared to $6.8 million for the six months ended December 31, 2004, an increase of $1.2 million or 17.6%. This increase was the result of (i) our purchase in August 2005 of a platform supply vessel; (ii) our purchase in November 2005 of a second platform supply vessel; (iii) increased depreciation related to the acquisition in August 2004 of the Thebaud Sea, a vessel previously operated under an operating lease arrangement; (iv) increased amortization of expenditures for drydocking and maintenance capital as a result of the total amount deferred increasing year over year; and (v) depreciation related to amounts capitalized to other vessels during the final two quarters of fiscal 2005 and the first two quarters of fiscal 2006. Depreciation and amortization for the oil and gas services segment was $7.5 million for the six months ended December 31, 2005, compared to $5.6 million for the six months ended December 31, 2004, an increase of $1.9 million or 33.9%. The transfer of the Bold Endurance from the construction and maintenance segment to the oil and gas services segment increased oil and gas services depreciation and amortization by $1.1 million as compared to the six months ended December 31, 2004. Also contributing to this increase was (i) our purchase in August 2005 of a platform supply vessel; (ii) our purchase in November 2005 of a second platform supply vessel; (iii) increased amortization of expenditures for drydocking and maintenance capital as a result of the total amount deferred increasing year over year; (iv) and depreciation related to amounts capitalized to oil and gas services vessels, during the final two quarters of fiscal 2005 and the first two quarters of fiscal 2006. Depreciation and amortization for the construction and maintenance segment was $0 for the six months ended December 31, 2005, compared to $0.7 million for the six months ended December 31, 2004. This Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations decrease resulted from the transfer of the Bold Endurance to the oil and gas services segment in the third quarter of fiscal 2005. Depreciation and amortization for the corporate and other segment for the six months ended December 31, 2005 was consistent with the six months ended December 31, 2004. Lease expense. Lease expense for the six months ended December 31, 2005, was $0 as compared to $0.7 million for the six months ended December 31, 2004, this decrease was the result of the acquisition, in August 2004, of the vessel Thebaud Sea. Capital taxes. Capital tax expense for the six months ended December 31, 2005 was consistent with the six months ended December 31, 2004. General and administrative costs. General and administrative costs were $3.4 million for the six months ended December 31, 2005, compared to $2.5 million for the six months ended December 31, 2004, an increase of $0.9 million or 36.0%. This increase was primarily the result of costs associated with a change in executive compensation as a result of a decision in fiscal 2006 to eliminate dividend payments, bonuses provided to administrative staff and increased professional fees associated with regulatory reporting requirements resulting from our SEC registration on March 23, 2005. Other income. Other income was $6.6 million for the six months ended December 31, 2005, compared to $13.1 million for the six months ended December 31, 2004, a decrease of $6.5 million or 49.6%. One item contributing to this decrease was a decrease in the translation gain on our foreign currency denominated senior secured notes of $4.9 million. Also contributing to this decrease was the fact that in fiscal 2005 we utilized proceeds from the issue of our senior secured notes in August 2004 to repay previously outstanding U.S. dollar denominated debt recognizing a gain of $0.5 million. No such repayment occurred in fiscal 2006. In addition, during the second quarter of 2006 we recorded an impairment in long-lived asset on a Remote Operated Vehicle ( ROV ) owned by us in the amount of $1.1 million. This impairment was the result of our verbal agreement, subsequent to December 31, 2005, for the sale of the ROV, at an amount $1.1 million less than the carrying value at December 31, 2005. Debt breakage and deferred financing costs write off. On August 26, 2004, we issued US$125 million of senior secured notes. The proceeds of these notes were primarily used to repay all of our existing long-term debt (with the exception of $21.6 million of debt on one vessel) and acquire a vessel and certain other equipment previously leased. Costs were incurred in the amount of $2.7 million to retire our existing debt, and previously deferred financing costs were written off in the amount of $2.3 million, for a total cost of $5.0 million. No such repayments, with related costs, were made during the six months ended December 31, 2005. Interest expense. Interest expense was $10.7 million for the six months ended December 31, 2005, compared to $7.6 million for the three months ended December 31, 2004, an increase of $3.1 million or 40.8%. This increase in interest expense resulted from higher debt levels and higher interest rates. Tax expense. Tax expense was $2.2 million for the six months ended December 31, 2005, compared to a recovery of $0.8 million for the six months ended December 31, 2004, an increase of $3.0 million. This increase was attributable to the reversal of deferred income tax assets resulting from Canadian operating income for the period, combined with the recognition of deferred income tax liabilities pertaining to operations in the U.K. North Sea. We believe our loss carry-forwards for tax purposes will be utilized Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations through the reversal of existing temporary differences, future earnings, tax strategies or a combination thereof. Fiscal Year Ended June 30, 2005 compared to Fiscal Year Ended June 30, 2004 At the end of the second quarter of fiscal 2005, we completed our remaining contract in the subsea telecommunications service industry, and the vessel previously assigned to that industry was reassigned to the oil and gas sector. During the quarter ended June 30, 2005, we reassessed our basis of segmentation and commencing with the third quarter of fiscal 2005, eliminated our construction and maintenance segment, within which our telecommunications service operations were conducted. Total Revenues. Total revenues were $69.5 million for the fiscal year ended June 30, 2005, compared to $60.0 million for the fiscal year ended June 30, 2004, an increase of $9.5 million or 15.8%. Overall utilization of the fleet increased in fiscal 2005 to 80.4% from 71.6% in fiscal 2004, and average dayrates increased to $19,989 per day in fiscal 2005 from $19,181 in fiscal 2004. Revenues from the oil services segment were $59.6 million for fiscal 2005, compared to $48.3 million for fiscal 2004, an increase of $11.3 million or 23.4%. During fiscal 2005, the Agile, which had been idle throughout fiscal 2004, was transitioned into the oil and gas services market. During fiscal 2004, revenues from this vessel were zero. In 2005, Agile revenues totaled $7.1 million, as it completed a pipelay project in the oil and gas services market, and commenced another charter on June 30, 2005. In addition, the Bold Endurance, previously operating in the subsea telecommunications cable maintenance market, completed its contract in the second quarter of fiscal 2005. In the third quarter of fiscal 2005, it commenced a charter in the oil and gas services sector resulting in $2.4 million of additional oil and gas services segment revenue. Also contributing to the increase in revenue during fiscal 2005 was the redeployment of two large platform supply vessels from the east coast of Canada to the North Sea. This movement resulted in increased utilization for the vessels as well as improved dayrates. As a result of this transition to the North Sea market, oil and gas segment revenues increased by $1.8 million. Revenues in the oil and gas segment also increased during fiscal 2005, as a vessel that was refitted during fiscal 2003 through fiscal 2004 was successful in obtaining a five-year contract off the east coast of Canada. This contract improved utilization for the vessel and resulted in increased revenue of $1.8 million over that achieved by the vessel in fiscal 2004. Offsetting these increases was a revenue decrease of approximately $2.0 million resulting from the fiscal 2004 sale of the Magdelan Sea. Prior to the elimination of the construction and maintenance segment as noted above, revenues from this segment were $7.1 million for fiscal 2005 compared to $9.5 million for fiscal 2004, a decrease of $2.4 million or 25.3%. Charter revenue in this segment declined during fiscal 2005 as the vessel operating in this segment completed its charter during the year and transitioned into the oil and gas services segment. Revenues in this segment for fiscal 2005 include $4.1 million of equipment received as a final settlement under the contract. Revenues from the corporate and other segment were $2.9 million for fiscal 2005 compared to $2.3 million for fiscal 2004, an increase of $0.6 million or 26.1%. Higher revenues were achieved under our shore base management contract in fiscal 2005 compared to fiscal 2004. Operating expenses. Total operating expenses in fiscal 2005 increased over those experienced in fiscal 2004 as a result of a number of factors, including costs of transitioning vessels to markets with better potential, higher repair and maintenance costs and increased costs associated with higher utilization. Operating expenses were $43.6 million for fiscal 2005, compared to $31.3 million for fiscal 2004, an increase of $12.3 million or 39.3%. Included in this amount are costs totaling $2.2 million for Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations subcontractor and engineering costs on a charter for the Agile and $0.5 million in costs related to charterer equipment removals on the Bold Endurance. Both of these amounts were recovered from the customer but with no margin. In addition, during fiscal 2005, we incurred additional fuel costs transitioning vessels to new markets and in performing ocean towing services. Fuel costs in 2005 were $2.0 million greater than in fiscal 2004. Additionally, during fiscal 2005, costs in the amount of $1.1 million were incurred to transition the vessel Bold Endurance from the subsea telecommunications cable maintenance market to the oil and gas services segment. In addition, repairs and maintenance costs for all other vessels in fiscal 2005 were $3.0 million higher than those experienced in fiscal 2004. These costs related primarily to preparing the vessel Agile for work in the oil and gas industry and unscheduled maintenance to the Thebaud Sea and Agile. Operating costs also increased as a result of the 9% year over year increase in utilization, excluding the addition of the two vessels from the construction and maintenance segment. Increases in operating expenses in the oil and gas services segment were offset by the disposal of a vessel in fiscal 2004 with related costs and expenses to the date of disposal of $1.2 million. This vessel was not replaced and no costs are accordingly reflected in fiscal 2005. Operating expenses for the oil and gas services segment increased to $39.0 million for fiscal 2005 from $24.4 million for fiscal 2004, an increase of $14.6 million or 59.8%. During fiscal 2005, two of the vessels that had previously been operating in the construction and maintenance segment began operations in the oil and gas segment. The total impact of these two vessels operating in this segment for the first time in fiscal 2005 was $10.5 million. The first of the two vessels to transition to the oil and gas market was the Agile. The fiscal 2004 costs related to this vessel were $1.5 million and are included in the construction and maintenance segment results. Commencing operations in the oil and gas segment, costs for this vessel increased by $5.9 million in fiscal 2005. Included in the costs for this charter was $2.2 million pertaining to subcontractor and engineering costs. These were fully recovered from the client at our cost. The second of these vessels, the Bold Endurance, completed its charter in the subsea fibre optic maintenance market in the second quarter of fiscal 2005 and shortly thereafter commenced operations in the oil and gas industry. Total costs for this vessel for fiscal 2005 increased by $1.1 million from $3.4 million to $4.5 million. This increase was primarily the result of costs incurred to remove charterer equipment remaining from the telecommunications cable maintenance charter and costs to transition the vessel to the oil and gas market. Under the terms of the charter, this cost was the responsibility of the charterer, however, under a supplemental agreement, we undertook to incur these costs, in exchange for certain equipment. As a result, costs and revenues for the same amount were recorded in fiscal 2005 to account for these removals. In addition, costs in the amount of $0.5 million were incurred to prepare the vessel for its charter in the oil and gas industry. Both vessels are earning higher dayrates in the oil and gas industry than those that they achieved in the subsea telecommunications industry. We transitioned two vessels from east coast Canada to the North Sea, and we also conducted an extended ocean tow contract utilizing another vessel pursuant to which we were responsible for the cost of fuel. Our resulting aggregate fuel cost for these vessels for fiscal 2005 was $1.0 million greater than fiscal 2004. In addition, repairs and maintenance costs for fiscal 2005, excluding costs noted above for the Bold Endurance transition and equipment removals, were $3.0 million higher than those experienced in fiscal 2004. These costs related primarily to preparing the Agile for work in the oil and gas industry and effecting unscheduled repairs to the vessels Ryan Leet, Thebaud Sea and Sable Sea. Costs also increased as the result of a 9% year over year utilization increase, excluding the addition of the two vessels from the construction and maintenance segment. Increases in operating expenses in the oil and gas services segment were offset by the disposal of a vessel in fiscal 2004 with related costs and expenses to the date of disposal of $1.2 million. Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations Operating expenses for the construction and maintenance segment, prior to the vessel transitioning to the oil and gas services segment, were $1.2 million for fiscal 2005 compared to $4.9 million for fiscal 2004, a decrease of $3.7 million or 75.5%. During fiscal 2005, the Agile, which had previously been included in this segment and which incurred costs of $1.5 million in fiscal 2004, commenced work in the oil and gas segment. As a result, the costs related to this vessel for fiscal 2005 were included in the oil and gas services segment. Costs and expenses also decreased in the construction and maintenance segment as the remaining vessel conducting subsea telecommunications cable maintenance completed its charter in the second quarter of fiscal 2005 and transitioned to the oil and gas segment. Costs and expenses for the corporate and other segment were $3.4 million for fiscal 2005, compared to $2.0 million for fiscal 2004, an increase of $1.4 million or 70.0%. This increase in costs and expenses was primarily attributable to increased shore base management costs and costs to ready one of the vessels in cold storage for a bareboat charter. Depreciation and amortization. Depreciation and amortization was $14.4 million in fiscal 2005 compared to $11.7 million in fiscal 2004, an increase of $2.7 million or 23.1%. This increase was the result of our purchase of the vessel Thebaud Sea in August 2004 with the proceeds from the senior secured notes. The vessel was previously utilized under an operating lease arrangement. Depreciation and amortization for the oil and gas services segment was $12.9 million in fiscal 2005 compared to $8.1 million in fiscal 2004, an increase of $4.8 million or 59.6%. The transfer of the Agile and Bold Endurance from the construction and maintenance segment to the oil and gas services segment increased oil and gas services depreciation and amortization by $2.8 million as compared to fiscal 2004. Also contributing to the increase in this segment was the acquisition, in August 2004, of the vessel Thebaud Sea. The acquisition of this vessel increased depreciation and amortization by $1.0 million. Depreciation and amortization for the construction and maintenance segment was $0.7 million in fiscal 2005 compared to $2.8 million in fiscal 2004, a decrease of $2.1 million or 75.0%. This decrease was entirely the result of the Agile and Bold Endurance, the only two assets in this segment, being transferred to the oil and gas services segment in fiscal 2005. Depreciation and amortization for the corporate and other segment was $0.8 million in fiscal 2005 compared to $0.9 million in fiscal 2004, a decrease of $0.1 million or 11.1%. Lease expense. Lease expense was $0.7 million in fiscal 2005 as compared to $7.7 million in fiscal 2004, a decrease of $7.0 million. This decrease was the result of the acquisition, in August 2004, of the vessel Thebaud Sea. Capital taxes. Capital tax expense for fiscal 2005 was consistent with fiscal 2004 at $0.5 million. General and administrative costs. General and administrative costs were $5.2 million in fiscal 2005 as compared to $4.8 million in fiscal 2004, an increase of $0.4 million or 8.3%. This increase was primarily the result of costs associated with our filing of a registration statement with the Commission in fiscal 2005 in connection with our senior secured notes issued in August 2004, and a staff bonus. No such bonus was paid in fiscal 2004. Other income. Other income was $10.5 million for fiscal 2005, compared to $0.7 million for fiscal 2004, an increase of $9.8 million. During fiscal 2005 a foreign currency translation gain was recorded in the amount of $9.8 million on translating senior secured notes repayable in US dollars into Canadian dollars as at June 30, 2005. At June 30, 2004 the amount related to translating the then U.S. dollar Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations repayable debt was less than $0.1 million. From the proceeds of the issue of the senior secured notes in August 2004, previously outstanding U.S. dollar denominated debt was repaid, and a gain of $0.5 million was realized in fiscal 2005. In the third quarter of fiscal 2004, a standby vessel was sold for a gain of $0.4 million. Corporate transaction costs. Corporate transaction costs were $0 in fiscal 2005, as compared to $1.2 million for fiscal 2004. In June of 2004, we ceased activities respecting a previously proposed corporate financing transaction. As a result of this decision, deferred corporate transaction costs related to this transaction were expensed in fiscal 2004. Debt breakage and deferred financing costs write off. On August 26, 2004, we issued US$125 million of senior secured notes. The proceeds of these notes were primarily used to repay all of the long-term debt (with the exception of $21.6 million of debt on one vessel) and acquire a vessel and certain other equipment previously leased. Costs were incurred in the amount of $2.7 million to retire the existing debt, and previously deferred financing costs were written off in the amount of $2.3 million, for a total cost of $5.0 million, compared to $0 in fiscal 2004. Interest expense. Interest expense was $17.7 million for fiscal 2005 compared to $8.8 million for fiscal 2004. The increase in interest expense resulted from higher debt levels and interest rates. Tax expense. Tax recovery was $1.8 million for fiscal 2005 compared to $1.6 million for fiscal 2004, an increase of $0.2 million or 12.5%. This increase was attributable to the recording of additional future income tax assets resulting from Canadian operating tax losses for the period with the result that as at June 30, 2005 a net future income tax asset in the amount totaling $4.0 million was recorded. We have not provided a valuation allowance against the deferred income tax assets, despite reporting losses in the previous two fiscal years. These assets arise largely from operating losses that can be applied to reduce taxable income earned in future years. The losses expire annually in varying amounts to 2015. In addition to expected higher earnings in future, in part from our expanded fleet, we can facilitate utilization of the losses by a number of tax planning strategies including inter-group transactions, elimination of certain international structures and revising the amount of depreciation claimed for tax purposes to prevent the expiration of loss carryforwards. As such, we have determined that it is more likely than not that we will realize the tax benefit from these deferred tax assets in the future. We believe our net operating loss carry-forwards will be utilized through the reversal of existing temporary differences, future earnings, tax strategies, or a combination thereof. Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30, 2003 Total Revenues. Total revenues were $60.0 million for the fiscal year ended June 30, 2004, compared to $62.4 million for the fiscal year ended June 30, 2003, a decrease of $2.4 million or 3.8%. Revenues from the oil services segment were $48.3 million for fiscal 2004, compared to $51.1 million for fiscal 2003, a decrease of $2.8 million or 5.5%. This decrease was primarily the result of lower utilization of the fleet. While the available number of vessel days for the oil and gas services fleet increased in the year ended June 30, 2004 as a result of vessel additions during the fourth quarter of fiscal 2003, utilization and dayrates decreased, reducing segment revenues. The decrease in dayrates and utilization was due to a continuation of the soft oil and gas services segment market that began in mid-2002. In addition, utilization was reduced by lower than expected activity in the east coast of Canada market. We used the opportunity presented by the low utilization in the third quarter to complete maintenance on the vessels Mariner Sea and Panuke Sea, two of the vessels operating in this market, to prepare them for expected activity during Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations the summer of 2004. During May 2004, the Panuke Sea commenced an 18-month charter and the Mariner Sea commenced an 80-day charter, both offshore of the east coast of Canada. Revenues from the construction and maintenance segment were $9.5 million for fiscal 2004 compared to $10.0 million for fiscal 2003, a decrease of $0.5 million or 5.0%. The charter revenue in this segment was received in U.S. dollars and fluctuation in the Canadian U.S. dollar exchange rate resulted in the segment revenue decrease. Revenues from the corporate and other segment were $2.3 million for fiscal 2004 compared to $1.4 million for fiscal 2003, an increase of $0.9 million or 64.3%. The segment revenue increase was the result of increased revenues from our shore base management services. Operating expenses. Operating expenses were $31.3 million for fiscal 2004, compared to $30.9 million for fiscal 2003, a decrease of $0.4 million. Vessel operating expenses for our oil and gas services segment decreased to $24.4 million for fiscal 2004 from $24.8 million for fiscal 2003, a decrease of $0.4 million or 1.6%. Fiscal 2004 was the first full year of operation for the vessels Panuke Sea and Mariner Sea. The increased costs related to the longer period of operations for these vessels in fiscal 2004 compared to fiscal 2003 were offset by cost savings resulting from lower utilization, cost management and by reduced costs from the sale of a vessel in February 2004. Operating expenses for our construction and maintenance segment were $4.9 million for fiscal 2004 compared to $4.5 million for fiscal 2003 an increase of $0.4 million or 8.9%. This increase was primarily due to increased repairs and maintenance costs on the Agile, preparing it for future contracts. Operating expenses for our corporate and other segment were $2.0 million for fiscal 2004, compared to $1.6 million for fiscal 2003, an increase of $0.4 million or 25.0%. This increase in costs was the result of increased costs pertaining to the shore base management contract. Depreciation and amortization. Depreciation and amortization totaled $11.7 million for fiscal 2004, compared to $9.9 million for fiscal 2003, an increase of $1.8 million or 18.2%. The increase was primarily attributable to fiscal 2004 being the first full year the Mariner Sea and the Panuke Sea were present in our vessel fleet. Depreciation and amortization for the oil and gas services segment was $8.1 million for fiscal 2004, compared to $6.3 million for fiscal 2003, an increase of $1.8 million or 28.6%. The increase was primarily attributable to fiscal 2004 being the first full year the Mariner Sea and the Panuke Sea were present in our vessel fleet. Depreciation and amortization for the construction and maintenance segment was consistent in fiscal 2004 with fiscal 2003 at $2.8 million. Depreciation and amortization for the corporate and other segment was consistent in fiscal 2004 with fiscal 2003 at $0.9 million. Lease expense. Lease expense was $7.7 million for fiscal 2004 compared to $9.5 million for fiscal 2003, a decrease of $1.8 million or 19.0%. This decrease was the result of two factors. Fluctuations in the Canada/U.S. exchange rate impacted the cost of an operating lease for the vessel Thebaud Sea, a lease requiring payments to be made in U.S. dollars. In addition, during the third quarter of fiscal 2004, we Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations renegotiated an operating lease on the Trinity Sea resulting in its reclassification as a capital lease. Accordingly, the related lease payments of approximately $313,000 per month were no longer accounted for as lease expense but rather as principal reduction and interest expense. Capital taxes. Capital tax expense for fiscal 2004 was consistent with fiscal 2003 at approximately $0.5 million. General and administrative costs. General and administrative costs were $4.8 million in fiscal 2004 as compared to $5.4 million in fiscal 2003, a decrease of $0.6 million or 11.1%. This decrease in expenses was primarily attributable to a decrease in general and administrative expenses as steps were taken in fiscal 2004 to reduce head office costs in response to weakness in the offshore vessel industry. Other income. Other income was $0.7 million for fiscal 2004, compared to $4.8 million for fiscal 2003, a decrease of $4.1 million or 85.4%. During fiscal 2003, a vessel that was being constructed in Europe was disposed of, for a gain of $2.3 million. In addition, during fiscal 2003 a foreign currency translation gain of $2.3 million was recorded on converting U.S. dollar-repayable debt into Canadian dollars at June 30, 2003. As at June 30, 2004, the amount recorded related to the same debt was less than $0.1 million. In February 2004, a stand-by vessel was disposed of and a gain of $0.4 million was recorded. Corporate transaction costs. Corporate transaction costs totaled $1.2 million for fiscal 2004. Corporate transaction costs were $0 for fiscal 2003. In June 2004, activities ceased respecting a previously proposed corporate financing transaction. As a result of this decision, deferred corporate transaction costs related to this transaction were expensed. Interest expense. Interest expense was $8.8 million for fiscal 2004 compared to $7.6 million for fiscal 2003, an increase of $1.2 million or 15.8%. The increase in interest expense resulted from there being no capitalized interest during fiscal 2004, compared to $0.7 million capitalized during fiscal 2003 and from debt levels that were higher in fiscal 2004 as a result of the acquisition and conversion of the Mariner Sea during the last two quarters of fiscal 2003. Tax expense. Tax recovery was $1.6 million for fiscal 2004 compared to a tax expense of $20,588 for fiscal 2003, an increase of $1.6 million. This increase was attributable to the recording of additional future income tax assets resulting from Canadian operating tax losses for fiscal 2004. RECENT ACCOUNTING PRONOUNCEMENTS In May 2004, the FASB issued Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP No. 106-2), which addresses the accounting and disclosure requirements associated with the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduced a prescription drug benefit under Medicare (Medicare Part D), as well as a nontaxable federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Because we are a Canadian company, neither the Medicare Prescription Drug, Improvement and Modernization Act, nor the FASB position has an impact upon us. In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123, Accounting for Stock-Based Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations Compensation and Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance that had allowed companies to choose between expensing stock options or showing pro forma disclosure only. This standard, together with a new rule adopted by the Commission in April 2005, is effective for us as of April 1, 2006 and will apply to all awards granted, modified, cancelled or repurchased after that date. The ultimate amount of increased compensation expense will be dependent on the number of option shares granted, the timing and vesting period and the method used to calculate the fair value of the awards, among other factors. LIQUIDITY AND CAPITAL RESOURCES Our capital requirements have historically been financed with cash flow from operations, debt instruments, and borrowings under credit facilities. We require capital to fund ongoing operations, construction of new vessels, vessel acquisitions, vessel recertifications, other capital expenditures and debt service. Since inception, we have been active in the acquisition of additional vessels through identifying, acquiring, modifying and converting vessels from the resale market that fit the business needs of our customers, as well as being active in new construction. Bank financing and internally generated funds have historically provided funding for these activities. On December 31, 2005, we had a cash balance of $6.7 million. We also have a $40 million revolving senior secured bank credit facility available for vessel acquisitions or, subject to a limit of $20.0 million, for general and corporate purposes. As of December 31, 2005, we had $26.2 million outstanding on this facility and $13.8 million of credit immediately available thereunder. We believe that current working capital, projected cash flow from operations and available capacity under our senior secured revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future. Although the generation of positive working capital from operations is expected in the future, events beyond our control, such as weather conditions, reduction in international consumption of refined petroleum products, or declines in expenditures for exploration, development and production activity may affect our financial condition or results of operations. Depending on the market demand for offshore supply and support services and other growth opportunities that may arise, we may require additional debt or equity financing. Operating activities. We expect cash flows from operations to provide working capital for current and future operations. Cash flows and utilization from operating activities for the six months ended December 31, 2005 and 2004 totaled $5.6 million and ($5.1) million, respectively. The increase in operating cash flow for six months ended December 31, 2005 compared with the six months ended December 31, 2004 was the result of (i) a $12.3 million increase in operating margin (not related to non-cash settlement of receivable) and other income, (ii) receipt of $3.1 million of unearned revenue and vessel charter deposit, (iii) no debt breakage costs, compared to $2.7 million in the same period of the year prior related to our August 2004 repayment of long-term debt and operating lease arrangements from the proceeds of the issuance of our senior secured notes, and (iv) $0.3 million less in expenditures for drydocking and maintenance capital and offset by (A) increased interest of $3.0 million as a result of higher debt levels and interest rates, (B) decrease of $4.5 million in net operating assets and (C) $0.6 million spent for deferred vessel preparation costs. Cash flows and utilization from operating activities for the fiscal years ended June 30, 2005, 2004 and 2003 totaled ($7.7) million, $9.6 million and $5.4 million, respectively. The decrease in operating cash flow for fiscal 2005 compared with fiscal 2004 was the result of (i) a $2.2 million increase in expenditures for drydockings and maintenance capital, (ii) debt breakage costs of $2.7 million related to our August 2004 repayment of long-term debt and operating lease arrangements from the proceeds of the issuance of our senior secured notes, (iii) an increase in Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations operating assets of $3.2 million, and (iv) increased interest of $8.5 million as a result of higher debt levels and interest rates. The increase in operating cash flow for fiscal 2004 compared with fiscal 2003 was primarily the result of lower receivables levels at June 30, 2004 as compared to June 30, 2003. As of June 30, 2005, we had net operating loss carry-forwards of approximately $33.9 million available at various fiscal year ends through 2015 to offset future taxable income. The use of these net operating losses for tax purposes and additional tax benefits may be limited due to Canadian tax laws. Investing activities. Investing activities for the six months ended December 31, 2005 totaled $26.6 million, including (i) $26.5 million to acquire two platform supply vessels for operations in the North Sea, (ii) $0.3 million for other equipment purchases and (iii) $0.2 million received on a note receivable. Investing activities for the six months ended December 31, 2004 totaled $29.0 million, including (i) $24.8 million, which was used to acquire a vessel, the Thebaud Sea, previously financed by an operating lease, (ii) $3.1 million to convert a vessel from fibre optic cable lay to pipelay, (iii) $0.8 million to upgrade two vessels with DP systems, (iv) $0.2 million for other equipment purchases and (v) $0.1 million in net advances to affiliates. In addition, on December 29, 2005 we declared a dividend in the amount of $1.7 million, which was settled on December 30, 2005, the proceeds of which were used to allow our parent company and companies related to our shareholder to repay amounts owed to us. This series of transactions was recorded by journal entries and no checks were issued. The dividend and the subsequent repayments have therefore not been reflected in the statements of cashflows. Investing activities for fiscal 2005 included $32.5 million for equipment purchases. The largest component, $24.8 million, was used to acquire a vessel, the Thebaud Sea, previously financed by an operating lease. We also invested approximately $4.0 million to convert a vessel from fibre optic cable lay to pipelay and $1.8 million to upgrade three vessels with DP systems. Investing activities for fiscal 2004 included $0.4 million for equipment purchases and $0.2 million in net advances to affiliates, which was offset by $2.7 million in proceeds on the sale of a standby vessel. During fiscal 2003, investing activities were $19.3 million for the continuation of the construction of a newbuild vessel in Europe, the continued conversion of the vessel Panuke Sea, the acquisition and conversion of the vessel Mariner Sea, and miscellaneous capital expenditures offset by proceeds from the sale of the newbuild vessel we were constructing in Europe, in the amount of $6.3 million. Financing activities. Financing activities for the six months ended December 31, 2005 consisted of the following: (i) advances drawn on our $40.0 million senior secured credit facility in the amount of $14.3 million primarily to fund the acquisition of two platform supply vessels in August and November 2005, (ii) an advance on our new US dollar denominated vessel acquisition term loan in the amount of $9.5 million, which was used in combination with the advances under our senior secured credit facility to fund the acquisition of a platform supply vessel in November 2005, and (iii) the execution of an equipment loan facility in the amount of $1.9 million to fund the acquisition of DP systems for two of our vessels during the fiscal year ended June 30, 2005. Offsetting these amounts were payments of (i) $0.8 million against our debt pertaining to the Bold Endurance, (ii) $0.6 million in costs pertaining to this offering and (iii) $0.2 million pertaining primarily to execution of our new US dollar denominated vessel acquisition term loan. Financing activities for the six months ended December 31, 2004 consisted primarily of the issuance in August 2004 of US$125 million senior secured notes and the repayment of our then outstanding long-term debt (with the exception of the debt pertaining to the Bold Endurance in the amount of $21.6 million as of August 26, 2004). Concurrent with the offering of the senior secured notes, we entered into a new $40 million revolving senior secured bank credit facility. Costs pertaining to the completion of both of these financings totaled $7.7 million during the 6 months ended December 31, 2004. In addition, during the six months ended December 31, 2005, preference shares were redeemed in the amount of $1.0 million and dividends were paid in the amount of $5.5 million. Financing activities during fiscal 2005 consisted primarily of the issuance in August 2004 of US$125 million senior secured notes and the repayment of our Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations then outstanding long-term debt (with the exception of the debt pertaining to the vessel the Bold Endurance in the amount of $21.6 million as of August 26, 2004). Concurrent with the offering of the senior secured notes, we entered into a new $40 million revolving senior secured bank credit facility. Costs pertaining to the completion of both of these financings totaled $8.0 million. In addition, during fiscal 2005 preference shares were redeemed in the amount of $1.0 million and dividends were paid in the amount of $5.9 million. Financing activities during fiscal 2004 consisted primarily of long- term debt repayments of $9.8 million, repayment of our demand operating line of credit in the amount of $0.3 million, payment of debt issue costs in the amount of $0.4 million and dividends paid in the amount of $0.4 million. Financing activities during fiscal 2003 consisted of the incurrence of additional long-term borrowings of $19.4 million, which was used for financing the construction of a newbuild vessel in Europe and the continued conversion of the Panuke Sea. Also in fiscal 2004, long-term debt obligations and amounts outstanding under our demand operating line of credit were repaid in the amount of $9.0 million and $1.3 million, respectively, debt issue costs were paid in the amount of $1.0 million and dividends were paid in the amount of $0.4 million. Indebtedness Bold Endurance Credit Facility. Pursuant to the Bold Endurance term loan facility, indebtedness equal to $19.5 million remained outstanding as of December 31, 2005. The Bold Endurance facility provides for an interest rate equal to Canadian Bankers Acceptance rate plus 4.88% and has a term that expires in July 2013. The interest rate on this facility as of December 31, 2005 was 8.07%. This facility is secured by a first marine mortgage on the Bold Endurance and an assignment of the Bold Endurance charter and assignment of the insurance. The obligations of 3013563 Nova Scotia Limited, the borrower under the Bold Endurance facility, are guaranteed by both our subsidiary, Secunda Global International Inc., and us. The guarantee of Secunda Global International Inc. is collateralized by a first marine mortgage on the Bold Endurance, an assignment of the Bold Endurance charter and a pledge of the preference shares of Secunda Global International Inc. Equipment Loan Facility. In August 2005, we entered into a new $1.9 million Equipment Loan Facility to finance the acquisition of DP equipment for two of our vessels in fiscal 2005. This facility provides for an interest rate equal to LIBOR plus 0.35% and has a term of 60 months that expires in August 2010. At December 31, 2005 $1.9 million remained outstanding under this facility and the interest rate was 3.22%. This facility is secured by promissory notes. Vessel Acquisition Term Loan Facility. In November 2005, we entered into a vessel acquisition term loan agreement in an amount up to US$9.0 million for the financing of a vessel acquisition. On November 14, 2005, we made a draw on this facility in the amount of US$8.0 million (which is now the maximum amount of the facility) for the acquisition of a platform supply vessel. This facility provides for an interest rate equal to LIBOR, plus an adjustment related to a reserve percentage under regulations issued from time to time by the Federal Reserve Board, plus 3.75%, and has a term of 72 months from November 2005, with 10 equal semi-annual principal repayments, commencing May 14, 2007. At December 31, 2005, US$8.0 million (Cdn $9.3 million) remained outstanding under this facility and the interest rate was 7.625%. As security for this facility, we have provided a first marine mortgage and an assignment of charter hire and insurance proceeds related to the acquired vessel. Senior Secured Credit Facility. On August 26, 2004, we entered into a new $40 million revolving senior secured bank credit facility available for vessel acquisitions or, subject to a limit of $20.0 million, for general and corporate purposes. This facility bears interest at LIBOR plus a margin of 1.75% to 3.25% (6.55% at December 31, 2005), adjusted quarterly, based on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA), a non-GAAP measure, as defined in the credit agreement. In connection with the credit facility, we are subject to a number of restrictions, including Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations restrictions on incurring additional indebtedness, declaring dividend and on creating liens on vessels, minimum EBITDA and working capital requirements and collateral maintenance limitations. The table below sets forth our financial position in relation to the specified financial tests in our credit facility as of December 31, 2005. Financial Test Requirement As of December 31, 2005 (1) Utilizing August 19, 2004 valuations. The revolving feature of the facility is in place until February 2007 at which time the then outstanding balance converts to a term loan with semi-annual principal payments equal to 4.1% of the outstanding balance at conversion, payable in August and February of each year, and a final balloon principal payment due at maturity in February 2012. At December 31, 2005, draws on this facility totaled $26.2 million. During fiscal 2005, the provisions of the revolving senior secured credit facility were amended to increase the permitted level of dividends and decrease the minimum EBITDA requirement for the fiscal year ended June 30, 2005. Senior Secured Floating Rate Notes due 2012. On August 26, 2004, we issued US$125.0 million of senior secured floating rate notes due 2012 pursuant to a private placement pursuant to Rule 144A under the Securities Act. We received net proceeds of approximately $154.5 million from the sale of the notes, which we used to retire all of our then outstanding indebtedness, except for the indebtedness related to one of our vessels, to acquire a vessel that was being utilized under an operating lease and for working capital and other general corporate purposes. We completed a public exchange offer for the notes on March 23, 2005. The senior secured notes are unconditionally guaranteed by all of our current material subsidiaries on a senior secured basis, except in the case of Secunda Global International Inc., which has unconditionally guaranteed the notes on a senior basis. The senior secured notes are non-amortizing, mature in 2012 and were issued at a price of 98.5% of par. The interest rate on the senior secured notes is LIBOR plus 8.0% (12.15% at December 31, 2005) and is reset quarterly. We pay interest quarterly on January 15, April 15, July 15 and October 15. The senior secured notes have the following redemption provisions: At any time prior to September 1, 2007, we may redeem up to 35% of the senior secured notes at a redemption price (expressed as a percentage of the principal amount) equal to the sum of (i) 100% plus (ii) the interest rate per annum (expressed as a percentage) in effect on the date which notice is given, plus accrued and unpaid interest thereon, with net cash proceeds of certain equity offerings, as long as at least 65% of the aggregate principal amount of the notes issued pursuant to the indenture remains outstanding after the redemption. On or after September 1, 2006, we are entitled to redeem all or a portion of the senior secured notes at the redemption prices (expressed as percentages of principal amount) set out below for the 12-month period then commencing, plus accrued and unpaid interest thereon, if any: September 1, 2006 104.0 % September 1, 2007 102.0 % September 1, 2008 101.0 % September 1, 2009 and thereafter 100.0 % Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations $ 204,079 $ 33,303 $ 18,417 $ 18,595 $ 133,764 (1) Revolving loan, which is accordingly considered repayable in less than one year. (2) Includes accommodation units on one of our vessels, two vehicles and a docking facility. Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations Other income 4,770 Other income 5,004 889 4,770 CURRENCY FLUCTUATIONS AND INFLATION Contracts for our vessels operating in international locations are primarily denominated in U.S. dollars (US$) and Great Britain Pounds (GBP ) while the related operating costs are generally in Canadian dollars. During the three months ended December 31, 2005, the Canadian dollar expressed as US$ and GBP was as follows: US$ GBP Low 0.869 0.499 High 0.836 0.475 Period end 0 858 0.499 Average 0.852 0.488 Outstanding long-term debt as of December 31, 2005 of $200.5 million included $155.0 million repayable in U.S. dollars pursuant to our senior secured notes and vessel acquisition term loan facility. The notes are typically valued and traded in U.S. dollars. For the six months ended December 31, 2005, 27% and 32% of our total consolidated revenue was denominated in U.S. dollars and Great Britain Pounds, respectively. These conditions have been evaluated taking into account the cost of financial instruments to hedge this exposure, as well as the level of U.S. dollar expenditures and the opportunity for additional U.S. dollar denominated revenue being generated from our fleet. As a result of this evaluation, we determined that it is not in our interest to utilize any financial instruments to hedge this exposure under present conditions. One or more of these factors may change, and, in response, financial instruments may be used in the future to hedge risks of foreign currency fluctuations. Day-to-day operating costs are generally affected by inflation. To date, general inflationary trends have not had a material effect on operating revenues or expenses. Because the energy services industry requires specialized goods and services, general economic inflationary trends may not affect our operating costs. One of the major consumables for our fleet is fuel, the price of which has escalated significantly over the last year. In virtually all of our charters, the customer is responsible for and pays for fuel and we record no entries for that fuel. In the unusual instance where we have responsibility for fuel, we record the cost of that fuel in operating expenses. As such, escalating fuel prices have not and likely will not adversely affect our operating cost structure. A significant impact on operating costs is the level of offshore exploration, development and production spending by energy exploration and production companies. As the level of spending increases, prices of goods and services used by the energy industry and the energy services industry may increase. Future increases in vessel dayrates may provide a shield from inflationary effects on operating costs. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not hold or issue forward exchange contracts or other derivative financial instruments for speculative purposes. All of our long-term debt has variable interest rates and we are, therefore, subject to interest rate risk. Total long-term debt outstanding at December 31, 2005 was $200.5 million. A hypothetical 2% increase in the interest rates on the long-term debt outstanding at December 31, 2005 would cause our interest expense to increase by $4.0 million with a corresponding decline in our earnings before income taxes. We are located in Canada and report in Canadian dollars. Our senior secured notes and vessel acquisition term loan facility are denominated in U.S. dollars. A hypothetical increase in the value of the Table of Contents Index to Financial Statements Management s discussion and analysis of financial condition and results of operations U.S. dollar relative to the Canadian dollar of $0.01 would cause our Canadian dollar equivalent liability to increase by $1.3 million with a corresponding foreign exchange loss recorded in income, and a corresponding decrease in income before income taxes. This would be a non-cash loss that would not be realized until ultimate repayment of the notes. Table of Contents Index to Financial Statements Industry overview Companies in the global offshore marine services industry operate various types of vessels to supply and support exploratory and developmental drilling rigs and production facilities, as well as offshore construction and subsea maintenance activities. The primary services provided include: (i) transporting drilling materials, supplies and personnel; (ii) towing and positioning offshore rigs and placing and retrieving their anchors; (iii) providing safety and emergency response services; and (iv) supporting offshore construction projects. Offshore supply and support vessels operate around the world but are generally concentrated in the key offshore oil and gas regions such as the Gulf of Mexico, the North Sea, West Africa, Brazil, Southeast Asia, the Middle East and the eastern coast of Canada. Vessels can move between geographic regions, but this migration is limited by factors such as mobilization costs, vessel suitability and regulatory restrictions. Vessel operators typically charge a daily fee, or dayrate, for the use of a vessel. The dayrate is determined by a number of factors including the type of vessel, the geographic region, the prevailing supply/demand balance and the length of the contract. A vessel may be marketed on a spot basis, meaning that contracts are short in duration and task-specific, or it may operate under a long-term contract, ranging in length from a few months to a few years. In the Gulf of Mexico and the North Sea, which are more mature offshore regions, vessels typically operate on the spot market, whereas less mature regions such as West Africa and Brazil are more often characterized by long-term contracts. The demand for offshore supply and support vessels is primarily related to offshore oil and gas exploration, development and production activity, which is influenced by a variety of factors including, but not limited to: oil and natural gas prices; the drilling budgets of offshore exploration and production companies; and political and economic conditions. More directly, demand for offshore supply and support vessels is determined by the number and type of offshore platforms in operation, the number of active offshore drilling rigs and the level of offshore construction activity. There are two general types of offshore platforms: fixed and floating. Due both to operational issues related to deeper waters and to the greater distances from shore, floating platforms require a higher level of support from offshore vessels. As demonstrated in the graph below, the worldwide installed base of offshore platforms has increased rapidly over the last several years, with floating platforms accounting for a large portion of the increase. According to Infield Energy Data Analysts, a total of 223 new floating production platform installations worldwide are expected for the five-year period from 2006 through 2010, representing a significant increase over the 90 floating production platforms that were installed globally during the five-year period between 2000 and 2004. Table of Contents Index to Financial Statements Industry overview WORLDWIDE OFFSHORE PLATFORMS (INSTALLED BASE) Source: Infield Systems Limited, London As demonstrated in the graph below, the number of active offshore rigs worldwide has increased significantly in the last 12 months. According to ODS-Petrodata, the demand for offshore drilling rigs is expected to increase by 88 rigs over the next 12 months. WORLDWIDE OFFSHORE RIG COUNT Source: Baker Hughes Incorporated Table of Contents Index to Financial Statements Industry overview With the substantial increase in the number of subsea well completions projected over the next few years, the global need for subsea infrastructure, including pipeline installations, should accelerate. Based on Infield Energy Data Analysts estimates, over 76,000 km of offshore pipelines are expected to be installed worldwide during the five-year period from 2006 through 2010, which represents a significant increase over the approximately 37,000 km of offshore pipelines installed globally in the five-year period between 2000 and 2004. WORLDWIDE OFFSHORE PIPELINES (INSTALLED BASE) Source: Infield Energy Data Analysts, London The robust conditions in the worldwide oil and gas industry and related increase in offshore expenditures have resulted in improved utilization and dayrates for offshore supply and support vessels. For example, according to ODS-Petrodata, the average dayrate for platform supply vessels operating in the North Sea spot market with dead weight tonnage capacities of between 3,000 to 4,000 tons has increased approximately 163% from July 2004 to July 2005. CANADIAN EAST COAST MARKET This market is one of the harshest marine environments in the world and requires offshore supply and support vessel operators with particular expertise working in this extreme environment. Over the last several years, this region has made an important transition from an exploration region to a development and production region with commencement of full-scale production at the Hibernia and Terra Nova oil fields and at the Sable natural gas fields. This is significant to marine service providers, as fields in production provide a more stable, long-term demand for their services. According to CAPP, current production in the Canadian east coast offshore region is estimated to be approximately 475 MBoe/d attributable to the Hibernia field (220 MBbl/d), the Terra Nova field (170 MBbl/d) and the Sable natural gas project (520 MMcfe/d). In addition, the White Rose oil field started production in late 2005 with an estimated peak production rate of 100 MBbl/d. Hibernia and Terra Nova fields comprise the two largest pools of conventional oil in Canada today. According to CAPP, Atlantic Canada will produce approximately 25% of Canada s total crude oil production from conventional sources in 2005. The Table of Contents Index to Financial Statements Industry overview Hibernia, Terra Nova and White Rose fields are also known to have significant natural gas reserves in addition to the oil already discovered. According to National Energy Board Reports, total potential resources offshore of the east coast of Canada are estimated at over 5 billion barrels of oil and over 90 Tcf of natural gas. Several large, multinational oil and gas companies have made significant commitments to the region. ExxonMobil has major investments in the Hibernia and Terra Nova oil fields and in the Sable natural gas fields. Petro-Canada and Husky Energy, the operators of the Terra Nova oil field and the White Rose oil field, respectively, are significant participants in the Canadian offshore oil and gas industry. ChevronTexaco, Shell and EnCana have also made significant investments offshore of the east coast of Canada. The significant infrastructure investments already made in the region include $8.6 billion for the Hibernia and Terra Nova oil projects, $3.0 billion for the Sable natural gas project, and $2.4 billion for the White Rose oil project. Infrastructure installed in the development of these producing fields, such as storage terminals and pipelines, reduces future exploration and development costs in the region, making it more attractive for oil and gas companies to conduct further production activity in the region. In addition to confirmed discoveries in the Deep Panuke, Hebron and Ben Nevis fields, there are a number of potentially active exploration plays in the region. According to CAPP, the Orphan Basin is estimated to contain six to eight billion barrels of potential crude oil reserves. Seismic data gathering is scheduled for 2005, with exploratory drilling scheduled to begin in 2006. The Offshore Labrador play is estimated to contain marketable reserves of 4.6 tcf of natural gas and 123 million barrels of natural gas liquids. The Laurentian Basin is estimated to contain potential reserves of eight to nine tcf of natural gas and 600 to 700 million barrels of crude oil. Seismic data gathering is scheduled for 2005, with exploratory drilling expected to begin in 2007. Exploration activities in these and other fields, combined with potential development activity in the Deep Panuke, Hebron and Ben Nevis fields, should increase demand for offshore supply and support vessels off the east coast of Canada over the next several years. Table of Contents Index to Financial Statements Business OVERVIEW We are a provider of supply and support services to the offshore oil and gas industry with, we believe, a leading position off the east coast of Canada and a rapidly growing presence in the international marketplace. We currently own and operate a fleet of 14 harsh weather, multifunctional marine vessels that provide supply, support and safety services to offshore exploration, development, production and subsea construction projects. We operate offshore of the east coast of Canada and North and West Africa and in the North Sea and the Gulf of Mexico. The combination of our experienced workforce and our multifunctional fleet allows us to operate in virtually any part of the world, including deepwater areas. We work closely with many of the largest global exploration and production and offshore oilfield services companies. By consistently providing reliable and cost-effective services to customers around the world, including in the demanding offshore region of the east coast of Canada, we have developed strong and long-standing customer relationships. Our current customers include ExxonMobil, Petro-Canada, Apache and Technip. Our fleet is comprised of anchor handling tug supply, platform supply, safety standby, subsea construction support and other vessels with large cargo capacities and harsh weather performance capabilities. In addition, seven of our vessels are equipped with state-of-the-art dynamic positioning ( DP ) systems, which use global positioning and computer controlled propulsion to maintain vessel position even in the harshest weather conditions. Our expertise in identifying, acquiring, modifying and converting vessels that fit the business needs of our customers has enabled us to significantly improve the quality of our fleet in a cost effective manner and further enhance our operational performance. In execution of this acquisition and conversion strategy, from 1998 to 2005, we spent a total of $160 million to convert seven vessels and a total of $67 million to build two new vessels. Our philosophy is to own and operate harsh weather vessels that can be configured in a multitude of ways to meet the specific requirements of our customers. This flexibility, combined with our extensive conversion expertise, gives us the capability to rapidly address the changing needs of our customers and the marketplace. We are a holding company incorporated in 1985 under the laws of the Province of Nova Scotia and we conduct our operations through our principal operating subsidiary, Secunda Marine Services Limited. All of our vessels are held by subsidiaries of Secunda Marine Services Limited, including several entities organized under the laws of Barbados. For the six months ended December 31, 2005, we generated total revenues of $46.5 million, net earnings from continuing operations of $5.6 million and EBITDA of $26.6 million. For the fiscal year ended June 30, 2005, we generated total revenues of $69.5 million, a net loss from continuing operations of $5.5 million and EBITDA of $24.8 million. Please read Summary Historical and Financial Operating Data Non-GAAP Financial Measures for the definition of EBITDA and a reconciliation of EBITDA to net earnings (loss). A major component of our strategy is growth. We recently acquired a platform supply vessel in each of August and November 2005 and intend to acquire two additional vessels with proceeds from this offering. While there can be no guarantee regarding the impact of these acquisitions, we expect these acquisitions, as well as the improved utilization and dayrate environment for offshore supply and support vessels, to positively impact our financial performance. For a discussion of the improved utilization and dayrate environment, please read Table of Contents Index to Financial Statements Business Management s Discussion and Analysis of Financial Condition and Results of Operations Trend Analysis. We believe we currently have access to a sufficient number of Secunda-trained, experienced personnel to operate these four additional vessels. We also believe we are well-positioned to capitalize on the expected increase in the level of activity in certain strategic international regions as well as the Canadian east coast market. OUR COMPETITIVE STRENGTHS We believe we have the following strengths that allow us to compete successfully in the offshore supply and support vessel industry: Established International Presence and Long-Term Customer Relationships. The harsh weather, multifunctional design of our vessels and the experience of our crews working in demanding conditions provide us with the ability to serve customer needs in any region of the world. We have operated for over 15 years in virtually all of the world s major offshore oil and gas markets, including those with harsh environments, such as in the North Sea and offshore the east coast of Canada. For the six months ended December 31, 2005, approximately 60% of our total revenues were derived from operations outside Canada compared to 14% for the same period in the prior year. We believe we enjoy strong relationships with global corporations in the energy industry, including ExxonMobil, Apache, Petro-Canada and Kerr McGee, and with other offshore oilfield services companies, such as Condux, Oceanographia, Technip and Heerema. Position in the Unique Canadian East Coast Offshore Market. We believe we are a leading provider of supply and support services to the offshore oil and gas industry of the east coast of Canada. There are currently three vessel operators in the Canadian east coast market. We operate six of the 17 supply and support vessels currently operating in this region and have nine vessels that are currently qualified to operate in Canadian waters. We have provided marine services to every major oil and natural gas project offshore of the east coast of Canada since 1990. The combination of our over 20 years of experience operating in the Canadian east coast market, the experience of our highly skilled and trained workforce operating within one of the world s harshest marine environments, our fleet of Canadian-compliant, harsh weather vessels and our history of successfully operating under the highly protective Canadian marine regulatory environment provides us with a competitive advantage in this market and an opportunity to capitalize on expected growth that we believe is difficult for new entrants in the market to replicate. In addition, the Canadian marine regulatory environment offers protective provisions that significantly increase the cost of, and limit the attractiveness to, foreign competitors participation in marine services in this region. Harsh Weather, Multifunctional Vessels and Responsive Fleet Management Capabilities. As a result of our active management of our vessels, we have assembled a fleet of vessels that is capable of operating in the world s most demanding offshore environments and has the flexibility to provide a wide range of marine services. Our ability to customize our vessels for deployment in specialized applications enables us to better meet the changing needs of the marketplace and extend the effective life of our vessels. We have significant experience in identifying customer demand for services and the ability to convert or acquire vessels to serve the particular requirements of our customers. This ability to quickly and economically convert vessels often provides us with affordable acquisition opportunities unavailable to our competitors who lack this capability. We believe that the multifunctional profile of our fleet provides us with a significant competitive advantage in meeting the specific needs of our customers in markets around the world. Highly-Trained Workforce and Superior Safety Program. Our workforce has extensive international experience and has been rigorously trained by us on the east coast of Canada for operations in some of Table of Contents Index to Financial Statements Business the world s most demanding marine environments. Our masters and chief engineers have on average over 10 years of experience with Secunda. Our masters and chief engineers have strong customer service skills, extensive harsh weather experience, top-level technical qualifications and experience in a wide array of international locations. We believe that by providing our crews with opportunities for professional advancement, such as our well-established cadet-training program, we have created a culture of strong commitment and loyalty. We believe our employee turnover rate, which has averaged approximately 2% per annum for the last three fiscal years, is one of the lowest in the industry. As a result, we believe we have the capability to staff a growing vessel fleet from our existing highly-trained crews or from other highly-trained available crews. Our focus on safe work conditions and our comprehensive training programs enable us to attract and retain quality personnel who, we believe, provide our customers with a superior level of service and enhance our competitive position. The results of our customers written evaluations of our performance indicate that the quality of our crews and their dedication to safety is a key factor in our customers high degree of satisfaction with us. Safety is an increasingly important consideration for our customers due to the environmental and regulatory sensitivity associated with offshore drilling and production activity. We have received internationally recognized certifications and classifications, and our ability to maintain such certifications demonstrates our commitment to safety and quality to our employees, our fleet, the environment and to the industry as a whole. Attractive Growth Opportunities. We believe we are well-positioned to capitalize on a number of attractive growth opportunities including: Greater Worldwide Offshore Exploration and Production Activity. As offshore oil and natural gas exploration and production activity increases worldwide, particularly in challenging regions where our experience and capabilities provide us with a competitive advantage, the long-term relationships we have developed with well-established global companies present opportunities to further expand our operations. Continued Canadian Offshore Exploration Activities and Increasing Long-Term Production. We believe the continuing exploration activities and additional production projects in the offshore region of the east coast of Canada will allow us to grow our operations on a long-term basis, as fields in production generally provide for more stable, longer-term demand for offshore supply and support vessels. In addition, several oil and gas companies are currently considering new exploration opportunities in this region. Increasing Subsea Construction Activity. Our fleet includes vessels uniquely configured to service the subsea construction sector. With the projected significant increase in the number of subsea development projects, we expect this business line to generate substantial growth in the next few years. Our Enhanced Access to Growth Capital. Throughout our 20-year history, limited access to capital has acted as a significant constraint on our ability to grow our company. We plan to grow our vessel fleet utilizing the enhanced financial flexibility provided by this offering. Experienced Management Team. Our management team, led by our founder Alfred A. Smithers, has an average of 17 years of experience in the international marine services industry and an average of 15 years of tenure with us. This management team has consistently demonstrated its ability to secure profitable contracts in various market conditions, to deliver dependable services in a cost-effective manner and to optimize our fleet through its expertise in new construction, conversion and strategic vessel acquisitions and dispositions. The strength of our management team is demonstrated by the fact that we have been annually recognized as one of the 50 Best Managed Companies in Canada since 2001. Table of Contents Index to Financial Statements Business We have the management, personnel and information and quality control systems to manage a significantly larger fleet. OUR BUSINESS STRATEGY Our strategy is to grow our business and maximize the profitability and cash flow of our existing operations. To achieve this objective, we intend to: Increase Our International Presence Through Acquisitions. We plan to continue to grow our fleet through strategic acquisitions of well-equipped or readily convertible vessels that complement our existing fleet and portfolio of contracts while extending our global reach to new markets. We intend to finance these acquisitions through cash flow from operations, borrowings available under our senior secured credit facility and, if necessary, future public debt or equity offerings. In each of August and November 2005, we acquired a platform supply vessel, and we intend to acquire additional vessels with a portion of the proceeds from this offering. We intend to acquire vessels with specifications that fit our international growth profile. We have developed a strong history of effectively responding to market change. We believe that an increased vessel fleet size will provide us with the necessary scale to efficiently move our vessels in and out of areas of high demand while maintaining our base of operations off the east coast of Canada. Over the last year, we have moved three of our vessels from the Canadian market to the more active North Sea market. In addition, we believe our long-standing relationships and previous work with international customers will facilitate the chartering of newly acquired vessels. Strengthen Our Leading Market Share in the Canadian East Coast Region. With the proceeds from this offering and the resulting future access to the U.S. capital markets, we believe that we will be able to capitalize on our more than 20 years of experience in the offshore region of the east coast of Canada to retain and expand our market share in this region. We believe the Canadian market will afford us steady growth opportunities in servicing both drilling and production operations. We believe we are a leading provider of supply and support services in this region. Our nine Canadian-flagged vessels position us well to meet future growth in the eastern Canadian offshore market. In addition, we believe our long-standing relationships with major oil companies operating in the region, our knowledge of, and ability to comply with, the protective requirements of the Canadian regulatory regime, and our reputation for reliable, cost-effective and safe performance in a particularly demanding environment provide opportunities for further growth as this market shifts from predominantly exploration-oriented activities to long-term production. Pursue Niche Opportunities. We intend to continue our disciplined approach to acquiring vessels capable of operating in demanding environments and converting them as required into multifunctional vessels capable of offering a wide range of services to our customers. Our extensive in-house conversion and maintenance expertise developed through our 20-plus major conversions over many years enables us to provide additional value to our customers by modifying our vessels to meet their specific needs. We anticipate that current market conditions will generate additional subsea construction support, pipelay, maintenance, inspection and repair opportunities for our vessels. In addition, through our careful and consistent program of planned and preventative maintenance, we have been able to, and expect to continue to, deliver additional value to our customers. Capitalize on the Strength of Our Crews. We invest a significant amount of time, resources and capital in our marine personnel through our well-established cadet-training program. This commitment to quality crews has resulted in a pool of tenured, and experienced marine personnel that we believe gives us a competitive advantage in our industry. The availability of these essential personnel is currently greater than our present fleet requires and will allow us to meet our growth objectives. Our masters and Table of Contents Index to Financial Statements Business chief engineers have strong customer relation skills, extensive harsh weather experience, top-level technical qualifications and experience in a wide array of international locations. Customer service evaluations indicate the performance of our crews is a key factor in their high satisfaction rating of our service. We have the crew capacity available to staff our growth strategy and the marine expertise available to ensure that growth is well managed. Pursue Optimal Mix of Long-Term and Short-Term Contracts. We seek to balance our portfolio of customer contracts by entering into both long-term and short-term charters. Long-term charters contribute to higher utilization rates and provide us with more predictable cash flow. Short-term, or spot, charters provide us the opportunity to benefit from increasing dayrates in favorable market cycles. We manage our mix of long-term and spot market charters based on anticipated market conditions. OUR OPERATIONS Our business can be divided into two categories: (i) marine services to offshore oil and gas companies, and (ii) other marine services. Over the past 20 years, we have developed an expertise operating offshore of the east coast of Canada. The chart below shows revenues generated by each of our business segments for the fiscal years ended June 30, 2003 through June 30, 2005 and for the six months ended December 31, 2004 and 2005: Fiscal Year Ended June 30, Six Months Ended December 31, 2003 2004 2005 2004 2005 (Cdn$ in thousands) Marine services to offshore oil and gas companies $ 51,058 $ 48,250 $ 59,550 $ 24,188 $ 44,809 Other marine services: Construction and maintenance 9,951 9,486 7,051 6,226 Corporate and other 1,428 2,267 2,922 1,592 1,684 Total $ 62,437 $ 60,003 $ 69,524 $ 32,006 $ 46,493 Marine Services to Offshore Oil and Gas Companies. We provide supply services, support services and supply base services to our oil and gas company customers. Supply Services. Supply services include the loading, transport and discharge of personnel and supplies between land and offshore installations to support offshore oil and natural gas exploration, development and production activities. The essential supplies delivered by us include all provisions required to support personnel on the offshore installations, including food, water and other living requirements, as well as all material required to operate the offshore facility, including fuel, drill pipe, tools, casing and drilling mud, drill water, brine, glycol, cement, barite, mineral oil, casing, groceries, stores and other supplies required to keep the platform in continuous operation. Supplies are assembled by the platform operator and are loaded onto our supply vessel at an onshore logistics base. Once our supply vessel is onsite at the platform, the supplies are discharged to the platform as required. In addition, supply vessels often backhaul cargo to the logistics base. Support Services. Support services include standby rescue services, anchor handling, towing services and other specialty services. Standby services are provided when a standby vessel is required by the regulatory Table of Contents Index to Financial Statements Business authorities to standby an offshore installation to provide emergency rescue and evacuation support. These standby services are required to be provided 24-hours-a-day, 365-days-a-year, to all offshore oil and natural gas facilities. Anchor handling and towing services include assistance in deploying rig anchors to secure a rig in its desired location and towing rigs between locations. Specialty services include providing a marine platform for remote operated vehicles, or ROV, or manned diving operations and assisting in seismic exploration, as well as assisting in subsea construction and maintenance. Supply Base Services. Supply base services involve managing shorebase and dock facilities required to support offshore oil and natural gas projects. These services include coordinating and deploying all goods and services destined for the offshore facility, managing and operating the dock, warehouse and marshalling yards and coordinating vessels to and from shore to offshore facilities. Providing supply base services is a natural complement to providing vessel supply and support services. The timely and dependable performance of supply and support services is critical to the effective operation of offshore oil and natural gas facilities. Due to the significant per hour costs associated with operating in an offshore environment, any supply shortage or towing or deployment delay will have a material impact on the operation and financial performance of an offshore facility. We have built a reputation for highly dependable supply and support services. Given the importance of these services and their low cost relative to the total operating costs of an offshore facility, our ability to provide high quality services has resulted in the development of strong and dedicated customer relationships. We believe that our customers are unlikely to switch service providers if their current services are being dependably provided because of the potential risks to the operator of an offshore facility from service interruptions resulting from a change of supplier. We have participated in the supply and support services business in eastern Canada since 1983 and in other harsh marine environments around the world since 1985 and, as a result, have developed extensive experience operating supply vessels in harsh environments. Most of our vessels are capable of performing as either supply or support vessels. We have provided supply and support services in the North Sea, the Gulf of Mexico and offshore of Latin America and Africa. In addition, offshore of the east coast of Canada, we have provided production supply and support services to rigs operated by Petro-Canada on the Terra Nova oil field, by Husky Energy on the White Rose oil field, by ExxonMobil on the Sable natural gas fields and by EnCana on the Panuke Cohasset oil field. Subsea Construction. We provide vessels to be used as marine platforms for various types of subsea construction and maintenance projects, which primarily include laying and maintaining pipelines. Once in operation, pipelines must be maintained in order to remain consistently operational and provide their respective services 24-hours-per-day. The charterer s crew generally operates the specialized subsea construction and maintenance equipment being used and the vessel operator s crew operates and maintains the vessel. These services involve assistance both with the construction of the subsea pathways and with subsequent maintenance work. Maintenance assignments typically involve both actual maintenance, as well as the deployment of vessels on a standby basis to respond immediately to problems. Other Marine Services. In addition to the marine services provided to offshore oil and gas companies and subsea construction and maintenance services, we have in the past exploited the flexibility of our vessels and crews in order Table of Contents Index to Financial Statements Business to deploy our vessels for other marine services and to maximize the efficient utilization of our fleet. These other marine services are generally comprised of ocean towing and salvage work. Ocean towage involves the towing of marine equipment, such as ocean going construction barges, oil rigs and inoperative vessels that are not equipped with transit propulsion systems, to destinations requested by charterers. Salvage involves the deployment of vessels that are able to assist in the recovery of other vessels in distress, resulting from navigation problems such as groundings, equipment failure or damage caused by severe weather. We employ experienced salvage masters and crews, salvage equipment and the vessels necessary to provide professional salvage services to vessels in distress. We are a recognized professional salvor and are able to respond and provide services throughout the northeastern Atlantic and along the east coast of North America. OUR FLEET Vessels. Our fleet is currently comprised of 14 specialized and multi-function vessels with large cargo capacities and harsh weather performance capabilities. In addition, seven of our vessels are equipped with state-of-the-art DP systems, which use global positioning and computer-controlled propulsion to maintain vessel position even in the harshest weather conditions. Our expertise in identifying, acquiring, modifying and converting vessels that fit our business needs has enabled us to significantly improve the quality of our fleet in a cost-effective manner and has helped position us to meet the increasing demand for offshore marine services internationally and off the east coast of Canada. In execution of this acquisition and conversion strategy, from 1998 to 2005, we spent a total of $160 million to convert seven vessels and a total of $67 million to build two new vessels. In addition, in August 2005, we completed the purchase of a platform supply vessel for US$6.5 million. Our philosophy is to own and operate harsh weather vessels that can be configured in a multitude of ways to meet the specific requirements of our customers. This flexibility, combined with our extensive conversion expertise, gives us the capability to rapidly address the changing needs of our customers and the marketplace. Table of Contents Index to Financial Statements Business (1) All of our vessels, other than the Scotsman Sea, Agile, Bold Endurance and J. D. Mitchell, are certified for standby and rescue service. (2) For a definition of some of these capabilities, please see Glossary of Selected Industry Terms included in this prospectus. (3) Length of charter is tied to the length of the related contracting party s drilling program. Fleet Management Strategy. We have built our fleet of vessels with the objective of ensuring that each vessel can serve multiple functions and markets, spanning a range of marine services, for an extended period of time. When we identify client demand for services that our fleet does not currently support, we seek opportunities to acquire and/or convert vessels to serve this demand. Similarly, when we believe a vessel in our fleet is no longer a good fit for the needs of our customers in our markets, we seek opportunities to dispose of the vessel on attractive terms. This flexibility creates a competitive advantage that is tied to our experience in sourcing vessels on financially attractive terms and retrofitting them for deployment into market niches through our conversion capabilities. This competitive strength is further enhanced by our leadership and ability to act quickly when opportunities arise to acquire vessels in distressed situations. Our practice of acquiring existing vessels on attractive terms and converting these vessels has also been important to the flexibility of the fleet. Table of Contents Index to Financial Statements Business Since our inception, we have grown our business by strategically acquiring vessels on attractive terms. We identify acquisition candidates through industry contacts, specialized marine brokers and vessel owner-operators. We pursue vessel acquisitions selectively, consummating only those where we believe the vessel is compatible with the demands of our customers. We have been successful in acquiring and selling vessels on attractive terms. In response to the evolution of the region offshore of the east coast of Canada from exploration to development and production and what we believe to be a long-term trend towards deepwater oil and natural gas exploration, development and production activities worldwide, we made a decision in 1996 to significantly change the profile of our fleet. As production operations in general, and deepwater oil and gas operations in particular, require supply and support vessels with larger cargo capacities, improved performance and more exacting maneuverability capabilities, we commenced a planned upgrade program which involved the disposal of certain existing vessels and the acquisition and/or conversion of other vessels to satisfy the requirements of the offshore oil and gas industry. As a result, we significantly increased the capabilities of our fleet and positioned ourselves for the growing demand for deepwater service providers. Vessel Conversion Expertise. In order to ensure the best fit between our vessels and our customers requirements, we have continuously engaged in vessel conversions to upgrade the functionality of our vessels. We have developed an in-house project capability that enables us to design and manage our own vessel conversions, adapt existing or newly acquired vessels for specialized purposes and oversee and manage the drydocking process. We believe that this results in a lower overall cost of ownership over the life of our vessels. Since 1998, we have converted or retrofitted seven vessels. OUR MARKETS We provide services to customers operating in the North Sea, the Gulf of Mexico, the North Pacific, the Caribbean and offshore of Latin America, North and West Africa and the east coast of Canada. The chart below shows our total revenues by geographic market segment for the fiscal years ended June 30, 2003 through June 30, 2005 and for the six months ended December 31, 2004 and 2005: Fiscal Year Ended June 30, Six Months Ended December 31, CUSTOMERS Our customers are primarily large oil and natural gas exploration, development and production companies and large contractors to those companies. These companies are primarily global, blue chip companies with strong credit ratings. These customers undertake large capital-intensive projects in offshore environments, related to the exploration, development and production of oil and natural gas reserves. Due to the long duration typical of these projects, we can service only a small number of customers at any point in time. However, because of the significant scale and long duration of these projects, we are able to generate significant annual revenue and cash flow from a small number of customers. As these large oil and gas companies and large contractors generate new opportunities, our Table of Contents Index to Financial Statements Business long standing good relationships with large global oil and gas companies enable us to generate new opportunities to deploy our vessels. We have provided services to more than 50 companies over the past five years. Our current customers, and the percentage of our revenues for six months ended December 31, 2005 generated by these customers, include Exxon Mobil (26%), Condux (13%), Oceanographia (11%), Technip (5%) Apache (5%), Petro Canada (8%), LV Travacean (5%) and Heerema (3%). CONTRACTS The standard contract for vessel employment in the offshore oil and gas industry is a time charter priced on a per-day basis. Under a typical time charter, a customer will agree to charter a vessel for an agreed time period. The owner provides a service to a charterer through the use of both the owner s ship and its officers and crew and pays for all running costs including insurance and other costs related to operation of the vessel. It is normal under a time charter for the charterer to pay for fuel and lubes, and this is virtually always the case with respect to time charters to oil companies or other operators in the offshore oil and gas sector. With a time charter, the charterer gets the right to use the vessel while the vessel remains squarely within the possession and control of the owner, its master and crew. Whether the operator uses the vessel or it sits at the dock has no bearing on the dayrate. Contracts that are a month or more in duration usually include a maintenance day allowance (typically one day for every 30 days worked) to give the operator a paid day to take the vessel out of service to do repair work that could not be performed during normal operating periods. Time charter terms may vary from several days to several years. Vessels may also be contracted for service under a bareboat charter. A bareboat charter is a form of charter pursuant to which the owner of a ship charters such vessel for an agreed period of time in exchange for periodic payments of hire. The ship is tendered by the owner to the charterer bare of officers and crew, and the charterer obtains full possession and control of the ship. The charterer has the responsibility for complete operation of the ship and to provide and pay for crew, insurance, supplies, fuel and all running costs of the ship. Charters are generally awarded based on suitability and availability of equipment, price and reputation for quality and safe service. The pricing of a charter is dependent on market prices in that geographic region and the availability of competing vessels. In addition, vessels from outside the geographic region will also compete, although usually at a disadvantage because of barriers to entry and mobilization costs. Overall utilization for any vessel with respect to any period is the ratio of aggregate number of days worked by such vessel to total calendar days available during such period. Rates per day worked and utilization of our fleet are a function of demand for and availability of marine vessels, factors which are closely aligned with the level of exploration and development of offshore areas. The level of exploration of offshore areas is affected by both short-term and long-term trends in oil and natural gas prices that, in turn, are related to the demand for petroleum products and the current availability of oil and natural gas resources. In contrast, the volatility of oil and natural gas prices has little bearing on production activities, including the demand for marine services. Towage contracts are performed on a charter basis with payment by way of lump sum or a time charter. Salvage work is performed on either a time charter dayrate basis or by way of a special salvage contract known as a Lloyd s Open Form, which is a no-cure, no-pay contract. Under a Lloyd s Open Form, the salvor is entitled to an award based on the service performed, which is generally higher margin. Table of Contents Index to Financial Statements Business Under the Lloyd s Open Form, a salvor may in some situations have the right to convert the contract to a dayrate payment. COMPETITION The principal competitive factors for fleets in the offshore marine service industry are price, vessel capabilities, experience, service, safety, reputation, the existence of national flag preference, operating conditions and intended use (all of which determine the suitability of vessel types), complexity of maintaining logistical support and the cost of transferring vessels and crews from one market to another. Our strong base in the Canadian marketplace has allowed us to grow and expand into international markets. Our highly-trained crews, fostered with our corporate culture of flexibility and ingenuity, have adapted to the international marketplace and have been well received by oil and gas companies in foreign markets. In both the international and Canadian marketplaces, we compete with the major offshore marine service companies, including Maersk Supply Service, GulfMark Offshore, Tidewater, Farstad Shipping ASA, Sealion Shipping Limited and BOURBON. North Sea Market The North Sea market is a well-developed and very active market that is naturally divided by nationality into the Norwegian sector and the UK sector. The Norwegian sector has certain barriers to entry and is predominantly populated by Norwegian vessels. The UK sector is considered a free trading zone for vessels and attracts companies from all over Europe and North America, including many of those noted above. We currently have three vessels operating in the North Sea market. The North Sea market is efficient and has traditionally been priced on a short-term basis with variability in rates determined by supply and demand for different types of vessels, weather and rig availabilities. The market is usually made by shipbrokers. Recently, an increase in dayrates and an occasional lack of availability of vessels to meet particular demand has resulted in longer term contract offers from operators in the UK sector of the North Sea to ensure the availability of vessels that meet their technical needs. The North Sea is an extreme environment and requires harsh weather vessels manned by crews experienced in loading, unloading and station keeping in severe conditions. Many of the competitors we describe above are active in this market. East Coast of Canada Market We believe our primary competitor in the region offshore of the east coast of Canada is Maersk, a European-based, well-established international provider of offshore supply and support services. We and Maersk each currently have six vessels operating offshore of the east coast of Canada. Atlantic Towing also currently has four large AHTS vessels operating in this region. In addition, Secunda has three other vessels working internationally that are capable and eligible to work in the Canadian offshore market. We are able to effectively compete with Maersk and Atlantic Towing and respond to changing market requirements as a result of our harsh weather, multifunctional vessels, strong crews, fully integrated safety management system and computerized planned maintenance system. Through our vessel modification and retrofitting capabilities, we are price competitive with operators working in the international marketplace and with those seeking to enter the expanding Canadian offshore oil and gas marine services business. As a Nova Scotia-based company, we understand and have dealt with the various Canadian government regulations and policies that govern this market and are capable of Table of Contents Index to Financial Statements Business working within these Canadian laws and regulations to ensure that we maximize any advantages they provide and maintain a strict compliance regimen. SALES AND MARKETING We have developed a diverse network of contacts in the offshore oil and gas and marine industries, including major international oil and gas companies, independent exploration and production companies, international oil field service contractors, and Canadian independents operating in Canada and abroad. We have an extensive network of international ship-brokers in both the area of chartering and the purchase and sale of vessels, as well as major oil field service contractors. The strength of these relationships, combined with our track record of dependable performance, has enabled us to successfully compete for projects around the world. We are intimately familiar with the chartering practices of the various industry sectors and we have been able to build strong relationships with project personnel, having worked with them on multiple projects around the world. In the offshore oil and gas business, different geographic regions operate under different business norms, such that companies must conduct themselves in accordance with the established practice of any given region. Certain regions in Canada and various international markets, including western Africa and the Gulf of Mexico, operate on the basis of direct dealings between offshore marine service companies and their customers (which are either the oil and gas companies themselves or large offshore contractors). In these regions, the relationship is direct and is usually based on established business relationships. In other regions, such as the North Sea, work is exclusively sourced through brokers who represent offshore marine service companies in business dealings with the oil and gas companies. SEASONALITY Seasonality has not historically had a material impact on our business; however, less drilling activity has historically taken place offshore of the east coast of Canada and other harsh weather environments in the winter months because of the increased costs associated with operations in even harsher winter conditions. Activities related to the production of oil and gas do not face the same cyclicality as drilling. In addition, in times of tight rig availability, drilling activity will continue on a year-round basis without the typical reduction in activity during the winter months. EXPENDITURES AND DIVESTITURES Our capital expenditures for the six months ended December 31, 2005 totaled $26.8 million, which was primarily comprised of $26.5 million for the acquisition of two platform supply vessels. Our capital expenditures for fiscal 2005 totaled $32.5 million, which was comprised primarily of the purchase of the Thebaud Sea for $24.8 million, capital spending on the Agile of approximately $4.0 million, and purchase of DP systems of approximately $1.8 million. Also during fiscal 2005 we sold the Cabot Sea, realizing combined proceeds of $0.9 million. Our capital expenditures for fiscal 2004 included $0.4 million for equipment purchases. During the same period we sold the Magdelan Sea, realizing $2.7 million in proceeds. During fiscal 2003, our capital expenditures were $19.3 million for continuation of the construction of a newbuild vessel in Europe, the continued conversion of a platform supply vessel, the acquisition and conversion of a platform supply vessel and miscellaneous capital expenditures. During the same period, we realized proceeds in the amount of $6.3 million from the sale of a newbuild vessel we were constructing in Europe. Table of Contents Index to Financial Statements Business REGULATION International Regulation and Foreign Laws. We often operate in foreign jurisdictions or call at foreign ports and, therefore, are subject to the national laws, regulations and licensing requirements of these foreign jurisdictions for the operation of our vessels. We must also comply with numerous international conventions that regulate the operation of our vessels, including the International Convention for the Safety of Life at Sea (SOLAS), the International Convention for Prevention of Pollution by Ships (MARPOL), the International Ship and Port Facility Security Code (ISPS) and the Convention for the Standards of Training, Certification and Watchkeeping for Seafarers (STCW). Furthermore, operations in Canadian waters, and operation of Canadian vessels worldwide, are governed by the Canada Shipping Act, which builds on these International Conventions and provides a further layer of regulatory compliance that must be achieved in structural design, safety equipment and human operations. In conjunction with the United Kingdom Offshore Operators Association, our vessels operating in the North Sea maintain the joint standard described in the Uniform Marine Inspection Document. East Coast of Canada. The Canadian marine regulatory environment offers certain protective measures for Canadian marine operating companies. Certain provisions in inter-governmental agreements among the Canadian federal government, Nova Scotia and Newfoundland augment these measures. Foreign flagged vessels seeking business opportunities offshore of Canada must demonstrate that no suitable Canadian vessels are available for the job at hand. Operators seeking to Canadianize foreign vessels may have to pay significant duties (subject to exemption or reduction pursuant to bilateral trade agreements) and must comply with Canadian vessel standards. In most cases, Canadian crews must be employed. Unlike the Jones Act s regulatory regime in the United States, Canadian vessel owners are permitted to move Canadian vessels to foreign markets, reflag them under foreign flags and later move the vessels back to Canadian waters to work there without losing preferred Canadian status. However, if Canadian vessels are reflagged with a foreign flag for operation in foreign waters they must be reflagged with a Canadian flag upon their return to Canadian waters. This process typically takes less than a month. Canadian Vessel and Marine Operation Regulations. The Canadian marine regulatory environment offers certain protective measures for Canadian marine operating companies. These protective provisions may increase the cost to foreign competitors of participating in the marine services offshore of Canada. Canadian Waters Reserved for Canadian Ships. Certain activities in Canadian waters (including the region offshore of Canada) are reserved for Canadian-flagged, fully duty-paid vessels. Foreign-flagged vessels can apply to operate temporarily in the Canadian waters, but if a Canadian vessel is suitable and available to do the work, the foreign vessel can be blocked from entry. Customs Duties on Foreign Built Vessels. Foreign built vessels attract duty at a rate based on the country of origin and the value of the vessel. Although vessels built in the United States, Mexico, Chile and certain other countries can be imported into Canada free of duty under NAFTA or other bilateral trade agreements, Goods and Service Tax or Harmonized Sales Tax is due upon importation but is generally refundable to vessel owners registered with Canada Revenue Agency as GST Registrants. In addition to being fully duty paid, the vessel must be registered in Canada to be automatically eligible to work in Canadian waters. Otherwise a temporary entry permit must be obtained for the vessel, which can be blocked if a Canadian flagged, fully duty-paid vessel is suitable and available to do the work. U.S. operators have a significant disincentive to change the flag of their vessels temporarily in order to exploit opportunities in Canadian waters once a U.S. vessel is transferred from the U.S. registry, the vessel permanently loses its status as a U.S.-built vessel for purposes of working in the U.S. coasting trade. Table of Contents Index to Financial Statements Business Canada Shipping Act. All vessels that are built outside of Canada and transferred onto the Canadian registry of vessels must meet stringent Canadian regulations. Our experience has been that the cost to convert a typical foreign supply vessel to meet these regulations is between $2 million and $3 million. Canadian Content Oil and Natural Gas Development. All operators seeking to carry out offshore oil and natural gas development must submit detailed development plans to the Canadian offshore regulator, including detailed estimated expenditures for local Canadian and provincial benefits that will result from their development work. Operators are therefore under significant pressure to meet the Canadian content expenditures provided for in their development plan, which benefits Canadian operators. All significant contracts must be reviewed and approved by the offshore regulators to ensure oil companies have given Canadian suppliers full and fair access to the bid process. First consideration is given to Canadian companies if they are competitive on price, quality and delivery. Other Regulatory Requirements. The legislative and regulatory framework of the Canadian federal government has in some circumstances been extended to offshore oil and natural gas development, including immigration regulations which effectively require that Canadians be employed in many types of offshore activities. Foreign Vessel and Marine Operation Regulations. We operate three vessels registered in Barbados, which are subject to the laws of Barbados as to ownership, registration, manning and safety of vessels. In addition, we have three vessels on the Barbados bareboat registry. These vessels are also subject to the requirements of a number of international conventions to which Barbados is a party. We believe that our vessels registered in Barbados or on the bareboat registry of Barbados are in compliance with all applicable material regulations and have all licenses necessary to conduct their business. Environmental, Health and Safety Regulation. The nature of our operations raises environmental, occupational health and safety issues relating to, among other things, our operation of marine vessels in demanding natural environments, our handling and marine transport of various hazardous substances (including, for example, bulk supplies of mud, brine and fuel to support drilling activities) and our work in inherently dangerous workplaces. We also carry out significant ship conversion and repair and maintenance operations. The risks inherent in these operations include the risk of accidental injury to workers, and accidental spills or releases of hazardous substances (including petroleum products) on or into the land, air or water, which may cause damage to the natural environment. As a consequence, our operations are subject to a complex and increasingly stringent set of international, federal, provincial, state and local laws, regulations and other legal requirements (including common law requirements) relating to occupational health and safety and the environment ( Environmental, Health and Safety Regulations ). We have implemented an integrated Quality, Health, Safety and Environmental Protection Management System ( QSM ) for protecting both the health and safety of our crews and the environment. Through the QSM, we have developed and implemented policies, procedures, training and instructions to promote compliance with Environmental, Health and Safety Regulations. For example, all vessels and onboard equipment are inspected, maintained and certified in accordance with applicable regulations, industry standards and company policies to ensure their continued reliability, safety and operational efficiency. Classification. All of our vessels are also inspected and surveyed by maritime authorities and recognized classification societies, such as Lloyds Registry of Shipping or Det Norske Veritas, at regulated intervals in order to maintain their respective statutory and class certification survey statuses. Table of Contents Index to Financial Statements Business Under applicable maritime regulations, these inspections typically take place in drydock twice in a five-year period. RISK MANAGEMENT/INSURANCE We have property, casualty and liability insurance to cover standard marine risks from the operation of our vessels with rated insurers in the form and with coverages, limits and exclusions that we believe to be appropriate, including insurance against damage to vessel hulls and onboard machinery, protection and indemnity insurance (covering liability risks, such as third party injury and property damage, crew injury and pollution) and war risk insurance. Insurance is placed through Marsh Canada with approved insurers in London, New York and Toronto, or through other appropriate insurance arrangements. Contracts in the offshore oil and gas industry are generally knock-for-knock, which is a contractual arrangement used in the industry to allocate liability, create contractual certainty and apportion risk. In a knock-for-knock arrangement, each party in the project takes responsibility for loss or damage to its own equipment and injury to its own personnel. Each party is required to enter similar arrangements with their own subcontractors. As a result, every commercial entity engaged in the project is responsible for their own equipment and personnel and cannot claim against others involved in the project for damage they cause. This arrangement eliminates the need for duplicate insurance and the determination of which party is responsible for damages. EMPLOYEES As of December 31, 2005, we had 374 non-unionized employees. Our workforce is comprised of approximately 41 non-vessel staff and 333 seafaring personnel, many of whom have substantial expertise in marine services and working on ocean-going vessels in demanding environments or in shore base management and services. Of our 333 seafaring employees, 105 are located on vessels currently operating in foreign jurisdictions. We place a strong emphasis on developing our human capital, promoting employee health, welfare and safety and providing competitive compensation packages. PROPERTIES Our principal offices are located at One Canal Street, Dartmouth, Nova Scotia B2Y 2W1 Canada, where we own approximately 16,000 square feet of office and shop space. We also own lands at Wright s Cove in Halifax Harbor and lease a causeway and dock at this location from the Halifax Port Corporation. In addition, we own 18,000 square feet of property adjacent to our principal offices located at Eighteen Canal Street, Dartmouth, Nova Scotia B2Y 2W1 Canada and currently lease this property to a third party. LITIGATION Our operations expose us to a variety of operating hazards and risks. As a result, at any given time we may be a defendant in legal proceedings and litigation arising in the ordinary course of business. There are currently no outstanding material legal proceedings to which we, or any of our subsidiaries is a party, nor are we or any of our subsidiaries aware of any material threatened or contemplated proceedings. Table of Contents Index to Financial Statements Business SECURITY Heightened awareness of security needs brought about by the events of September 11, 2001 has led to the adoption of heightened security procedures in Canada relating to ports with vessel access. Transport Canada, the regulatory agency responsible for overseeing Canadian transportation regulations has, and other regulatory authorities have, recently begun to enforce new marine security requirements under the International Maritime Organization ISPS Code. Under the ISPS Code requirements, all affected vessels wishing to enter Canadian waters must have an International Ship Security Certificate. The new requirements also apply to Canadian marine facilities and ports serving such vessels. Similar regulations apply in foreign ports and jurisdictions. We have complied with such new procedures and have revised our vessel access procedures in light of new requirements. Table of Contents Index to Financial Statements Management DIRECTORS AND EXECUTIVE OFFICERS The following table lists the names, ages and positions of our current directors and senior management: Name Age Current Position Alfred A. Smithers 63 President, Chief Executive Officer and Chairman of the Board P. Michael Connolly 56 Vice President of Planning and Investor Relations and Director P. L. Meier 56 Vice President of Finance and Director Donald A. MacLeod 46 Vice President, General Counsel, Secretary and Director J. Bernard Boudreau 61 Director John G. Hughes 45 Managing Director Dwayne B. Smithers 38 Senior Vice President of Business Development and Marketing Alfred ( Fred ) A. Smithers is our President, Chief Executive Officer, Chairman of the Board and founder. Mr. Smithers is a member of the Board of Directors of St. John Ambulance, Saint Mary s University in Halifax, Nova Scotia, the Nova Scotia College of Art and Design, the Halifax Airport Authority and is a director of Barrington Wind Energy. Prior to founding our predecessor in 1982, Mr. Smithers owned and operated a concrete construction business in Nova Scotia. P. Michael Connolly has served as our Vice President of Planning and Investor Relations since August 2005. Mr. Connolly continues to serve as a director and served as our Chief Operating Officer from July 2004 to August 2005 and as Chief Operating Officer of Secunda Marine Services Limited, our principal operating subsidiary, from May 2003 to August 2005. From November 1995 to May 2003, Mr. Connolly served as Vice President and Chief Financial Officer to Secunda Marine Services Limited. Prior to joining Secunda in 1995, Mr. Connolly provided contract senior executive services to several Atlantic Canadian businesses. From 1978 to 1990, Mr. Connolly was employed by The Mortgage Insurance Company of Canada, a publicly traded Canadian mortgage insurer. Mr. Connolly held various senior management positions including President, Chief Executive Officer and Company Director. P. L. ( Paul ) Meier has served as our Vice President of Finance and director since July 2004. Mr. Meier has served as Vice President of Finance of Secunda Marine Services Limited since May 2003. Prior to joining us in 2003, Mr. Meier was Managing Partner of the Saint John, New Brunswick office of Grant Thornton LLP. From 1984 to 1989, Mr. Meier worked for John Labatt Limited in various capacities, including Director, Internal Audit and Corporate Controller and Treasurer. From 1970 to 1982, Mr. Meier worked in public practice with Clarkson Gordon and Doane Raymond, the predecessor firm to Grant Thornton. Donald A. MacLeod has served as our Vice President, General Counsel, Secretary and director since July 2004. Mr. MacLeod has served as Vice President General Counsel of Secunda Marine Services Limited since March 1989. Prior to joining us, Mr. MacLeod was a political aid to a number of Canadian Federal Cabinet Ministers from 1984 to 1989. Mr. MacLeod is the Vice Chairman of the Shipowners Mutual Protection and Indemnity Association (Luxembourg) and a Director of SOP (Bermuda), Spandilux SA and the Barbados Shipowners Association. He is a member of the Federal Government s Shipbuilding and Industrial Marine Advisory Committee and sits on the Board of Governors of the Nova Scotia Community College and Board of Regents of Mount Allison University. J. Bernard Boudreau was appointed as a director in July 2004. Mr. Boudreau was a Founding Member and Senior Partner with the law firm of Boudreau, Beaton and LeFosse in Sydney, Nova Scotia. Mr. Table of Contents Index to Financial Statements Management Boudreau was first elected to the Provincial Legislature of Nova Scotia in September 1988. In September 1993, Mr. Boudreau was appointed Minister of Finance for the Province of Nova Scotia and subsequently served as Minister of Health. In 1999, Mr. Boudreau was appointed to the Senate of Canada and served as Leader of the Government in the Senate and Minister responsible for the Atlantic Canada Opportunities Agency, where he served until January 2001. Mr. Boudreau is a former Director of the Bank of Canada and currently serves as a Director of Export Development Canada, P2P Health Systems Inc. and PharmEng International Inc. Currently he is the President and CEO of Radcliff Consulting and Investment Limited based in Halifax, Nova Scotia. John G. Hughes has served as a Managing Director of Secunda Marine Services since 2003. Captain Hughes previously served as Director of Fleet Operations and, prior to that, as Operations Manager with Secunda Marine Services Limited commencing in 1998. Captain Hughes obtained his Master Mariners Certificate in 1984 and worked previously as Vessel Master aboard offshore anchor handling tugs, supply vessels and dynamically positioned saturation diving vessels. Dwayne B. Smithers has served as the Senior Vice President of Business Development and Marketing of Secunda Marine Services Limited since November 2005. Mr. Smithers previously served as Vice President of Marketing and Corporate Development from October 2004 to November 2005 and Sales and Marketing Manager from November 2002 to October 2004. In addition, since 1998, Mr. Smithers has been President of Offshore Logistics Inc., a subsidiary of Secunda Marine Services Limited, which assists offshore operators with their logistics needs. Mr. Smithers has over 19 years of experience in the offshore marine industry and is the son of our President and Chief Executive Officer, Alfred A. Smithers. BOARD OF DIRECTORS PRACTICES Our board of directors will be divided into three classes serving staggered three-year terms, with only one class being elected each year by our shareholders. At each annual meeting of shareholders, directors will be elected to succeed the class of directors whose terms have expired. COMMITTEES OF THE BOARD OF DIRECTORS We have established an audit committee currently consisting of two persons and which is responsible for reviewing our accounting controls and recommending to the board of directors the engagement of our outside auditors and which, upon the implementation of this offering, will have a written charter and will have three members. Following the phase-in period permitted under the Nasdaq National Market rules, each member of our audit committee will be an independent director. We will appoint a financial expert, who will serve as chairman of the audit committee, and who will be independent as those terms are defined under the Commission and Nasdaq regulations. The initial members of the audit committee will be Messrs. P.L. Meier, J. Bernard Boudreau and an additional director yet to be determined. CORPORATE GOVERNANCE PRACTICES We have certified to Nasdaq that our corporate governance practices are not prohibited by the laws of the Province of Nova Scotia. Therefore, we are exempt from many of Nasdaq s corporate governance practices other than the requirements regarding the disclosure of a going concern audit opinion, submission of a listing agreement, notification of material non-compliance with Nasdaq corporate governance practices and the establishment and maintenance of an audit committee with specified Table of Contents Index to Financial Statements Management responsibilities. The practices that we follow in lieu of Nasdaq s corporate governance rules are described below. We are not required under Nova Scotia law to maintain a board of directors with a majority of independent directors and we do not intend to do so. However, following the phase-in period permitted under Commission and Nasdaq rules, we anticipate that our board of directors will include three independent directors. In lieu of a compensation committee comprised of independent directors, our board of directors will be responsible for establishing the compensation and benefits of our Chief Executive Officer and of all other executive officers. Under Nova Scotia law, compensation of our executive officers is not required to be determined by an independent committee. We are not required under Nova Scotia law to have a nomination committee comprised of independent directors or a formal written charter addressing the nomination process. A shareholder may nominate potential candidates to become board members by submitting a proposal in writing in accordance with the procedures prescribed by the Companies Act (Nova Scotia) or by nomination at the Annual General Meeting. As a foreign private issuer, we are not required to solicit proxies or provide proxy statements to Nasdaq pursuant to Nasdaq corporate governance rules or Nova Scotia law and we do not intend to solicit proxies or provide proxy statements for meetings of our shareholders. Consistent with Nova Scotia law, we will notify our shareholders of meetings not less than 21 days before the meeting. This notification will contain, among other things, information regarding the business to be transacted at the meeting. Nova Scotia law provides that our voting shareholders may designate a proxy (who need not be a shareholder) to attend and act on their behalf at any meeting of our shareholders. In lieu of our audit committee or another independent body of the board of directors reviewing all related party transactions for conflicts of interest, consistent with Nova Scotia law requirements, any director who has a potential conflict of interest is required to identify and declare the nature of the conflict to our board of directors at a meeting of the board of directors. Nova Scotia law does not require, and we do not intend to obtain, shareholder approval prior to the issuance of any of our shares which form part of our authorized capital. Though we have an audit committee, Nova Scotia law does not require us to. Our audit committee will have two rather than three members as otherwise required by Nasdaq. Other than as noted above, we are in full compliance with all other applicable Nasdaq corporate governance standards. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS For the fiscal year ended June 30, 2005, we paid our directors and executive officers annual compensation in the aggregate amount of $2,211,500. All of our directors, including officers who also serve as directors, receive compensation for their services as directors. Audit committee members each receive an additional fee for their services. In addition, each director will be reimbursed for out-of-pocket expenses incurred while attending any meeting of the board of directors or any board committee. 2005 EQUITY INCENTIVE PLAN The following contains a summary of the material terms of our 2005 Equity Incentive Plan which will be adopted by our board of directors and approved by our shareholders prior to the closing of this offering. Table of Contents Index to Financial Statements Management The description of such terms is not complete. For more information, we refer you to the full text of the 2005 Equity Incentive Plan, which has been filed as an exhibit to the registration statement of which this prospectus forms a part. The 2005 Equity Incentive Plan permits the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, phantom stock awards, performance awards, bonus stock awards or any combination of the foregoing to employees, officers, directors and certain consultants to us and to our affiliates. A maximum of 1,200,000 common shares may be delivered pursuant to awards under the 2005 Equity Incentive Plan. Our board of directors has the discretion to adjust the number of shares deliverable pursuant to the awards under the 2005 Equity Incentive Plan on account of mergers, consolidations, reorganizations, stock splits, stock dividends and other dilutive changes in our common shares. Common shares used to pay exercise prices and to satisfy tax withholding obligations with respect to awards, as well as shares covered by awards that expire, terminate or lapse, will again be available for awards under the 2005 Equity Incentive Plan. Administration. The 2005 Equity Incentive Plan will be administered by our board of directors. The board of directors has the sole discretion to determine the employees, directors and consultants to whom awards may be granted under the 2005 Equity Incentive Plan and to establish the terms and conditions of those awards. Awards are granted by board of directors to employees, directors and consultants in such numbers and at such times during the term of the 2005 Equity Incentive Plan as the board of directors shall determine. The board of directors is authorized to interpret the 2005 Equity Incentive Plan, to establish, amend and rescind any rules and regulations relating to the 2005 Equity Incentive Plan, and to make any other determinations that it deems necessary or desirable for the administration of the 2005 Equity Incentive Plan. The board of directors may correct any defect, supply any omission or reconcile any inconsistency in the 2005 Equity Incentive Plan in the manner and to the extent the board of directors deems necessary or desirable. Options. The board of directors determines the exercise price for each option. However, options must generally have an exercise price at least equal to the fair market value of the common shares on the date the option is granted. An option holder may exercise an option by written notice and payment of the exercise price in a manner prescribed by the board of directors. Share Appreciation Rights. The board of directors may grant share appreciation rights independent of or in connection with an option. Generally, each share appreciation right will entitle a participant upon exercise to an amount equal to (i) the excess of (1) the fair market value on the exercise date of one common share over (2) the exercise price, times (ii) the number of common shares covered by the stock appreciation right. Payment shall be made in common shares or in cash, or partly in common shares and partly in cash, all as shall be determined by the . Performance Awards. The board of directors may grant performance awards that vest upon such terms and conditions as the committee may establish, including the achievement of performance criteria. To the extent earned, performance awards may be paid in common shares or in cash or any combination thereof as determined by the committee. Restricted Share and Phantom Share Awards. The board of directors may grant awards of restricted shares and/or phantom shares that are valued in whole or in part by reference to, or are otherwise based on the fair market value of, common shares. Bonus Share Awards. The board of directors may, in its discretion, grant bonus share awards. Each such bonus share award will constitute a transfer of unrestricted common shares, without other payment therefor. Table of Contents Index to Financial Statements Management Transferability. Unless otherwise determined by the board of directors, awards granted under the 2005 Equity Incentive Plan are not transferable other than by (1) will or by the laws of descent and distribution, or (2) pursuant to a qualified domestic relations order as defined by the U.S. Internal Revenue Code of 1986, as amended. Change of Control. In the event of a change of control of our company (as defined in the 2005 Equity Incentive Plan), the board of directors may provide for: acceleration of the time at which all or any portion of an award can be exercised; payment in exchange for the cancellation of an award; and/or the adjustment of options then outstanding as the committee deems appropriate. Amendment and Termination. The board of directors may amend, alter or discontinue the 2005 Equity Incentive Plan in any respect at any time, but no amendment may diminish any of the rights of a participant under any awards previously granted, without his or her consent. Table of Contents Index to Financial Statements Principal and selling shareholders The following table sets forth certain information regarding the beneficial ownership of our common shares that will be owned upon the consummation of the offering and the related transactions by: each person known by us to be a beneficial owner of more than 5.0% of the common shares; each of our directors; each of our named executive officers; and all directors and executive officers as a group. The number of shares and percentages of beneficial ownership before the offering set forth below are based on our common shares issued and outstanding as of , and after giving effect to the -for-one common share split we expect to effect immediately prior to the consummation of this offering. The number of shares and percentages of beneficial ownership after the offering are based on of our common shares to be issued and outstanding immediately after this offering and assuming no exercise of the underwriters option to purchase additional shares and full exercise of that option. Except as otherwise indicated, the person or entities listed below have sole voting and investment power with respect to all shares of our common shares beneficially owned by them, subject to community property laws where applicable. Shares Beneficially Owned Prior to the Offering Shares Offered in the Offering Shares Beneficially Owned After the Closing(1) Name of Beneficial Owners Number Percent Number Percent of Existing Shares Number Percent 3002534 Nova Scotia Limited(2) 100 % % % Alfred A. Smithers(3) 100 % % % P. Michael Connolly(4) % P. L. Meier(4) % Donald A. MacLeod(4) % J. Bernard Boudreau(4) % All executive officers and directors as a group (seven persons)(4) % % % (1) Assumes the underwriters over-allotment option is not exercised. (2) Includes beneficial ownership of common shares of Secunda International Limited beneficially owned by 3002534 Nova Scotia Limited. A trust for the benefit of Mr. Smithers and his family owns 100% of the outstanding common shares of 3002534 Nova Scotia Limited and Mr. Smithers owns all of its outstanding preferred shares. The address of 3002534 Nova Scotia Limited is c/o Secunda International Limited, One Canal Street, Dartmouth, Nova Scotia, Canada B2Y 2W1. (3) Includes beneficial ownership of common shares of Secunda International Limited beneficially owned by 3002534 Nova Scotia Limited. A trust for the benefit of Mr. Smithers and his family owns 100% of the outstanding common shares of 3002534 Nova Scotia Limited and Mr. Smithers owns all of its outstanding preferred shares. The address of Mr. Smithers is c/o Secunda International Limited, One Canal Street, Dartmouth, Nova Scotia, Canada B2Y 2W1. (4) Does not include common shares that may be acquired through the exercise of options to purchase our common shares to be granted in connection with the consummation of the offering as follows: Alfred A. Smithers (75,000), Donald A. MacLeod (80,000), Dwayne Smithers (75,000), P. Michael Connolly (75,000), P. L. Meier (60,000) and John Hughes (60,000). None of such options are exercisable within 60 days of the date of this prospectus. Table of Contents Index to Financial Statements Related party transactions We are paying the expenses of this offering by the selling shareholder, other than the underwriting discounts, commissions and transfer taxes with respect to the common shares sold by the selling shareholder and the fees and expenses of any attorneys, accountants and other advisors separately retained by it. We will enter into a registration rights agreement immediately prior to the closing of this offering with our sole existing shareholder pursuant to which we will grant it, its affiliates and certain of its transferees, the right, under certain circumstances and subject to certain restrictions, including restrictions included in the lock-up agreements described elsewhere in this prospectus, to require us to register under the Securities Act common shares held by them. The registration rights agreement will also provide that we will pay the costs and expenses, other than underwriting discounts and commissions, related to the registration and sale of the common shares that are registered pursuant to the agreement. The agreement will contain customary registration procedures and indemnification and contribution provisions for the benefit of the shareholder and us. As of December 31, 2005, 3002534 Nova Scotia Limited, our parent company, had loans outstanding in the amount of $2.1 million to 1680030 Nova Scotia Limited, $0.1 million to Landwell Developments Limited, $0.6 million to Talinco Limited, and an aggregate of $30,000 to IONA Resources II Limited, Highland Shipping Limited, Smithers Family Trust and 3242048 Canada Limited. Each of these companies is wholly owned by our Chairman and Chief Executive Officer. The loan to 1680030 Nova Scotia Limited bears interest at 1% per annum; the other loans are all non-interest bearing. As of December 31, 2005, our parent company had a loan outstanding in the amount of $85,000 to our Senior Vice-President of Business Development and Marketing. This loan is non-interest bearing and is due and payable on May 31, 2006. In addition, prior to February 2, 2005, (the date on which we filed our exchange registration statement relating to our senior secured notes with the Commission) we had, from time to time, advanced funds to our Chief Executive Officer, which he has repaid out of funds received in dividends from us. As of December 31, 2005 there were no outstanding balances in our Chief Executive Officer s shareholder account. The advances to our Chief Executive Officer did not bear interest. Prior to December 31, 2001, we loaned $0.7 million to our parent company. As of December 31, 2005, $2,001 remained outstanding pursuant to this loan, an amount that was repaid subsequent to December 31, 2005. In 1998, we entered into an obligation with our parent company pursuant to which we were required to fund a life insurance policy on the life of our Chief Executive Officer for the benefit of our parent company and pay capital tax obligations incurred by our parent company that historically have not been in excess of $5,000 per annum. Pursuant to this obligation, we were required to pay annual premiums on the insurance policy and make capital tax remittances. As of December 31, 2005 nothing was outstanding pursuant to this obligation. At September 30, 2002 we entered into a loan arrangement in the amount of $0.3 million with Naturally Nova Scotia Health Products Limited, a company wholly owned by the spouse of our Chief Executive Officer. At December 31, 2005 nothing was outstanding under this obligation. In addition, prior to January 31, 2002, we entered into obligations with IONA Resources II Limited, 1680030 Nova Scotia Limited, Highland Shipping Limited, Smithers Family Trust and 3242048 Canada Limited, all of which are companies owned by our Chief Executive Officer, to fund property tax, registry of joint stock fees and capital tax remittances of the companies. As of January 31, 2002, the balance owing from these companies to us was $0.3 million. At December 31, 2005 nothing was outstanding under these obligations. These loans were all non-interest bearing with no set terms of repayment. Table of Contents Index to Financial Statements Related party transactions In November 2004, we (i) paid a dividend in the amount of $5,499,999 to our parent company; (ii) redeemed and retired all of our Class A Preference Shares held by our parent company at a redemption price of $10,000 per share for a total of $1,000,000; and (iii) redeemed and retired all of our Class B Preference Shares held by 3002534 Nova Scotia Limited at a redemption price of $0.01 per share for a total of $1.00. In February 2005 we paid a dividend in the amount of $0.4 million to our parent company. On August 23, 2005, we redeemed all of our issued and outstanding Class C Preference Shares, all of which were owned by our subsidiary, Secunda Marine Services Limited. The aggregate redemption price for such Class C Preference Shares, in the amount of $1.01 million plus all declared and unpaid dividends thereon, was satisfied by the set off of such amount against indebtedness of an equal amount owed by Secunda Marine Services Limited to us. On December 30, 2005, we paid a dividend in the amount of $1,720,000. The dividend proceeds were used by our parent company to repay its indebtedness owed to us and to advance funds to other companies related to our parent company to enable them to repay their indebtedness to us. Table of Contents Index to Financial Statements Description of our share capital GENERAL The following description of our share capital, Memorandum of Association, Articles of Association and registration rights agreement is only a summary. For more complete information, you should refer to our Memorandum of Association, Articles of Association and registration rights agreement, which we have filed with the Commission as exhibits to the registration statement of which this prospectus is a part. In addition, you should refer to the general company laws of Nova Scotia, which also govern our structure, management and activities. Secunda International Limited was incorporated in Nova Scotia, Canada, on December 13, 1985, under the Companies Act of Nova Scotia (the Companies Act ). As of the date of this prospectus, our authorized share capital consists of common shares without nominal or par value. As of the date of this prospectus, there were of our common shares outstanding. Prior to the completion of this offering, 3002534 Nova Scotia Limited, the sole existing shareholder of the company, will adopt a Special Resolution amending the authorized capital of the company to subdivide all of our existing authorized and outstanding common shares on a - for - 1 basis and amending certain provisions of our Articles of Association. The information in this prospectus gives effect to that subdivision of shares. Please see Glossary of selected industry terms for the definition of a Special Resolution under the Companies Act. Before this offering, there has been no public market for the common shares. Although we have applied for the listing of the common shares on the Nasdaq National Market, we cannot assure you that a market for the common shares will develop or, if one develops, that it will be sustained. COMMON SHARES Each common share entitles its holder to notice of, to attend and to one vote at all meetings of shareholders of the company. There are no cumulative voting rights. Accordingly, a simple majority of the holders of common shares present at an annual meeting will be able to elect all of the directors standing for election. Each common share is entitled to receive dividends if, as and when declared by the board of directors of the company; however, we do not anticipate that we will pay dividends on the common shares in the forseeable future. Holders of common shares are entitled to participate in any distribution of the company s net assets upon liquidation, dissolution or winding-up on an equal basis per share. Except for payment of the amount agreed to be paid upon the subscription for the common shares, holders of common shares are not, as shareholders, generally liable for any of our liabilities. Holders of common shares have no preemptive, redemption or conversion rights. The rights of common shareholders may only be changed by a Special Resolution. Pursuant to our Memorandum and Articles of Association and subject to Nasdaq rules, our board of directors is authorized to issue any of our authorized but unissued common shares. MEMORANDUM OF ASSOCIATION Under the Companies Act, the company is required to specify in its Memorandum of Association the restrictions, if any, on the objects and powers of the company. Our Memorandum of Association does not specify any restrictions on the objects or powers of the company. In addition, our Memorandum of Association provides that we have express powers to: (a) sell or dispose of our undertaking, or a Table of Contents Index to Financial Statements Description of our share capital substantial part thereof; (b) distribute any of our property in kind among our members; and (c) amalgamate with any company or other body of persons. ARTICLES OF ASSOCIATION Meetings. General meetings of the shareholders of the company are to be held at least once in every calendar year in compliance with the Companies Act, at such time and place as may be determined by the directors and not more than fifteen months after the preceding general meeting. The directors, whenever they think fit, may convene a special general meeting and on the requisition of shareholders holding not less than five percent of shares carrying the right to vote at the meeting sought to be held, the directors are required to forthwith proceed to convene a special general meeting to be held at such time and place as may be determined by the directors. At least 21 days notice of every general meeting specifying the place, day and hour of the meeting, and, in the case of special business, the general nature of such business, is required to be sent to the shareholders entitled to be present at such meeting. No business may be transacted at any general meeting unless a quorum is present, which quorum consists of shareholders present in person or by proxy and entitled to vote. A proxy holder need not be a shareholder. Pursuant to the Companies Act and our Articles of Association, a resolution, including a Special Resolution, in writing and signed by every shareholder who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by shareholders at a meeting. Pursuant to the Companies Act, shareholder proposals (including a nomination for election of directors, which must be signed by holders of not less than 5% of the common shares) must be submitted not less than 90 days before the anniversary date of the previous annual meeting, but failure to submit such a proposal does not prevent a shareholder from discussing at a meeting any matter in respect of which he would have been entitled to submit a proposal or preclude nominations made at the meeting. Election and Removal of Directors. Our board will consist of not less than one nor more than ten directors. The exact number of directors will be fixed from time to time by resolution of the board. Our board of directors is divided into three classes serving staggered three-year terms, with only one class being elected each year by our shareholders. At each annual meeting of shareholders, directors will be elected to succeed the class of directors whose terms have expired. This system of electing and removing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of our company, because it generally makes it more difficult for shareholders to replace a majority of the directors. The directors have the power at any time and from time to time to appoint any other person as a director either to fill a casual vacancy or as an addition, but the total number of directors shall not at any time exceed the maximum number, fixed as above, and no such appointment shall be effective unless two-thirds of the directors concur therein. Our Articles of Association also provide that the company may, by Special Resolution, remove any director before the expiration of his period of office and appoint another person to replace him; and the person so appointed shall hold office during such time only as the director in whose place he is appointed would have held the same if he had not been removed. Interest in Transactions. The Companies Act and our Articles of Association provide that a director must declare the nature of any direct or indirect interest in a proposed contract at the first meeting of the board of directors at which the proposed contract is considered. A general notice to the board of directors to the effect that a director is a member of a specified company or firm and may be regarded as interested in any contract entered into between us and that company or firm is deemed sufficient declaration of the interest in the contract. Our Articles of Association prohibit any director from voting Table of Contents Index to Financial Statements Description of our share capital on a contract in respect of which he is so interested, but this prohibition may at any time or times be suspended or relaxed to any extent by a simple majority at a general meeting. Our Articles of Association do not restrict the company s ability to extend loans to our directors. Indemnification of Directors and Officers. Our Articles of Association provide for the indemnification of our directors and officers under the circumstances and to the fullest extent permitted by Nova Scotia law. The Articles of Association also provide that no director or officer shall be liable for any acts or defaults of any other director or officer or for any loss, damage or misfortune which shall happen in execution of the duties of his office or in relation thereto unless the same happened through his own dishonesty. We have purchased and maintain insurance for the benefit of our directors and officers, former directors and officers and those individuals who become our directors or officers. Amendments to Share Capital. Our Articles of Association provide that, subject to the rights, if any, of the holders of shares of any class or series of shares to vote separately as a class or series thereon, the company may from time to time: by a simple majority at a general meeting, consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; by a simple majority at a general meeting, convert all or any of its paid-up shares into stock, and reconvert that stock into paid-up shares of any denomination; by Special Resolution, subdivide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum of association; however, that in the subdivision the proportion between the amount paid and the amount if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived. The Special Resolution whereby any share is subdivided may determine that, as between the holders of the shares, resulting from such subdivision, one or more of such shares shall have some preference or special advantage as regards dividend, capital, voting, or otherwise, over, or as compared with, the others or other; by a simple majority at a general meeting, exchange shares of one denomination for another; by a simple majority at a general meeting, cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled; by Special Resolution, convert any part of its issued or unissued share capital into preference shares redeemable or purchasable by the company in the manner provided in the Companies Act; by Special Resolution, provide for the issue of shares without any nominal or par value; by Special Resolution, except in the case of preferred shares, convert all or any of its previously authorized unissued or issued and fully paid-up shares, with nominal or par value into the same number of shares without any nominal or par value, and reduce, maintain or increase accordingly its liability on any of its shares so converted, provided, however, that the power to reduce its liability on any of its shares so converted where it results in a reduction of capital may only be exercised subject to confirmation by the Court as provided by the Companies Act; and by Special Resolution, convert all or any of its previously authorized unissued or issued and fully paid-up shares, without nominal or par value, into the same or a different number of shares with nominal or par value. Restrictions on Ownership and Transfer. Our Articles of Association contain no restrictions on the right to own or transfer common shares. Table of Contents Index to Financial Statements Description of our share capital Amendments to Articles of Association. Our Articles of Association may be amended by Special Resolution. Change of Control. Under the Companies Act, a statutory amalgamation requires the approval of a three-quarters majority of the votes cast by the holders of the common shares. In addition, the amalgamation must also be approved by the Supreme Court of Nova Scotia before it becomes effective. Appraisal Rights. Under the Companies Act, the holders of the common shares are entitled to rights of dissent and appraisal if the company participates in certain major corporate transactions, including changing or removing any restriction on the business or businesses that the company may carry on, amalgamating with another company, other than a wholly-owned subsidiary of the company, continuing under the laws of another jurisdiction, or selling, leasing or exchanging all or substantially all of its property other than in the ordinary course of business of the company. Pursuant to these rights, common shareholders may dissent from the proposed transaction and receive cash in the amount of the fair market value of the shares held by such shareholders (as determined by a court or by agreement of the company and the shareholder). INVESTMENT CANADA ACT The Investment Canada Act (the ICA ) provides, among other things, that an acquisition by a non-Canadian as defined by the ICA (which includes an individual, a government or an agency thereof, or a corporation, partnership, trust or joint venture, which is not Canadian or Canadian-controlled) of more than 50 percent of the voting shares of a corporation incorporated in Canada carrying on a Canadian business is deemed to be an acquisition of control and, if the value of the Canadian business exceeds certain stipulated thresholds, is subject to Canadian Government administrative review and possible prohibition if the Canadian Minister of Industry is not satisfied that the acquisition is of net benefit to Canada. The ICA further provides that the acquisition of less than a majority but one-third or more of the voting shares of a corporation incorporated in Canada carrying on a Canadian business is presumed to be an acquisition of control of that corporation unless it can be established that, on the acquisition, the corporation is not controlled in fact by the acquirer through the ownership of voting shares. MATERIAL DIFFERENCES BETWEEN THE COMPANIES ACT AND DELAWARE LAW The following is a summary of material differences between the Companies Act, and the Delaware General Corporation Law ( DGCL ). Companies Act DGCL Shareholder Action by Written Consent Under the Companies Act, shareholder action without a meeting may be taken by written resolution signed by all of the shareholders who would be entitled to vote on the relevant issue at a general meeting. Under the DGCL, a corporation s certificate of incorporation (a) may permit stockholders to act by written consent if such action is signed by all stockholders, or (b) may permit stockholders to act by written consent signed by the stockholders having the minimum number of votes that would be necessary to take such action at a meeting, or (c) may prohibit actions by written consent. Table of Contents Index to Financial Statements Description of our share capital Companies Act DGCL Election of Directors The Companies Act does not provide for the method of election of directors (and in particular make no provision for cumulative voting), leaving the matter to be dealt with in the articles of association, which are equivalent to the by-laws of a Delaware corporation, of the company. Under the DGCL, stockholders are not entitled to cumulative voting in the election of directors unless provided for in the corporation s certificate of incorporation. Absent any such provision, directors are elected by a plurality of the votes cast by the holders of stock entitled to vote in person or by proxy at a duly convened meeting of stockholders held for the election of directors in the manner provided in the corporation s bylaws. Removal of Directors Under the Corporations Miscellaneous Provisions Act (NS), a director may be removed by a resolution passed, at a special meeting of the shareholders called for the purpose, by a three-fourths majority of the votes of the shareholders present or represented by proxy thereat and representing the majority of the shares in the company then issued and outstanding. The DGCL provides that in the case of an unclassified board any director may generally be removed, with or without cause, by the affirmative vote of a majority of the shares then entitled to vote at a meeting of stockholders held for the election of directors. In the case of a corporation with a classified board, stockholders may remove a director or directors only for cause unless the certificate of incorporation otherwise provides. Required Vote for Certain Transactions Under the Companies Act, unless expressly so authorized by its memorandum of association, a company may not sell or dispose of its undertaking or a substantial part thereof, distribute any of its property in specie among its members (except as otherwise permitted by the Companies Act) or amalgamate, unless approved by Special Resolution and confirmed by the court. Special votes are stipulated by the legislation as follows: An amalgamation requires the approval of 3/4 of the votes cast at a special meeting of holders of voting shares called to approve the amalgamation agreement and, unless the other company is a wholly owned subsidiary, approval by 2/3 vote of all shareholders and of each class of shares (and series of shares if a series is affected by the amalgamation differently that the other shares of the class). Under the DGCL, merger, consolidation, sale, lease or exchange or other disposition of all, or substantially all, the property and assets of a corporation requires the approval of a majority of the votes cast by holders of shares entitled to vote in person or by proxy and if any class or series is entitled to vote thereon as a class, the affirmative vote of a majority of the shares within each class or series entitled to vote as a class in person or by proxy, unless the certificate of incorporation requires a greater vote. Table of Contents Index to Financial Statements Description of our share capital Companies Act DGCL A compromise or arrangement requires approval of a majority in number representing 3/4 in value of the creditors or class of creditors, or shareholders or class of shareholders, present either in person or by proxy at a meeting called in accordance with the order of the Court. A resolution to authorize a company to be continued under the laws of another jurisdiction requires approval of a Special Resolution at a special meeting of holders of voting shares called to approve such resolution and approval by 2/3 vote of all shareholders (whether otherwise carrying the right to vote or not) and of each class of shares (and series of shares if a series is affected by the continuance differently that the other shares of the class). Approval of a resolution to authorize the company to sell, lease or exchange all or substantially all its property other than in the ordinary course of business requires an affirmative vote of 2/3 of all shareholders and of each class of shares (and series of shares if a series is affected by the sale lease or exchange differently that the other shares of the class). Amendment of Constating Documents Amendments to the memorandum of association (other than to authorized capital), to the extent permitted by the Companies Act, are required to be approved by Special Resolution and confirmed by the court. An amendment to the authorized capital or to the articles of association requires approval by Special Resolution. If such an amendment would prejudice or interfere with a right or special right attached to issued shares of a class or series of shares, such amendment must also be approved separately by two-thirds of the holders of the class or series of shares being affected. The DGCL provides that a corporation may amend its certificate of incorporation if its board of directors has adopted such amendment, followed by the affirmative vote of a majority of the outstanding shares entitled to vote on the amendment and a majority of the outstanding shares of each class entitled to vote on the amendment as a class. Table of Contents Index to Financial Statements Description of our share capital Companies Act DGCL Dissent or Appraisal Rights The Companies Act provides that shareholders of a company are entitled to exercise dissent rights in respect of certain matters and to be paid the fair value of their shares in connection therewith. The right arises if (i) the company is subject to a court order relating to a compromise or arrangement that affects such holder or (ii) if the company resolves to: (a) amend its memorandum or articles to add, change or remove any provisions restricting or constraining the issue or transfer of the shares of the class held by the dissident shareholder; (b) amend its memorandum or articles to add, change or remove any restriction upon the business or businesses that the company may carry on; (c) amalgamate with another company, other than any wholly-owned subsidiary; (d) be continued under the laws of another jurisdiction; or (e) sell, lease or exchange all or substantially all its property other than in the ordinary course of business. The DGCL provides that any stockholder of a corporation who has neither voted in favor of or consented in writing to a merger or consolidation of the corporation is entitled to demand an appraisal of the fair value of their shares. in addition, the DCGL provides that any corporation may provide in its certificate of incorporation that appraisal rights shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. Quorum of Stockholders The Companies Act does not provide for a quorum for shareholder meetings, leaving the matter to be dealt with in the articles of association of the company. Under the DGCL, with respect to any matter, a quorum shall be present at a meeting of stockholders if the holders of a majority of the shares entitled to vote are represented at the meeting in person or by proxy, unless otherwise provided in the certificate of incorporation, but in no event shall a quorum consist of less than one-third of shares entitled to vote at a meeting. Special Meeting The Companies Act does not provide for special shareholder meetings generally, leaving the matter to be dealt with in the articles of association of the company, however it does provide a right to requisition a meeting if the directors should decline to call a meeting when requested to do so: in that event, the holders of not less than 5% of the issued shares of a company that carry the right to vote at the meeting sought to be held may requisition the directors to call a meeting of shareholders. Under the DGCL, special meetings of stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or the bylaws. Table of Contents Index to Financial Statements Description of our share capital Companies Act DGCL Anti-takeover Provisions and Interested Stockholder Transactions The Companies Act does not deal with or restrict related party transactions and contains no provisions restricting takeovers of Nova Scotia companies. Under the DGCL, a certificate of incorporation may provide the board of directors with the ability to designate the terms of and issue a new series of preferred shares without stockholder approval. Delaware corporations are subject to Delaware s business combination statute. In general, such statute prohibits a publicly-traded corporation from engaging in various business combination transactions with any interested stockholder for a period of three years after the time that the stockholder became an interested stockholder, unless the business combination meets certain criteria. REGISTRATION RIGHTS We will enter into a registration rights agreement immediately prior to the closing of this offering with our sole existing shareholder pursuant to which we will grant it, its affiliates and certain of its transferees, the right, under certain circumstances and subject to certain restrictions, including restrictions included in the lock-up agreements described elsewhere in this prospectus, to require us to register under the Securities Act common shares held by it. The registration rights agreement will also provide that we will pay the costs and expenses, other than underwriting discounts and commissions, related to the registration and sale of the common shares that are registered pursuant to the agreement. The agreement will contain customary registration procedures and indemnification and contribution provisions for the benefit of the shareholder and us. TRANSFER AGENT The transfer agent and branch registrar for our common shares is . NASDAQ LISTING We have applied to have our common shares listed for quotation on the Nasdaq National Market under the symbol SMSL . Table of Contents Index to Financial Statements Shares eligible for future sale Prior to this offering, there has been no public market for our common shares. The market price of our common shares could decrease due to sales of a large number of shares of our common shares or the perception that these sales could occur. These factors also could make it more difficult to raise funds through future offerings of common shares. After this offering, common shares will be outstanding, or common shares if the underwriters exercise their over-allotment option in full, in each case, assuming no exercise of options to purchase 425,000 common shares to be granted in connection with the completion of the offering. Of these shares, the common shares sold in this offering, or common shares if the underwriters exercise their over-allotment option in full, will be freely tradable without restriction under the Securities Act, except for any shares purchased by one of our affiliates as defined in Rule 144 under the Securities Act. A total of common shares will be restricted securities within the meaning of Rule 144 under the Securities Act or subject to lock-up arrangements. The restricted securities generally may not be sold unless they are registered under the Securities Act or are sold under an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. REGISTRATION RIGHTS After the closing of this offering, our existing shareholder will have certain demand and piggyback registration rights. By exercising its registration rights and selling a large number of shares, this holder could cause the price of our common shares to decline. Furthermore, if we file a registration statement to offer additional shares of our common shares and have to include shares held by that holder, it could impair our ability to raise needed capital by depressing the price at which we could sell our common shares. LOCK-UP AGREEMENTS Our officers and directors and the selling shareholder have entered into lock-up agreements described in Underwriting . After the expiration of these lock-up agreements, the common shares that were issued to these persons prior to this offering will generally not be eligible for sale into the public market pursuant to Rule 144 under the Securities Act until one year after the closing of this offering. As restrictions on resale end, the market price of our common shares could drop significantly if the holder of these restricted shares sells them, or are perceived by the market as intending to sell them. RULE 144 In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: 1% of the then outstanding common shares; and the average weekly trading volume in the common shares on the Nasdaq during the four calendar weeks immediately preceding the date on which the notice of the sale on Form 144 is filed with the Commission. Table of Contents Index to Financial Statements Shares eligible for future sale Sales under Rule 144 are also subject to other provisions relating to notice and manner of sale and the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provision of Rule 144. SHARE OPTIONS In connection with the consummation of this offering, we will grant options to purchase a total of 425,000 common shares under the 2005 Equity Incentive Plan to our directors, executive officers and employees. Up to an additional 775,000 common shares will be available for future option grants under the 2005 Equity Incentive Plan. We intend to file a registration statement on Form S-8 to register common shares issued or reserved for issuance under the 2005 Equity Incentive Plan within 180 days after the date of this prospectus, thus permitting the resale of such shares by nonaffiliates in the public market without restriction under the Securities Act. Table of Contents Index to Financial Statements Tax considerations U.S. FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of certain U.S. federal income tax consequences that may apply to a holder of our common shares and, unless otherwise noted in the following discussion, is the opinion of Vinson & Elkins L.L.P., our U.S. counsel, insofar as it relates to matters of U.S. federal income tax law and legal conclusions with respect to those matters. The opinion of our counsel is dependent on the accuracy of representations made by us to them, including descriptions of our operations contained herein. This discussion is based on the Internal Revenue Code of 1986, as amended, which we refer to as the Code, Treasury Department regulations promulgated under the Code, published Internal Revenue Service, or IRS, rulings or administrative pronouncements, and court decisions that are currently applicable, any or all of which could materially and adversely change at any time, possibly on a retroactive basis. In addition, the discussion does not consider the potential effects, both adverse and beneficial, of any proposed legislation which, if enacted, could be applied at any time, possibly on a retroactive basis. Holders and prospective holders of our common shares are urged to consult their own tax advisors about the U.S. federal, state, local and non-U.S. tax consequences of purchasing, owning and disposing of our common shares. No ruling has been or will be requested from IRS regarding any matter affecting us or prospective shareholders. Instead, we will rely on opinions of Vinson & Elkins L.L.P. Unlike a ruling, an opinion of counsel represents only that counsel s best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made here may not be sustained by a court if contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for the common shares and the prices at which common shares trade. United States Federal Income Taxation of U.S. Holders. As used in this discussion, a U.S. Holder means a holder of our common shares who is a citizen or individual resident of the United States for U.S. federal income tax purposes, a corporation or entity taxable as a corporation for U.S. federal income tax purposes that is created or organized in or under the laws of the United States or of any political subdivision thereof or the District of Columbia, an estate whose income is taxable in the United States irrespective of source, or a trust if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. This discussion does not address the tax consequences to, and the term U.S. Holder does not include, persons subject to special provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, dealers in securities, persons or entities that have a functional currency other than the U.S. Dollar, shareholders subject to the alternative minimum tax, shareholders who hold our common shares as part of a straddle, hedging or a conversion transaction, constructive sale or other arrangement involving more than one position, partners and other pass-through entities and persons holding an interest in such entities, and shareholders who acquired their common shares through the exercise of employee stock options or otherwise as compensation for services. This discussion is limited to U.S. Holders who own Table of Contents Index to Financial Statements Tax considerations our common shares as capital assets (generally, property held for investment). This discussion does not address the consequences to a person or entity holding an interest in a shareholder or the consequences to a person of the ownership, exercise or disposition of any options, warrants or other rights to acquire our common shares. If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds our common shares, the tax treatment of a partner generally will depend upon the status of the partner and upon the activities of the partnership. If you are a partnership, or a partner in a partnership, holding common shares, you should consult your tax advisor. Distributions on Our Common Shares. We do not anticipate paying any cash dividends on our common shares in the foreseeable future. Nonetheless, if U.S. Holders receive dividend distributions with respect to our common shares, then such holders generally would be required to include in gross income for U.S. federal income tax purposes an amount equal to the U.S. Dollar value of such distributions on the date of receipt (based on the exchange rate on such date) to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes and without reduction for any Canadian income tax withheld from such distributions. See below under Foreign Tax Credit regarding the deductibility or creditability of any Canadian income tax withheld from distributions. To the extent distributions exceed our current or accumulated earnings and profits, they will be applied first to reduce a U.S. Holder s adjusted tax basis in our common shares (and, as a return of basis, will not be subject to federal income tax) and thereafter will be treated as gain from the sale or exchange of the common shares (which is taxable as capital gain). Dividends paid on our common shares generally will not be eligible for the dividends-received deduction available to corporations receiving dividends from certain U.S. domestic corporations. Any taxable dividends received on our common shares by a U.S. Holder who is an individual, trust or estate (a U.S. Individual Holder ) will be treated as qualified dividend income, which is subject to tax at preferential rates through 2008 provided that we are eligible for the benefits of a comprehensive income tax treaty with the United States that has been determined to be satisfactory for this purpose (the U.S.-Canada Treaty is included for this purpose); we are not a passive foreign investment company or PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (which we do not believe we are or have been or will be); the U.S. Individual Holder has owned the common shares for more than 60 days in the 121-day period beginning 60 days before the date on which the common shares become ex-dividend; and the U.S. Individual Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. Special rules may apply to any extraordinary dividend that is treated as qualified dividend income. For this purpose, an extraordinary dividend generally is a dividend equal to or in excess of 10 percent of a shareholder s adjusted basis (or fair market value in certain circumstances) in a share of common stock. Any loss derived by a U.S. Individual Holder from the sale or exchange of common shares with respect to which such holder has received an extraordinary dividend treated as qualified dividend income will be deemed to be a long-term capital loss to the extent of such dividend. Taxable dividends that are not treated as qualified dividend income will be taxed as ordinary income (as opposed to capital gains). As discussed below, special rules apply to distributions received from a passive foreign investment company or controlled foreign corporation, although we do not believe Table of Contents Index to Financial Statements Tax considerations that we are or have been and do not expect to be a passive foreign investment company or controlled foreign corporation for the foreseeable future. Foreign Tax Credit. A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of our common shares may be entitled, at his or her election, either to a deduction or a tax credit for such foreign tax paid or withheld. Furthermore, a U.S. Holder that is a domestic corporation that owns 10% or more of our voting stock may be eligible to claim a deemed paid foreign tax credit based on any underlying non-U.S. income taxes paid by us. The election to credit or deduct foreign taxes is made on a year-by-year basis and applies to all foreign income taxes paid by (or withheld from) the U.S. Holder during the year. There are significant and complex limitations that apply to the foreign tax credit. U.S. Holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit, the deemed paid foreign tax credit available to certain corporations, and the application of the limitations on the credit, in light of their particular circumstances. Sale, Exchange or other Disposition of Common Shares. A U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our common shares in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder s tax basis in such shares. Subject to the discussion of extraordinary dividends above, and the discussion applicable to passive foreign investment companies and controlled foreign corporations below, such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder s holding period is greater than one year at the time of the sale, exchange or other disposition. Preferential tax rates for long-term capital gains may apply to certain U.S. Holders who satisfy this minimum holding period. There currently are no preferential tax rates for long-term capital gains recognized by a corporation. A U.S. Holder s ability to deduct capital losses is subject to certain limitations. Special Rules. Special U.S. federal income tax rules apply to shareholders of passive foreign investment companies and controlled foreign corporations, as those terms are defined below, and the above sections of the discussion do not describe the U.S. federal income tax consequences to a U.S. Holder in the event we were treated as a passive foreign investment company or controlled foreign corporation. While we do not believe that we are now, or are likely to become, a passive foreign investment company or a controlled foreign corporation, the circumstances that would result in our becoming a passive foreign investment company or a controlled foreign corporation are not completely within our control and therefore there can be no assurance that we will not become a passive foreign investment company or controlled foreign corporation in the future. Passive Foreign Investment Company. A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be a passive foreign investment company, or PFIC, in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to a look through rule, either (i) 75% or more of its gross income is passive income, such as interest, dividends and certain rents and royalties, or (2) at least 50% of the average value of its assets is attributable to assets that produce passive income or are held for the production of passive income. We do not believe that we are a PFIC, or will be a PFIC in the future, because we are primarily engaged in providing services to unrelated oil and gas exploration and production companies. Moreover, we have not received 75% or more of our gross income from passive sources, nor has 50% or more of the fair market value of our assets been held for the production of passive income, for any taxable year. Nonetheless, in the event we were treated as a PFIC for any taxable year, U.S. Holders may be subject to U.S. federal income taxes in excess of those described above on distributions paid with respect to, or Table of Contents Index to Financial Statements Tax considerations dispositions of, our common shares. The taxation of a U.S. person who owns stock in a PFIC is extremely complex. U.S. Holders are urged to consult their own tax advisors regarding the impact of the PFIC rules and the advisability and availability of certain federal income tax elections that may alleviate the adverse tax consequences that may result to them if we are or were to become a PFIC. Controlled Foreign Corporation. A controlled foreign corporation, or CFC, is a foreign corporation more than 50% of the stock of which, by vote or value, is owned, directly, indirectly or constructively, by U.S. shareholders each of whom owns, directly, indirectly or constructively, 10% or more of the total combined voting power of all classes of stock of the foreign corporation (each a CFC Shareholder ). If we are a CFC, a CFC Shareholder would be treated as receiving current distributions of an allocable share of certain types of our income at the end of each year. Additionally, such a CFC Shareholder would recognize ordinary income to the extent of an allocable share of our earnings and profits, rather than capital gain, on the sale of his or her common shares. Management does not believe that we are a CFC, because U.S. shareholders who directly, indirectly or constructively own 10% or more of the total voting power of our outstanding common shares do not own more than 50% of our common shares. However, ownership of our common shares may change such that we could become a CFC in the future and we are not relying on an opinion of counsel as to whether we are or could become a CFC. United States Federal Income Taxation of Non-U.S. Holders. For purposes of this discussion, a beneficial owner of our common shares that is not a U.S. Holder (other than a partnership or entity treated as a partnership for U.S. federal income tax purposes) is a Non-U.S. Holder. As set forth above, an owner of an interest in a partnership should consult his or her own tax advisor regarding the tax consequences of the partnership s ownership of our common shares. Distributions on our Common Shares. Any distributions we pay to a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax if the Non-U.S. Holder is not engaged in a U.S. trade or business. If the Non-U.S. Holder is engaged in a U.S. trade or business, any distributions we pay will be subject to U.S. federal income tax at regular graduated rates if those distributions are treated as dividends or capital gains (as described above with respect to U.S. Holders) and are effectively connected with that Non-U.S. Holder s U.S. trade or business and, if an income tax treaty applies, are attributable to a permanent establishment maintained by that Non-U.S. Holder in the United States. In addition, a branch profits tax may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on the effectively connected earnings of a Non-U.S. Holder that is a corporation. Sale, Exchange or other Disposition of Common Shares. Non-U.S. Holders generally will not be subject to federal income tax on any gain recognized on a disposition of our common stock unless the gain is effectively connected with the Non-U.S. Holder s conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States. If the Non-U.S. Holder is engaged in a U.S. trade or business and the gain is effectively connected with that trade or business (and if a tax treaty applies, is attributable to a permanent establishment maintained by such Non-U.S. Holder in the United States), such gain will be subject to U.S. federal income tax at regular graduated rates and, if the Non-U.S. Holder is a corporation, the branch profits tax described above also may apply. A Non-U.S. Holder who is an individual and who is present in the United States for 183 days or more in a taxable year and meets other requirements also will be subject to U.S. federal income tax on capital gains recognized during such year, including such gains realized from a disposition of our stock. Information Reporting and Backup Withholding Tax. In general, dividend payments or other taxable distributions made within the United States will be subject to information reporting and U.S. backup Table of Contents Index to Financial Statements Tax considerations withholding tax if a U.S Holder fails to provide an accurate taxpayer identification number certified under penalties of perjury, as well as certain other information, or otherwise establish an exemption from backup withholding. Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on an IRS Form W-8BEN, W-8ECI or W-8IMY as applicable. If a Non-U.S. Holder sells shares to or through the U.S. office of a U.S. or foreign broker, the payment of the proceeds generally will be subject to information reporting requirements and backup withholding unless the Non-U.S. Holder properly certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption and the payor or broker does not have actual knowledge or reason to know that the holder is a U.S. person. Information reporting requirements and backup withholding generally will not apply to any payment of the proceeds of the sale of common shares effected outside the United States by a foreign office of a broker. Information reporting requirements (but not backup withholding requirements) will apply, however, to payment of the sales proceeds if the broker is a U.S. person or has certain other contacts with the United States. Backup withholding is not an additional tax. Rather, a holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed such holder s U.S. federal income tax liability by timely filing a properly completed claim for refund with the IRS. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS General. In the opinion of McInnes Cooper, Canadian tax counsel to Secunda, the following is a general discussion of the principal Canadian federal income tax consequences generally applicable in respect of the ownership and disposition of Secunda common shares by holders noted below. The tax consequences to any particular holder of Secunda common shares will vary according to the status of that holder as an individual, trust, corporation or member of a partnership, the jurisdiction in which that holder is subject to taxation, the place where that holder is resident and, generally, that holder s particular circumstances. This general discussion is applicable only to holders who acquire, as beneficial owner, Secunda common shares pursuant to this offering and who, at all relevant times for purposes of the application of the Income Tax Act (Canada), deal at arm s length and are not affiliated with Secunda, are not (and have never been) and are not deemed to be resident in Canada, hold their common shares as capital property and do not (and will not) use or hold their common shares in, or in the course of, carrying on business in Canada (a non-resident holder ). This general discussion is not applicable to holders who acquire common shares (or any other property or rights) pursuant to the 2005 Equity Incentive Plan. Special rules which are not discussed in this general discussion may apply to a non-resident holder that is an insurer that carries on business in Canada and elsewhere. McInnes Cooper is not opining on, and has not conducted any review in respect of, the view of management of Secunda noted below that Secunda common shares do not derive their value principally from Canadian real property. This general discussion is based on the current provisions of the Income Tax Act (Canada), the regulations thereunder, all amendments thereto publicly proposed by or on behalf of the Minster of Finance (Canada) prior to November 29, 2005 (being the date on which the 39th Canadian general election was called), the published administrative practices of the Canada Revenue Agency and on the current provisions of the Canada-United States Tax Convention (1980), as amended (the Treaty ). Except as otherwise expressly provided, this general discussion does not take account of any provincial, territorial or foreign tax law or treaty. It has been assumed that all currently proposed amendments will Table of Contents Index to Financial Statements Tax considerations be enacted substantially as proposed and that there is no other relevant change in any governing law or practice, although no assurance can be given in these respects. The following discussion is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of Secunda common shares. Accordingly, holders and prospective holders of Secunda common shares should consult their own tax advisors about the Canadian federal, provincial, territorial and foreign tax consequences of purchasing, owning and disposing of Secunda common shares. Dividend Withholding. Canadian federal tax legislation would require a 25% withholding by Secunda from any dividends paid or deemed to be paid or credited (e.g., in certain circumstances, the purchase by Secunda of Secunda s common shares may result in a deemed dividend) to our non-resident holders. However, where the non-resident holder is a United States resident entitled to benefits under the Treaty and is the beneficial owner of the dividends, this rate is reduced to 15% pursuant to the Treaty. The withholding tax rate on the gross amount of dividends is reduced by the Treaty to 5% if the beneficial owner of the dividend is a U.S. corporation entitled to benefits under the Treaty which owns at least 10% of Secunda s voting stock. In the absence of notice and evidence satisfactory to Secunda that a non-resident holder is entitled to a lower rate of withholding. Secunda will withhold at a rate of 25% from any dividends paid or deemed to be paid or credited to Secunda s non-resident holders. The amount of stock dividends paid to non-resident holders would be subject to withholding tax at the same rate as cash dividends. The amount of a stock dividend (for tax purposes) would generally be equal to the amount by which Secunda s paid-up capital had increased by reason of the payment of such dividend. Secunda will furnish additional tax information to such holders in the event of such a stock dividend. Capital Gains. A non-resident holder generally will not be subject to Canadian taxes under the Income Tax Act (Canada) on capital gains realized on the disposition of Secunda s common shares unless such shares are taxable Canadian property to the non-resident holder within the meaning of the Income Tax Act (Canada), and no relief is afforded under any applicable tax treaty. Common shares generally will not be taxable Canadian property of a non-resident holder unless, at any time during the five-year period immediately preceding a disposition of such shares, not less than 25% of the issued shares of any class or series of Secunda s capital stock (or interests in or options in respect thereof) belonged to the non-resident holder, to persons with whom such holder did not deal at arm s length, or to the non-resident holder together with such persons, or unless the common shares were acquired by the holder in one of several tax deferred exchanges for shares which were themselves taxable Canadian property. Common shares will also be taxable Canadian property at any time at which they are not listed on a prescribed stock exchange. A non-resident holder whose common shares constitute taxable Canadian property and who is a resident of the United States and entitled to benefits under the Treaty generally would be exempt from Canadian income tax on any capital gain realized on a disposition of those shares in any event, provided such shares do not derive their value principally from Canadian real property (including Canadian resource properties). Management of Secunda is of the view that Secunda common shares do not derive their value principally from Canadian real property. A non-resident holder claiming exemption under the Treaty will, however, have Canadian tax filing obligations with respect to a disposition of Secunda common shares, including the obligation to file a Canadian income tax return for the taxation year in which the disposition occurs. Table of Contents Index to Financial Statements Underwriting We and the selling shareholder are offering our common shares described in this prospectus through the underwriters named below. UBS Securities LLC, Bear, Stearns & Co. Inc., RBC Capital Markets Corporation, and Fortis Securities LLC are the representatives of the underwriters. UBS Securities LLC is the sole book-running manager of this offering. We and the selling shareholder have entered into an underwriting agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase the number of common shares listed next to its name in the following table: Underwriters Number of Common Shares UBS Securities LLC Bear, Stearns & Co. Inc. RBC Capital Markets Corporation Fortis Securities LLC Total The underwriting agreement provides that the underwriters must buy all of the shares if they buy any of them. However, the underwriters are not required to take or pay for the shares covered by the underwriters over-allotment option described below. Our common shares and the common shares of the selling shareholder are offered subject to a number of conditions, including: receipt and acceptance of our common shares by the underwriters; and the underwriters right to reject orders in whole or in part. In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically. Sales of common shares made outside of the United States may be made by affiliates of the underwriters. OVER-ALLOTMENT OPTION We and the selling shareholder have granted the underwriters an option to buy up to an aggregate of additional common shares. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional common shares approximately in proportion to the amounts specified in the table above. COMMISSIONS AND DISCOUNTS Common shares sold by the underwriters to the public will initially be offered at the offering price set forth on the cover of this prospectus. Any common shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per common share from the public offering price. Any of Table of Contents Index to Financial Statements Underwriting these securities dealers may resell any common shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per common share from the public offering price. If all the common shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed % of the common shares to be offered. The following table shows the per common share and total underwriting discounts and commissions we and the selling shareholder will pay to the underwriters, assuming both no exercise and full exercise of the underwriters option to purchase up to an additional common shares. Paid by us Paid by selling shareholder Total No exercise Full exercise No exercise Full exercise No exercise Full exercise Per share $ $ $ $ $ $ Total $ $ $ $ $ $ We estimate that the total expenses of this offering payable by us, not including the underwriting discounts and commissions, will be approximately $ million. NO SALES OF SIMILAR SECURITIES We, our executive officers and directors, and our existing security holders, including the selling shareholder, have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of UBS Securities LLC, offer, sell, offer to sell, contract or agree to sell, hypothecate, hedge, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, any of our common shares or any securities convertible into or exercisable or exchangeable for our common shares, or warrants or other rights to purchase our common shares. These restrictions will be in effect for a period of 180 days after the date of this prospectus. At any time and without public notice, UBS Securities LLC may in its sole discretion release some or all of the securities from these lock-up agreements. If during the period that begins on the date that is 15 calendar days plus 3 business days before the last day of the 180-day lock-up period and ends on the last day of the 180-day lock-up period: we issue an earnings release; or material news or a material event relating to us occurs; or prior to the expiration of the 180-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day lock-up period, then the 180-day lock-up period will be extended until the expiration of the date that is 15 calendar days plus 3 business days after the date on which the issuance of the earnings release or the material news or material event occurs. INDEMNIFICATION AND CONTRIBUTION We and the selling shareholder, with respect to certain limited matters, have agreed to indemnify the underwriters against certain liabilities, including certain liabilities under the Securities Act. If we or the selling shareholder are unable to provide this indemnification, we and the selling shareholder, with respect to certain limited matters, have agreed to contribute to payments the underwriters and their Table of Contents Index to Financial Statements Underwriting controlling persons may be required to make in respect of those liabilities. The selling shareholder may be deemed to be an underwriter within the meaning of the Securities Act. NASDAQ NATIONAL MARKET QUOTATION We have applied to have our common shares listed for quotation on the Nasdaq National Market under the symbol SMSL . PRICE STABILIZATION, SHORT POSITIONS In connection with this offering, and in accordance with Regulation M under the Securities Exchange Act of 1934 (the Exchange Act ), the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including: stabilizing transactions; short sales; purchase to cover positions created by short sales; imposition of penalty bids; and syndicate covering transactions. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common shares while this offering is in progress. These transactions may also include making short sales of our common shares, which involve the sale by the underwriters of a greater number of common shares than they are required to purchase in this offering and purchasing common shares on the open market to cover positions created by short sales. Short sales may be covered short sales , which are short positions in an amount not greater than the underwriters over-allotment option referred to above, or may be naked short sales , which are short positions in excess of that amount. The underwriters may close out any covered short position by either exercising their over-allotment option, in whole or in part, or by purchasing common shares in the open market. In making this determination, the underwriters will consider, among other things, the price of common shares available for purchase in the open market as compared to the price at which they may purchase common shares through the over-allotment option. Naked short sales are in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing common shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common shares in the open market that could adversely affect investors who purchased in this offering. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased common shares sold by or for the account of that underwriter in stabilizing or short covering transactions. As a result of these activities, the price of our common shares may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the Table of Contents Index to Financial Statements Underwriting underwriters at any time. The underwriters may carry out these transactions on the Nasdaq National Market, in the over-the-counter market or otherwise. DETERMINATION OF OFFERING PRICE Prior to this offering, there was no public market for our common shares. The initial public offering price will be determined by negotiation by us, the selling shareholder and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include: the information set forth in this prospectus and otherwise available to representatives; our history and prospects and the history of and prospects for the industry in which we compete; our past and present financial performance and an assessment of our management; our prospects for future earnings and the present state of our development; the general condition of the securities markets at the time of this offering; the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and other factors deemed relevant by the underwriters and us. AFFILIATIONS Fortis Capital Corp., an affiliate of Fortis Securities LLC is an agent and a lender under our senior secured credit facility. In such capacity, Fortis Capital Corp. has received customary fees for such services. RBC Capital Markets Corporation and Fortis Securities LLC acted as initial purchasers in our senior secured notes offering in August 2004. In such capacities, each has received customary fees and commissions for such services. The underwriters and their affiliates may from time to time in the future engage in transactions with us and perform services for us in the ordinary course of their business. Because Fortis Securities LLC and its affiliate may receive more than 10% of the entire net proceeds in this offering, it may be deemed to have a conflict of interest under Rule 2710(h) of the Conduct Rules of the National Association of Securities Dealers, Inc. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 2720 of the Conduct Rules. Rule 2720 requires that the initial public offering price can be no higher than that recommended by a qualified independent underwriter, as defined by the National Association of Securities Dealers, Inc. UBS Securities LLC has agreed to serve in that capacity and has performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part. The representatives of the underwriters may be reached at the following addresses: UBS Securities LLC, 299 Park Avenue, New York, New York 10171; Bear, Stearns & Co. Inc., 383 Madison Avenue, New York, New York 10179; RBC Capital Markets Corporation, One Liberty Plaza, 165 Broadway, New York, New York 10006; Fortis Securities LLC, 520 Madison Avenue, New York, New York 10022. Table of Contents Index to Financial Statements Notice to investors EUROPEAN ECONOMIC AREA With respect to each Member State of the European Economic Area which has implemented Prospectus Directive 2003/71/EC, including any applicable implementing measures, from and including the date on which the Prospectus Directive is implemented in that Member State, the offering of our common shares in this offering is only being made: (a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or (c) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. UNITED KINGDOM Our common shares may not be offered or sold and will not be offered or sold to any persons in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses and in compliance with all applicable provisions of the Financial Services and Markets Act 2000 (FSMA) with respect to anything done in relation to our common shares in, from or otherwise involving the United Kingdom. In addition, each Underwriter has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of our common shares in circumstances in which Section 21(1) of the FSMA does not apply to us. Without limitation to the other restrictions referred to herein, this prospectus is directed only at (1) persons outside the United Kingdom, (2) persons having professional experience in matters relating to investments who fall within the definition of investment professionals in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005; or (3) high net worth bodies corporate, unincorporated associations and partnerships and trustees of high value trusts as described in Article 49(2) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. Without limitation to the other restrictions referred to herein, any investment or investment activity to which this prospectus relates is available only to, and will be engaged in only with, such persons, and persons within the United Kingdom who receive this communication (other than persons who fall within (2) or (3) above) should not rely or act upon this communication. SWITZERLAND Our common shares may be offered in Switzerland only on the basis of a non-public offering. This prospectus does not constitute an issuance prospectus according to articles 652a or 1156 of the Swiss Federal Code of Obligations or a listing prospectus according to article 32 of the Listing Rules of the Swiss exchange. The common shares may not be offered or distributed on a professional basis in or from Switzerland and neither this prospectus nor any other offering material relating to our common shares may be publicly issued in connection with any such offer or distribution. The common shares have not been and will not be approved by any Swiss regulatory authority. In particular, the common shares are Table of Contents Index to Financial Statements Notice to Investors not and will not be registered with or supervised by the Swiss Federal Banking Commission, and investors may not claim protection under the Swiss Investment Fund Act. CANADA Our common shares have not been and will not be qualified for sale under the securities laws of Canada or any province or territory of Canada. The common shares have not been and will not be approved by any Canadian regulatory authority. Our common shares may not be offered or sold, directly or indirectly, in Canada or to or for the account of any resident of Canada except pursuant to applicable exemptions under Canadian securities laws. We are currently not a reporting issuer in any province or territory of Canada and consequently we are not required to file annual or other information with any securities commission or other similar authority in Canada. Table of Contents Index to Financial Statements Enforceability of civil liabilities against foreign persons We are a corporation organized under the laws of the Province of Nova Scotia, Canada. Some of our directors, controlling persons and officers and certain of the experts named in this prospectus are not residents of the United States, and all or a substantial portion of their assets and all or a substantial portion of our assets are located outside the United States. We have agreed to accept service of process in any suit, action or proceeding arising under the securities laws of the United States or any state in the United States brought in any federal or state court located in New York City by an agent designated for such purpose, and to submit to the jurisdiction of such courts in connection with such suits, actions or proceedings. However, it may be difficult for you to effect service of process within the United States upon our directors, controlling persons and officers who are not residents of the United States or to realize in the United States upon judgments of U.S. courts based upon the civil liability under the federal securities laws of the United States. We have been advised by McInnes Cooper, our Canadian counsel, that there is doubt as to the enforceability in Canada against us or against our directors, controlling persons, officers or experts, who are not residents of the United States, in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities based solely upon the federal securities laws of the United States. Legal matters The validity of the common shares and certain other legal matters with respect to the laws of the Province of Nova Scotia will be passed upon for us by our Canadian counsel, McInnes Cooper, Halifax, Nova Scotia, as to Nova Scotia and Canadian federal law. Certain other legal matters will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Vinson & Elkins L.L.P. may rely on the opinions of McInnes Cooper for all matters of Nova Scotia and Canadian federal law. Andrews Kurth LLP, Houston, Texas, will pass upon certain legal matters in connection with this offering for the underwriters.
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+SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS We are a societ per azioni (stock company) organized under the laws of the Republic of Italy. Substantially all of our directors, executive officers, and certain
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@@ -0,0 +1 @@
+LEGAL MATTERS Dykema Gossett PLLC will pass upon the validity of the issuance of our common stock and as to certain matters of Michigan law. Certain legal matters will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Milbank, Tweed, Hadley & McCloy LLP, New York, New York. In addition, Stuntz, Davis & Staffier, P.C., Washington, D.C. is advising us on matters relating to the FERC. Simpson Thacher & Bartlett LLP is relying upon the opinion of Dykema Gossett PLLC as to certain matters of Michigan law. Certain partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others have an indirect interest, through limited partnerships who are investors in KKR Millennium Fund, L.P., in less than 1% of our shares of common stock.
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+Legal matters Morrison Foerster LLP, Palo Alto, California, will pass for us on the validity of the common stock offered hereby. Latham Watkins LLP, Menlo Park, California, is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus.
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index 0000000000000000000000000000000000000000..241768fac54ed8dff8b8bc39dc64dbd68cfa2baf
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001319899_warner_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Davis Polk & Wardwell, New York, New York has passed upon the validity of the notes on our behalf.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001319903_warner_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001319903_warner_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..241768fac54ed8dff8b8bc39dc64dbd68cfa2baf
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001319903_warner_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Davis Polk & Wardwell, New York, New York has passed upon the validity of the notes on our behalf.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001321258_high_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001321258_high_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e3ed3749731d4edc056c499e2d1e00f0e97e5c78
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001321258_high_legal_matters.txt
@@ -0,0 +1 @@
+legal matters in connection with the sale of the Common Shares offered hereby will be passed upon for us by Troutman Sanders LLP, New York, New York as to matters of United States law, and by Stewart McKelvey Stirling Scales as to matters of Canadian law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001321268_eastern_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001321268_eastern_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e6e3424b539ecf33ed8b0c66e079d6e7e7e9e768
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001321268_eastern_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed upon for Eastern Holdings and Educators by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, counsel to Eastern Holdings and Educators. Certain legal matters will be passed upon for EHC and Eastern Holdings by Stevens & Lee, Valley Forge and Lancaster, Pennsylvania, counsel to EHC and Eastern Holdings. Certain legal matters will be passed upon for Keefe, Bruyette & Woods, Inc. by Lord, Bissell & Brook LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322069_fall_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322069_fall_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322069_fall_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322071_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322071_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322071_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322088_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322088_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322088_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322101_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322101_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322101_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322106_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322106_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322106_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322109_loeks_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322109_loeks_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322109_loeks_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322113_lewisville_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322113_lewisville_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322113_lewisville_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322116_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322116_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322116_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322120_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322120_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322120_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322123_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322123_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322123_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322127_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322127_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322127_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322133_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322133_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322133_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322134_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322134_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322134_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322138_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322138_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322138_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322141_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322141_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322141_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322142_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322142_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322142_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322144_ltm_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322144_ltm_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322144_ltm_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322147_ohio_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322147_ohio_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322147_ohio_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322149_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322149_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322149_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322153_richmond_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322153_richmond_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322153_richmond_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322156_springfiel_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322156_springfiel_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322156_springfiel_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322157_star_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322157_star_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322157_star_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322158_star_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322158_star_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322158_star_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322159_walter_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322159_walter_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322159_walter_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322160_theater_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322160_theater_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322160_theater_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322162_waterfront_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322162_waterfront_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322162_waterfront_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322167_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322167_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322167_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322168_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322168_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322168_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322173_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322173_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322173_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322178_south_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322178_south_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322178_south_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322180_music_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322180_music_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322180_music_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322182_new_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322182_new_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322182_new_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322186_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322186_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322186_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322187_red-bank_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322187_red-bank_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322187_red-bank_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322189_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322189_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322189_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322207_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322207_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322207_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322226_parkcheste_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322226_parkcheste_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322226_parkcheste_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322230_talent_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322230_talent_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322230_talent_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322236_mid_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322236_mid_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322236_mid_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322240_stroud_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322240_stroud_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322240_stroud_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322248_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322248_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322248_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322250_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322250_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322250_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001322253_loews_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001322253_loews_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001322253_loews_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001323974_mwi_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001323974_mwi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ebbbb2910a68a45b345f5af22f55550fb4e7d17e
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001323974_mwi_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered hereby will be passed on for us by Dechert LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering will be passed on for the underwriters by Shearman & Sterling LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001324915_omega_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001324915_omega_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..508c4fc3f90190bf5c30324ad60922a10ada5498
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001324915_omega_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Class A common stock and certain other matters relating to United States and Marshall Islands law, including matters relating to Marshall Islands and United States federal income tax consequences, will be passed upon for us by Seward & Kissel LLP, New York, New York. Certain legal matters in connection with the U.S. offering will be passed upon for the underwriters by Vinson & Elkins L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001326973_smart_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001326973_smart_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..13234f5f2d5515259163f4e8b194e9d702897d96
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001326973_smart_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters as to U.S. law in connection with this offering will be passed upon for us by Davis Polk Wardwell, Menlo Park, California. The validity of the ordinary shares offered hereby and certain other matters will be passed upon for us by Maples and Calder, Cayman Islands. Certain legal matters relating to the offering will be passed upon for the underwriters by Simpson Thacher Bartlett LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001328208_golden_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001328208_golden_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a4da02244b5938779a03e1fd739075ab8e0af0f0
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001328208_golden_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Patton Boggs LLP, Dallas, Texas. Venable LLP, Vienna, Virginia, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001328650_bronco_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001328650_bronco_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..01f353dc53014d460d794b05c07dd97ba251796d
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001328650_bronco_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock to be offered hereby will be passed upon by Akin, Gump, Strauss, Hauer & Feld, L.L.P.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001329364_pq-corp_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001329364_pq-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4aaabbe70b1c0ff77a93e3087434a67a0c21d981
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001329364_pq-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby is being passed upon for us by Latham & Watkins LLP, New York, New York and, with respect to certain matters of Pennsylvania law, by Babst, Calland, Clements and Zomnir, P.C., Pittsburgh, Pennsylvania. Certain partners of Babst, Calland, Clements and Zomnir, P.C., related persons and others have an indirect interest, through investments in a limited liability company, in less than 1% of the common stock of the Company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001329367_delpen_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001329367_delpen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4aaabbe70b1c0ff77a93e3087434a67a0c21d981
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001329367_delpen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby is being passed upon for us by Latham & Watkins LLP, New York, New York and, with respect to certain matters of Pennsylvania law, by Babst, Calland, Clements and Zomnir, P.C., Pittsburgh, Pennsylvania. Certain partners of Babst, Calland, Clements and Zomnir, P.C., related persons and others have an indirect interest, through investments in a limited liability company, in less than 1% of the common stock of the Company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001329369_potters_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001329369_potters_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4aaabbe70b1c0ff77a93e3087434a67a0c21d981
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001329369_potters_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby is being passed upon for us by Latham & Watkins LLP, New York, New York and, with respect to certain matters of Pennsylvania law, by Babst, Calland, Clements and Zomnir, P.C., Pittsburgh, Pennsylvania. Certain partners of Babst, Calland, Clements and Zomnir, P.C., related persons and others have an indirect interest, through investments in a limited liability company, in less than 1% of the common stock of the Company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001329370_pq-asia_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001329370_pq-asia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4aaabbe70b1c0ff77a93e3087434a67a0c21d981
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001329370_pq-asia_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby is being passed upon for us by Latham & Watkins LLP, New York, New York and, with respect to certain matters of Pennsylvania law, by Babst, Calland, Clements and Zomnir, P.C., Pittsburgh, Pennsylvania. Certain partners of Babst, Calland, Clements and Zomnir, P.C., related persons and others have an indirect interest, through investments in a limited liability company, in less than 1% of the common stock of the Company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001329374_pq_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001329374_pq_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4aaabbe70b1c0ff77a93e3087434a67a0c21d981
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001329374_pq_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby is being passed upon for us by Latham & Watkins LLP, New York, New York and, with respect to certain matters of Pennsylvania law, by Babst, Calland, Clements and Zomnir, P.C., Pittsburgh, Pennsylvania. Certain partners of Babst, Calland, Clements and Zomnir, P.C., related persons and others have an indirect interest, through investments in a limited liability company, in less than 1% of the common stock of the Company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001331426_warner_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001331426_warner_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..241768fac54ed8dff8b8bc39dc64dbd68cfa2baf
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001331426_warner_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Davis Polk & Wardwell, New York, New York has passed upon the validity of the notes on our behalf.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001331430_tc_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001331430_tc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..269ffd63273afad04cad3a421c2577b87ea97168
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001331430_tc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Lowenstein Sandler PC, Roseland, New Jersey. Certain legal matters with respect to this offering will be passed upon for the underwriters by Cooley Godward LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001331945_harbor_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001331945_harbor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e5422f2ede3f9d6a4e1441b6aa87a843617f4182
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001331945_harbor_legal_matters.txt
@@ -0,0 +1,930 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the securities offered in this prospectus is being passed upon for us by Davis, Malm & D'Agostine, P.C., Boston, Massachusetts. Venable
+LLP, Vienna, Virginia, is acting as counsel for the underwriters in this offering. 
+
+59
+
+ 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The financial statements included in this prospectus and in the registration statement have been audited by Goldstein Golub Kessler LLP, to the extent and for the
+period set forth in their report appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of Goldstein Golub Kessler LLP are included in
+reliance upon their report given upon the authority of Goldstein Golub Kessler LLP as experts in auditing and accounting. 
+
+ 
+ 
+
+WHERE YOU CAN FIND ADDITIONAL INFORMATION 
+ 
+
+ We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act,
+with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement,
+parts of the registration statement have
+been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The
+registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC's public reference room at 100 F Street, N.E., Room 1580,
+Washington, D.C. 20549-0102. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In
+addition, the SEC maintains a Web site at http://www.sec.gov which contains the Form S-1 and other reports, proxy and information statements and information regarding issuers that
+file electronically with the SEC. 
+
+60
+
+ 
+
+ 
+ 
+
+INDEX TO FINANCIAL STATEMENTS 
+ 
+
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+ 
+F-2
+
+BALANCE SHEET
+
+ 
+
+F-3
+
+STATEMENT OF OPERATIONS
+
+ 
+
+F-4
+
+STATEMENT OF STOCKHOLDERS' EQUITY
+
+ 
+
+F-5
+
+STATEMENT OF CASH FLOWS
+
+ 
+
+F-6
+
+NOTES TO FINANCIAL STATEMENTS
+
+ 
+
+F-7
+
+F-1
+
+ 
+
+ 
+ 
+
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+ 
+
+To
+the Board of Directors
+
+Harbor Acquisition Corporation 
+
+We
+have audited the accompanying balance sheet of Harbor Acquisition Corporation (a development stage company) as of December 31, 2005, and the related statements of operations, stockholders'
+equity and cash flows for the period from June 20, 2005 (inception) to December 31, 2005. These financial statements are the responsibility of the Company's management. Our
+responsibility is to express an opinion on these financial statements based on our audit. 
+
+We
+conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
+reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
+financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
+We believe that our audit provides reasonable basis for our opinion. 
+
+In
+our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harbor Acquisition Corporation as of December 31, 2005, and the
+results of its operations and its cash flows for the period from June 20, 2005 (inception) to December 31, 2005 in conformity with United States generally accepted accounting principles. 
+
+The
+accompanying financial statements have been prepared assuming Harbor Acquisition Corporation will continue as a going concern. The Company has a net loss, working capital deficiency and has no
+operations. This raises substantial doubt about the Company's ability to continue as a going concern. As discussed in Note 2, the Company is in the process of raising capital through a Proposed
+Offering. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 
+
+/s/
+GOLDSTEIN GOLUB KESSLER LLP
+
+GOLDSTEIN
+GOLUB KESSLER LLP
+
+New York, New York 
+
+March
+23, 2006, except for the first
+
+paragraph of Note 6, as to which
+
+the date is April 14, 2006 
+
+F-2
+
+ 
+
+ 
+ 
+
+Harbor Acquisition Corporation 
+ 
+ (A Development Stage Company) 
+ 
+ Balance Sheet 
+ 
+ As of December 31, 2005 
+ 
+
+Assets
+ 
+ 
+ 
+ 
+
+Current Assets
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash
+
+ 
+
+$
+
+6,654
+
+ 
+
+ 
+ 
+
+ 
+
+Total Current Assets
+ 
+ 
+6,654
+ 
+
+Deferred Offering Costs
+
+ 
+
+ 
+
+303,509
+
+ 
+
+ 
+ 
+
+ 
+
+Total Assets
+
+ 
+
+$
+
+310,163
+
+ 
+
+ 
+ 
+
+ 
+
+Liabilities And Stockholders' Equity
+
+ 
+
+ 
+
+ 
+
+ 
+
+Liabilities
+
+ 
+
+ 
+
+ 
+
+ 
+
+Accrued Expenses
+
+ 
+
+$
+
+215,000
+
+ 
+
+Notes Payable, Stockholders
+ 
+ 
+75,000
+ 
+
+ 
+ 
+
+ 
+
+Total Liabilities
+ 
+ 
+290,000
+ 
+
+ 
+ 
+
+ 
+
+Commitment
+
+ 
+
+ 
+
+ 
+
+ 
+
+Stockholders' Equity
+
+ 
+
+ 
+
+ 
+
+ 
+
+Preferred Stock, $.0001 par value, 1,000,000 shares authorized; none issued or outstanding
+
+ 
+
+ 
+
+ 
+
+ 
+
+Common Stock, $.0001 par value, 70,000,000 shares authorized; 2,500,000 shares issued and outstanding
+ 
+ 
+250
+ 
+
+Additional Paid-in Capital
+ 
+ 
+24,750
+ 
+
+Deficit accumulated during the development stage
+ 
+ 
+(4,837
+)
+
+ 
+ 
+
+ 
+
+Total Stockholders' Equity
+ 
+ 
+20,163
+ 
+
+ 
+ 
+
+ 
+
+Total Liabilities and Stockholders' Equity
+
+ 
+
+$
+
+310,163
+
+ 
+
+ 
+ 
+
+ 
+
+The
+accompanying notes should be read in conjunction with the financial statements. 
+
+F-3
+
+ 
+
+ 
+ 
+
+Harbor Acquisition Corporation 
+ 
+ (A Development Stage Company) 
+ 
+ Statement of Operations 
+ 
+ Period from June 20, 2005 (inception) to December 31, 2005 
+
+Interest Income
+ 
+$
+163
+ 
+
+Operating Expenses
+
+ 
+
+ 
+
+ 
+
+ 
+
+General & Administrative
+
+ 
+
+$
+
+5,000
+
+ 
+
+ 
+ 
+
+ 
+
+Net Loss
+
+ 
+
+$
+
+(4,837
+
+)
+
+ 
+ 
+
+ 
+
+Loss per Share basic and fully diluted
+
+ 
+
+$
+
+(0.00
+
+)
+
+ 
+ 
+
+ 
+
+Weighted Average number of common shares outstanding basic and diluted
+
+ 
+
+ 
+
+2,500,000
+
+ 
+
+ 
+ 
+
+ 
+
+The
+accompanying notes should be read in conjunction with the financial statements. 
+
+F-4
+
+ 
+
+ 
+ 
+
+Harbor Acquisition Corporation 
+ 
+ (A Development Stage Company) 
+ 
+ Statement of Stockholders' Equity 
+ 
+ Period from June 20, 2005 (inception) to December 31, 2005 
+
+ 
+
+ 
+Common Stock
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Additional Paid-in Capital
+ 
+Deficit Accumulated
+
+During the
+
+Development Stage
+ 
+ 
+
+ 
+
+ 
+
+ 
+Shares
+ 
+Amount
+ 
+Total
+ 
+
+Stock issued June 22, 2005 at $.01 per share
+ 
+2,500,000
+ 
+$
+250
+ 
+$
+24,750
+ 
+ 
+ 
+ 
+$
+25,000
+ 
+
+Net Loss
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+$
+
+(4,837
+
+)
+
+$
+
+(4,837
+
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2005
+
+ 
+
+2,500,000
+
+ 
+
+$
+
+250
+
+ 
+
+$
+
+24,750
+
+ 
+
+$
+
+(4,837
+
+)
+
+$
+
+20,163
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes should be read in conjunction with the financial statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+Harbor Acquisition Corporation 
+ 
+ (A Development Stage Company) 
+ 
+ Statement of Cash Flows 
+ 
+ Period from June 20, 2005 (inception) to December 31, 2005 
+
+Cash Flows From Operating Activities
+ 
+ 
+ 
+ 
+
+Net Loss
+
+ 
+
+$
+
+(4,837
+
+)
+
+Change in Accrued Expenses
+ 
+ 
+5,000
+ 
+
+ 
+ 
+
+ 
+
+Net Cash Provided By Operating Activities
+
+ 
+
+ 
+
+163
+
+ 
+
+ 
+ 
+
+ 
+
+Cash Flows From Financing Activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+Proceeds from sale of stock
+
+ 
+
+ 
+
+25,000
+
+ 
+
+Proceeds from advances from Stockholders
+ 
+ 
+75,000
+ 
+
+Payment of offering costs
+ 
+ 
+(93,509
+)
+
+ 
+ 
+
+ 
+
+Net Cash provided by Financing Activities
+
+ 
+
+ 
+
+6,491
+
+ 
+
+ 
+ 
+
+ 
+
+Net Change in Cash and Cash at end of period
+
+ 
+
+$
+
+6,654
+
+ 
+
+ 
+ 
+
+ 
+
+Supplemental schedule of non-cash financing activity:
+ 
+ 
+ 
+ 
+
+Accrual of offering costs
+ 
+$
+210,000
+ 
+
+ 
+ 
+
+ 
+
+The accompanying notes should be read in conjunction with the financial statements. 
+
+F-6
+
+ 
+
+ 
+ 
+
+Harbor Acquisition Corporation
+ (A Development Stage Company) 
+ 
+ Notes to Financial Statements 
+ 
+
+1. Organization, Business Operations and Significant Accounting Policies 
+
+ Harbor Acquisition Corporation (the "Company") was incorporated in Delaware on June 20, 2005 as a blank check company whose objective is to acquire an
+operating business. 
+
+ At
+December 31, 2005, the Company had not yet commenced any operations. All activity through December 31, 2005 relates to the Company's formation and the proposed public offering
+described below. The Company has selected December 31 as its fiscal year-end. 
+
+ The
+Company's ability to commence operations is contingent upon obtaining adequate financial resources through a proposed public offering of up to 10,000,000 units ("Units") which is
+discussed in Note 2 ("Proposed Offering"). This factor raises substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements are prepared
+assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's management has
+broad discretion with respect to the specific application of the net proceeds of this Proposed Offering, although substantially all of the net proceeds of this Proposed Offering are intended to be
+generally applied toward consummating a business combination with an operating business ("Business Combination"). Furthermore, there is no assurance that the Company will be able to successfully
+effect a Business Combination. Upon the closing of the Proposed Offering, management has agreed that at least $5.78 per Unit sold in the Proposed Offering will be held in a trust account ("Trust
+Account") and invested in government securities until the earlier of (i) the consummation of its first Business Combination and (ii) liquidation of the Company. The placing of funds in
+the Trust Account may not protect those funds from third party claims against the Company. Although the Company will seek to have all vendors, prospective target businesses or other entities it
+engages, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account, there is no guarantee that they will execute such
+agreements. Certain of the Company's directors have severally agreed that they will be personally liable under certain circumstances to ensure
+that the proceeds in the Trust Account are not reduced by the claims of target businesses or vendors or other entities that are owed money by the Company for services rendered, contracted for or
+products sold to the Company. However, there can be no assurance that the directors will be able to satisfy those obligations. The remaining net proceeds (not held in the Trust Account) may be used to
+pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. The Company, after signing a definitive agreement for the
+acquisition of a target business, is required to submit such transaction for stockholder approval. In the event that stockholders owning 20% or more of the shares sold in the Proposed Offering vote
+against the Business Combination and exercise their conversion rights described below, the Business Combination will not be consummated. All of the Company's stockholders prior to the Proposed
+Offering, including all of the officers and directors of the Company ("Initial Stockholders"), have agreed to vote their 2,500,000 founding shares of common stock, as well as any shares of common
+stock acquired in connection with or following the Proposed Offering, in accordance with the vote of the majority in interest of all other stockholders of the Company ("Public Stockholders") with
+respect to any Business Combination. After consummation of a Business Combination, these voting safeguards will no longer be applicable. 
+
+ With
+respect to a Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his or her
+shares. The per share conversion price will equal the amount in the Trust Account, calculated as of two business days prior to the consummation of the proposed Business Combination (net of the
+underwriters' deferred non-accountable expense allowance described in Note 2), divided by the number 
+
+F-7
+
+ 
+
+of
+shares of common stock held by Public Stockholders at the consummation of the Proposed Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate number of shares owned by all
+Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Account (subject
+to distributions for working capital and amounts paid or accrued for taxes) computed without regard to the shares held by Initial Stockholders. 
+
+ The
+Company's Certificate of Incorporation provides for mandatory liquidation of the Company in the event that the Company does not consummate a Business Combination within
+18 months from the date of the consummation of the Proposed Offering, or 24 months from the consummation of the Proposed Offering if certain extension criteria have been satisfied. In
+the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public offering
+price per share in the Proposed Offering (assuming no value is attributed to the Warrants contained in the Units to be offered in the Proposed Offering discussed in Note 2). 
+
+ Deferred
+income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established
+when necessary to reduce deferred tax assets to the amount expected to be realized. 
+
+ The Company recorded a deferred income tax asset for the tax effect of temporary differences, aggregating approximately $2,000. In recognition of the uncertainty regarding the ultimate
+amount of income tax benefits to be derived, the Company has recorded a full valuation allowance at December 31, 2005.
+
+ The
+effective tax rate differs from the statutory rate of 34% due to the increase in the valuation allowance. 
+
+ Loss
+per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. 
+
+ The
+preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
+that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from
+those estimates. 
+
+ Management
+does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial
+statements. 
+
+2. Proposed Public Offering: Value of Unit Purchase Option 
+
+ The Proposed Offering calls for the Company to offer for public sale up to 10,000,000 Units at a proposed offering price of $6.00 per Unit (plus up to an
+additional 1,500,000 units solely to cover over-allotments, if any). Each Unit consists of one share of the Company's common stock and two Redeemable Common Stock Purchase Warrants
+("Warrants"). Each Warrant will entitle the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing the later of the completion of a Business Combination
+and one year from the effective date of the Proposed Offering and expiring five years from the effective date of the Proposed Offering. The Company may redeem the Warrants at a price of $.01 per
+Warrant upon 30 days' notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a
+30 trading day period ending on the third day prior to 
+
+F-8
+
+ 
+
+the
+date on which notice of redemption is given. The Company will pay the underwriters in the Proposed Offering an underwriting discount of 5.0%, and a non-accountable expense allowance of 2.25% of
+the gross proceeds of the proposed offering. The non-accountable expense allowance will be held in the Trust Account and payable only upon the consummation of a business combination. 
+
+ Certain of the Initial Stockholders are expected to purchase 2,000,000 warrants at a purchase price of $0.65 per warrant, in a private placement to be completed prior to the
+offering.
+
+ The Initial Stockholders will be entitled to registration rights with respect to their founding shares pursuant to an agreement to be signed prior to or on the effective date of the
+Proposed Offering. The holders of the majority of these shares are entitled to make up to two demands that the Company register these shares at any time commencing three months prior to the third
+anniversary of the effective date of the Proposed Offering. In addition, the Initial Stockholders have certain "piggy-back" registration rights on registration statements filed subsequent
+to the third anniversary of the effective date of the Proposed Offering.
+
+ 
+
+ In
+addition, the Company has agreed to sell to Ferris Baker, Watts, Incorporated for $100, an option to purchase up to a number of Units equal to 5% of the Units sold in the
+Proposed Offering, excluding any exercise of the underwriters' over-allotment option. The Units that would be issued upon exercise of this option are identical to those offered by this prospectus,
+except that each of the Warrants underlying this option entitles the holder to purchase one share of the Company's common stock at a price of $6.25. This Underwriter's Purchase Option (UPO) is
+exercisable at $7.50 per Unit at the latter of one year from the effective date, or the consummation of a business combination. The UPO has a life of five years from the effective date. The UPO will
+only be granted if and when the Company consummates the Proposed Offering. 
+
+ The sale of the option will be accounted for as an equity transaction. Accordingly, there will be no net impact on the Company's financial position or results of operations, except for
+the recording of the $100 proceeds from the sale. The Company has determined, based upon a Black-Scholes model, that
+
+the fair value of the option on the date of sale would be approximately $1,263,000 using an expected life of five years, volatility of 49.3% and a risk-free interest rate of 4.635%.
+
+ 
+
+ The Company has no trading history, as such it is not possible to value the UPO based on historical trades. In order to estimate the value of the UPO the Company considered the historic
+volatilities of 22 publicly traded companies that operate within the consumer and industrial products sectors. The average volatility of the representative companies was calculated to be 49.3%.
+Management believes that this volatility is a reasonable benchmark to use in estimating the value of the UPO. The actual volatility of the Unit will depend on many factors that cannot be ascertained
+at this time.
+
+3. Deferred Offering Costs 
+
+ Deferred offering costs consist principally of legal and accounting fees incurred through the balance sheet date that are directly related to the Proposed
+Offering and that will be charged to Stockholders' equity upon the receipt of the capital raised. 
+
+4. Notes Payable, Stockholders 
+
+ The Company issued an aggregate of $75,000 unsecured promissory notes to two of its Initial Stockholders on June 22, 2005. The notes are
+non-interest bearing and are payable on the earlier of 
+
+F-9
+
+ 
+
+June 15,
+2006 or the consummation of the Proposed Offering. Due to the short-term nature of the notes, the fair value of the notes approximates its carrying amount. 
+
+5. Commitments and Related Party Transactions 
+
+ The Company presently occupies office space provided by an affiliate of several of the Initial Stockholders. Such affiliate has agreed that, until the Company
+consummates a Business Combination, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time.
+The Company has agreed to pay such affiliate $7,500 per month for such services commencing on the effective date of the Proposed Offering. 
+
+ Pursuant
+to letter agreements dated June 22, 2005 with the Company and the Representative, the Initial Stockholders have waived their right to receive distributions with respect
+to their founding shares upon the Company's liquidation. 
+
+6. Subsequent Events 
+
+ On April 14, 2006, the Company's majority stockholders approved an amendment to the Company's Certificate of Incorporation to increase the number of
+authorized shares of common stock to 70,000,000. All references in the accompanying financial statements to the number of shares of stock have been retroactively restated to reflect this transaction.
+
+ Upon
+the consummation of the Proposed Offering, a shareholder of the Company will loan the Company $150,000. The loan will bear interest at 4% per annum and will be paid from the
+interest earned on the amounts in the Trust Fund. 
+
+7. Preferred Stock 
+
+ The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from
+time to time by the Board of Directors. 
+
+F-10
+
+ Until , 2006, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a
+prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 
+
+ No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this
+offering other than those contained in this prospectus and, if given or made, the information or representation must not be relied upon as having been authorized by us. This prospectus does not
+constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any
+securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. 
+
+ TABLE OF CONTENTS
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001332552_asia_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001332552_asia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b951aa536225ff224ccbde822a9b42b688323f4d
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001332552_asia_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Strobl & Sharp PC, Bloomfield Hills, Michigan. Kramer Levin Naftalis & Frankel LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001333248_cadence_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001333248_cadence_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c83c30128d025caca82c827ebd0009e94725b18d
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001333248_cadence_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered by this prospectus will be passed upon for us by Latham Watkins LLP, San Diego, California. Latham Watkins LLP and certain attorneys and investment funds affiliated with the firm collectively own an aggregate of 90,000 shares of our preferred stock, which will convert into an aggregate of 22,500 shares of our common stock upon the completion of this offering. Certain legal matters in connection with this offering will be passed upon for the underwriters by Heller Ehrman LLP, San Diego, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001333513_dealertrac_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001333513_dealertrac_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e3f7528d0b4c63f42ec131f9113020e5958012f2
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001333513_dealertrac_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Goodwin Procter LLP, Boston, Massachusetts. Davis Polk Wardwell, New York, New York is counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001335725_israel_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001335725_israel_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3e2ccd2d6d782907af49ca18d5c339c0b0082ee4
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001335725_israel_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents DILUTION Throughout this Dilution section, the use of the term our common stock means and includes both our common stock and our Class B common stock unless the context requires otherwise. The difference between the public offering price per share of our common stock, assuming no value is attributed to the Class W warrants and Class Z warrants included in the Series A units and Series B units, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of Class B common stock which may be converted into cash), by the number of outstanding shares of our common stock. At April 30, 2006, our net tangible book value was a deficit of $258,249, or a deficit of $2,582.49 per share of common stock. After giving effect to the sale of 1,000,000 shares of common stock and 9,200,000 shares of Class B common stock included in the Series A units and Series B units, respectively, and the deduction of underwriting discounts and estimated expenses of this offering, our pro forma net tangible book value at April 30, 2006 would have been $38,652,877 or approximately $4.62 per share, representing an immediate increase in net tangible book value of $2,587.11 per share to the existing stockholders and an immediate dilution of $0.35 per share or 7.0% to new investors not exercising their conversion rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $9,287,354 less than it otherwise would have been because if we effect a business combination, the conversion rights to the Class B stockholders may result in the conversion into cash of up to approximately 19.99% of the aggregate number of the Class B shares sold in this offering at a per-share conversion price equal to the amount in the trust fund as of two business days prior to the consummation of the proposed business combination, inclusive of any interest, divided by the number of shares of Class B common stock sold in this offering. The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units: Weighted average public offering price $ 4.97 Net tangible book value before this offering $ (2,582.49 ) Increase attributable to new investors $ 2,587.11 (1) The offering expenses are estimated at $394,500. Purchasers of the Series A units will bear all of the expenses of this offering relating to the sale of both our Series A units and Series B units, including the underwriting discounts and commissions. Purchase Option We have agreed to sell to the representative, for $100, an option to purchase up to a total of 25,000 Series A units and/or 230,000 Series B units. The Series A units and Series B units issuable upon exercise of this option are identical to those offered by this prospectus, except that the exercise price of the warrants included in the units is $5.50 per share (110% of the exercise price of the warrants included in the units sold to the public) and the Class Z warrants shall be exercisable by the representative for a period of only five years from the date of this prospectus. This option is exercisable at $14.025 per Series A unit and $16.665 per Series B unit, and may be exercised on a cashless basis, commencing on the later of the completion of a business combination with a target business and one year from the date of this prospectus and expiring five years from the date of this prospectus. The option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period following the date of this prospectus, except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part of, the option grants to holders demand and piggy back rights for periods of five and seven years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. We will have no obligation to net cash settle the exercise of the purchase option or the warrants underlying the purchase option. The holder of the purchase option will not be entitled to exercise the purchase option or the warrants underlying the purchase option unless a registration statement covering the securities underlying the purchase option is effective or an exemption from registration is available. If the holder is unable to exercise the purchase option or underlying warrants, the purchase option or warrants, as applicable, will expire worthless. The exercise price and number of Series A units and Series B units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at prices below the option exercise price. Warrant Solicitation Fee We have engaged HCFP/Brenner Securities, the representative of the underwriters, on a non-exclusive basis, as our agent for the solicitation of the exercise of the Class W warrants and Class Z warrants. To the extent not inconsistent with the guidelines of the NASD and the rules and regulations of the SEC, we have agreed to pay the Table of Contents representative for bona fide services rendered a commission equal to 5% of the exercise price for each Class W warrants and Class Z warrant exercised more than one year after the date of this prospectus if the exercise was solicited by the underwriters. In addition to soliciting, either orally or in writing, the exercise of the Class W warrants and Class Z warrants, the representative s services may also include disseminating information, either orally or in writing, to warrantholders about us or the market for our securities, and assisting in the processing of the exercise of warrants. No compensation will be paid to the representative upon the exercise of the Class W warrants and Class Z warrants if: the market price of the underlying shares of common stock is lower than the exercise price; the holder of the warrants has not confirmed in writing that the representative solicited the exercise; the warrants are held in a discretionary account; the warrants are exercised in an unsolicited transaction; or the arrangement to pay the commission is not disclosed in the prospectus provided to warrantholders at the time of exercise. Regulatory Restrictions on Purchase of Securities Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. However, the underwriters may engage in the following activities in accordance with the rules: Stabilizing Transactions. The underwriters may make bids or purchases for the purpose of preventing or retarding a decline in the price of our Series A Units and Series B Units, so long as stabilizing bids do not exceed the respective per-unit offering price. Over-Allotments and Syndicate Coverage Transactions. The underwriters may create a short position in our Series A Units and Series B Units by selling more of our Series A Units and Series B Units than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative may engage in syndicate covering transactions by purchasing our Series A Units and Series B Units in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option. Penalty Bids. The representative may reclaim a selling concession from a syndicate member when the Series A Units and Series B Units originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the prices of the securities if it discourages resales of the securities. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the OTC Bulletin Board, in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time. The distribution of our units in this offering will be completed once all the units have been sold, all stabilizing transactions have been completed and all penalty bids have been reclaimed or withdrawn. Other Terms We have granted HCFP/Brenner Securities the right to have a representative present at all meetings of our board of directors to observe such meetings for a period of five years from the date of this prospectus. The Table of Contents representative will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. Additionally, upon consummation of a business combination and until the expiration of the five-year period, HCFP/Brenner Securities shall be entitled to appoint a designee to our board of directors. HCFP/Brenner Securities has not named a designee as of the date of this prospectus. We have agreed to reimburse the representative and/or designee for his or her reasonable out-of-pocket expenses in connection with attending board meetings. We have also agreed to reimburse HCFP/Brenner Securities up to $15,000 for its expenses incurred in connection with the background investigation of our management as part of its due diligence for this offering. We have engaged the representative of the underwriters to act as our investment banker in connection with our business combination. We will pay the representative a cash fee at the closing of our business combination for assisting us in structuring and negotiating the terms of the transaction of $1,500,000. Except as set forth above, we are not under any contractual obligation to engage any of the underwriters to provide any services for us after this offering, and have no present intent to do so. However, any of the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after this offering, we may pay such underwriter fair and reasonable fees that would be determined at that time in an arm s length negotiation; provided that no agreement will be entered into with any of the underwriters and no fees for such services will be paid to any of the underwriters prior to the date which is 90 days after the date of this prospectus, unless the National Association of Securities Dealers determines that such payment would not be deemed underwriter s compensation in connection with this offering. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in this respect. LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Blank Rome LLP, New York, New York. Certain legal matters relating to Israel law will be passed upon by Yigal Arnon & Co. as our Israeli counsel. Graubard Miller, New York, New York, is acting as counsel for the underwriters in this offering. Blank Rome LLP, from time to time, acts as counsel to the representative on matters unrelated to this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001336249_north_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001336249_north_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..04adb22f4fdc0488b8253e65aaade954524de236
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001336249_north_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters regarding the securities offered by this prospectus will be passed upon for us by Shearman & Sterling LLP, Washington, D.C. Shearman & Sterling LLP will receive a portion of its legal fees upon the completion of this offering. Certain legal matters in connection with the offering will be passed upon for the underwriter by Bingham McCutchen LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001336775_phoenix_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001336775_phoenix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a2bf6fb02a7e154096014d6a121c0982f8114eb1
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001336775_phoenix_legal_matters.txt
@@ -0,0 +1,3348 @@
+Legal Matters
+
+55
+
+Experts
+
+55
+
+Where You Can Find Additional Information
+
+55
+
+Financial Statements
+
+F-1
+
+i
+
+PROSPECTUS SUMMARY
+
+This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to Phoenix India Acquisition Corp. The term public stockholders refers to those persons that purchase the securities offered by this prospectus in this offering or in the aftermarket. Furthermore, as used in this prospectus, a target business shall include an operating business in the KPO or BPO sectors and a business combination shall mean the acquisition by us of one or more target businesses. Unless we tell you otherwise, references in this prospectus to units include 93,750 units that our executive officers and
+directors , through an entity they own,
+ have agreed to purchase in a private placement immediately prior to this offering. All share and per share information in this prospectus gives effect to a 2-for-1 reverse stock split effected in January 2006. 
+
+We are a blank check company organized under the laws of the State of Delaware on July 13, 2005. We were formed to acquire, through merger, capital stock exchange, asset acquisition or other similar business combination, within the information technology, information technology enabled services and information technology enabled products industries (IT/ITES/ITEP), one or more unidentified businesses, including those in the knowledge process outsourcing, or KPO, and business processing outsourcing, or BPO, sectors operating in India. To date, our efforts have been limited to organizational activities. We do not have any specific business combination under consideration, nor have we had any discussions with any target business regarding a possible business combination.
+
+KPO involves processes that demand advanced information search, analytical, interpretative and technical skills, as well as judgment and decision making. Examples of KPO functions include, but are not limited to, intellectual property or patent research, pharmaceutical and biotechnology research and development (including clinical trials), data mining, database creation, packaging, as well as a variety of analytical services such as equity research, competitive intelligence, industry reports and financial modeling. BPO functions involve more routine back office processes, such as transaction processing operations, as well as more complex and knowledge-based functions, such as human resources, accounting and finance.
+
+According to the April 2004 report published by research firm, International Data Corporation (IDC), titled Worldwide and US Business Process Outsourcing (BPO) 2004-2008 Forecast, the worldwide spending on BPO services is expected to grow from approximately $448 billion in 2004 to approximately $682 billion by 2008, a compound annual growth rate of 11%. As a result of the well established track record and client relationships of Indian information technology services companies, favorable wage differentials, availability of a large, quality, English speaking talent pool and a regulatory environment becoming friendlier to investment, management believes India is becoming a leading destination for BPO services. We believe these same factors will facilitate India s growth in the KPO service industry as well.
+
+We have not conducted any research with respect to identifying the likelihood of consummating a business combination or the specific number and characteristics of the potential target businesses within any segment of the KPO or BPO industries, or the likelihood or probability of success of any proposed business combination. In addition, we have not compiled a database of entities that are suitable target businesses. We cannot assure you that we will be able to locate a target business meeting the criteria described above in these segments or that we will be able to engage in a business combination with a target business on favorable terms.
+
+While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or businesses with a collective fair market value equal to at least 80% of our net assets (excluding any funds (net of taxes payable) held in the trust account for the benefit of Rodman & Renshaw, LLC) at the time of such acquisition. We may not be able to acquire more than one target business because of various factors, including possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of due diligence and negotiations, proxy statement disclosure, foreign exchange or other clearances and closings with multiple target businesses. In addition, we would also be exposed to the
+risk that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied, bringing the fair market value of the initial 
+
+1
+
+business combination below the required fair market value of 80% of our net assets threshold (excluding any funds held in the trust account for the benefit of Rodman & Renshaw, LLC).
+
+We may further seek to acquire a target business that has a fair market value significantly in excess of 80% of our net assets. In order to do so, we may seek to raise additional funds through a private offering of debt or equity securities and/or any other methods of financing although we have not entered into any such arrangement and have no current intention of doing so. However, if we did, such arrangement would only be consummated simultaneously with the consummation of the business combination. We have not, nor has anyone on our behalf, either directly or indirectly, contacted any potential target businesses or their representatives or had any discussions with respect to effecting any potential business combination with our company. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. Neither we nor any of our agents or affiliates has yet taken
+any measure, directly or indirectly, to locate a target business.
+
+Our offices are located at 645 Madison Avenue, 12th Floor, New York, NY 10022, and our telephone number is (212) 371-1302.
+
+Private Placement
+
+Our executive officers and directors have agreed that they or an entity they control will
+ purchase an aggregate of 93,750 units from us at a purchase price of $8.00 per unit in a private placement that will occur immediately prior to this offering. The $750,000 of gross proceeds from the private placement will be held in the trust account for the benefit of the public stockholders.
+
+The Offering
+
+Securities offered: 
+
+6,156,250 units, at $8.00 per unit, each unit consisting of: 
+
+ 
+
+One share of common stock; and
+
+ 
+
+One warrant.
+
+ The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants will trade separately within the first 20 trading days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, unless Rodman & Renshaw, LLC determines that an earlier date is acceptable, provided, however, that in no event will Rodman & Renshaw LLC, the representative of the underwriters, allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the SEC, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. Such Current Report on Form 8-K will not be
+distributed to our stockholders. The audited balance sheet will include those proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised following the initial filing of such Form 8-K, an amended Form 8-K will be filed to provide updated financial information to reflect the exercise of the over-allotment option.
+
+2
+
+Common stock:
+
+ 
+
+Number outstanding before this offering 
+
+ 
+1,656,250
+ shares
+
+Number to be outstanding after this offering 
+
+7,812,500 shares, or 8,966,796 shares if the underwriters over-allotment option, and our existing stockholders options to purchase up to 230,859 units, are exercised in full.
+
+Warrants:
+
+ 
+
+Number outstanding before this offering 
+
+ 
+1,656,250
+ warrants 
+
+Number to be outstanding after this offering 
+
+7,812,500 warrants, or 8,966,796 warrants if the underwriters over-allotment option and our existing stockholders options to purchase up to 230,859 units are exercised in full.
+
+Exercisability 
+
+Each warrant is exercisable for one share of common stock and may be exercised on a cashless basis.
+
+Exercise price 
+
+$5.00
+
+Exercise period 
+
+The warrants will become exercisable on the later of: 
+
+ 
+
+The completion of a business combination or terms described in this prospectus, or
+
+ 
+
+ , 2007 [one year anniversary of the date of this prospectus].
+
+ None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Upon exercise of the warrants and disbursement of the trust, the warrant exercise price, if any, will be paid directly to us. The warrants will expire at 5:00 p.m., New York City time, on , 2011 [five year anniversary of the date of this prospectus] or earlier upon redemption.
+
+Redemption 
+
+We may redeem the outstanding warrants (including any warrants issued upon exercise of Rodman & Renshaw, LLC s unit purchase option): 
+
+ 
+
+In whole and not in part,
+
+ 
+
+At a price of $.01 per warrant at any time after the warrants become exercisable,
+
+ 
+
+Upon a minimum of 30 days prior written notice of redemption, and
+
+ 
+
+If, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. 
+
+3
+
+ We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a reasonable cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his, her or its warrant prior to the date scheduled for redemption, by payment of the exercise price or on a cashless basis in lieu of paying the cash exercise price as described in this prospectus. However, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made.
+
+Proposed OTC Bulletin Board symbols for our: 
+
+ 
+
+Units
+
+ 
+
+Common stock
+
+ 
+
+Warrants
+
+ 
+
+Offering proceeds to be held in trust:
+
+47,847,500 of the proceeds of this offering and the private placement (approximately $7.77 per unit) will be placed in a trust account at JPMorgan Chase NY Bank maintained by American Stock Transfer & Trust Company, acting as trustee, pursuant to an agreement to be entered into on the date of this prospectus. These proceeds consist of 45,877,500 from the net proceeds (approximately $7.45 per unit) payable to us and $1,970,000 of the proceeds ($0.32 per unit) attributable to the underwriters discount. These proceeds will not be released until the earlier of the completion of a business combination or our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account (other than up to $1,250,000 of interest earned on the trust account that may be released to us) will not be available for our use for any expenses related to this offering or expenses which we may
+incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. These expenses may be paid prior to a business combination only from amounts available outside the trust account and up to $1,250,000 of interest earned on the trust account that may be released to us to fund our working capital requirements and repay our management loans. The $1,970,000 of the proceeds attributable to the underwriters discount (and any accrued interest thereon, net of taxes payable) will be paid to Rodman & Renshaw, LLC and any stockholders exercising their redemption rights upon completion of a business combination on the terms described in this prospectus or to our public stockholders upon our liquidation, but will, in no event, be available for use by us in a business combination.
+
+4
+
+ We may use a portion of the funds not held in the trust account to make a deposit, down payment or fund a no-shop, standstill provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate.
+
+ Prior to completion of a business combination, there will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than:
+
+ 
+
+The options to purchase an aggregate of 230,859 units granted to our initial stockholders in August 2005;
+
+ 
+
+Repayment of $340,464 of loans with 4% interest made by our management to date to cover offering expenses solely from interest in excess of $750,000 earned on the trust account;
+
+ 
+
+Repayment of $159,536 of loans with 4% interest to be made to us by management upon the closing of this offering solely from interest in excess of $750,000 earned on the trust account;
+
+ 
+
+Payment of up to $5,000 per month to affiliates of our officers and directors for office space and administrative services; and
+
+ 
+
+Reimbursement for any expenses incident to the offering and finding a suitable business combination.
+
+ Subsequent to a business combination, our post-combination board of directors will make determinations with respect to compensation, if any, and the reimbursement of expenses incurred by such individuals following the combination.
+
+Stockholders must approve business combination:
+
+We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering and the private placement in accordance with the majority of the shares of common stock voted by the public stockholders. All shares acquired by our
+
+5
+
+ executive officers and directors in the private placement, in this offering or in the aftermarket will be voted in favor of any business combination negotiated by our officers. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 20% of the aggregate shares sold in this offering and the private placement exercise their redemption rights described below. Voting against the business combination alone will not result in redemption of a stockholder s shares for a pro rata share of the trust account (net of taxes payable). Such stockholder must have also exercised his, her or its redemption rights described below.
+
+Redemption rights for stockholders voting to reject a business combination: 
+
+Public stockholders voting against a business combination will be entitled to redeem their stock for a pro rata share of the trust account (excluding the portion attributable to the private placement), including any interest (net of taxes payable) earned on their portion of the trust account not previously released to us, if the business combination is approved and completed. Public stockholders who redeem their stock for a share of the trust account will continue to have the right to exercise any warrants they may hold. These redemption provisions, which are contained in our certificate of incorporation, cannot be amended without the affirmative vote of 95% of the shares sold in this offering and the private placement. Neither we nor our board of directors will propose, or seek stockholder approval of, any amendment of these provisions.
+
+ In order to exercise this redemption right, the public stockholders must make an affirmative election. Voting against a business combination does not automatically trigger the redemption right. Public stockholders who redeem their shares of stock into their share of the trust account will continue to have the right to exercise any warrants they may hold.
+
+Liquidation if no business combination:
+
+We will dissolve and promptly distribute only to our public stockholders the amount in the trust account plus any remaining net assets if we do not effect a business combination within 18 months after consummation of this offering (or within 24 months from the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after consummation of this offering and the business combination has not yet been consummated within such 18-month period). These liquidation provisions, which are contained in the investment management trust agreement, cannot be amended without the affirmative vote of 100% of the public stockholders. The provisions are also set forth in our certificate of incorporation, an amendment to which requires the affirmative vote of 95% of the shares sold in this offering and the private placement. Neither we nor our
+board of directors will propose, or seek stockholder
+
+6
+
+ approval of, any amendment of these provisions.
+ Our existing stockholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering (including the 93,750 shares comprising the units they are acquiring in the private placement). In addition, the underwriters have agreed to waive their rights to $1,970,000 of deferred underwriting compensation deposited in the trust account for their benefit. We will pay the costs of liquidation and dissolution from our remaining assets outside of the trust account.
+
+Escrow of existing stockholders shares: 
+
+On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place the units they owned before the private placement and this offering into an escrow account maintained by American Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death, these units will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of a business combination or earlier in the event the business combination results in a change of control of us or we receive stockholder approval of the release of such units. A change of control for this purpose means a consolidation or merger where our stockholders immediately prior to such transaction hold less than 50% of the voting stock of the
+surviving entity.
+
+Risks
+
+In making your decision on whether or not to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our existing stockholders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 9 of this prospectus.
+
+7
+
+SUMMARY FINANCIAL DATA
+
+The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data is presented.
+
+ 
+
+ 
+
+December 31, 2005
+
+ 
+
+ 
+
+ 
+
+Actual
+
+ As Adjusted(1)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance Sheet Data:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Working capital (deficiency)
+
+ 
+
+$
+
+(288,641
+
+)
+
+ 
+
+$
+
+46,099,500
+
+ 
+
+Total assets
+
+ 
+
+ 
+
+311,875
+
+ 
+
+ 
+
+46,099,500
+
+ 
+
+Total liabilities
+
+ 
+
+ 
+
+289,875
+
+ 
+
+ 
+
+200,000
+
+ 
+
+Value of common stock which may be redeemed for cash (2)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+9,020,987
+
+ 
+
+Stockholders equity
+
+ 
+
+ 
+
+22,000
+
+ 
+
+ 
+
+38,878,573
+
+ 
+
+ 
+
+(1)
+
+The As Adjusted information gives effect to the sale of the units in this offering and the private placement, including the application of the related gross proceeds and the payment of the estimated remaining costs from such transactions but does not reflect additional working capital loans from management that were made subsequent to December 31, 2005 or that will be made upon the consummation of this offering.
+
+(2)
+
+Does not reflect the portion of the redemption price attributable to the deferred portion of the underwriters discount.
+
+The working capital in the Actual column excludes $310,641 of costs related to this offering and private placement which were paid prior to December 31, 2005. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the As Adjusted column.
+
+The working capital and total assets amounts in the As Adjusted column include the $45,877,500 being held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If a business combination is not so consummated, we will be dissolved, the proceeds held in the trust account, together with the deferred portion of the underwriters discount, will be distributed solely to our public stockholders.
+
+We will not proceed with a business combination if public stockholders owning 20% or more of the aggregate shares sold in this offering and the private placement vote against the business combination and exercise their redemption rights. Accordingly, we may effect a business combination if public stockholders owning up to approximately 19.99% of the shares sold in this offering and the private placement exercise their redemption rights. If this were to occur, we would be required to redeem for cash up to approximately 19.99% of the 6,250,000 shares of common stock included in the units, or 1,249,375 shares of common stock, at an aggregate redemption price of $9,020,987 without taking into account interest earned on the trust account (net of taxes payable). The actual per-share redemption price will be equal to:
+
+ 
+
+The amount in the trust account, including all accrued interest (net of taxes payable and up to $1,250,000 of interest earned on the trust account that may be released to us to fund our working capital and repay management loans), as of two business days prior to the proposed consummation of the business combination, 
+
+ 
+
+Minus the proceeds of the private placement and accrued interest thereon,
+
+ 
+
+Divided by the number of shares of common stock sold in the offering. 
+
+The redemption price (approximately $7.65 exclusive of interest) is less than the liquidation price (approximately $7.77 exclusive of interest) you will receive if we fail to timely consummate a business combination since the liquidation amount will include the proceeds of the private placement.
+
+8
+
+RISK FACTORS
+
+An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. If any of the following risks occur, our business and financial condition may be materially adversely affected. In that event, the trading price of our securities could decline and you may lose all or part of your investment. Additional risks not currently known to us, or that we deem immaterial, may also harm us or affect your investment.
+
+Risks associated with our business
+
+We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective.
+
+We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more operating businesses. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any revenues until, at the earliest, after the consummation of a business combination.
+
+If we are forced to liquidate before a business combination, our public stockholders will receive less than $8.00 per share upon distribution of the trust account and our warrants will expire worthless.
+
+If we are unable to complete a business combination and are forced to liquidate our assets (which will include the full amount in the trust account, including the $1,970,000 (or $2,265,500 if the underwriters exercise their over-allotment option in full) held for the benefit of Rodman & Renshaw, LLC and any interest earned thereon (net of taxes payable)), the per-share liquidation price will be less than approximately $7.77 per share, plus interest, if any (net of taxes payable and up to $1,250,000 of interest earned on the trust account that may be released to us to fund our working capital and repay management loans) because of the expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination. Furthermore, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants will expire worthless if we liquidate before the completion
+of a business combination. For a more complete discussion of the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Effecting a business combination Liquidation if no business combination. 
+
+You will not be entitled to protections normally afforded to investors of blank check companies.
+
+Since the net proceeds of this offering are intended to be used to complete a business combination with one or more target businesses that have not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and will file a Current Report on Form 8-K with the SEC upon consummation of this offering, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we believe we are not subject to Rule 419, our units will be immediately tradable, and we have a longer period of time to complete a business combination in certain circumstances. For a more detailed
+comparison of our offering to offerings under Rule 419, see the section entitled Proposed Business Comparison to offerings of blank check companies. 
+
+If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders may be less than $7.77 per share and the per share redemption price for redeeming stockholders could be less than $7.65.
+
+Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have vendors, prospective target businesses or other entities we hire or do business with execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements or, even if they execute such agreements, that they would be prevented from bringing claims against the trust account. If any third 
+
+9
+
+party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us and evaluate if such engagement would be in the best interest of our stockholders. Examples of possible instances where we may engage a third party that has refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason.
+Accordingly, the proceeds held in trust could be subject to claims which could take priority over the claims of our public stockholders and the per-share liquidation price could be less than approximately $7.77, plus interest (net of taxes payable and up to $1,250,000 of interest earned on the trust account that may be released to us to fund our working capital and repay management loans), due to claims of such creditors. If we are unable to complete a business combination and are forced to liquidate, our officers and directors, severally, in accordance with their respective beneficial ownership interests in us, will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of various vendors (which does not include, for example, third party creditors) for services rendered or contracted for or products sold to us, but only to the extent necessary to ensure that such loss, liability, claim, damage or expense does not reduce the amount in the trust account.
+However, we cannot assure you that they will be able to satisfy those obligations. Further, they will not be personally liable to pay debts and obligations to prospective target businesses, if a business combination is not consummated with such prospective target businesses, or for claims from any entity other than vendors. Accordingly, the proceeds held in trust could be subject to claims which could take priority over the claims of our public stockholders and the per-share liquidation price could be less than approximately $7.77, plus interest (net of taxes payable and up to $1,250,000 of interest earned on the trust account that may be released to us to fund our working capital and repay management loans), due to claims of such creditors. In addition, such third party claims could result in the per share redemption price received by stockholders who vote against a business combination and elect to redeem their shares for cash being less than approximately $7.65 per-share, plus interest (net of
+taxes payable and interest previously released to us).
+
+Since we have not currently selected any target business with which to complete a business combination, investors in this offering are unable to currently ascertain the merits or risks of the target business operations.
+
+Since we have not yet identified a prospective target business, investors in this offering have no current basis to evaluate the possible merits or risks of the target business operations. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section below entitled Effecting a
+business combination We have not identified a target business. 
+
+We will be dependent upon interest earned on the trust account to fund our search for a target company and consummation of a business combination.
+
+None of the net proceeds of this offering or the private placement will be available to us initially outside the trust account, although our executive officers and directors have agreed to forego immediate repayment of their approximately $340,000 principal amount of outstanding loans and to loan us an additional approximately $160,000 for working capital upon the closing of this offering. Accordingly, we will have only approximately $500,000 initially available to us outside the trust account to fund our working capital requirements. We will be dependent upon sufficient interest being earned on the proceeds held in the trust account to provide us with the additional working capital we will need to search for a target company and consummate a business combination. While we are entitled to the interest earned on the trust account (net of taxes payable), up to a maximum of $1,250,000, for such purpose and to repay working capital loans
+from management, if interest rates were to decline substantially, we may not have sufficient funds available to complete a business combination. In such event, we would need to borrow funds from our insiders or others or be forced to liquidate.
+
+10
+
+Because there are numerous companies with business plans similar to ours seeking to effectuate business combinations, it may be more difficult for us to do so.
+
+Since August 2003, based upon publicly available information, approximately 40 similarly structured blank check companies have completed initial public offerings, and numerous others have filed registration statements for initial public offerings. Of these companies, only four companies have consummated a business combination, while seven other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination. While, like us, some of those companies have specific industries in which they must complete a business combination, a number of them may consummate a business combination in any industry they choose. Moreover, we know of at least two companies which have filed a registration statement and seek to consummate a business combination in India. We may, therefore, be subject to competition from these and other companies seeking to consummate a business
+plan similar to ours, which, as a result, would increase demand for privately-held companies to combine with companies structured similarly to ours. Further, the fact that only a few of such companies have completed a business combination or entered into a definitive agreement for a business combination, may be an indication that there are only a limited number of attractive target businesses available to such entities, or that many privately held or publicly held, target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. We cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If we are unable to find a suitable target business within such time periods, we will be forced to liquidate.
+
+We may issue shares of our capital stock or convertible debt securities to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership.
+
+Our certificate of incorporation authorizes the issuance of up to 89,000,000 shares of common stock, par value $.0001 per share, and 1,000,000 shares of blank check preferred stock, par value $.0001 per share. Immediately after this offering (assuming exercise of the representative of the underwriters unit purchase option, but no exercise of its over-allotment option or the existing stockholders options), there will be 72,513,126 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants) and all of the 1,000,000 shares of blank check preferred stock available for issuance. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional shares of our common stock or blank check preferred stock, or a combination of common and blank
+check preferred stock, to complete a business combination. The issuance of additional shares of our common stock or any number of shares of our blank check preferred stock:
+
+ 
+
+May significantly reduce the equity interest of investors in this offering; 
+
+ 
+
+Will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors;
+
+ 
+
+May reduce or limit the voting power or other rights of holders of our common stock if we issue preferred stock with dividend, liquidation, compensation or other rights superior to the common stock; and
+
+ 
+
+May reduce the prevailing market prices for our common stock warrants and units. 
+
+Similarly, if we issue debt securities, it could result in:
+
+ 
+
+Default and foreclosure on our assets if our operating cash flow after a business combination were insufficient to pay our debt obligations; 
+
+ 
+
+Acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; 
+
+ 
+
+Our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and 
+
+11
+
+ 
+
+Our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. 
+
+For a more complete discussion of the possible structure of a business combination, see the section below entitled Effecting a business combination Selection of a target business and structuring of a business combination. 
+
+Our ability to successfully effect a business combination and to be successful afterward will be totally dependent upon the efforts of our management, some of whom may join us following a business combination and whom we would have only a limited ability to evaluate. It is also possible that one or more of our current officers and directors will resign upon the consummation of a business combination.
+
+Our ability to successfully effect a business combination will be totally dependent upon the efforts of the four members of our management team. The future role of our management following a business combination, however, cannot presently be fully ascertained. Although we expect our officers and directors to remain associated with us following a business combination, we may employ other personnel following the business combination. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate and agree to mutually acceptable employment terms as part of any such combination, which terms would be disclosed to stockholders in any proxy statement relating to such transaction. If we were to acquire a target business in an all-cash transaction, it would be more likely that current members of management would remain with the combined company
+if they chose to do so. If a business combination were structured as a merger whereby the stockholders of the target business were to control the combined company following a business combination, it may be less likely that our current management would remain with the combined company, unless it had been negotiated as part of the transaction via the acquisition agreement, an employment agreement or other arrangement. In making the determination as to whether current management should remain with us following the business combination, management will analyze the experience and skill set of the target business management and negotiate as part of the business combination that certain members of current management remain, if it is believed to be in the best interests of the combined company post-business combination. The terms of any employment or consulting arrangements of our current management with the combined company post-business combination will be determined at the time management negotiates
+the terms of the business combination with a target business. Since our current management will be negotiating the terms of the business combination as well as the terms of their employment or consulting arrangements, our current management may have a conflict of interest in negotiating terms favorable to the company in the acquisition agreement and at the same time negotiating terms in their employment or consulting arrangements that are favorable to them. Although management intends to fully exercise its fiduciary duty to negotiate terms in the acquisition agreement that will be in the best interests of the combined-company and its public stockholders, members of management may be negotiating terms in their employment or consulting agreements that are favorable to them. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with
+the requirements of operating a public company, as well as United States securities laws, which could cause us to have to expend time and resources helping them become familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues which may result in our operations becoming less efficient.
+
+Our officers and directors will allocate their time to other businesses, thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This could have a negative impact on our ability to consummate a business combination.
+
+Our officers and directors are not required to commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. We do not intend to have any full-time employees prior to the consummation of a business combination. Our officers are engaged in several other business endeavors and are not obligated to contribute any specific number of hours per week to our affairs. While it is our officers intention to devote substantial business time to identifying potential target businesses and consummating a business combination, their other business affairs could require them to devote more substantial amounts of time to such affairs, thereby limiting their ability to devote time to our affairs. This could have a negative impact on our ability to consummate a business combination. For a complete discussion of the potential conflicts of interest that you should
+be aware of, see the section below entitled Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor.
+
+12
+
+Our officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
+
+Although none of our officers, directors or affiliates have previously been associated with any blank check companies, our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Additionally, our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Further, certain of our officers and directors are currently involved in merchant banking/private equity businesses. Due to these existing affiliations, they may have fiduciary obligations to present potential business opportunities to those entities prior to presenting them to us which could cause additional conflicts of interest. Accordingly, they may have conflicts of interest in determining to which
+entity a particular business opportunity should be presented. For a complete discussion of our management s business affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Officers and Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor.
+
+All of our officers and directors own shares of our common stock which will not participate in liquidation distributions and, therefore, they may have a conflict of interest in determining whether or not a particular target business is appropriate for a business combination.
+
+All of our officers and directors and their respective affiliates own shares of our common stock that were issued in connection with our formation (including shares underlying their anti-dilution options) as to which they have waived their right to receive distributions upon our liquidation or failure to complete a business combination. Additionally, our executive officers and directors have agreed to purchase , through an entity they own,
+ an aggregate of 93,750 units in a private placement that will occur immediately prior to this offering and have waived their liquidation rights with respect to the shares included in such units. The shares and warrants owned by our officers and directors and their affiliates will be worthless if we do not consummate a business combination. The personal and financial interests of our officers and directors may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our directors and officers discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our public stockholders best interest.
+
+Our officers and directors own shares that are subject to early release from escrow if a business combination involves a change of control, and, therefore, they may have a conflict of interest in determining how to structure a business combination.
+
+The shares of common stock owned by our existing stockholders prior to this offering have been placed into an escrow account and will only be released one year after we complete a business combination unless the business combination results in a change of control. In such event, the shares will be released from escrow immediately upon the completion of the transaction. Consequently, our officers and directors may have a conflict of interest in determining how to structure, in terms of cash and/or equity, a business combination. A change of control for this purpose means a consolidation or merger where our stockholders immediately prior to such transaction hold less than 50% of the voting stock of the surviving entity.
+
+Our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the available funds outside the trust account, unless the business combination is consummated and, therefore, they may have a conflict of interest in determining whether or not a particular target business is appropriate for a business combination and in the public stockholders best interest.
+
+Our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the available funds held outside the trust account and the portion of the interest earned on the trust account released to us (which, because interest rates are unknown, may be insufficient to fund all of our working capital requirements) unless the business combination is consummated. The personal and financial interests of our officers and directors could influence their motivation in selecting a target business and, thus, there may be a conflict of interest when determining whether or not a particular business combination is in the stockholders best interest.
+
+13
+
+We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination.
+
+Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate a business combination, as we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds (including interest earned on the trust account released to us) in search of a target business, or because we become obligated to redeem for cash a significant number of shares from dissenting stockholders, we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the
+transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, it is possible that we could use a portion of the funds not held in the trust account to make a deposit, down payment or fund a no-shop, standstill provision with respect to a particular proposed business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to conduct due diligence and pay other expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate. In addition, if we consummate a business
+combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could limit the development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination.
+
+Risks associated with the outsourcing industry in India
+
+There is intense competition in the market for outsourcing services.
+
+Certain factors may affect the competitive landscape in the outsourcing industry, including divestitures and acquisitions that result in consolidation within the industry. These changes may result in larger competitors with significantly more resources. In addition, some competitors may add or announce plans to add cost-competitive offshore capabilities to their outsourcing service offerings. These competitors may be able to offer their services using the offshore and onsite model more efficiently than the acquired business. A number of these competitors may also have significantly more experience with international operations and significantly greater financial, technical and marketing resources, generate greater revenues, have more extensive existing client relationships and technology partners and have greater brand recognition than the acquired business. Consequently, following a business combination, we may be unable to compete
+successfully against these competitors.
+
+An acquired businesses revenues could be significantly affected if the laws of the government in which it operates, restrict companies from outsourcing work to foreign companies.
+
+In the United States, despite some economic recovery, unemployment levels have not declined significantly from the pre-economic recovery levels. There has been concern among the legislators about the impact of outsourcing on unemployment levels in the United States. For example, legislation has been proposed to prohibit federal and state governments from outsourcing IT and IT enabled services to foreign companies. Legislators have also proposed to introduce economic deterrents for U.S. companies outsourcing work to foreign companies. If such proposed laws come into effect, we could be prevented from performing certain outsourcing services.
+
+Wage pressures in India may prevent an acquired company from sustaining a competitive advantage and may reduce its profit margins.
+
+Wage costs in India have historically been significantly lower than wage costs in the United States and Europe for comparably skilled professionals, which we expect will be one of the competitive strengths of a company we acquire. However, if, following a business combination, wages for skilled professionals increase in India, we may not be able to sustain this competitive advantage, which could negatively affect profit margins. In addition, we may need to increase the levels of an acquired company s employee compensation to remain competitive with other 
+
+14
+
+employers, or seek to recruit in other low labor cost areas to keep its wage costs low. Compensation increases may result in decreased profitability.
+
+Exchange controls in India may limit our ability to utilize our cash flow effectively following a business combination.
+
+Following a business combination, we will be subject to India s rules and regulations on currency conversion. In India, the Foreign Exchange Management Act, or FEMA, regulates the conversion of the Indian rupee into foreign currencies. Following a business combination, we will likely be a FEMA company as a result of our ownership structure. Such companies are permitted to operate in India without any special restrictions, effectively placing them on par with wholly Indian owned companies. However, we cannot assure you that the Indian authorities will eliminate or continue to relax foreign currency restrictions. Any future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our shareholders or to fund operations we may have outside of India.
+
+Returns on investment in Indian companies may be decreased by withholding and other taxes.
+
+Following a business combination, investments we may make in India could incur tax risk unique to investment in India and in developing economies in general. Income that might otherwise not be subject to withholding of local income tax under normal international conventions may be subject to withholding of Indian income tax. Under treaties with India and under local Indian income tax law income is generally sourced in India and subject to Indian tax if paid from India. This is true whether or not the services or the earning of the income would normally be considered as from sources outside India in other contexts. Additionally, proof of payment of withholding taxes may be required as part of the remittance procedure. Following a business combination, any withholding taxes paid by us on income from our investments in India may or may not be creditable on our income tax returns.
+
+Following a business combination, we intend to avail ourselves of income tax treaties with India to seek to minimize any Indian withholding tax or local tax otherwise imposed. However, there is no assurance that the Indian tax authorities will recognize application of such treaties to achieve a minimization of Indian tax.
+
+India has different corporate disclosure, governance and regulatory requirements than those in the United States which may make it more difficult or complex to consummate a business combination.
+
+Companies in India are subject to accounting, auditing, regulatory and financial standards and requirements that differ, in some cases significantly, from those applicable to public companies in the United States, which may make it more difficult or complex to consummate a business combination. In particular, the assets and profits appearing on the financial statements of an Indian company may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. GAAP. Moreover, companies in India are subject to a different regulatory scheme than United States companies with respect to such matters as insider trading rules, tender offer regulation, shareholder proxy requirements and the timely disclosure of information. Accordingly, appropriate adjustments to the financial statements of an Indian company may be required in order to appropriately
+determine the underlying valuation of the Indian company.
+
+Legal principles relating to corporate affairs and the validity of corporate procedures, directors fiduciary duties and liabilities and shareholders rights for Indian corporations may differ from those that may apply in the United States, which may make the consummation of a business combination with an Indian company more difficult than a business combination with a company based in the United States.
+
+Foreign currency fluctuations could cause a business combination to be more expensive.
+
+Because our business objective is to acquire one or more operating businesses with primary operations in India, changes in the U.S. dollar-Indian rupee exchange rate may affect our ability to achieve such objective. The exchange rate between the Indian rupee and the U.S. dollar has changed substantially in the last two decades and may fluctuate substantially in the future. If the U.S. dollar declines in value against the Indian rupee, any business combination will be more expensive and therefore more difficult to complete. Furthermore, we may incur costs in connection with conversions between U.S. dollars and Indian rupees, which may make it more difficult to consummate a business combination.
+
+15
+
+Certain sectors of the Indian economy are subject to government regulations that limit foreign ownership, which limits our ability to achieve our business objective which is to acquire one or more operating businesses with primary operations in India.
+
+The Indian government prohibits investments in certain sectors and limits the ownership in certain other sectors. We intend to avoid sectors in which foreign investment is disallowed. This could limit the possible number of acquisitions that are available for investment. The Indian government also regulates investments in certain other sectors (e.g., banking) by increasing the amount of ownership over time. The management team will evaluate the risk associated with investments in sectors in which ownership is restricted. However, there can be no guarantee that management will be correct in its assessment of political and policy risk associated with investments in general and in particular in sectors that are regulated by the Indian government. Any changes in policy could limit our ability to achieve our business objective which is to acquire one or more operating businesses with primary operations in India.
+
+If the relevant Indian authorities find us or the target business with which we ultimately complete a business combination to be in violation of any existing or future Indian laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
+
+ 
+
+Levying fines; 
+
+ 
+
+Revoking our business and other licenses; and 
+
+ 
+
+Requiring that we restructure our ownership or operations.
+
+The requirement that Indian companies provide accounting statements that are in compliance with United States Generally Accepted Accounting Principles (GAAP) may limit the potential number of acquisition targets.
+
+To meet the requirements of the United States Federal securities laws, in order to seek stockholder approval of a business combination, a proposed target business will be required to have certain financial statements which are prepared in accordance with, or which can be reconciled to, GAAP and audited in accordance with U.S. Generally Accepted Auditing Standards (GAAS). GAAP and GAAS compliance may limit the potential number of acquisition targets.
+
+If political relations between the U.S. and India weaken, it could make a target business operations less attractive.
+
+The relationship between the United States and India may deteriorate over time. Changes in political conditions in India and changes in the state of Indian-United States relations are difficult to predict and could result in restrictions on our future operations or cause potential target businesses to become less attractive. This could lead to a decline in our profitability following a business combination.
+
+Because the Indian judiciary will determine the scope and enforcement under Indian law of almost all of our target business material agreements, we may be unable to enforce our rights inside and outside of India following a business combination.
+
+Indian law will govern almost all of our target business material agreements, some of which may be with Indian governmental agencies. Therefore a target business or businesses may not be able to enforce their material agreements and certain remedies may not be available outside of India. 
+
+The laws of India may not protect intellectual property rights to the same extent as those of the United States, and we may be unsuccessful in protecting intellectual property rights following a business combination and may also be subject to third party claims of intellectual property infringement.
+
+The one or more businesses we acquire will likely rely on a combination of patent, copyright, trademark and design laws, trade secrets, confidentiality procedures and contractual provisions to protect its intellectual property. However, the laws of India may not protect proprietary rights to the same extent as laws in the United States. Therefore, efforts to protect such intellectual property may not be adequate. Furthermore, competitors may independently develop similar technology or duplicate its products or services. Unauthorized parties may infringe upon or misappropriate its products, services or proprietary information.
+
+16
+
+Following a business combination, we may be liable to our clients for damages caused by disclosure of confidential information or system failures.
+
+Following a business combination, we may have access to, or will be required to collect and store, confidential client and customer data in connection with our outsourcing services. Following a business combination, many of our client agreements may not limit our potential liability for breaches of confidentiality. If any person, including any of our employees, penetrates our network security or misappropriates sensitive data, we could be subject to significant liability from our clients or from our clients customers for breaching contractual confidentiality provisions or privacy laws. Following a business combination, unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems, systems failure or otherwise, could damage our reputation and cause us to lose clients.
+
+Risks associated with this offering
+
+Our existing stockholders paid an aggregate of $25,000, or approximately $0.016 per unit, for their initial units and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock.
+
+The difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering and the private placement constitutes the dilution to you and the other investors in this offering. The fact that our existing stockholders acquired their initial shares of common stock at a nominal price has significantly contributed to this dilution. Assuming the offering and the private placement are completed, you and the other new investors will incur an immediate and substantial dilution of approximately 30% or $2.38 per share (the difference between the pro forma net tangible book value per share of $5.62 and the initial offering price of $8.00 per unit).
+
+Our outstanding warrants may substantially reduce the market price of our common stock and make it more difficult to effect a business combination.
+
+In connection with this offering and the private placement of the units, we will be issuing warrants to purchase 6,250,000 shares of our common stock. Following the offering, there will be 7,812,500 warrants, or 8,966,796 warrants if the underwriters over-allotment option, and our existing stockholders options to purchase up to 230,859 units, are exercised in full. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants may make it more difficult to effectuate a business combination or increase the cost
+of the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could substantially reduce the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants and options are exercised, you may experience dilution to your holdings.
+
+If our existing stockholders exercise their registration rights, it may substantially reduce the market price of our common stock, and the existence of these rights may make it more difficult to effect a business combination.
+
+Our existing stockholders are entitled to demand that we register the resale of their initial shares of common stock, including shares of common stock underlying their warrants and options at any time after the date on which their shares are released from escrow, which, except in limited circumstances, will not be before the one year anniversary of a business combination. Furthermore, they are entitled to demand the registration of the securities underlying the 93,750 units they are purchasing in the private placement at any time after we announce that we have entered into a letter of intent, stock purchase agreement or other definitive agreement in connection with a business combination. If our existing stockholders exercise their registration rights with respect to all of their shares of common stock and warrants, then there would be up to an additional 3,312,500 shares of common stock (which amount includes 1,656,250 shares of our
+common stock issuable upon exercise of outstanding warrants) eligible for trading in the public market (3,774,218) shares of common stock, if the existing stockholders options and the underlying warrants are exercised in full). The presence of this additional number of shares of common stock eligible for trading in the public market may substantially reduce the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate a business combination, or increase the cost of 
+
+17
+
+the target business, since the stockholders of the target business may be discouraged from entering into a business combination with us or request a higher price for their securities as a result of these registration rights, and the potential future effect their exercise may have on the trading market for our common stock.
+
+If you are not an institutional investor, you may purchase our securities in this offering only if you reside within certain states and may engage in resale transactions only in those states and a limited number of other jurisdictions.
+
+We have applied to register our securities, or have obtained or will seek to obtain an exemption from registration, in Colorado, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Indiana, New York and Rhode Island. If you are not an institutional investor, you must be a resident of these jurisdictions in order to purchase our securities in the offering. In order to prevent resale transactions in violation of states securities laws, you may engage in resale transactions only in these states and in a limited number of other jurisdictions in which an applicable exemption is available or a Blue Sky application has been filed and accepted. This restriction on resale may limit your ability to resell the securities purchased in this offering and may impact the price of our securities. For a more complete discussion of the Blue Sky state securities laws and registrations affecting this offering, please see the
+section below entitled Underwriting State Blue Sky Information below. Even if you are an institutional investor, you may purchase our securities in this offering only if you are located in a jurisdiction permitting sales of the units to institutional investors. You should consult with your own financial and legal advisors to determine if you are eligible to participate in this offering.
+
+There is currently no market for our securities, and a market for our securities may not develop, which could limit the liquidity and price of our securities.
+
+There is no market for our securities. Therefore, stockholders should be aware that they cannot benefit from information about prior market history as to their decisions to invest, which means they are at further risk if they invest. In addition, the price of the securities, after the offering, can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports.
+
+Furthermore, an active trading market for our securities may never develop or, if developed, it may not be maintained. Investors may be unable to sell their securities unless a market can be established or maintained.
+
+We have substantial discretion as to how to spend the proceeds in this offering which are outside of the trust.
+
+Our management has broad discretion as to how to spend the proceeds in this offering which are held outside of the trust account and may spend these proceeds in ways with which our stockholders may not agree. If we choose to invest some of the proceeds held outside of the trust account, we cannot predict that investment of the proceeds will yield a favorable return, if any.
+
+We intend to have our securities quoted on the OTC Bulletin Board, which will limit the liquidity and price of our securities more than if our securities were quoted or listed on the Nasdaq Stock Market or a national exchange.
+
+We expect our securities to be traded in the over-the-counter market. It is anticipated that they will be quoted on the OTC Bulletin Board, a NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included in the Nasdaq Stock Market. Quotation of our securities on the OTC Bulletin Board will limit the liquidity and price of our securities more than if our securities were quoted or listed on The Nasdaq Stock Market or a national exchange. We cannot assure you, however, that such securities will be approved for quotation or continue to be authorized for quotation by the OTC Bulletin Board or any other market in the future.
+
+If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements, and our activities may be restricted, which may make it difficult for us to complete a business combination.
+
+If we are deemed to be an investment company under the Investment Company Act of 1940, our activities may be restricted, including:
+
+ 
+
+Restrictions on the nature of our investments; and 
+
+ 
+
+Restrictions on the issuance of securities, 
+
+18
+
+which may make it difficult for us to complete a business combination.
+
+In addition, we may have imposed upon us burdensome requirements, including:
+
+ 
+
+Registration as an investment company; 
+
+ 
+
+Adoption of a specific form of corporate structure; and 
+
+ 
+
+Reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. 
+
+We do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may only be invested by the trustee in Treasury Bills issued by the United States with maturity dates of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we were deemed to be subject to the act, compliance with these additional regulatory burdens would require additional expense that we have not allotted for.
+
+Our directors may not be considered independent under the policies of the North American Securities Administrators Association, Inc. and we will generally not have the benefit of independent directors examining our financial statements and the propriety of expenses incurred on our behalf and subject to reimbursement.
+
+Under the policies of the North American Securities Administrators Association, Inc., an international organization devoted to investor protection, because each of our directors owns shares of our securities and may receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations, state securities administrators could take the position that such individuals are not independent. If this were the case, they would take the position that we would not have the benefit of any independent directors sitting on an audit committee to review our financial statements or a compensation committee to review the reasonableness of compensation to our executives. Additionally, state securities administrators may take the position that we would not have the benefit of any independent
+directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Further, there is no limit on the amount of out-of-pocket expenses that could be incurred and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which would include persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Although we believe that all actions taken by our directors on our behalf will be in our best interests, whether or not they are deemed to be independent, we cannot assure you that this will actually be the case. If actions are taken, or expenses are incurred that are actually not in our best interests, it could have a material adverse effect on our business and operations and the price of our stock held by the public stockholders.
+
+Because after the consummation of a business combination a significant portion of our assets may be located outside of the United States, it may be difficult for investors to enforce their legal rights against such assets.
+
+After the consummation of a business combination, a significant portion of our assets may be located outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon our directors or officers, or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws.
+
+19
+
+USE OF PROCEEDS
+
+We estimate that the net proceeds of this offering and the private placement will be as set forth in the following table:
+
+ 
+
+ 
+
+Without
+
+Over-Allotment
+
+Option
+
+ 
+
+Over-Allotment
+
+Option 
+
+Exercised
+
+ 
+
+Gross proceeds
+
+ 
+
+ 
+
+ 
+
+Offering
+
+ $
+
+49,250,000
+
+ $
+
+56,637,496
+
+ 
+
+Private placement
+
+ 750,000
+
+ 750,000
+
+ 
+
+Total
+
+ $
+
+50,000,000
+
+ $
+
+57,387,496
+
+ 
+
+ 
+
+Offering and placement expenses(1)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Underwriting discount (7% of gross proceeds)(2)
+
+ 
+
+ 
+
+3,447,500
+
+ 
+
+ 
+
+3,964,625
+
+ 
+
+Legal fees and expenses (including blue sky services and expenses)
+
+ 
+
+ 
+
+475,000
+
+ 
+
+ 
+
+475,000
+
+ 
+
+Miscellaneous expenses
+
+ 
+
+ 
+
+47,869
+
+ 
+
+ 
+
+47,869
+
+ 
+
+Printing and engraving expenses
+
+ 
+
+ 
+
+65,000
+
+ 
+
+ 
+
+65,000
+
+ 
+
+Accounting fees and expenses
+
+ 
+
+ 
+
+40,000
+
+ 
+
+ 
+
+40,000
+
+ 
+
+SEC registration fee
+
+ 
+
+ 
+
+25,211
+
+ 
+
+ 
+
+25,211
+
+ 
+
+NASD registration fee
+
+ 
+
+ 
+
+21,920
+
+ 
+
+ 
+
+21,920
+
+ 
+
+ 
+
+Net proceeds
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Held in trust for our benefit(2)
+
+ 
+
+ 
+
+45,877,500
+
+ 
+
+ 
+
+52,647,871
+
+ 
+
+Not held in trust
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+100,000
+
+ 
+
+Total net proceeds
+
+ 
+
+$ 
+
+45,877,500
+
+ 
+
+$ 
+
+52,747,871
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Proceeds from management loans(3)
+
+ $
+
+500,000
+
+ $
+
+500,000
+
+ 
+
+ 
+
+Use of funds not held in trust
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Legal, accounting and other expenses attendant to the structuring and negotiation of a business combination and the preparation and filing of the related proxy statement
+
+ 
+
+$
+
+50,000
+
+ 
+
+ 
+
+10.00
+
+%
+
+Payment for office space and administrative and support services (approximately $5,000 per month for up to two years)
+
+ 
+
+ 
+
+120,000
+
+ 
+
+ 
+
+24.00
+
+%
+
+Due diligence of prospective target businesses
+
+ 
+
+ 
+
+50,000
+
+ 
+
+ 
+
+10.0
+
+%
+
+Legal and accounting fees relating to SEC reporting obligations
+
+ 
+
+ 
+
+70,000
+
+ 
+
+ 
+
+14.0
+
+%
+
+Working capital to cover miscellaneous expenses (including potential deposits, down payments or funding of a no-shop, standstill provision with respect to a particular business combination) and D&O insurance 
+
+ 
+
+ 
+
+190,000
+
+ 
+
+ 
+
+38.0
+
+%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+
+ 
+
+$
+
+500,000
+
+ 
+
+ 
+
+100.0
+
+%
+
+ 
+
+(1)
+
+A portion of the offering expenses, including the SEC registration fee and NASD filing fee and approximately $285,241 of legal and accounting fees, have been paid from the loans we received from our officers and directors described below. These funds will be repaid only upon consummation of a business combination or earlier solely from interest in excess of $750,000 earned on the trust account.
+
+(2) 
+
+Rodman & Renshaw, LLC has agreed to deposit 4.0% of the gross proceeds ($0.32 per unit) attributable to the underwriters discount into the trust account until the earlier of the consummation of a business combination or the liquidation of the trust account. They have further agreed to forfeit any rights to, or claims against, such proceeds unless we successfully consummate a business combination.
+
+(3)
+
+Includes the approximately $340,000 of prior loans and $160,000 of loans to be made upon consummation of this offering, which amounts are payable only upon consummation of a business combination or earlier solely from interest in excess of $750,000 earned on the trust account.
+
+$45,877,500 or $52,647,871 if the underwriters over-allotment option is exercised in full, of net proceeds will be placed in a trust account at JPMorgan Chase NY Bank maintained by American Stock Transfer & Trust 
+
+20
+
+Company, New York, New York, as trustee. Additionally, $1,970,000 or $2,265,500 if the underwriters over-allotment option is exercised in full, of the proceeds attributable to the underwriters discount will be deposited in the trust account. Rodman & Renshaw, LLC has agreed that such amounts will be distributed to the public stockholders in the event of liquidation. The proceeds held in trust will not be released from the trust account until the earlier of the completion of a business combination or our liquidation. Other than up to $1,250,000 of the interest income that may be released to us to fund our working capital requirements and repay management loans, the proceeds held in the trust account (exclusive of any funds held for the benefit of Rodman & Renshaw, LLC) may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not
+paid as consideration to the sellers of the target business may be used to finance operations of the target business, other than amounts held in trust for the benefit of Rodman & Renshaw, LLC for its services as representative of the underwriters, or amounts paid for finders or professional fees or amounts paid for any fees or costs incurred in connection with any debt or equity financing made in connection with the business combination. We do not currently have any agreement with any party with respect to the payment of finders or professional fees. If we agree to pay such fees in the future, such fees shall be negotiated on an arms-length basis.
+
+The payment to Phoenix Capital Partners, LLC, an affiliate of Ramesh Akella, our President, Chief Strategy Officer and a member of our board of directors, of a monthly fee of $5,000 is for certain administrative, technology and secretarial services, as well as the use of certain limited office space in New York City. This arrangement is being agreed to by Phoenix Capital Partners, LLC for our benefit and is not intended to provide Mr. Akella compensation in lieu of a salary. We believe, based on rents and fees for similar services in New York City, that the fee charged by Phoenix Capital Partners, LLC is at least as favorable as we could have obtained from an unaffiliated person. Upon completion of a business combination or our liquidation, we will no longer be required to pay this monthly fee.
+
+We have estimated the costs related to the acquisition of a target business will be approximately $600,000; approximately $300,000 to identify and research prospective target businesses and approximately $300,000 for costs related to the business combination, including legal and accounting expenses to structure the transaction, prepare the transaction documents and file the related proxy statement. Only $100,000 of the funds available outside the trust have been allocated for such purposes and we intend to fund the balance, as well as amounts that may exceed our current estimates and reimbursement of any out-of-pocket expenses incurred by our existing stockholders in connection with activities on our behalf as described below, from a portion of the interest earned on the proceeds being held in the trust account. We have agreed with Rodman & Renshaw, LLC that the interest earned on the trust account (net of taxes payable) up to a
+maximum of $1,250,000 will be released to us to fund our working capital requirements and repay up to $500,000 of management loans. We expect that due diligence of prospective target businesses will be performed by some or all of our officers and directors and may include engaging market research firms and/or third party consultants. Our officers and directors will not receive any compensation for their due diligence of prospective target businesses, but will be reimbursed for any out-of-pocket expenses (such as travel expenses) incurred in connection with such due diligence activities. We believe that the excess working capital will be sufficient to cover the foregoing expenses and reimbursement costs.
+
+It is also possible that we could use a portion of such excess working capital to make a deposit, down payment or fund a no-shop, standstill provision with respect to a particular proposed business combination, although we do not have any current intention to do so. If we did, the amount that would be used as a down payment or to fund a no-shop, stand-still provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. In the event that such deposit were large enough (thereby depleting enough of our non-trust fund assets) or in the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to conduct due diligence and pay other expenses related to finding
+another suitable business combination without securing additional financing. It is possible that our existing stockholders could advance us the additional required funds, thereby increasing the amount of excess out-of-pocket expenses that could be reimbursed following a business combination. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate.
+
+To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account, as well as any other net proceeds not expended, will be used to finance the operations of the target business which may include subsequent acquisitions.
+
+21
+
+As of the date of this prospectus, our officers and directors have advanced to us a total of $340,464 which was used to pay a portion of the expenses of this offering referenced in the line items above for SEC and NASD registration fee, legal fees and expenses. Such loans will be payable with 4% annual interest upon the consummation of a business combination, subject to earlier repayment solely to the extent of interest in excess of $750,000 earned on the trust account (net of taxes payable).
+
+The proceeds of this offering (including that portion of the proceeds attributable to the deferred underwriters discount) held in the trust account and the proceeds of the management working capital loans not immediately required for the purposes set forth above, will be invested only in United States government securities, defined as any Treasury Bills issued by the United States having a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940, so that we are not deemed to be an investment company under the Investment Company Act. The interest income derived from investment of these net proceeds during this period (net of taxes payable) will be used to defray our general and administrative expenses, as well as costs relating to compliance with securities laws and regulations, including associated professional fees, until a
+business combination is completed.
+
+Provided $750,000 of interest earned on the trust account is released to us, we believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 24 months, assuming that a business combination is not consummated during that time.
+
+Except for an option to purchase a number of units as would maintain the respective ownership percentages of the existing stockholders in the event that the underwriters over-allotment option is exercised, and for the administrative services fee, no compensation of any kind (including any finder s and/or consulting fees) will be paid to any of our existing stockholders, or any of their affiliates, for services rendered to us, prior to or in connection with, the consummation of the business combination. However, our existing stockholders will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. To the extent that such expenses exceed the available funds not deposited in the trust account or released to us, such out-of-pocket expenses would not be
+reimbursed by us unless we consummate a business combination. These reimbursements may be paid from the $50,000 initially allocated for due diligence. Other than the agreement with Phoenix Capital Partners, LLC, described above, there are no current agreements or understandings with any of our existing stockholders or any of their respective affiliates with respect to the payment of compensation of any kind subsequent to a business combination. Since the role of present management after a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to those persons after a business combination.
+
+A public stockholder will be entitled to receive funds from the trust account (including interest, net of taxes payable and interest previously released to us, earned on his, her or its portion of the trust account) only in the event of our liquidation as a result of our failure to complete a business combination within the allotted time, or if that public stockholder were to seek to redeem such shares for cash in connection with a business combination which the public stockholder voted against and which we actually consummate. In no other circumstances will a public stockholder have any right or interest of any kind to or in the trust account.
+
+22
+
+DILUTION
+
+The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be redeemed for cash), by the number of outstanding shares of our common stock.
+
+At December 31, 2005, our net tangible book value was a deficiency of approximately $288,641 or approximately $(0.18) per share, of common stock. After giving effect to the sale of 6,250,000 shares of common stock included in the units, and the deduction of underwriting discounts and estimated expenses of this offering and the private placement, our pro forma net tangible book value (as decreased by the value of 1,249,375 shares of common stock which may be redeemed for cash) at December 31, 2005 would have been $36,878,513 or $5.62 per share, representing an immediate increase in net tangible book value of $5.80 per share to the existing stockholders and an immediate dilution of $2.38 per share, or 30% to new investors not exercising their redemption rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $9,020,987 less than it otherwise would have been
+because, if we effect a business combination, the redemption rights to the public stockholders may result in the redemption for cash of up to approximately 19.99% of the aggregate number of the shares sold in this offering at a per-share redemption price equal to the amount in the trust account (exclusive of the private placement proceeds) as of the record date for the determination of stockholders entitled to vote on the business combination, inclusive of any interest (net of taxes payable), divided by the number of shares sold in this offering.
+
+The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units:
+
+Public offering price
+
+ 
+
+ 
+
+ 
+
+ 
+
+$
+
+8.00
+
+ 
+
+Net tangible book value before this offering
+
+ 
+
+$ 
+
+(.18
+
+) 
+
+ 
+
+ 
+
+ 
+
+Increase attributable to new investors
+
+ 
+
+ 
+
+5.80
+
+ 
+
+ 
+
+ 
+
+ 
+
+Pro forma net tangible book value after this offering
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+5.62
+
+ 
+
+Dilution to new investors
+
+ 
+
+ 
+
+ 
+
+ 
+
+$
+
+2.38
+
+ 
+
+The following table sets forth information with respect to our existing stockholders and the new investors:
+
+ 
+
+ 
+
+Units Purchased
+
+ 
+
+Total Consideration
+
+ 
+
+Average
+
+Price Per
+
+Share
+
+ 
+
+ 
+
+Number
+
+ 
+
+Percentage
+
+ 
+
+Amount
+
+ 
+
+Percentage
+
+ 
+
+Existing stockholders 
+
+ 
+
+ 
+
+1,562,500
+
+ 
+
+ 
+
+20.0
+
+% 
+
+$
+
+25,000
+
+ 
+
+ 
+
+.049
+
+% 
+
+$
+
+.016
+
+ 
+
+Private placement investors
+
+ 93,750
+
+ 1.2
+
+%
+
+$
+
+750,000
+
+ 1.500
+
+%
+
+$
+
+8.00
+
+ 
+
+New investors
+
+ 
+
+ 
+
+6,156,250
+
+ 
+
+ 
+
+78.8
+
+% 
+
+$
+
+49,250,000
+
+ 
+
+ 
+
+98.451
+
+%
+
+$
+
+8.00
+
+ 
+
+ 
+
+ 
+
+ 
+
+7,812,500
+
+ 
+
+ 
+
+100.0
+
+% 
+
+$
+
+50,025,000
+
+ 
+
+ 
+
+100.00
+
+%
+
+ 
+
+ 
+
+ 
+
+The pro forma net tangible book value after the offering is calculated as follows:
+
+Numerator:
+
+ 
+
+ 
+
+ 
+
+Net tangible book value before the offering and the private placement
+
+ 
+
+$
+
+(288,641
+
+)
+
+Net proceeds from this offering and the private placement after expenses
+
+ 
+
+ 
+
+45,877,500
+
+ 
+
+Offering costs paid in advance and excluded from tangible book value before this offering 
+
+ 
+
+ 
+
+310,641
+
+ 
+
+Less: Proceeds held in trust subject to redemption for cash ($45,127,500 19.99%)(1)
+
+ 
+
+ 
+
+(9,020,987
+
+)
+
+ 
+
+ 
+
+$
+
+36,878,513
+
+ 
+
+Denominator:
+
+ 
+
+ 
+
+ 
+
+ 
+
+Shares of common stock outstanding prior to the offering and the private placement(2)
+
+ 
+
+ 
+
+1,562,500
+
+ 
+
+Shares of common stock included in the units offered
+
+ 
+
+ 
+
+6,250,000
+
+ 
+
+Less: Net shares subject to redemption (6,250,000 19.99%)
+
+ 
+
+ 
+
+(1,249,375
+
+)
+
+ 
+
+ 
+
+ 
+
+6,563,125
+
+ 
+
+ 
+
+(1)
+
+Does not reflect the portion of the total per share redemption price of $7.65 attributable to the deferred underwriters discount.
+
+(2)
+
+Excludes 1,562,500 common stock purchase warrants.
+
+The preceding calculations assume the payment in full of the underwriters discount.
+
+23
+
+CAPITALIZATION
+
+The following table sets forth our capitalization at December 31, 2005 and as adjusted to give effect to the sale of our units in this offering and the private placement and the application of the estimated net proceeds derived from the sale of our units:
+
+ 
+
+ 
+
+December 31, 2005
+
+ 
+
+ 
+
+ 
+
+ Actual 
+
+ 
+
+As Adjusted
+
+ 
+
+ 
+
+Notes payable to stockholders
+
+ 
+
+$
+
+200,000
+
+ 
+
+ 200,000 
+
+(1)
+
+Accounts payable
+
+ 89,875
+
+ 
+
+ 
+
+Total debt
+
+ 
+
+$
+
+289,875
+
+ 
+
+ 200,000 
+
+(1)
+
+Common stock, $.0001 par value, 0 and 1,249,375 shares which are subject to possible redemption, shares at redemption value(2)
+
+ 
+
+ 
+
+ 
+
+$
+
+9,020,987
+
+ 
+
+Stockholders equity:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Preferred stock, $.0001 par value, 1,000,000 shares authorized; none issued or outstanding
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Common stock, $.0001 par value, 89,000,000 shares authorized; 1,562,500 shares issued and outstanding; 6,563,125 shares issued and outstanding (excluding 1,249,375 shares subject to possible redemption), as adjusted
+
+ 
+
+ 
+
+157
+
+ 
+
+ 
+
+657
+
+ 
+
+Additional paid-in capital
+
+ 
+
+ 
+
+24,843
+
+ 
+
+ 
+
+36,880,856
+
+ 
+
+Deficit accumulated during the development stage
+
+ 
+
+ (3,000 
+
+) 
+
+ (3,000 
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total stockholders equity
+
+ 
+
+$
+
+22,000
+
+ 
+
+$
+
+36,878,513
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total capitalization
+
+ 
+
+$
+
+311,875
+
+ 
+
+$
+
+46,099,500
+
+ 
+
+ 
+
+(1)
+
+Does not reflect additional working capital loans from management that were made subsequent to December 31, 2005 or that will be made upon the consummation of this offering.
+
+(2)
+
+If we consummate a business combination, the redemption rights afforded to our public stockholders may result in the redemption for cash of up to approximately 19.99% of the aggregate number of shares sold in this offering and the private placement at a per-share redemption price equal to the amount in the trust account (exclusive of the private placement proceeds) inclusive of any interest thereon (net of taxes payable), as of two business days prior to the proposed consummation of a business combination divided by the number of shares sold in this offering. This amount excludes the portion of the redemption price attributable to the deferred underwriters discount.
+
+24
+
+MANAGEMENT S DISCUSSION AND ANALYSIS
+
+OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
+
+We were formed on July 13, 2005, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination in IT/ITES/ITEP, including those in the KPO or BPO sectors in India. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt, or a combination of cash, capital stock and debt, in effecting a business combination. The issuance of additional shares of our capital stock:
+
+ 
+
+May significantly reduce the equity interest of our stockholders; 
+
+ 
+
+Could cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and may also result in the resignation or removal of one or more of our present officers and directors; 
+
+ 
+
+May adversely affect the voting power or other rights of holders of our common stock if we issue preferred stock with dividend, liquidation, compensation or other rights superior to the common stock; and
+
+ 
+
+May adversely affect prevailing market prices for our common stock. 
+
+Similarly, if we issued debt securities, it could result in:
+
+ 
+
+Default and foreclosure on our assets if our operating revenues, after a business combination, were insufficient to pay our debt obligations; 
+
+ 
+
+Acceleration of our obligations to repay the indebtedness even if we will have made all principal and interest payments when due, if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; 
+
+ 
+
+Our immediate payment of all principal and accrued interest, if any, if the debt security were payable on demand; and 
+
+ 
+
+Our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. 
+
+We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities.
+
+We estimate that the net proceeds from the sale of the units, after deducting offering expenses of approximately $675,000 and underwriting discounts of $3,447,500 (or $3,964,625 if the underwriters over-allotment option is exercised in full), will be approximately $45,877,500 (or $52,747,871 if the underwriters over-allotment option is exercised in full). All of such proceeds (except for $100,000 if the underwriters over-allotment option is exercised in full) will be held in trust. Additionally, $1,970,000 or $1,982,312 if the underwriters over-allotment option is exercised in full, of the proceeds attributable to the underwriters discount will be deposited in the trust account, which will be distributed to the public stockholders in the event that a business combination is not consummated and we liquidate the trust. Other than amounts held in the trust account for the benefit of Rodman & Renshaw, LLC
+and redeeming stockholders, we will use substantially all of the net proceeds of this offering and the private placement to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account (which are not attributable to the underwriters discount) as well as any other net proceeds not expended will be used to finance the operations of the target business. We believe that, upon consummation of this offering, the funds available to us outside of the trust account will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Over this time period, we anticipate approximately $300,000 of expenses for legal, accounting and other
+expenses attendant to the due diligence investigations, structuring and negotiating of a business combination and preparation and filing of the related proxy statement, approximately $120,000 for administrative services and support payable to certain affiliated entities (up to $5,000 per month for 24 months), $300,000 of expenses for the due diligence and investigation of a target business (or businesses), $100,000 of expenses in legal and accounting fees relating to our SEC reporting 
+
+25
+
+obligations and $200,000 for general working capital that will be used for miscellaneous expenses and reserves, including approximately $125,000 for director and officer liability insurance premiums. Up to $1,250,000 of the interest earned on the trust account will be released to us to fund our working capital requirements and repay the management loans. We intend to use these funds to cover expenses that exceed the $500,000 we initially will have available outside of the trust account. Although we do not know the rate of interest to be earned on the trust account, we believe that even an interest rate of 2% will be sufficient to fund our working capital requirements. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through a private offering of debt or equity securities if such
+funds are required to consummate a business combination that is presented to us. We would only consummate such a fund raising simultaneously with the consummation of a business combination.
+
+We do not currently have an agreement with any party with respect to the payment of finder s or professional fees. If we agree to pay such fees in the future, such fees will be negotiated on an arms length basis.
+
+As of the date of this prospectus, our officers and directors have advanced a total of $340,464 to us for payment of offering expenses on our behalf. Upon the consummation of this offering, our executive officers and directors will loan us an additional approximately $160,000, so that we will have approximately $500,000 initially available to us outside the trust account to fund working capital. Such loans are payable with 4% annual interest upon our consummation of a business combination, subject to earlier repayment solely from interest in excess of $750,000 earned on the trust account.
+
+The payment to Phoenix Capital Partners, LLC, an affiliate of Ramesh Akella, our President, Chief Strategy Officer and a member of our board of directors, of a monthly fee of $5,000 is for certain administrative, technology and secretarial services, as well as the use of certain limited office space in New York City. This arrangement is being agreed to by Phoenix Capital Partners, LLC for our benefit and is not intended to provide Mr. Akella compensation in lieu of a salary. We believe, based on rents and fees for similar services in New York City, that the fee charged by Phoenix Capital Partners, LLC is at least as favorable as we could have obtained from an unaffiliated person. Upon completion of a business combination or our liquidation, we will no longer be required to pay this monthly fee.
+
+We have agreed to sell to Rodman & Renshaw, LLC, as representative of the underwriters, for $100, an option to purchase up to a total of 430,937 units. We will account for this purchase option as a cost of raising capital and will include the instrument as equity in our financial statements. Accordingly, there will be no net impact on our financial position or results of operations, except for the recording of the $100 proceeds from the sale. We have estimated, based upon a Black-Scholes model, that the fair value of the purchase option on the date of sale is approximately $6.04 per unit, using an expected life of five years, volatility of 100%, and a risk-free rate of 5.0%. However, because our units do not have a trading history, the volatility assumption is based on information currently available to management. The volatility estimate is calculated based on information currently available to management. Although an expected life
+of five years was used in the calculation, if we do not consummate a business combination within the prescribed time period and we liquidate, we believe the option will become worthless.
+
+We have granted to our existing stockholders options, exercisable at $0.016 per share, to purchase that number of units which will enable them to maintain their 20% ownership interest after the offering in the event the underwriter exercises the over-allotment option. We have elected to follow Accounting Principles Board Opinion No. 25 in accounting for our stock options. Under Accounting Principles Board Opinion No. 25, no compensation expense is recognized when the exercise price of our stock options equals the market price of the underlying stock on the date of grant. Using a Black-Scholes option valuation model, the per share weighted-average fair value of the existing stockholders options would be $7.99 per unit. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require
+the input of highly subjective assumptions including the expected stock price volatility. Because our existing stockholders options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.
+
+26
+
+PROPOSED BUSINESS
+
+Introduction
+
+We are a blank check company recently organized under the laws of Delaware incorporated on July 13, 2005 in order to serve as a vehicle for the acquisition of an operating business through a merger, capital stock exchange, asset acquisition or other similar business combination. We intend to focus our efforts on identifying within the information technology, information technology enabled service and information technology enabled products (IT/ITES/ITEP) industries, a prospective target business (or businesses), including those in the knowledge process outsourcing, or KPO, and business process outsourcing, or BPO, sectors operating in India.
+
+Industry Overview
+
+Current global macroeconomic conditions and intense competitive pressures have forced companies to focus on their core activities and outsource critical but non-core activities to companies that specialize in such non-core functions. Outsourcing enables companies to reduce their operating costs, realize benefits of scale and flexible cost structures and achieve significant process improvements.
+
+KPO involves processes that demand advanced information search, analytical, interpretation and technical skills as well as some judgment and decision making. Typical users of KPO services include market research and consulting firms, pharmaceutical and biotechnology companies, investment banks and financial services institutions, industry associations, media, publishing and database firms and corporate planning departments of large companies. Examples of KPO functions are:
+
+ 
+
+Intellectual property or patent research;
+
+ 
+
+Pharmaceutical and biotechnology research and development (including clinical trials);
+
+ 
+
+Generic drug raw material supply, manufacturing and packaging;
+
+ 
+
+Paralegal and medical transcription services; 
+
+ 
+
+Data mining;
+
+ 
+
+Database creation; and
+
+ 
+
+Analytical services, such as equity research, econometric modeling, competitive intelligence, industry reports and financial modeling.
+
+BPO involves more routine information technology processes, including:
+
+ 
+
+Billing, accounting and other financial services;
+
+ 
+
+Software research and development and related support functions; and
+
+ 
+
+Transaction processing, including customer service operations.
+
+According to the Indian National Association of Software and Service Companies (NASSCOM) Strategic Review Report 2005, the total combined Indian information technology services and IT-enabled services export market for the fiscal year ended March 31, 2005 was nearly $18 billion. According to NASSCOM s Strategic Review Report 2005, the total Indian IT services and IT-enabled services export market is projected to grow to approximately $48 billion by fiscal 2009. The growth in the Indian KPO and BPO market is based on several factors:
+
+ 
+
+Established capability for providing highest quality standards. SEI-CMM is the Software Engineering Institute s Capability Maturity Model, which assesses the quality of organizations management system processes and methodologies. According to NASSCOM s Strategic Review Report 2005, out of the 275 companies which have various quality certifications, 75 are assessed at SEI-CMM Level 5, their highest ranking. 
+
+27
+
+ 
+
+Large, highly skilled, relatively low cost English-speaking labor pool. According to NASSCOM Strategic Review Report 2005, the Indian IT industry employed nearly 700,000 software professionals as of March 31, 2005, making it the second largest employer in the IT services industry after the United States. Approximately 250,000 engineering degree and diploma holders enter the workforce annually, with a majority of them entering the IT industry. According to this report, companies could expect total savings of approximately 25% to 50% by using offshore processes primarily because of the differential in wages paid by these companies in comparison to their India-based counterparts. Although wages in India may be rising at a faster pace than wages paid offshore, the labor rate differential is currently anticipated to remain a competitive advantage for Indian companies.
+
+ 
+
+Time differential which allows 24-hour a day service. With the time differential between India and its largest market, the United States, Indian companies are able to provide a combination of onsite and offshore services on a 24-hour basis on specific projects.
+
+Effecting a business combination
+
+General
+
+We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering and the private placement (excluding any funds held for the benefit of Rodman & Renshaw, LLC or redeeming stockholders), our capital stock, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering are intended to be generally applied toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, prospective investors will invest in us without an opportunity to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of, or merger with, a company which does not need
+substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various Federal and state securities laws. In the alternative, we may seek to consummate a business combination with a target business that may be financially unstable or in its early stages of development or growth. We may also seek to effect a business combination with more than one target business, although this may entail the simultaneous acquisitions of several operating businesses at the same time.
+
+We have not identified a target business
+
+To date, we have not selected any target business with which to seek a business combination. None of our officers, directors, promoters or other affiliates is currently engaged in discussions on our behalf with representatives of other companies regarding the possibility of a potential merger, capital stock exchange, asset acquisition or other similar business combination with us; nor have we, nor any of our agents or affiliates, been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate. Finally, we note that there has been no diligence, discussions, negotiations and/or other similar activities undertaken, directly or indirectly, by us, our affiliates or representatives, or by any third party, with respect to a business
+combination transaction with us.
+
+Subject to the limitation that a target business or businesses have a fair market value of at least 80% of our net assets (excluding any funds held for the benefit of Rodman & Renshaw, LLC) at the time of the acquisition, as described below in more detail, we will have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the target business (or businesses) with which we may ultimately complete a business combination. To the extent we effect a business combination with a financially unstable company or an entity in its early stage of development or growth, including entities without established records of sales or earnings, we may be affected by numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies.
+Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors.
+
+28
+
+Sources of target businesses
+
+We anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds and other members of the financial community who are aware that we are seeking a business combination partner via public relations and marketing efforts, direct contact by management or other similar efforts, who may present solicited or unsolicited proposals. Our officers and directors, as well as their affiliates, may also bring to our attention target business candidates. While our officers and directors make no commitment as to the amogunt of time they will spend trying to identify or investigate potential target businesses, they believe that the various relationships they have developed over their careers, together with their direct inquiry, will generate a number of potential target businesses that
+will warrant further investigation. Except for the administrative fee or the option to purchase a number of units as would maintain the respective ownership percentages of the existing stockholders in the event that the underwriters over-allotment option is exercised, in no event will we pay any of our existing officers, directors or stockholders, or any entity with which they are affiliated any finder s fee or other compensation for services rendered to us prior to or in connection with the consummation of a business combination. We may pay fees or compensation to third parties for their efforts in introducing us to potential target businesses. In addition, none of our officers, directors or existing stockholders will receive any finder s fees, consulting fees or any similar fees from any person or entity in connection with any business combination involving us, other than any compensation or fees that may be received for any services provided following such business combination.
+
+Selection of a target business and structuring of a business combination
+
+Subject to the requirement that our initial business combination must be with a target business or businesses with a collective fair market value that is at least 80% of our net assets (excluding any funds held for the benefit of Rodman & Renshaw, LLC) at the time of such acquisition, our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business in the KPO and BPO sectors in India. We have not conducted any specific research on such industries to date, nor have we conducted any research with respect to identifying the number and characteristics of the potential acquisition candidates or the likelihood or probability of success of any proposed business combination. In evaluating a prospective target business, our management will conduct the necessary business, legal and accounting due diligence on such target business and will consider, among other factors, the following:
+
+ 
+
+Financial condition and results of operation; 
+
+ 
+
+Earnings and growth potential; 
+
+ 
+
+Experience and skill of management and availability of additional personnel; 
+
+ 
+
+Key customer relationships and goodwill;
+
+ 
+
+Capital requirements; 
+
+ 
+
+Competitive position; 
+
+ 
+
+Need for compliance with GAAP, SEC and Sarbanes-Oxley requirements;
+
+ 
+
+Domestic and foreign competition;
+
+ 
+
+Proprietary features and degree of intellectual property or other protection of the products, processes or services; 
+
+ 
+
+Regulatory environment of the industry; and 
+
+ 
+
+Costs associated with effecting the business combination.
+
+These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors, as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, 
+
+29
+
+among other things, meetings with incumbent management, where applicable, and inspection of facilities, as well as review of financial and other information which will be made available to us.
+
+The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. However, we will not pay any finder s or consulting fees to our existing stockholders, or any of their respective affiliates, for services rendered to or in connection with a business combination.
+
+Difficulties in acquiring more than one business in a business combination.
+
+Although we will consider acquiring more than one business in a business combination, we may not be able to acquire more than one target business because of various factors, including possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of due diligence and negotiations, proxy statement disclosure, foreign exchange or other clearances and closings with multiple target businesses. In addition, we would also be exposed to the risk that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied, bringing the fair market value of the initial business combination below the required fair market value of 80% of our net assets threshold (excluding any funds held in the
+trust account for the benefit of Rodman & Renshaw, LLC).
+
+Fair market value of target business (or businesses)
+
+The initial target business or businesses that we acquire must have a collective fair market value equal to at least 80% of our net assets (excluding any funds held in the trust account for the benefit of Rodman & Renshaw, LLC) at the time of such acquisition, including any amount held in the trust fund subject to the redemption rights described below, although we may acquire a target business whose fair market value significantly exceeds 80% of our net assets (excluding any funds held in the trust account for the benefit of Rodman & Renshaw, LLC). To this end, we may seek to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate such a business combination although we have not entered into any such arrangement and do not currently anticipate effecting such a financing arrangement. However, if we did enter into such an arrangement, it would only be consummated
+simultaneously with the consummation of the business combination. The fair market value of such business (or businesses) will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. If our board is not able to independently determine the fair market value of a target business, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the National Association of Securities Dealers, Inc. with respect to the satisfaction of such criteria. Since any opinion, if obtained, would merely state that the fair market value meets the 80% of net assets threshold, it is not anticipated that copies of such opinion would be distributed to our stockholders, although copies will be provided to stockholders who request it. We will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of
+directors independently determines that the target business has sufficient fair market value. However, we have agreed not to consummate a business combination with an entity which is affiliated with any of our existing stockholders unless we obtain a fairness opinion from an independent investment banking firm.
+
+Possible lack of business diversification
+
+While we may seek to effect a business combination with more than one target business, our initial business combination must be with one or more target businesses which satisfies the minimum valuation standard at the time of such acquisition, as discussed above. Consequently, it is likely that we will have the ability to effect only one business combination, although this may entail simultaneous acquisitions of several entities at the same time. We may not be able to acquire more than one target business because of various factors, including possible complex domestic or international accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and other legal issues and closings with multiple target
+businesses. In addition, we would also be exposed to the risks that conditions to closings, with respect to the acquisition of one or more of the target businesses, would not be satisfied bringing the fair market value of the initial business combination below the required fair market value of 80% of net 
+
+30
+
+assets threshold. Accordingly, for an indefinite period of time, the prospects for our future viability may be entirely dependent upon the future performance of a single business. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries, or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating a business combination with only a single entity, our lack of diversification may:
+
+ 
+
+Subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination; and
+
+ 
+
+Result in our dependency upon the development or market acceptance of a single or limited number of products, processes or services.
+
+Additionally, since our business combination may entail the simultaneous acquisitions of several entities at the same time and may be with different sellers, we will need to convince such sellers to agree that the purchase of their entities is contingent upon the simultaneous closings of the other acquisitions.
+
+Limited ability to evaluate the target business management
+
+Although we expect all of our management to remain associated with us following a business combination, there can be no assurance that any or all will maintain such association. It is likely that the management of the target business (or businesses) at the time of the business combination will remain in place, and we may employ other personnel following the business combination. Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target business management will prove to be correct. In addition, we cannot assure you that the future management will have the necessary skills, qualifications or abilities to manage a public company. Furthermore, the future role of our officers and directors, if any, in the target business cannot presently be stated with any certainty. Moreover, our
+current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate and agree to mutually acceptable employment terms in connection with any such combination, which terms would be disclosed to stockholders in any proxy statement relating to such transaction. While it is possible that one or more of our directors will remain associated in some capacity with us following a business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to a business combination. Moreover, we cannot assure you that our officers and directors will have significant experience or knowledge relating to the operations of the particular target business (or businesses).
+
+Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business (or businesses). We cannot assure you that we will have the ability to recruit additional managers, or that those additional managers will have the requisite skills, knowledge or experience necessary to enhance the incumbent management.
+
+Opportunity for stockholder approval of business combination
+
+Prior to the completion of a business combination, we will submit the transaction to our stockholders for approval, even if the nature of the acquisition is such that it would not ordinarily require stockholder approval under applicable state law. In connection with seeking stockholder approval of a business combination, we will furnish our stockholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, which, among other matters, will include a description of the operations of the target business and audited historical financial statements of the target business (or businesses) based on GAAP.
+
+In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock owned by them prior to the private placement (including shares issuable upon exercise of their options) in accordance with the majority of the shares of common stock voted by the public stockholders. Our officers and directors have agreed to vote any shares they acquire in the private placement, this offering or the aftermarket in favor of any business combination negotiated by our officers. Accordingly, they will not be entitled to exercise any redemption rights (described below) for public stockholders who vote against the business combination. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of 
+
+31
+
+the business combination and public stockholders owning less than 20% of the aggregate number of shares sold in this offering and the private placement exercise their redemption rights.
+
+Redemption rights
+
+At the time we seek stockholder approval of any business combination, we will offer each public stockholder the right to have such stockholder s shares of common stock redeemed for cash if the stockholder votes against the business combination and the business combination is approved and completed. The actual per-share redemption price will be equal to the amount in the trust account (exclusive of the proceeds of the private placement) calculated as of two business days prior to the consummation of the proposed business combination (net of taxes payable)), inclusive of any interest and the deferred portion of the underwriters discount,
+ net of taxes payable, divided by the number of shares sold in this offering. Without taking into any account interest earned on the trust account, the initial per-share redemption price would be approximately $7.65 or $0.35 less than the per-unit offering price of $8.00. An eligible stockholder may request redemption at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. If a stockholder votes against the business combination but fails to properly exercise his, her or its redemption rights, such stockholder will not have his, her or its shares of common stock redeemed for its pro rata distribution of the trust account. Any request for redemption, once made, may be withdrawn at any time up to the date of the meeting. It is
+anticipated that the funds to be distributed to stockholders entitled to redeem their shares who elect redemption will be distributed promptly after completion of a business combination. Public stockholders who redeem their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units. We will not complete any business combination if public stockholders, owning 20% or more of the aggregate number of shares sold in this offering and the private placement exercise their redemption rights. These redemption provisions, which are contained in our certificate of incorporation, cannot be amended without the affirmative vote of 95% of the shares sold in this offering and the private placement.
+
+Liquidation if no business combination
+
+If we do not complete a business combination within 18 months after the consummation of this offering, or within 24 months if the extension criteria described below have been satisfied, we will be dissolved and will distribute to all of our public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account inclusive of any interest (net of taxes payable and up to $1,250,000 of interest earned on the trust account that may be released to us) plus any remaining net assets. These liquidation provisions, which are contained in the investment management trust agreement, cannot be amended without the affirmative vote of 100% of the public stockholders. The provisions are also set forth in our certificate of incorporation, an amendment to which requires the affirmative vote of 95% of the shares sold in this offering and the private placement. Our existing stockholders have waived
+their rights to participate in any liquidation distribution with respect to shares of common stock owned by them immediately prior to this offering. Additionally, the underwriters have agreed to forfeit any rights to, or claims against, the proceeds held in the trust account, which includes a portion of their discount. There will be no distribution from the trust account with respect to our warrants, which will expire worthless.
+
+If we are unable to consummate a business combination and expend all of the net proceeds of this offering, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the initial per-share liquidation price would be approximately $7.77 (of which approximately $0.16 per share is attributable to the underwriters discount which was deposited into the trust account and will be distributed to the public stockholders in the event of our liquidation), or approximately $0.32 less than the per-unit offering price of $8.00. Because the initial per-share redemption price is lower than the $8.00 per-unit offering price and may be lower than the market price of the common stock on the date of redemption, there may be a perceived disincentive on the part of public stockholders to exercise their redemption rights. The proceeds deposited in the trust account could,
+however, become subject to the claims of our creditors, which could be prior to the claims of our public stockholders. Each member of our board of directors has agreed, pursuant to agreements with us and Rodman & Renshaw, LLC, that if we liquidate prior to the consummation of a business combination, they will be personally liable to pay the debts and obligations owed by us to vendors for services rendered or products sold to us in excess of the net proceeds of this offering not held in the trust account, but only to the extent necessary to ensure 
+
+32
+
+that such loss, liability, claim, damage or expense does not reduce the amount in the trust account. It is our intention that all vendors, prospective target businesses and other entities that we engage will execute agreements with us waiving any right to the monies held in the trust account. If any third party refused to execute an agreement waiving such claims, we would perform an analysis of the alternatives available to us and evaluate if such engagement would be in the best interest of our stockholders, if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that had refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be superior to those of other consultants that would agree to execute a waiver, or in cases where management does not believe it would be able to find a
+provider of required services willing to provide the waiver. We cannot assure you, however, that they would be able to satisfy those obligations. Further, they will not be personally liable to pay debts and obligations to prospective target businesses if a business combination is not consummated with such prospective target businesses, or for claims from any other entity other than vendors. Accordingly, we cannot assure you that the actual per-share liquidation price will not be less than approximately $7.77, plus interest (net of taxes payable and up to $1,250,000 of interest earned on the trust account that may be released to us), due to claims of creditors.
+
+If we enter into either a letter of intent, an agreement in principle or a definitive agreement to complete a business combination prior to the expiration of 18 months after the consummation of this offering, but are unable to complete the business combination within the 18-month period, then we will have an additional six months in which to complete the business combination contemplated by the letter of intent, agreement in principle or definitive agreement. If we are unable to do so by the expiration of the 24-month period from the consummation of this offering, we will then liquidate. The trustee of the trust account will immediately commence liquidating the investments constituting the trust account and will turn over the proceeds to our transfer agent for distribution to our public stockholders.
+
+Our public stockholders shall be entitled to receive funds from the trust account only in the event of our liquidation or if the stockholders seek to redeem their respective shares for cash upon a business combination which the stockholder voted against and which is actually completed by us. In no other circumstances shall a stockholder have any right or interest of any kind to or in the trust account.
+
+Competition
+
+In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business. Further:
+
+ 
+
+Our obligation to seek stockholder approval of a business combination and to obtain the necessary financial information to be included in the proxy statement to be sent to stockholders in connection with such business combination may delay or prevent the completion of a transaction; 
+
+ 
+
+Our obligation to redeem for cash shares of common stock held by our public stockholders in certain instances may reduce the resources available to us for a business combination; 
+
+ 
+
+Our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses; and
+
+ 
+
+The requirement to acquire one or more operating businesses that have a fair market value equal to at least 80% of our net assets (excluding any funds held in the trust account for the benefit of Rodman & Renshaw, LLC) at the time of the acquisition could require us to acquire several companies or closely related operating businesses at the same time, all of which sales would be contingent on the closings of the other sales, which could make it more difficult to consummate the business combination.
+
+Any of these factors may place us at a competitive disadvantage in successfully negotiating a business combination. Our management believes, however, that to the extent that a target business (or businesses) is a privately held entity, 
+
+33
+
+our status as a well-financed public entity may give us a competitive advantage over entities having a similar business objective as ours in acquiring a target business with significant growth potential on favorable terms.
+
+If we succeed in effecting a business combination, there will be, in all likelihood, intense competition from competitors of the target business. We cannot assure you that, subsequent to a business combination, we will have the resources or ability to compete effectively.
+
+Facilities
+
+We maintain our executive offices at 645 Madison Avenue, 12th Floor, New York, New York 10022. Phoenix Capital Partners, LLC has agreed to provide us with certain administrative, technology and secretarial services, as well as the use of certain limited office space at this location at a cost of $5,000 per month pursuant to a letter agreement between us and Phoenix Capital Partners, LLC. We believe, based on rents and fees for similar services in New York City, that the $5,000 fee is at least as favorable as we could have obtained from an unaffiliated person. We consider our current office space adequate for our current operations.
+
+Employees
+
+We have four officers, all of whom are also members of our board of directors. These individuals are not obligated to contribute any specific number of hours per week and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on the availability of suitable target businesses to investigate, although we expect each of them to devote a reasonable number of hours per week to our business. We do not intend to have any full time employees prior to the consummation of a business combination.
+
+Periodic reporting and financial information
+
+We have registered our units, common stock and warrants under the Securities Exchange Act of 1934, as amended, and have reporting obligations, including the requirement that we file annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual reports will contain financial statements audited and reported on by our independent accountants.
+
+We will not acquire a target business if audited financial statements based on GAAP cannot be obtained for such target business. Additionally, our management will provide stockholders with the foregoing financial information as part of the proxy solicitation materials sent to stockholders to assist them in assessing each specific target business we seek to acquire. Our management believes that the requirement of having available financial information for the target business may limit the pool of potential target businesses available for acquisition.
+
+We will be required to comply with the internal control requirements of the Sarbanes-Oxley Act for the fiscal year ending December 31, 2006. A target business may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition.
+
+Legal proceedings
+
+To the knowledge of management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such.
+
+34
+
+Comparison to offerings of blank check companies
+
+The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and that the underwriter will not exercise its over-allotment option. None of the terms of a Rule 419 offering will apply to this offering.
+
+ 
+
+ 
+
+Terms of Our Offering
+
+ 
+
+Terms Under a Rule 419 Offering
+
+ 
+
+Escrow of offering proceeds
+
+ 
+
+$47,847,500 of the proceeds of this offering and the private placement will be deposited into a trust account at JPMorgan Chase NY Bank maintained by American Stock Transfer & Trust Company acting as trustee. These proceeds include $1,970,000 of the proceeds attributable to the underwriters discount.
+
+ 
+
+$41,222,250 of the offering proceeds would be required to be deposited into either an escrow account with an insured depositary institution or in a separate bank account established by a broker-dealer in which the broker-dealer acts as trustee for persons having the beneficial interests in the account.
+
+ 
+
+Investment of net proceeds
+
+ 
+
+The $47,847,500 held in trust will only be invested in U.S. government securities, defined as any Treasury Bill issued by the United States having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940.
+
+ 
+
+Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940 or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the United States.
+
+ 
+
+Limitation on fair value or net assets of target business
+
+ 
+
+The initial target business or businesses that we acquire must have a fair market value equal to at least 80% of our net assets (excluding any funds held in the trust account for the benefit of Rodman & Renshaw, LLC) at the time of such acquisition.
+
+ 
+
+We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represent at least 80% of the maximum offering proceeds.
+
+ 
+
+35
+
+ 
+
+ 
+
+ 
+
+Terms of Our Offering
+
+ 
+
+Terms Under a Rule 419 Offering
+
+ 
+
+Trading of securities issued
+
+ 
+
+The units may commence trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin to trade separately within 20 trading days following the earlier to occur of the expiration of the underwriter s over-allotment options or its exercise in full, unless Rodman & Renshaw, LLC determines an earlier date is acceptable based upon the relative strength of the securities market and small capitalization companies in general and the trading patterns and demand for such securities in particular, provided we have filed with the SEC a Current Report on Form 8-K, which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option, if such option is exercised prior to the filing of the Form 8-K.
+
+ 
+
+No trading of the units or the underlying common stock and warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account.
+
+ 
+
+Exercise of the warrants
+
+ 
+
+The warrants cannot be exercised until the later of the completion of a business combination or one year from the date of this prospectus and, accordingly, will only be exercised after the trust account has been terminated and distributed.
+
+ 
+
+The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account.
+
+36
+
+ 
+
+ 
+
+ 
+
+Terms of Our Offering
+
+ 
+
+Terms Under a Rule 419 Offering
+
+ 
+
+Election to remain an investor
+
+ 
+
+We will give our stockholders the opportunity to vote on the business combination. In connection with seeking stockholder approval, we will send each stockholder a proxy statement containing information required by the SEC. A stockholder following the procedures described in this prospectus is given the right to redeem his, her, or its shares into his or her pro rata share of the trust account. However, a stockholder who does not follow these procedures, or a stockholder who does not take any action, would not be entitled to the return of any funds.
+
+ 
+
+A prospectus containing information required by the SEC would be filed as part of a post-effective amendment to the original registration statement filed in connection with the offering and would be sent to each investor. Each investor would be given the opportunity to notify the company, in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a stockholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held in the trust or escrow account would automatically be returned to the stockholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities will
+be issued.
+
+ 
+
+37
+
+ 
+
+ 
+
+ 
+
+Terms of Our Offering
+
+ 
+
+Terms Under a Rule 419 Offering
+
+ 
+
+Business combination deadline
+
+ 
+
+A business combination must occur within 18 months after the consummation of this offering, or within 24 months after the consummation of this offering if a letter of intent or definitive agreement relating to a prospective business combination were entered into prior to the end of the 18-month period.
+
+ 
+
+If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors.
+
+ 
+
+Release of funds
+
+ 
+
+Other than up to $1,250,000 of interest earned on the trust account that may be released to us, the proceeds held in the trust account will not be released until the earlier of the completion of a business combination or our liquidation upon our failure to effect a business combination within the allotted time.
+
+ 
+
+The proceeds held in the escrow account would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time.
+
+38
+
+MANAGEMENT
+
+Directors and Officers
+
+Our current directors and officers are as follows:
+
+Name
+
+ 
+
+Age
+
+ 
+
+Position
+
+ 
+
+Raju Panjwani
+
+ 
+
+50
+
+ 
+
+Chairman of the Board of Directors
+
+Ramesh Akella
+
+ 
+
+40
+
+ 
+
+President, Chief Strategy Officer and Director
+
+Shekhar Wadekar
+
+ 
+
+47
+
+ 
+
+Executive Vice President, Secretary, Treasurer and Director 
+
+Rohit Phansalkar
+
+ 
+
+61
+
+ 
+
+Executive Vice President and Director
+
+Raju Panjwani has served as Chairman of our Board of Directors since August 2005. Prior to that he was our Executive Vice President and a member of our board of directors. Mr. Panjwani is the Chairman, Chief Executive Officer and majority stockholder of Epitome Global Services Private Limited, or EGS, based in Mumbai, India, which he founded in May 2005. EGS provides offshore consulting, middle office and back office, and knowledge based research and analytical services to global financial service companies. From October 1987 until April 2005, Mr. Panjwani was at Morgan Stanley - New York, where he was a Managing Director since 1999. Nearly seven of those 18 years were spent in India. He was responsible for establishing the Morgan Stanley presence in India in 1994 in businesses such as Institutional Equities, Custody, Asset Management and Investment Banking. Subsequently, he played a significant role
+in negotiating Morgan Stanley s first ever joint venture, with JM Financial. Today, JM Morgan Stanley is Morgan Stanley s flagship business in India, employing over 350 people. From 1999 until 2001 Mr. Panjwani was Morgan Stanley s India Country Representative and Chief Operating Officer and looked after its interests in the joint venture. He was also responsible for fostering Morgan Stanley s IT outsourcing efforts, and later headed Morgan Stanley s offshore initiatives in India. He was largely responsible for conceiving of and establishing Morgan Stanley s first Global Knowledge Center in 2003, which supports knowledge-based services globally across institutional businesses, and today employs over 400 people in India. In addition, Mr. Panjwani served on the Board of Directors of the U.S. India Business Council in Washington, D.C. from October 2002 to April 2005. Mr. Panjwani received his B.S. in Business from Delhi University in 1975, became a
+Chartered Accountant in India in 1979 and is a certified public accountant in New York State since 1980.
+
+Ramesh Akella has served as our President and Chief Strategy Officer and a member of our board of directors since our inception. He is the founder and managing partner of Phoenix Capital Partners LLC, a financial advisory firm for companies in the entertainment, media and communications, healthcare and IT industries, which he founded in 1998. From 1996 to 1998, Mr. Akella was Managing Director of Dover Finance Group, Ltd., a corporate finance boutique specializing in structured finance for media, entertainment and communications companies. From 1987 to 1996, Mr. Akella managed private equity investments and corporate development for a family office. He is an advisor to Cornell University s BR Ventures and a member of Cornell s Johnson Graduate School of Management s Advisory Council. Mr Akella holds an M.B.A. with Distinction from Cornell University.
+
+Shekhar Wadekar, Ph.D., has served as our Executive Vice President, Secretary and Treasurer and a member of our board of directors since our inception. Since November 2003, he has served as President and Chief Executive Officer of Traxyz Medical, Inc., a development stage medical device company. From February 2002 to September 2003, he served as President and Chief Operating Officer of MadMax Optics, a scientific software company. From August 1994 until joining MadMax Optics, Dr. Wadekar served as research analyst on Wall Street following the semiconductor industry. From April 1999 to February 2002, he served as Director in Equity Research at Royal Bank of Canada Capital Markets. Prior thereto, he was employed by Raymond James and Associates and Sanford C. Bernstein and Co., Inc. From August 1989 to December 1993, Dr. Wadekar was employed at IBM working on optical communications and was also
+Technical Coordinator of the IBM/Siemens/Toshiba joint development program in semiconductor memory. He holds a Ph.D. in electrical engineering from the University of Delaware, an M.B.A. from the Stern School of Business at New York University and a B.Tech. in metallurgical engineering from the Indian Institute of Technology, Bombay.
+
+Rohit Phansalkar has served as our Executive Vice President since August 2005 and has been a member of our board of directors since our inception. Prior to that, he was our Chief Executive Officer and Chairman of the Board. Since June 2001, he has served as Chairman of the Board and Chief Executive Officer of RKP Capital, Inc., a merchant banking boutique. From June 2000 to September 2000, Mr. Phansalkar served as Chairman of the Board and Chief Executive Officer of Osicom Technologies, Inc., listed on the NASDAQ. From February 1998 until joining Osicom, he was a Partner of Anderson, Weinroth & Co., L.P., a private equity firm. Prior thereto, he served as Vice Chairman and Chief Executive Officer of Newbridge Capital, a firm engaged in private equity investments in India. Mr. Phansalkar previously served as Senior Vice President and Co-head of the Energy Finance Group at 
+
+39
+
+Shearson American Express, Managing Director of Bear Stearns and Managing Director and Head of the Energy Finance Group at Oppenheimer & Co. Mr. Phansalkar was the Founding Chairman of The India Fund, a $510 million, closed-end investment fund, listed on the NYSE. Mr. Phansalkar received his M.B.A. from Harvard Graduate School of Business.
+
+Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors, consisting of Rohit Phansalkar, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Shekhar Wadekar, will expire at the second annual meeting. The term of office of the third class of directors, consisting of Raju Panjwani and Ramesh Akella, will expire at the third annual meeting.
+
+These individuals will play a key role in identifying, evaluating, and selecting target businesses, and structuring, negotiating and consummating our business combination. None of these individuals has been a principal of or affiliated with a public company or blank check company that executed a business plan similar to our business plan and none of these individuals is currently affiliated with such an entity. However, we believe that the skills and experience of these individuals, their collective access to acquisition opportunities and ideas, their contacts, and their transaction expertise should enable them to successfully identify and effect a business combination although we cannot assure you that they will, in fact, be able to do so.
+
+Between 2000 and 2003, Mr. Phansalkar was a party to a civil litigation with his former employer, Andersen Weinroth & Co., L.P., a boutique merchant banking firm ( AW ), regarding the terms of his departure from the firm. The consolidated action in federal court consisted of two complaints relating to events that occurred between 1998 and 2000: Mr. Phansalkar s complaint against AW and its principals asserting claims for conversion, breach of contract, quantum meruit, unjust enrichment and promissory estoppel based on his allegation that AW and its principals misappropriated certain securities he had purchased and refused to give him agreed upon compensation; and AW s complaint against Mr. Phansalkar asserting claims for breach of fiduciary duty, breach of contract and conversion based on its allegation that he refused to turn over to the firm certain options he received as a director of outside corporations
+contrary to firm policies. 
+
+After trial in two phases, the district court found, among other things, that (i) AW and its principals converted Mr. Phansalkar s securities and awarded judgment to him in the amount of $4,417,655, plus interest; and (ii) Mr. Phansalkar was not entitled to additional compensation based in part on its finding that he engaged in isolated misdeeds of employee disloyalty in failing to disclose certain compensation he received as a director of certain outside entities. The district court stated that his non-disclosures did not permeate his service at AW or taint his other transactions while at the firm, that he did not attempt to conceal the director compensation granted to him, and that he brought a number of attractive deals to the firm which generated substantial cash fees.
+
+Upon appeal, the Second Circuit reversed the district court s decision, holding that Mr. Phansalkar was required to forfeit all compensation he received at AW after October 15, 1999 in light of a finding of employee disloyalty, and remanded to the district court for further proceedings. Thereafter, the parties reached a consensual settlement and filed a stipulation dismissing the action with prejudice.
+
+Executive Compensation
+
+None of our executive officers has received any cash compensation for services rendered. Similarly, except for an option to purchase a number of units as would maintain the respective ownership percentages of the existing stockholders in the event that the underwriters over-allotment option is exercised at an exercise price of $0.016 per share, no compensation of any kind, including finder s and consulting fees, has been or will be paid to any of our existing stockholders, including our officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with a business combination. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Such individuals may be paid consulting, management or other fees
+from target businesses as a result of the business combination, with any and all amounts being fully disclosed to stockholders, to the extent then known, in the proxy solicitation materials furnished to the stockholders. There is no limit on the amount of reimbursable out-of-pocket expenses, and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Because none of our directors may be deemed to be independent, we will generally not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement.
+
+40
+
+Option Grants in Last Fiscal Year 
+
+The following table contains information concerning the option grants made to the named executive officers from inception to date. No stock appreciation rights were granted to these individuals during such year. 
+
+ Individual Grant
+
+ 
+
+Name
+
+ Number of
+
+Securities
+
+Underlying
+
+Options
+
+Granted(1)
+
+ % of Total 
+
+Options 
+
+Granted to 
+
+Employees in
+
+Fiscal Year
+
+ 
+
+Exercise 
+
+or Base 
+
+Price ($/Sh)
+
+ 
+
+Expiration
+
+Date
+
+ 
+
+Grant Date
+
+Present Value
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Raju Panjwani
+
+ 
+
+54,829
+
+ 23.75
+
+% 
+
+$
+
+0.016
+
+ 
+
+(5)
+
+ 
+
+$
+
+438,084
+
+ 
+
+Ramesh Akella
+
+ 
+
+66,372
+
+(2) 
+
+28.75
+
+%
+
+$
+
+0.016
+
+ (5)
+
+ $
+
+530,312
+
+(6)
+
+Shekhar Wadekar 
+
+ 54,829
+
+(3)
+
+23.75
+
+%
+
+$
+
+0.016
+
+ (5)
+
+ $
+
+438,084
+
+(6) 
+
+Rohit Phansalkar
+
+ 54,829
+
+(4)
+
+23.75
+
+%
+
+$
+
+0.016
+
+ (5)
+
+ $
+
+438,084
+
+(6) 
+
+ 
+
+(1)
+
+The options are exercisable for units which are identical to the units sold in this offering.
+
+(2)
+
+Includes (i) an aggregate of up to 4,432 shares issuable upon the exercise of options granted to Mr. Akella s brother-and-sister in law and (ii) options exercisable for up to an additional 11,543 shares Mr. Akella has agreed to transfer only in the event the shares are released for escrow.
+
+(3)
+
+Represents options held in trusts for the benefit of Mr. Wadekar, his wife and children. Neither Mr. Wadekar nor his wife serve as trustees of these trusts.
+
+(4)
+
+Includes an aggregate of 4,432 shares issuable upon the exercise of options held by Mr. Phansalkar s wife, his son and as custodian for the benefit of his daughters.
+
+(5)
+
+The options are exercisable for three days, beginning on the day that the underwriters exercise their over-allotment option, and then only to the extent necessary to maintain the stockholders 20% beneficial ownership in our units. If the underwriters do not exercise their over-allotment option or if the underwriters exercise only a portion of the over-allotment option, the unexercised portion of the options will terminate. 
+
+(6)
+
+We estimated the fair value for these options at the date of grant using a Black-Scholes option pricing model with the following assumptions: weighted-average volatility factor of 0.10; no expected dividend payments; weighted-average risk-free interest rates in effect of 5.0%; and a weighted-average expected life of 0.13 years. Based upon the above methodology, the per share weighted-average fair value of the options would be $7.99.
+
+Conflicts of Interest
+
+Potential investors should be aware of the following potential conflicts of interest:
+
+ 
+
+None of our officers and directors is required to commit his full time to our affairs and, accordingly, they will have conflicts of interest in allocating management time among various business activities. 
+
+ 
+
+In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a complete description of our management s other affiliations, see the previous section entitled Directors and Officers. 
+
+ 
+
+Our officers and directors or their affiliates may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by our company. 
+
+ 
+
+Since our directors beneficially own shares of our common stock and warrants which will be released from escrow only in certain limited situations, and because they have waived their liquidation distribution rights with respect to the 93,750 shares included in the units they are purchasing in the private placement, our board may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. Furthermore, the release of their securities from escrow will occur earlier if the business combination involves a change of control of us. The personal and financial interests of our directors and officers may influence their motivation in identifying and selecting a target business, 
+
+41
+
+determining how to structure the transaction, completing a business combination timely and securing the release of their stock. 
+
+ 
+
+If management negotiates their retention as a condition to any potential business combination, management may look unfavorably upon or reject a business combination with a potential target whose owners refuse to retain members of management post-business combination. 
+
+ 
+
+In the event management were to make substantial loans to us in excess of the amount outside the trust fund, they may look unfavorably upon or reject a business combination with a potential target whose owners refuse to repay such amounts. 
+
+In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if:
+
+ 
+
+The corporation could financially undertake the opportunity; 
+
+ 
+
+The opportunity is within the corporation s line of business; and 
+
+ 
+
+It would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. 
+
+Accordingly, Mr. Panjwani, as of result of his affiliation with EGS, a KPO company targeting the financial services industry, and our other officers and directors, as a result of possible future business affiliations, may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor.
+
+In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers and directors has agreed in principle, until the earlier of a business combination, our liquidation or such time as he ceases to be an officer or director, to present to the company for its consideration, prior to presentation to any other entity, any business opportunity which may reasonably be required to be presented to us under Delaware law, subject to any pre-existing fiduciary obligations he might have.
+
+Each of our directors has, or may come to have, to a certain degree, other fiduciary obligations. To the extent that they identify business opportunities that may be suitable for any of these other companies, they will honor those fiduciary obligations. Accordingly, they may not present opportunities to us that otherwise may be attractive to us, unless these other companies and any successors to such entities has declined to accept such opportunities.
+
+In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock which were owned by them prior to the private placement and this offering in accordance with the vote of the public stockholders owning a majority of the shares of our common stock sold in this offering and our executive officers and directors have agreed to vote any shares they or any entity they control
+ acquire in the private placement, this offering or the aftermarket in favor of any business combination our officers negotiate and present to the stockholders. In addition, they have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering and the shares included in the units being purchased in the private placement.
+
+To further minimize potential conflicts of interest, we have agreed not to consummate a business combination with an entity which is affiliated with any of our existing stockholders, unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our stockholders from a financial point of view. Such opinion will be included in each case in our proxy soliciting materials furnished to our stockholders, and we expect that such independent banking firm will be a consenting expert.
+
+42
+
+PRINCIPAL STOCKHOLDERS
+
+The following table sets forth information regarding the beneficial ownership of our common stock as of the date of this prospectus, and as adjusted to reflect the sale of our common stock included in the units 
+offered by this prospectus (assuming no purchase of units in this offering), by:
+
+ 
+
+Each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; 
+
+ 
+
+Each of our officers and directors; and 
+
+ 
+
+All our officers and directors as a group. 
+
+Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
+
+Name and Address of Beneficial Owner(1)
+
+ Amount and 
+
+Nature of 
+
+Beneficial 
+
+Ownership
+
+ Approximate Percentage of
+
+Outstanding Common Stock
+
+ 
+
+Before 
+
+Offering 
+
+ After 
+
+Offering 
+
+ 
+
+Raju Panjwani
+
+ 
+
+ 
+274,415
+
+ (2)
+ 
+
+ 
+
+ 
+16.57
+
+ 
+
+ 
+
+ 
+3.51
+
+ 
+
+Ramesh Akella
+
+ 
+
+ 
+352,539
+
+ (2)
+(3)
+
+ 
+
+ 
+21.28
+
+ 
+
+ 
+
+ 
+4.51
+
+ 
+
+Shekhar Wadekar
+
+ 
+
+ 
+274,414
+
+ (2)
+(4)
+
+ 
+
+ 
+16.57
+
+ 
+
+ 
+
+ 
+3.51
+
+ 
+
+Rohit Phansalkar 
+
+ 
+
+ 
+274,414
+
+ (2)
+(5)
+
+ 
+
+ 
+16.67
+
+ 
+
+ 
+
+ 
+3.51
+
+ 
+
+ Phoenix India Management Company LLC(6)
+
+ 480,468
+
+ (7)
+
+ 29.01
+
+ 6.15
+
+ 
+
+All directors and officers as a group 
+
+(four individuals)
+
+ 
+1,656,250
+
+ 
+(7)(8)
+
+ 
+
+100.00
+
+%
+
+ 
+
+21.20
+
+%
+
+ 
+
+(1)
+
+Unless otherwise indicated, the business address of each of the individuals and entities is c/o Phoenix Capital Partners LLC, 645 Madison Avenue, 12th Floor, New York, NY 10022. 
+
+(2) 
+
+ Excludes such individuals pro rata portion of the shares owned by their affiliated entity, Phoenix India Management Company LLC, including the 93,750 shares included in the units that such entity will acquire in a private placement that will occur immediately prior to this offering.
+
+(3)
+
+Includes (i) an aggregate of 30,000 shares held by Mr. Akella s brothers and sister-in-law and (ii) 78,126 shares which Mr. Akella has agreed to transfer only in the event the shares are released from escrow.
+
+(4)
+
+Represents shares held in following four trusts for the benefit of Mr. Wadekar, his wife and children. Neither Mr. Wadekar, nor his wife, serve as trustees of these trusts.
+
+(5)
+
+Includes an aggregate of 30,000 shares held by Mr. Phansalkar s wife, his son and as custodian for the benefit of his daughters.
+
+ (6)
+
+ Messrs. Panjwani, Akella, Wadekar and Phansalkar are joint and equal owners of this limited liability company and Mr. Akella serves as its managing member.
+
+ (7)
+
+ In consideration of a loan to fund the purchase of the private placement units, 386,718 of these shares will be transferred to the funding entity at such time, if ever, as they are released from escrow.
+
+ 
+(8)
+
+ After the offering,
+ the existing stockholders will
+ hold warrants to purchase an aggregate of 
+1,656,250
+ shares, which warrants are substantially identical to the warrants contained in the units. In addition, such individuals have been granted options to purchase, on a pro rata basis, up to an aggregate of 230,859 units, at $0.016 per unit, which option is exercisable only if the underwriters exercise the over-allotment option and then only to the extent necessary to maintain the existing stockholders 
+21.20%
+ ownership after the offering.
+
+None of our existing stockholders, officers and directors has indicated to us that he or it intends to purchase units in the offering. 
+Assuming 
+no such
+securities are 
+purchased, immediately after this offering, our existing stockholders, which include all of our officers and directors, collectively, will beneficially own 
+21.20%
+ of the then issued and outstanding shares of our common stock on a fully diluted basis. Because of this ownership block, these stockholders may be able to effectively influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions other than approval of a business combination. 
+
+43
+
+All of the units outstanding prior to the date of this prospectus , other than the private placement units,
+ will be placed in escrow with American Stock Transfer & Trust Company, as escrow agent. Subject to certain limited exceptions, these units will not be transferable during the escrow period and will not be returned from escrow, until one year after the consummation of a business combination or earlier in the event the business combination results in a change of control of us or we receive stockholder approval of the release of such units.
+
+During the escrow period, the holders of these shares will not be able to sell or transfer their securities except to their spouses and children or trusts established for their benefit or otherwise as provided in the stock escrow agreement, but will retain all other rights as our stockholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our existing stockholders will receive any portion of the liquidation proceeds with respect to common stock owned by them prior to the date of this prospectus.
+
+The existing stockholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering; they will participate in any liquidation distribution with respect to any shares of common stock acquired in connection with or following this offering.
+
+In addition, in connection with the vote required for our initial business combination, all of our existing stockholders, including our officers and directors, have agreed to vote all of the shares of common stock owned by them, including shares they may acquire in the offering, or in the after market, in accordance with the majority of the shares of common stock voted by the public stockholders. Accordingly, they will not be entitled to any redemption rights available to public stockholders who vote against a business combination.
+
+Messrs. Panjwani, Akella, Wadekar and Phansalkar are deemed to be our promoters, as this term is defined under the Federal securities laws.
+
+44
+
+CERTAIN TRANSACTIONS
+
+On July 22, 2005, we issued an aggregate of 1,562,500 units, each unit consisting of one share of our common stock and one warrant, to the individuals set forth below and their respective nominees for $25,000 in cash, at a purchase price of $0.016 per unit, as follows:
+
+Name
+
+ 
+
+Number
+
+of Units
+
+ 
+
+Relationship to Us
+
+ 
+
+Raju Panjwani
+
+ 
+
+371,094
+
+ 
+
+Chairman of the Board of Directors
+
+Ramesh Akella 
+
+ 
+
+449,218
+
+ 
+
+President, Chief Strategy Officer and director
+
+Shekhar Wadekar
+
+ 
+
+371,094
+
+ 
+
+Executive Vice President, Secretary, Treasurer and director
+
+Rohit Phansalkar 
+
+ 
+
+371,094
+
+ 
+
+Executive Vice President and director
+
+On August 15, 2005, we issued the aforementioned stockholders options to purchase such additional number of shares as would be necessary to maintain their and those of their affiliates percentage ownership in us after the offering in the event the underwriter exercises the over-allotment option. Such options are exercisable at $0.016 per share only if and only to the extent that the over-allotment option is exercised.
+
+In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing stockholders collective ownership at 
+21.2%
+ of our issued and outstanding shares of common stock upon consummation of the offering.
+
+The holders of the majority of these shares will be entitled to make up to two demands that we register these shares pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these shares may elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow, which, except in limited circumstances, is not before one year following the consummation of a business transaction. In addition, these stockholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements.
+
+Our officers 
+have agreed that Phoenix India Management Company LLC, an entity they own, will
+ purchase 93,750 units from us at a purchase price of $8.00 per unit in a private placement that will occur immediately prior to this offering. We have granted the holders of 
+the private placement
+units demand and piggy-back registration rights with respect to the 93,750 shares, the 93,750 warrants and the 93,750 shares underlying the warrants at any time commencing on the date we announce that we have entered into a letter of intent with respect to a proposed business combination. The demand registration may be exercised by the holders of a majority of such units. We will bear the expenses incurred in connection with the filing of any such registration statements.
+
+Phoenix Capital Partners, LLC, an entity for which Ramesh Akella serves as Manager, has agreed commencing on the effective date of this prospectus through the acquisition of a target business, it will make available to us certain administrative, technology and secretarial services, as well as the use of certain limited office space in New York City, as we may require from time to time. We have agreed to pay Phoenix Capital Partners, LLC $5,000 per month for these services. Mr. Akella is a managing member of Phoenix Capital Partners, LLC and, as a result, will benefit from the transaction to the extent of his interest in this entity. However, this arrangement is solely for our benefit and is not intended to provide Mr. Akella compensation in lieu of a salary. We believe, based on rents and fees for similar services in New York City that the fee charged by Phoenix Capital Partners, LLC is at least as favorable as we could have obtained
+from an unaffiliated person. However, as our directors are not deemed independent, we did not have the benefit of disinterested directors approving this transaction.
+
+From our inception to date, our executive officers and directors have advanced a total of $340,464 to us to cover expenses related to this offering and the private placement. Upon the consummation of this offering, our executive officers and directors will loan us an additional $159,536, which will be available to us outside the trust account to fund working capital. Such loans are payable with 4% annual interest upon our consummation of a business combination, subject to earlier repayment solely from interest in excess of $750,000 earned on the trust account.
+
+We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged.
+
+45
+
+Other than reimbursable out-of-pocket expenses payable to our officers and directors and except for the administrative services fee and an option to purchase a number of units as would maintain the respective ownership percentages of the existing stockholders in the event that the underwriters over-allotment option is exercised, no compensation or fees of any kind, including finders and consulting fees, will be paid to any of our existing stockholders, officers or directors who owned our common stock prior to this offering, or to any of their respective affiliates for services rendered to us prior to or with respect to the business combination.
+
+46
+
+DESCRIPTION OF SECURITIES
+
+General
+
+We are authorized to issue 89,000,000 shares of common stock, par value $.0001, and 1,000,000 shares of preferred stock, par value $.0001. 
+Immediately prior to this offering, 1,656,250
+ shares of common stock and warrants to purchase 
+1,656,250
+ shares of our common stock 
+will be
+outstanding, held 
+of record by 
+14
+holders. No shares of preferred stock are currently outstanding. An additional 230,859 units are subject to outstanding options, which are exercisable only if the underwriter exercises the over-allotment option.
+
+Units
+
+Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The common stock and warrants will begin to trade separately on the 20th trading day after the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, unless Rodman & Renshaw, LLC determines that an earlier date is acceptable (based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general and the trading pattern of, and demand for, our securities in particular), provided that in no event may the common stock and warrants be traded separately until we have filed with the SEC a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the SEC which includes this audited
+balance sheet upon the consummation of this offering. The audited balance sheet will reflect the proceeds that we receive from the exercise of the over-allotment option, if the over-allotment option is exercised prior to the filing of the Form 8-K. Such Current Report on Form 8-K will not be distributed to our stockholders.
+
+Common stock
+
+Our stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock owned by them in accordance with the public stockholders. However, our existing stockholders, officers and directors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders.
+
+We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 20% of the shares sold in this offering exercise their redemption rights discussed below.
+
+Our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors.
+
+If we are forced to liquidate prior to a business combination, our public stockholders are entitled to share ratably in the trust account, inclusive of any interest (net of taxes payable), and any net assets remaining available for distribution to them after payment of liabilities. Our existing stockholders have agreed to waive their rights to share in any distribution with respect to common stock owned by them prior to the offering if we are forced to liquidate.
+
+Our stockholders have no redemption, preemptive or other subscription rights, and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock redeemed for cash equal to their pro rata share of the trust account if they vote against the business combination and the business combination is approved and completed. Public stockholders who redeem their stock into their share of the trust account still have the right to exercise the unsold warrants that they received as part of the units.
+
+Preferred stock
+
+Our certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No 
+
+47
+
+shares of preferred stock are being issued or registered in this offering. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust account, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the
+future.
+
+Warrants
+
+ Immediately prior to this offering
+ there 
+will be 1,656,250
+ warrants 
+outstanding held by 
+14
+ record holders. 
+Each warrant entitles the registered holder to purchase one share of our common stock at a price of $5.00 per share, subject to adjustment as discussed below, at any time commencing on the later of:
+
+ 
+
+The completion of a business combination; or 
+
+ 
+
+The first anniversary of the date of this prospectus. 
+
+The warrants will expire five years from the date of this prospectus at 5:00 p.m., New York City time.
+
+The warrants will trade separately on the 20th trading day after following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, unless Rodman & Renshaw, LLC determines that an earlier date is acceptable, provided that in no event may the common stock and warrants be traded separately until we have filed a Current Report on Form 8-K, which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option if such option is exercised prior to our filing of the Form 8-K.
+
+We may call the warrants for redemption (including any warrants issued upon exercise of our unit purchase option),
+
+ 
+
+In whole and not in part, 
+
+ 
+
+At a price of $.01 per warrant at any time after the warrants become exercisable, 
+
+ 
+
+Upon not less than 30 days prior written notice of redemption to each warrant holder, and 
+
+ 
+
+If, and only if, the reported last sale price of the common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. 
+
+We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price, as well as a reasonable cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his, her or its warrant prior to the date scheduled for redemption either by payment of the exercise price in cash or on a cashless basis; however, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. Exercises on a cashless basis enable the holder to convert the value in the warrant (the fair market value of the common stock minus the exercise price of the warrant) into shares of common stock. We will establish the value to be converted into shares
+of our common stock upon exercise of the warrants on a cashless basis and provide such information in the notice of redemption. The value will be determined using the last sale price of the common stock for the date ending on the third business day prior to the notice of redemption to warrant holders.
+
+The warrants will be issued in registered form under a warrant agreement between American Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants.
+
+The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or 
+
+48
+
+consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices.
+
+The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
+
+No warrants will be exercisable unless, at the time of exercise, a prospectus relating to common stock issuable upon exercise of the warrants is current 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 meet these conditions and use our best efforts to maintain a current prospectus relating to 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. The warrants may be deprived of any value and the market for the warrants may be limited, if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside.
+
+No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder.
+
+Purchase Option
+
+We have agreed to sell to the underwriter an option to purchase up to a total of 430,937 units at a per-unit price of $8.80. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that the per-unit price is 110% of the price of the securities sold in this offering and the exercise price of the underlying warrant is $5.50 per share, which is 110% of the exercise price of the warrants included in the units sold in this offering. For a more complete description of the purchase option, including the dates when it is exercisable, see the section below entitled Underwriting Purchase Option. 
+
+Dividends
+
+We have not paid any dividends on our common stock to date and do not intend to pay dividends prior to the completion of a business combination. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
+
+In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing stockholders collective ownership at 
+21.2%
+ of our issued and outstanding shares of common stock upon consummation of the offering.
+
+Our Transfer Agent and Warrant Agent
+
+The transfer agent for our securities and warrant agent for our warrants is American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038.
+
+Shares Eligible for Future Sale
+
+Immediately after this offering, we will have 7,182,500 shares of common stock outstanding, or 8,966,796 shares if the underwriters over-allotment option, and our existing stockholders options to purchase up to 230,859 units, are exercised in full. Of these shares, the 6,156,250 shares sold in this offering, or 7,079,687 shares if the over-allotment option is exercised, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the 
+
+49
+
+Securities Act. All of the remaining 3,312,500 shares (including those underlying warrants) (3,774,218 shares if the existing stockholders options and underlying warrants are exercised in full) are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. None of those shares will be eligible for sale under Rule 144 prior to July 22, 2006. Notwithstanding this, all of those shares other than those issued in the private placement
+ have been placed in escrow and will not be transferable for a period of one year following the consummation of a business transaction, subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death, while in each case remaining subject to the escrow agreement, and will only be released prior to that date if a change of control occurs or we receive a shareholder vote approving the release, in which case the shares would be destroyed, or if we were to consummate a transaction after the consummation of a business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property.
+
+Rule 144
+
+In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following:
+
+ 
+
+1% of the number of shares of common stock then outstanding, which will equal 78,125 shares immediately after this offering (or 89,668 shares, if the underwriter s exercise their over-allotment option); and 
+
+ 
+
+The average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. 
+
+Sales under Rule 144 also require compliance with the manner of sale provisions and notice requirements and upon the availability of current public information about us.
+
+Rule 144(k)
+
+Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell his, her or its shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
+
+SEC Position on Rule 144 Sales
+
+The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act when reselling the securities of a blank check company. Accordingly, Rule 144 may not be available for the resale of those securities despite technical compliance with the requirements of Rule 144, in which event the resale transactions would need to be made through a registered offering.
+
+Registration Rights
+
+The holders of our 1,562,500 issued and outstanding shares of common stock and the 1,562,500 shares of our common stock underlying the issued and outstanding warrants on the date of this prospectus will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of this offering. The holders of the majority of these securities are entitled to make up to two demands that we register these securities. The holders of the majority of these securities can elect to exercise these registration rights at any time after the date on which the shares of common stock are released from escrow. In addition, these stockholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which the shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements.
+
+We have granted the holders of the 93,750 units being purchased in a private placement immediately prior to this offering demand and piggy-back registration rights with respect to the shares, the warrants and the shares underlying the warrants comprising such units at any time commencing on the date we announce that we have entered into a letter of intent with respect to a proposed business combination. The demand registration may be exercised by the holders of a majority of such units.
+
+50
+
+UNDERWRITING
+
+In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Rodman & Renshaw, LLC, on a firm commitment basis, is acting as representative, have severally, and not jointly, agreed to purchase on a firm commitment basis the number of units offered in this offering set forth opposite their respective names below:
+
+Underwriters
+
+ 
+
+Number of Units
+
+ 
+
+ 
+
+Rodman & Renshaw, LLC
+
+ 
+
+ 
+
+ 
+
+I-Bankers Securities, Inc.
+
+ 
+
+ 
+
+ 
+
+Total
+
+ 
+
+ 
+
+6,156,250
+
+ 
+
+A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part.
+
+State Blue Sky Information
+
+We will offer and sell the units to retail customers only in Colorado, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Indiana, New York and Rhode Island. In New York, we have relied on our exemption from the state registration requirements for transactions between an issuer and an underwriter involving a firm-commitment underwritten offering. In the other states, we have relied on an exemption or we have applied to have the units registered for sale and will not sell the units in these states until such registration is effective (including in Colorado, pursuant to 11-51-302).
+
+If you are not an institutional investor, you may purchase our securities in this offering only in the jurisdictions described directly above. Institutional investors in every state except in Idaho and Oregon may purchase the units in this offering pursuant to exemptions provided to such entities under the Blue Sky laws of various states. The definition of an institutional investor varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities.
+
+Under the National Securities Markets Improvement Act of 1996, the resale by stockholders of the units, from and after the effective date, and the common stock and warrants comprising the units, once they become separately transferable are exempt from state registration requirements because we will file periodic and annual reports under the Securities Exchange Act of 1934. However, states are permitted to require notice filings and collect fees with regard to these transactions and a state may suspend the offer and sale of securities within such state if any such required filing is not made or fee is not paid. As of the date of this prospectus, we have determined in which states we will submit the required filings or pay the required fee.
+
+We believe that the units, from and after the effective date, and the common stock and warrants comprising the units, once they become separately transferable, will be eligible for sale on a secondary market basis in each of the following states, without any notice filings or fee payments, based upon the availability of an applicable exemption from the state s registration requirements:
+
+ 
+
+Immediately in Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, New York, Pennsylvania, Rhode Island and Wisconsin;
+
+ 
+
+Commencing 90 days after the date of this prospectus in Nevada and New Mexico; and 
+
+ 
+
+Commencing 180 days from the date of this prospectus in Alabama. 
+
+We will amend this prospectus for the purpose of disclosing additional states, if any, in which our securities will be eligible for resale in the secondary trading market. If you are not an institutional investor, you may purchase our securities in this offering or in any subsequent trading market which may develop, only in the jurisdictions described above.
+
+51
+
+Pricing of Securities
+
+We have been advised by the representative of the underwriters that it proposes to offer the units to the public at the initial offering price set forth on the cover page of this prospectus. They may allow some dealers concessions not in excess of $ per unit and the dealers may reallow a concession not in excess of $ per unit to other dealers.
+
+Prior to this offering, there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include:
+
+ 
+
+The history and prospects of companies whose principal business is the acquisition of other companies; 
+
+ 
+
+Prior offerings of those companies; 
+
+ 
+
+Our prospects for acquiring an operating business at attractive values; 
+
+ 
+
+Our capital structure; 
+
+ 
+
+An assessment of our management and their experience in identifying operating companies; 
+
+ 
+
+General conditions of the securities markets at the time of the offering; and 
+
+ 
+
+Other factors as were deemed relevant. 
+
+However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry.
+
+Over-Allotment Option
+
+We have also granted to the underwriters an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of 923,437 additional units for the sole purpose of covering over-allotments, if any. The over- allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. The underwriters may exercise that option if the underwriters sell more units than the total number set forth above. If any units underlying the option are purchased, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.
+
+Commissions and Discounts
+
+The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
+
+ 
+
+Per Unit
+
+ Without
+
+Option
+
+ 
+
+With
+
+Option
+
+ 
+
+ 
+
+Public offering price
+
+ 
+
+$
+
+8.00
+
+ 
+
+$
+
+49,250,000
+
+ 
+
+$
+
+56,637,496
+
+Discount(1)(2)
+
+ 
+
+$
+
+0.56
+
+ 
+
+$
+
+3,447,500
+
+ 
+
+$
+
+3,964,625
+
+Proceeds before expenses(3)
+
+ 
+
+$
+
+7.44
+
+ 
+
+$
+
+45,802,500
+
+ 
+
+$
+
+52,672,871
+
+ 
+
+(1)
+
+Rodman & Renshaw, LLC, the representative of the underwriters in this offering, has agreed to deposit 4.0% of the gross proceeds attributable to the underwriters discount ($0.32 per unit) into the trust account that will be paid to the underwriters only upon the consummation of a business combination (and then only with respect to those units as to which the component shares have not been redeemed). In the event of the liquidation of the trust account if we fail to consummate a business combination, this amount will be distributed among our public stockholders.
+
+(2)
+
+Does not include expenses to be paid on behalf of the underwriters by us, such as the expense associated with engaging an investigative search firm to conduct background checks (estimated at $20,000).
+
+(3)
+
+The offering expenses are estimated to be approximately $675,000.
+
+52
+
+Warrant Solicitation Fee
+
+We have engaged Rodman & Renshaw, LLC, representative of the underwriters, on a non-exclusive basis, as our agent for the solicitation of the exercise of the warrants. To the extent not inconsistent with the guidelines of the NASD and the rules and regulations of the SEC, we have agreed to pay the representative for bona fide services rendered a commission equal to 5% of the exercise price for each warrant exercised more than one year after the date of this prospectus for cash only if the exercise had been solicited by the representative. In addition to soliciting, either orally or in writing, the exercise of the warrants, the representative s services may also include disseminating information, either orally or in writing, to warrant holders about us or the market for our securities, and assisting in the processing of the exercise of the warrants. No compensation will be paid to the representative upon the exercise of the
+warrants if:
+
+ 
+
+The market price of the underlying shares of common stock is lower than the exercise price; 
+
+ 
+
+The holder of the warrants has not confirmed in writing that the underwriter solicited the exercise;
+
+ 
+
+The warrant is exercised by cashless exercise;
+
+ 
+
+The warrants are held in a discretionary account; 
+
+ 
+
+The warrants are exercised in an unsolicited transaction; or 
+
+ 
+
+The arrangement to pay the commission is not disclosed in the prospectus provided to warrant holders at the time of exercise. 
+
+Purchase Option
+
+We have agreed to sell to the representative, upon completion of the offering, for $100, an option to purchase up to a total of 430,937 units. The units issuable upon exercise of this option are identical to those offered by this prospectus, except the per-unit price is 110% of the price of the units sold in this offering and the exercise price of the underlying warrant is $5.50 per share (110% of the exercise price of the warrants included in the units sold in this offering). This option is exercisable at $8.80 per unit, commencing on the later of the consummation of a business combination or one year from the date of this prospectus, and expiring five years from the date of this prospectus. The option and the 430,937 units, the 430,937 shares of common stock and the 430,937 warrants underlying such units, and the 430,937 shares of common stock underlying such warrants, have been deemed to be compensation by the NASD and are therefore
+subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180-day period) following the date of this prospectus. However, the option may be transferred to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part, the option grants to holders demand and piggy back rights for periods of five and seven years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the
+holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below its exercise price.
+
+Regulatory Restrictions on Purchase of Securities
+
+Rules of the SEC may limit the ability of the representative to bid for or purchase our securities before the distribution of the securities is completed. However, the representative may engage in the following activities in accordance with the rules:
+
+ 
+
+Stabilizing Transactions. The underwriter may make bids or purchases for the purpose of pegging, fixing or maintaining the price of our securities, so long as stabilizing bids do not exceed the maximum price specified in Regulation M of the SEC, which generally requires, among other things, that no stabilizing bid 
+
+53
+
+shall be initiated at or increased to a price higher than the lower of the offering price or the highest independent bid for the security on the principal trading market for the security. 
+
+ 
+
+Over-Allotments and Syndicate Coverage Transactions. The underwriters may create a short position in our securities by selling more of our securities than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative may engage in syndicate covering transactions by purchasing our securities in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option.
+
+ 
+
+Penalty Bids. The representative may reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
+
+Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the prices of the securities if it discourages resales of the securities.
+
+Neither we nor the underwriter makes any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the OTC Bulletin Board, in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time.
+
+The restricted period under Regulation M for this offering will have ended when all of the units have been distributed and any over-allotment and stabilization arrangements and trading restrictions in connection with the offering have been terminated.
+
+Other Terms
+
+We have granted the underwriter the right to have its designee present at all meetings of our board of directors for the earlier of two years from the date of this prospectus or the date a business combination is consummated. The designee will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. The underwriter has not named a designee as of the date of this prospectus.
+
+Although we are not under any contractual obligation to engage the underwriter to provide any services for us after this offering, and have no present intent to do so, the underwriter may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If the underwriter provides services to us after this offering, we may pay the underwriter fair and reasonable fees that would be determined at that time in an arm s length negotiations where the terms would be fair and reasonable to each of the interested parties.
+
+Indemnification
+
+We have agreed to indemnify the underwriters (which indemnity the trust account is also subject to) against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriter may be required to make in this respect.
+
+Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the
+Securities Act and will be governed by the final adjudication of such issue.
+
+54
+
+LEGAL MATTERS
+
+The validity of the securities offered in this prospectus is being passed upon for us by Loeb & Loeb LLP, New York, New York. Gersten Savage LLP, New York, New York, is acting as counsel for the underwriters in this offering.
+
+EXPERTS
+
+The financial statements included in this prospectus and in the registration statement have been audited by Miller, Ellin & Company, LLP, independent registered public accounting firm, to the extent and for the period set forth in their report appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of Miller, Ellin & Company, LLP are included in reliance upon their report given upon the authority of Miller, Ellin & Company, LLP as experts in auditing and accounting.
+
+WHERE YOU CAN FIND ADDITIONAL INFORMATION
+
+We have filed with the SEC a registration statement on
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001337899_fortunet_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001337899_fortunet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..68350dd6cd1e4ffc77271abb37eeb74b1c4f5e10
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001337899_fortunet_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS An opinion will be delivered by Lewis and Roca LLP, Phoenix, Arizona to the effect that the shares of common stock being offered hereby will be, when issued as contemplated by this prospectus, validly issued, fully paid and non-assessable. Certain legal matters related to the offering will be passed upon for the underwriter by Morrison Foerster LLP, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001338648_oracle_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001338648_oracle_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bbecce0e37b8dc95ebe848e0022a8d36ebe1fd17
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001338648_oracle_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Willkie Farr & Gallagher LLP will pass upon the validity of the securities offered in this prospectus for us. Certain legal matters with respect to this offering will be passed upon for the underwriters by Bingham McCutchen LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001339048_western_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001339048_western_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..849ec7fa6a9c371f1095c297c1f7332806a6a072
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001339048_western_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for our company by Andrews Kurth LLP, Houston, Texas. The underwriters have been represented by Davis Polk Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001340041_superior_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001340041_superior_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..21d7a4f65017308b755c3d218e05680fc962a38f
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001340041_superior_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Vinson Elkins L.L.P., Houston, Texas and certain legal matters in connection with this offering will be passed upon for the underwriters by Baker Botts L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001340980_access_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001340980_access_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5b9f51e778d0587f9c8df997acb0d224a1caefd1
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001340980_access_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Jones Vargas has issued an opinion with respect to the validity of the shares of common stock being offered hereby.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001340995_restaurant_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001340995_restaurant_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c7ecea533cea23cb07e5f37680d263a8cbdb7300
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001340995_restaurant_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Pillsbury Winthrop Shaw Pittman LLP, New York, New York. Greenberg Traurig, P.A., West Palm Beach, Florida, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001341318_lake_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001341318_lake_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5e0cbc8a9777227ad9e21fa844336732c780dbd5
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001341318_lake_legal_matters.txt
@@ -0,0 +1 @@
+legal matters will be passed upon for Ryan Beck & Co., Inc. by Luse Gorman Pomerenk & Schick, P.C., Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001341769_grubb_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001341769_grubb_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..13fa0e7e309dcab6ca2bb6d5310725dd6cdb39e7
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001341769_grubb_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Zukerman Gore Brandeis, LLP, New York, New York. Skadden, Arps, Slate, Meagher Flom, LLP, Los Angeles, California, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001343202_verasun_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001343202_verasun_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c339b6369aa1aa72c72be2621f8309f0bb4854fd
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001343202_verasun_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered in this prospectus will be passed upon for us by Stoel Rives LLP, Portland, Oregon. Cadwell Sanford Deibert Garry LLP will pass upon matters of South Dakota law. Sidley Austin LLP, Chicago, Illinois, will pass upon certain legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001345111_tim_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001345111_tim_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b0ca01fee4f8fb10dcbb79bce2cc0f2650a25954
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001345111_tim_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Akin Gump Strauss Hauer Feld LLP, Washington, D.C. and for the underwriters by Sullivan Cromwell LLP, New York, New York. Certain matters regarding Canadian law will be passed upon for us by Lang Michener LLP, and for the underwriters by Torys LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001347006_hd_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001347006_hd_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fadcbd630f8b456933c23027a42bdf700b6bae80
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001347006_hd_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Ellenoff Grossman & Schole LLP, New York, New York. DLA Piper Rudnick Gray Cary US LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001349318_fortissimo_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001349318_fortissimo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..821b2764f5ca3afd2b549b7ca1e8e58de0c75589
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001349318_fortissimo_legal_matters.txt
@@ -0,0 +1,570 @@
+Legal Matters
+
+65
+
+Experts
+
+65
+
+Where You Can Find Additional Information
+
+65
+
+Financial Statements
+
+F-1
+
+ 
+
+EarlyBirdCapital, Inc.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ _______ __, 2006
+
+ 
+
+ 
+
+PART II
+
+INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and Distribution.
+
+The estimated expenses payable by us in connection with the offering described in this registration statement (other than the underwriting discount and commissions and the Underwriter s non-accountable expense allowance) will be as follows:
+
+ 
+
+ 
+
+Amount to
+
+be Paid
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+SEC registration fee
+
+ 
+
+$
+
+ 
+8,625
+
+ 
+
+NASD filing fee
+
+ 
+
+ 
+
+ 
+8,560
+
+ 
+
+Legal fees and expenses
+
+ 
+
+ 
+
+150,000
+
+ 
+
+Blue Sky fees and expenses
+
+ 
+
+ 
+
+50,000
+
+ 
+
+Accounting fees and expenses
+
+ 
+
+ 
+
+35,000
+
+ 
+
+Printing and engraving expenses
+
+ 
+
+ 
+
+60,000
+
+ 
+
+Initial Trustee s fee
+
+ 
+
+ 
+
+1,000
+
+(1)
+
+Directors & Officers liability insurance premiums
+
+ 
+
+ 
+
+100,000
+
+(2)
+
+Miscellaneous
+
+ 
+
+ 
+
+ 
+66,815
+
+(3)
+
+Total
+
+ 
+
+$
+
+480,000
+
+ 
+
+ 
+
+(1)
+
+In addition to the initial fee that is charged by American Stock Transfer & Trust Company, as trustee, the registrant will be required to pay to American Stock Transfer & Trust Company annual fees of $3,000 for acting as trustee, $4,800 for acting as transfer agent of the registrant s common stock, $2,400 for acting as warrant agent for the registrant s warrants and $1,800 for acting as escrow agent.
+
+(2)
+
+This amount represents the approximate amount of Director and Officer liability insurance premiums the registrant anticipates paying following the consummation of its initial public offering and until it consummates a business combination.
+
+(3)
+
+This amount represents additional expenses that may be incurred by the Company in connection with the offering over and above those specifically listed above, including distribution and mailing costs.
+
+Item 14. Indemnification of Directors and Officers.
+
+Our amended and restated certificate of incorporation provides that all directors, officers, employees and agents of the registrant shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law.
+
+Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below.
+
+ Section 145. Indemnification of officers, directors, employees and agents; insurance.
+
+(a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person s conduct was unlawful. The termination of any action, suit or 
+
+II-1
+
+proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person s conduct was unlawful.
+
+(b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
+
+(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith.
+
+(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.
+
+(e) Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.
+
+(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office.
+
+(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.
+
+(h) For purposes of this section, references to the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or 
+
+II-2
+
+agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.
+
+(i) For purposes of this section, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to serving at the request of the corporation shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the corporation as referred to in this section.
+
+(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
+
+(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation s obligation to advance expenses (including attorneys fees). 
+
+Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
+
+Paragraph B of Article Ninth of our amended and restated certificate of incorporation provides:
+
+ The Corporation, to the full extent permitted by Section 145 of the GCL, as amended from time to time, shall indemnify all persons whom it may indemnify pursuant thereto. Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which such officer or director may be entitled to indemnification hereunder shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereby. 
+
+Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the Underwriter and the Underwriter has agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act.
+
+Item 15. Recent Sales of Unregistered Securities.
+
+(a) During the past three years, we sold the following shares of common stock without registration under the Securities Act:
+
+Stockholders
+
+ 
+
+Number of
+
+Shares
+
+ 
+
+ 
+
+ 
+
+Fortissimo Capital Fund GP, L.P.
+
+ 
+
+ 
+
+950,000
+
+ 
+
+Michael Chill
+
+ 
+
+ 
+
+50,000
+
+ 
+
+II-3
+
+The shares of Common Stock listed above were issued on December 30, 2005 in connection with our organization. Such issuance was made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended (the Securities Act ). Specifically, such shares were sold to a sophisticated, wealthy individual and to a partnership, each of whom was an accredited investor as defined in Rule 501(a) of the Securities Act. The shares issued to the entity and individual listed above were sold for an aggregate offering price of $25,000, or at a purchase price of $0.025 per share. 
+
+In January 2006, FCF transferred 50,000 of its shares to Yair Seroussi, one of our special advisors. Mr. Seroussi paid the same price for these shares specifically, $0.025 per share or an aggregate of $1,250 as was paid by Fortissimo Capital Fund GP, L.P., ( FCF ) and the other special advisor. The foregoing transfer was made in reliance upon exemptions from registration pursuant to the so-called Section 4(1-1/2) exemption. The foregoing transfer was made by persons or entities other than the company, underwriter or dealer and not involving any public offering. The transfer was made between accredited and sophisticated individuals or entities with no consideration being received by us and no underwriting discounts or commissions being paid with respect to such transfer. Furthermore, the transferee acknowledged that he was acquiring the shares for his own account, for investment purposes only and that he had no present intention of selling or otherwise disposing of the shares in violation of the securities laws of the United States.
+
+In addition, FCF, one of our initial stockholders, has committed to purchase an aggregate of 333,334 units (the Insider Units ) at $6.00 per unit (for an aggregate purchase price of $2,000,004) from us. This purchase will take place on a private placement basis simultaneously with the consummation of our initial public offering. This issuance will be made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act. The obligation to purchase the Insider Units undertaken by FCF was made pursuant to a Subscription Agreement, dated as of January 31, 2006 (which was filed as Exhibit 10.15 to the original Registration Statement on Form S-1). That obligation was made prior to the filing of the Registration Statement, and the only conditions to the obligation undertaken by FCF are conditions outside of the investor s control. Consequently, the investment decision relating to the purchase of the Insider Units was made prior to the filing of the Registration Statement relating to the public offering and therefore constitutes a completed private placement. 
+
+No underwriting discounts or commissions were paid with respect to any of the sales described above.
+
+Item 16. Exhibits and Financial Statement Schedules.
+
+(a) The following exhibits are filed as part of this Registration Statement:
+
+Number
+
+ 
+
+Description
+
+ 
+
+ 
+
+1.1 *
+
+ 
+
+Form of Underwriting Agreement. 
+
+1.2*
+
+ 
+
+Form of Selected Dealers Agreement. 
+
+3.1 *
+
+ 
+
+Form of Second Amended and Restated Certificate of Incorporation. 
+
+3.2*
+
+ 
+
+By-laws. 
+
+4.1*
+
+ 
+
+Specimen Unit Certificate. 
+
+4.2*
+
+ 
+
+Specimen Common Stock Certificate. 
+
+4.3*
+
+ 
+
+Specimen Warrant Certificate.
+
+4.4*
+
+ 
+
+Form of Unit Purchase Option to be granted to the Underwriter. 
+
+4.5*
+
+ 
+
+Form of Warrant Agreement between American Stock Transfer & Trust Company and the Registrant. 
+
+5.1 
+
+ 
+
+Opinion of Proskauer Rose LLP.
+
+10.1*
+
+ 
+
+Letter Agreement, dated January 31, 2006, among the Registrant, EarlyBirdCapital, Inc. and Fortissimo Capital Fund GP, L.P.
+
+10.2*
+
+ 
+
+Letter Agreement, dated January 31, 2006, among the Registrant, EarlyBirdCapital, Inc., Fortissimo Capital Fund L.P., Fortissimo Capital Fund (Israel) L.P. and Fortissimo Capital Fund (Israel -DP), L.P.
+
+10.3*
+
+ 
+
+Letter Agreement, dated January 31, 2006, among the Registrant, EarlyBirdCapital, Inc. and Yair Seroussi.
+
+10.4*
+
+ 
+
+Letter Agreement, dated January 31, 2006, among the Registrant, EarlyBirdCapital, Inc. and Michael Chill.
+
+10.5 
+
+ 
+
+Letter Agreement, dated 
+September 22,
+ 2006, among the Registrant, EarlyBirdCapital, Inc. and Yuval Cohen.
+
+II-4
+
+Number
+
+ 
+
+Description
+
+ 
+
+ 
+
+10.6 
+
+ 
+
+Letter Agreement, dated 
+September 22,
+ 2006, among the Registrant, EarlyBirdCapital, Inc. and Eli Blatt.
+
+10.7 
+
+ 
+
+Letter Agreement, dated 
+September 22,
+ 2006, among the Registrant, EarlyBirdCapital, Inc. and Marc Lesnick.
+
+10.8 
+
+ 
+
+Letter Agreement, dated 
+September 22,
+ 2006, among the Registrant, EarlyBirdCapital, Inc. and Shmoulik Barashi.
+
+10.9 
+
+ 
+
+Letter Agreement, dated 
+September 22,
+ 2006, among the Registrant, EarlyBirdCapital, Inc. and Yochai Hacohen.
+
+10.10 *
+
+ 
+
+Form of Investment Management Trust Agreement between American Stock Transfer & Trust Company and the Registrant. 
+
+10.11*
+
+ 
+
+Form of Stock Escrow Agreement between the Registrant, American Stock Transfer & Trust Company and the Initial Stockholders. 
+
+10.12*
+
+ 
+
+Form of Promissory Note issued to Fortissimo Capital Fund GP, L.P.
+
+10.13 *
+
+ 
+
+Form of Registration Rights Agreement among the Registrant and the Initial Stockholders. 
+
+10.14*
+
+ 
+
+Letter Agreement, dated January 31, 2006, between the Registrant and each of the Initial Stockholders.
+
+10.15(a)*
+
+ 
+
+Subscription Agreement, dated January 31, 2006, between the Registrant and Fortissimo Capital Fund GP, L.P. 
+
+10.15(b)*
+
+ Amendment No. 1 to Subscription Agreement, dated March 10, 2006.
+
+10.16*
+
+ 
+
+Form of Letter Agreement between the Registrant and Fortissimo Capital Management Company Ltd. regarding administrative support.
+
+10.17 
+
+ Letter Agreement, dated August 7, 2006, among the Registrant and Fortissimo Capital Fund GP, L.P.
+
+10.18 
+
+ Form of Indemnification Agreement, dated 
+September 22,
+ 2006, among Fortissimo Capital Fund GP, L.P. and each of the Registrant s officers and directors.
+
+23.1
+
+ 
+
+Consent of Goldstein Golub Kessler LLP.
+
+23.2*
+
+ 
+
+Consent of Proskauer Rose LLP (included in Exhibit 5.1). 
+
+24.1*
+
+ 
+
+Power of Attorney. 
+
+ 
+
+*
+
+Previously filed.
+
+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;
+
+ii.
+
+To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement.
+
+iii.
+
+To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
+
+(2) That, for 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 
+
+II-5
+
+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.
+
+(b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
+
+(c) 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.
+
+(d) The undersigned registrant hereby undertakes that:
+
+(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
+
+(2) For the purpose of determining any liability under the Securities Act 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.
+
+(e) The undersigned registrant hereby undertakes to obtain the agreement from its existing stockholders prior to this offering that such stockholders will waive conversion rights with respect to any shares of common stock owned by them, directly or indirectly, in connection with the vote for a proposed business combination. The undersigned registrant undertakes to file such agreement with the Securities and Exchange Commission by a post-effective amendment to this registration statement. Moreover, the undersigned registrant further undertakes to not allow any of the existing stockholders to exercise any conversion rights in connection with a business combination.
+
+II-6
+
+SIGNATURES
+
+Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 4 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Rosh Ha ayin, Israel, on this 
+22
+ day of 
+September,
+ 2006.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001349426_omrix_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001349426_omrix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..126875de4f9e55aef5001a6acff1e949eb369e34
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001349426_omrix_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the common stock offered hereby will be passed upon for us by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York. Dewey Ballantine LLP, New York, New York is counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001350031_embarq_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001350031_embarq_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bb1e046c4f9eaad90cc8706fbb79d97630bfbe41
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001350031_embarq_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered by Sprint Capital under this prospectus will be passed upon for us by King & Spalding LLP, New York, New York. Certain legal matters relating to this offering will be passed upon for the underwriters by Sullivan & Cromwell LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001350415_alien_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001350415_alien_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..173be666f2a187a427f5f2fb5871202c711a5175
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001350415_alien_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Paul, Hastings, Janofsky & Walker LLP, Costa Mesa, California. As of the date of this prospectus, certain members of, and investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich & Rosati beneficially owned 39,521 shares of common stock, less than 1% of our common stock outstanding as of April 1, 2006.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001350620_restore_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001350620_restore_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0709041bf05bf01cb0223826b5b3af95ef0872ba
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001350620_restore_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Dorsey Whitney LLP will pass upon the validity of the shares of common stock offered by this prospectus. Skadden, Arps, Slate, Meager Flom LLP will act as counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001352276_windsor_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001352276_windsor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e69548bd25d4484203023a741daa5a18e1a0b90b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001352276_windsor_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock that are offered hereby by us and the selling stockholder will be passed upon by Akin Gump Strauss Hauer & Feld LLP. The underwriters have been represented by Cravath, Swaine & Moore LLP and Porter & Hedges, L.L.P.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001352302_geomet-inc_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001352302_geomet-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b30bbb418c730402292f3b691f276621c54f7c42
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001352302_geomet-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered hereby and certain other legal matters in connection with this offering will be passed upon for us by Thompson & Knight LLP, Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001352341_verigy-ltd_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001352341_verigy-ltd_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aec31984e52a11ddf03a91172b90ddbdff0f89a6
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001352341_verigy-ltd_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ordinary shares offered hereby and selected legal matters will be passed upon for us by Baker & McKenzie. Wong & Leow, Singapore. Selected legal matters as to U.S. law in connection with this offering will be passed upon for us by Simpson Thacher & Bartlett LLP, Palo Alto, California. Selected legal matters will be passed upon for the underwriters by Latham & Watkins LLP, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001352591_neg-inc_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001352591_neg-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3d99f58ddcc3f0393f6775938299eec31dc13ddf
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001352591_neg-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001353209_loopnet_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001353209_loopnet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fe3aede5866a912b83db938816cbd4e7522eb3a9
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001353209_loopnet_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered by this prospectus will be passed upon for us by Heller Ehrman LLP, Los Angeles and San Francisco, California which has acted as our counsel in connection with this offering. The underwriters have been represented by Morrison Foerster LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001354217_volcano_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001354217_volcano_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fb8f9a4dec8d323fd6810635425338f6095e73e1
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001354217_volcano_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Reed Smith LLP, San Francisco, California. Morrison Foerster LLP, San Diego, California, is counsel for the underwriters in connection with this offering. We have granted a partner of Reed Smith LLP an option to purchase 18,181 shares of our common stock at an exercise price of $0.33 per share.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001354513_ctc-media_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001354513_ctc-media_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4a910cc88266384304444704c2005df25da04b87
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001354513_ctc-media_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, London, England. Legal matters in connection with this offering will be passed upon for the underwriters by Cleary Gottlieb Steen & Hamilton LLP, London, England.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001355007_cowen_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001355007_cowen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cca6179f7438b5763e79d42c66a2ccd34423d17a
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001355007_cowen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001356212_ryan-beck_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001356212_ryan-beck_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3966d7080e5460bf9d749d45ea1aec471c3daee2
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001356212_ryan-beck_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the issuance of the shares of Class A common stock offered by this prospectus will be passed upon for us by Pitney Hardin LLP, New York, New York. Certain legal matters in connection with the shares of Class A common stock offered by this prospectus will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, New York, New York. Simpson Thacher & Bartlett LLP will rely on the opinion of Pitney Hardin LLP as to matters of New Jersey law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001356792_chg_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001356792_chg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8135f4eef349df034264a1ef0825626295af23de
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001356792_chg_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed on for us by King & Spalding LLP, Houston, Texas. Certain legal matters relating to the common stock offered by this prospectus will be passed on by Kirkland & Ellis LLP, New York, New York, as counsel for the underwriters. Kirkland & Ellis LLP has represented us and certain of the selling stockholders from time to time.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001356804_catalytic_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001356804_catalytic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1f0f0f22feb7b6851ee7a202e9665965d3f3169d
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001356804_catalytic_legal_matters.txt
@@ -0,0 +1 @@
+Release of funds The proceeds held in the trust account are not released until the earlier of the completion of our initial business combination or the failure to complete our initial business combination within the allotted time. The proceeds held in the escrow account are not released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. Amended and Restated Certificate of Incorporation Our amended and restated certificate of incorporation requires that we obtain unanimous consent of our stockholders to amend certain provisions of the restated certificate. However, the validity of unanimous consent provisions under Delaware law has not been settled. A court could conclude that the unanimous consent requirement constitutes a practical prohibition on amendment in violation of the stockholders implicit rights to amend the corporate charter. In that case, certain provisions of the restated certificate would be amendable without unanimous consent and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders, and we will not take any action to waive or amend any of these provisions. Competition In identifying, evaluating, and selecting a target business for a business combination, we may encounter intense competition from other entities having a business objective similar to ours including other blank check companies, private equity groups and leveraged buyout funds, and operating businesses seeking acquisitions. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Moreover, many of these competitors possess greater financial, technical, human, and other resources than us. While we believe there are numerous potential target businesses with which we could combine, our ability to acquire larger target businesses will be limited by our available financial resources. This inherent limitation gives others an advantage in pursuing the acquisition of a target business. In addition: the requirement that we obtain stockholder approval of an initial business combination and audited and perhaps interim-unaudited financial information to be included in the proxy statement to be sent to stockholders in connection with such business combination may delay or prevent the completion of a transaction; the conversion of common stock held by our public stockholders into cash may reduce the resources available to us to fund an initial business combination; our outstanding warrants, and the dilution they potentially represent, may not be viewed favorably by certain target businesses; and the requirement to acquire assets or an operating business that has a fair market value at least equal to 80% of the balance in the trust account (less the deferred underwriting discounts and commissions) at the time of the acquisition could require us to acquire several assets or closely related operating businesses at the same time, all of which sales would be contingent on the closings of the other sales, which could make it more difficult to consummate the business combination. Any of these factors may place us at a competitive disadvantage in successfully negotiating a business combination. Our management believes, however, that a privately held target business may view our status as a well-financed public entity as offering advantages over other entities that have a business objective similar to ours. Total net proceeds of this offering and the private placement $ 97,250,004 $ 111,650,004 Table of Contents Based upon publicly available information, as of August 29, 2006, approximately 68 similarly structured blank check companies have completed initial public offerings since August 2003, and numerous others have filed registration statements. Of these companies, we estimate that only nine companies have consummated a business combination, while 19 other companies have announced that they have entered into definitive agreements or letters of intent with respect to potential business combinations, but have not yet consummated such business combinations. Accordingly, there are approximately 40 blank check companies which we estimate to have more than $3.1 billion in trust, and potentially an additional 38 blank check companies with more than an additional $2.9 billion in trust, that have filed registration statements, and are or will be seeking to enter into a business combination. While some of these companies have specific industries in which they must identify a potential target business, a number of these companies may complete a business combination in any industry they choose. We believe that there are approximately 17 blank check companies that have identified media, digital media, or technology as the industries in which they are seeking to complete a business combination, and another 26 companies that have declared that they intend to target a broader range of companies to effect a business combination, which may include companies in the media, digital media, or technology industries. As a result, we may be subject to competition from these and other companies seeking to complete a business combination within the media, digital media, or technology industries, which, in turn, will result in an increased demand for privately-held companies in these industries. Further, the fact that only nine blank check companies have completed a business combination, and 19 other companies have entered into definitive agreements or letters of intent with respect to potential business combinations, may be an indication that there are a limited number of attractive target businesses available or that many target businesses may not be inclined to enter into a business combination with a publicly-held blank check company. If we succeed in effecting a business combination, there will, in all likelihood, be intense competition from competitors of the target businesses. In particular, certain industries that experience rapid growth frequently attract an increasingly larger number of competitors, including competitors with increasingly greater financial, marketing, technical, human, and other resources than the initial competitors in the industry. The degree of competition characterizing the industry of any prospective target business cannot presently be ascertained. We cannot assure you that, subsequent to a business combination, we will have the resources to compete effectively, especially to the extent that the acquired businesses are in high-growth industries. Facilities We currently maintain our executive offices at 100 Wilshire Boulevard, Suite 1100, Santa Monica, California 90401. These offices are currently provided to Catalytic Capital LLC by Monitor Group in exchange for the right to receive a portion of any fees received by Catalytic Capital LLC, Russ Pillar, Matt Pillar, and Jon May pursuant to a services agreement. Upon the completion of this offering, we expect to maintain our current location. Under our agreement with Catalytic Capital LLC, we will pay a combined total of $7,500 per month for offices and administrative services, including secretarial support, commencing on completion of this offering. The services agreement provides for a term of up to two years, commencing on the effective date of this offering, until the earlier of our (i) consummation of a business combination; (ii) failure to enter into a letter of intent, definitive agreement, or agreement in principle with respect to a business combination during the eighteen-month period immediately following such effective date; and (iii) failure to consummate a business combination during the twenty-four month period immediately following such effective date. The services agreement also may be terminated by either party upon 30 days advance written notice to the other party. This arrangement is memorialized in a letter agreement between us and Catalytic Capital LLC that was not negotiated on an arm s length basis. We believe that based on rents and fees for similar services in the Santa Monica, California area, that the fee which will be charged by Catalytic Capital LLC is at least as favorable as we could have obtained from an unaffiliated party. We consider our existing office space adequate for our current operations. Table of Contents Employees We currently have three officers, one of whom is also a member of our Board of Directors, and intend to hire an additional officer. Although our officers are not obligated to contribute any specific number of hours per week to our business, we expect that following this offering Russ Pillar, Jeff Goldstein, and Matt Pillar will devote a majority of their working time to our business. The amount of time Russ Pillar, Jeff Goldstein, and Matt Pillar will devote to us in any time period will vary based on the availability of suitable target businesses to investigate, the course of negotiations with target businesses, and the due diligence preceding and accompanying a possible business combination. We do not intend to have any full time employees prior to the consummation of a business combination. Periodic Reporting and Financial Information We have registered our securities under the Securities Exchange Act of 1934, as amended, and after this offering will have public reporting obligations, including the filing of annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual report will contain financial statements audited and reported on by our independent registered public accounting firm and our quarterly reports will contain unaudited financial statements. We will not acquire a target business if we cannot obtain audited financial statements based on United States generally accepted accounting principles for such target business. We will provide these financial statements in the proxy solicitation materials sent to stockholders for the purpose of seeking stockholder approval of our initial business combination. Our management believes that the need for target businesses to have, or be able to obtain, audited financial statements may limit the pool of potential target businesses available for acquisition. Legal Proceedings To the knowledge of management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such. Russell I. Pillar 41 Chairman of the Board and Chief Executive Officer Jeffrey D. Goldstein 37 President Matthew G. Pillar 38 Executive Vice President, Chief Financial Officer, and Secretary Dennis S. Bookshester 67 Director Michael T. Felix 52 Director Sharon D. Garrett, Ph.D. 57 Director Jeffrey F. Rayport, Ph.D. 46 Director Russell I. Pillar, Chairman of the Board and Chief Executive Officer. Russ Pillar is Chairman of our Board, Chief Executive Officer, and Co-Founder of Catalytic Capital Investment Corporation, positions he has held since our founding in February 2006. In addition to those responsibilities, he is co-Founder and Managing Director of Catalytic Capital LLC, formerly known as Critical Mass Venture Holdings LLC, and related entities, all investment and advisory vehicles focused on creating value at the intersection of media, technology, and consumer brands, and has served in that and similar capacities since October 1991. From January 2000 until February 2006 he was Viacom and CBS s chief digital media strategy and execution executive, serving in a variety of positions including Senior Advisor, Viacom; President, Viacom Digital Media Group; and President and Chief Executive Officer, CBS Internet Group. From November 1998 to January 2000, he was President, Chief Executive Officer, and a Director of Virgin Entertainment Group. From October 1996 to February 2000, he co-led the leveraged buyout, turnaround, and subsequent public offering of Prodigy, serving in a variety of positions including Vice Chairman of the Board of Directors and President and Chief Executive Officer of Prodigy Internet. He currently serves as a Director of Playboy Enterprises, Inc.; over the past two decades he has served on the Board of Directors of more than a dozen public and private companies. Mr. Pillar, a Crown Fellow at the Aspen Institute, graduated Phi Beta Kappa, cum laude with a Bachelor of Arts in East Asian Studies from Brown University. He is Chairman of the Nominating and Corporate Governance Committee of the Board. Jeffrey D. Goldstein, President. Jeff Goldstein is President of Catalytic Capital Investment Corporation, a position he has held since April 2006. From July 2005 to May 2006, he served as Senior Vice President, Mergers & Acquisitions of Experian Interactive, where he was the lead mergers and acquisitions executive for all of Experian s consumer Internet business that, according to ComScore Media Metrix, is the 8th largest consumer Internet business in the United States as measured by monthly unique visitors, with approximately $600 million in aggregate revenues. From June 2004 to July 2005, he was Senior Vice President, Corporate Development at LowerMyBills, Inc., the sale of which he led to Experian for approximately $380 million. Prior to his tenure at LowerMyBills.com, from May 2000 to May 2004, he held a variety of positions at IAC/InterActiveCorp, including Vice President of Mergers and Acquisitions/Strategic Planning and Vice President and Head of Corporate Development for Ticketmaster. Before joining Ticketmaster, he was an investment banker at Lehman Brothers; he began his career as a corporate attorney at Gibson, Dunn & Crutcher. Mr. Goldstein graduated Phi Beta Kappa with a Bachelor of Arts in Economics from the University of California at Berkeley, earned a J.D. from Columbia Law School where he was a Harlan Fiske Stone Scholar, and earned an M.B.A. from INSEAD. Matthew G. Pillar, Executive Vice President, Chief Financial Officer, and Secretary. Matt Pillar is Executive Vice President, Chief Financial Officer, Secretary, and Co-Founder of Catalytic Capital Investment Corporation, positions he has held since our founding in February 2006. In addition to those responsibilities, he is co-Founder and Managing Director of Catalytic Capital LLC, formerly known as Critical Mass Venture Holdings Table of Contents LLC, an investment and advisory vehicle focused on creating value at the intersection of media, technology, and consumer brands, and has served in that and similar capacities since October 2003. From November 1998 to January 2002, he served as principal digital media analyst at Vulcan Ventures, where he initiated and evaluated more than $600 million in investments and managed Vulcan s fund of funds portfolio, comprised of more than $300 million the firm had invested in 30 private equity and venture capital funds across the United States. Prior to joining Vulcan, he lived in Hong Kong from September 1990 to August 1997 where he served as a founding sales, marketing, and business development executive at STAR TV, Pacific Century Corporate Access, and Pacific Century Group in China, India, Hong Kong, and Singapore. Mr. Pillar has served on the Board of Directors of a number of privately-held emerging growth enterprises. Proficient in Mandarin Chinese, Mr. Pillar graduated with a Bachelor of Arts with Honors in East Asian Studies from Brown University and an M.B.A. with Honors from Harvard University. Mr. Pillar is the brother of Russ Pillar, our Chairman. Dennis S. Bookshester, Director. Dennis Bookshester served as the Chief Executive Officer of Turtle Wax Inc. from January 2004 until May 2005. Prior to his tenure at Turtle Wax, he was the Chief Executive Officer of Fruit of the Loom, Inc. from June 1999 to May 2002. From December 1990 to May 1991, he served as Chief Executive Officer of Zale Corporation, a company principally involved in the retail sale of jewelry. Prior to his tenure at Zale, he was Corporate Vice Chairman, Chairman, and Chief Executive Officer of the Retail Group of Carson Pirie Scott & Co., positions he held from 1984 to 1989. He is Chairman of the Illinois Racing Board, a member of the Board of Directors of both Northwestern Hospital Foundation, and Playboy Enterprises, Inc., and serves on the Visiting Committee of the University of Chicago Graduate School of Business, the University of Chicago Visiting Committee to Biological Sciences, and the Pritzker School of Business. Mr. Bookshester currently serves as a Director of a number of private companies and is a member of the World Presidents Organization and the Chief Executives Organization. Mr. Bookshester is a member of the Audit Committee and Compensation Committee of the Board. Michael T. Felix, Director. Mike Felix has served as President and Chief Executive Officer of AT&T Alascom, a $200 million (revenue) division of AT&T providing voice, data, and managed services to business, government, and consumer markets across the State of Alaska, since February 2002. From April 2000 until July 2001 he was Senior Vice President, Sales and Marketing at Vsys, Inc., a creator of communications software for enabling voice and data transmission over packet (IP) networks. Prior to joining Vsys he held senior executive positions at a variety of technology and telecommunications companies, including serving as one of the founding employees at what is today Sprint Nextel. He graduated with a Bachelor of Science in Electrical Engineering from the University of South Florida, Tampa. Mr. Felix is Chairman of the Audit Committee of the Board. Sharon D. Garrett, Ph.D., Director. Sharon Garrett served as Executive Vice President, Enterprise Services at PacifiCare from December 2002 to January 2006, where her responsibilities included operations, information technology, and business transformation, for which she oversaw an operating budget of $500 million and more than 3,000 employees. Prior to joining PacifiCare, she served as Interim Chief Executive Officer of Zyan Communications, a broadband services provider, from April 2000 to November 2000, and also served as interim executive manager (CEO/COO) for a number of other information technology companies including HQ Global, ChannelPoint Software, and Medschool.com. She served as Senior Vice President and Chief Information Officer of The Walt Disney Company from 1989-2000, where she was responsible for global information technology operations, including an approximately $900 million operating and capital budget and more than 2,200 employees. Prior to her tenure at Disney, she served as Deputy Director of the UCLA Medical Center. Dr. Garrett currently serves on the Board of Directors of Ross Stores, Inc. She graduated with a Bachelor of Arts in Economics, a Masters in Public Health in Statistics and Planning, and Ph.D. in Public Health, all from UCLA. Dr. Garrett is a member of the Audit Committee and Nominating and Corporate Governance Committee of the Board. Jeffrey F. Rayport, Ph.D., Director. Jeffrey Rayport is founder and Chairman of Marketspace, a digital media/e commerce research unit he established in 1998 at global consulting firm Monitor Group. He is also a Senior Advisor to Catalytic Capital LLC. From 1991 to 2000, he was a faculty member at Harvard Business School, where he authored more than 100 case studies on digital media, e commerce, and a variety of related areas and was voted Table of Contents Outstanding Professor in 1997, 1998, and 1999 by the Harvard Business School Students Association. He serves as a Director of several public and private companies including Andrews McMeel Universal (parent of Universal Press Syndicate), GSI Commerce, International Data Group, and ValueClick. He graduated with a Bachelor of Arts, A.M. and Ph.D. from Harvard University and an M. Phil. from the University of Cambridge (U.K.). Dr. Rayport is Chairman of the Compensation Committee of the Board. Senior Advisors We may also from time to time appoint Senior Advisors, which will generally be people who have demonstrated experience in the media, digital media, or technology industries. We currently have two Senior Advisors: John A. Moran, Senior Advisor. Mr. Moran is a Senior Advisor to Catalytic Capital Investment Corporation, a position he has held since our founding in February 2006. He is also a Senior Advisor to Catalytic Capital LLC. He is the retired Chairman of The Dyson-Kissner-Moran Corporation, a private investment company with a historical portfolio of more than 100 businesses engaged in the technology, media, financial services, retailing, and manufacturing industries, among others. He has served either as Chairman and/or President of more than 30 companies over a business career that has spanned more than 50 years. He currently serves on the Board of Directors of Wynn Resorts, Limited and is a member and former director of the World Presidents Organization and the Chief Executives Organization. Kwang-I Yu, Ph.D., Senior Advisor. Dr. Yu is a Senior Advisor to Catalytic Capital Investment Corporation, a position he has held since March 2006. He was the founder, Chairman, and Chief Executive Officer of Paracel, Inc., a leader in high-speed, complex analysis of genomic and text data, which he grew and sold to Celera Genomics in 2000; subsequent to the sale, he served as Senior Vice President and Division General Manager for Celera for two years. Prior to founding Paracel, Dr. Yu held a number of senior technical and management position at TRW, including serving as a TRW Fellow, Division Chief Scientist, and Founder of Coyoteworks, TRW s center for very large-scale computing systems. Dr. Yu has served as a Board member of several public and private technology companies as well as the Keck Graduate Institute of Life Sciences, one of the Claremont Colleges. Dr. Yu graduated with a Bachelor of Science in Physics and Mathematics from the University of Richmond and earned a Ph.D. in Computer Science from the California Institute of Technology. Number and Terms of Directors Our Board of Directors has five directors and is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors, consisting of Jeffrey F. Rayport, Ph.D. and Dennis S. Bookshester, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Michael T. Felix and Sharon D. Garrett, Ph.D., will expire at the second annual meeting. The term of office of the third class of directors, consisting of Russ Pillar, will expire at the third annual meeting. However, if we are subject to Section 2115(b) of the California Corporations Code, all of our directors will be selected at each annual meeting of stockholders and will hold office until the next annual meeting. For a further discussion of the potential application to the Company of Section 2115(b) of the California Corporations Code, see the section entitled Description of Securities Applicability of Provisions of California Corporate Law. Russ Pillar has served on our Board of Directors since our inception in February 2006. Each of our other current directors has served on our Board of Directors since March 2006. Our directors will play a key role in identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating its acquisition. None of our directors has been a principal of or affiliated with a public company or blank check company that executed a business plan similar to our business plan and none of our directors is currently affiliated with such an entity. However, we believe that the skills and expertise of our directors, their collective access to acquisition opportunities and ideas, Table of Contents their contacts, and their transaction expertise should enable them to successfully identify and effect an acquisition, although we cannot assure you that they will, in fact, be able to do so. Director Independence Our Board of Directors has determined that Messrs. Bookshester and Felix and Drs. Garrett and Rayport are independent directors as defined in applicable SEC rules. Committees of the Board of Directors Audit Committee Our Board of Directors has an Audit Committee that reports to the Board of Directors and is composed entirely of independent directors. Messrs. Bookshester and Felix and Dr. Garrett serve as members of our Audit Committee. Mr. Felix serves as the chairman of the Audit Committee. Each member of the Audit Committee is financially literate and our Board of Directors has determined that Mr. Felix qualifies as an audit committee financial expert as defined in applicable SEC rules. The Audit Committee is responsible for meeting with our independent accountants regarding, among other issues, audits, and adequacy of our accounting and control systems. In addition, the Audit Committee will monitor compliance on a quarterly basis with the terms of this offering. If any noncompliance is identified, then the Audit Committee will be charged with the responsibility to immediately take all necessary action to rectify such noncompliance or otherwise cause compliance with the terms of this offering. The Audit Committee approval will be required for any affiliated party transaction. For more information, see the section entitled Proposed Business Amended and Restated Certificate of Incorporation. Compensation Committee The Compensation Committee of the Board of Directors: reviews and approves our overall compensation strategy and policies; reviews and approves corporate performance goals and objectives relevant to the compensation of our executive officers and other senior management; determines the compensation and other terms of employment of our Chief Executive Officer; and reviews and approves the compensation and other terms of employment of the other executive officers and senior management. Two directors comprise the Compensation Committee: Mr. Bookshester and Dr. Rayport. Dr. Rayport will serve as chairman of the Compensation Committee. Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee of the Board of Directors: identifies, reviews and evaluates candidates to serve as directors of the Company (consistent with criteria approved by the Board of Directors); reviews and evaluates incumbent directors; recommends candidates to the Board for election to the Board of Directors; makes recommendations to the Board regarding membership on committees of the Board of Directors; and reviews and assesses our corporate governance principles. Use of net proceeds not held in the trust account and up to $1.0 million of the interest (net of taxes payable) earned on the trust account(2), (4) Legal, accounting, and other expenses attendant to the structuring and negotiation of a business combination $ 400,000 Due diligence and investigation of prospective target businesses(5) 100,000 Legal and accounting fees relating to SEC reporting obligations 150,000 Administrative Fees relating to office space ($7,500 per month for two years) 180,000 Director and officer insurance 250,000 Corporate franchise taxes 300,000 Working capital to cover potential deposits, down payments, exclusivity fees, finder s fees, or similar fees or compensation, reserves, costs, and expenses associated with our dissolution and liquidation, and other miscellaneous expenses not yet identified(6) 120,000 Table of Contents Two directors comprise the Nominating and Corporate Governance Committee: Mr. Pillar and Dr. Garrett. Mr. Pillar will serve as chairman of the Nominating and Corporate Governance Committee. Restricted Stock Purchases On March 1, 2006, we issued 6,250 shares (after giving effect to the reverse stock split) of common stock to each of Messrs. Bookshester and Felix, and Drs. Garrett and Rayport at a per share price of $0.0080 pursuant to restricted stock purchase agreements, which allow us to repurchase the shares subject to the agreements at a price per share equal to the lesser of the price per share paid by the individuals or the fair market value of the shares at the time of repurchase. On March 22, 2006, Catalytic Capital Management Holdings LLC sold an aggregate of 100,000 shares (after giving effect to the reverse stock split) of our common stock held by it to Messrs, Bookshester and Felix and Drs. Garrett and Rayport at purchase price of approximately $0.0080 per share pursuant to stock transfer agreements. Messrs. Bookshester and Felix and Drs. Garrett and Rayport also entered into stock restriction agreements with us that allow us to repurchase the shares purchased by them from Catalytic Capital Management Holdings LLC at a price per share equal to the lesser of the price per share paid by the individuals or the fair market value of the shares at the time of repurchase. These shares shall be released from the right of repurchase over 24 months with fifty percent of the shares being released on the first anniversary of the date of issuance and the remaining shares being released ratably each month for the following 12 months until the right of repurchase has terminated. In the event that the individual s service with us terminates prior to that time, we will have the right to repurchase those shares which have not been released from the right of repurchase within 90 days of such termination. The maximum aggregate cost of repurchasing all of the shares of common stock subject to restricted stock purchase agreements will not exceed $1,000. This repurchase right is designed to ensure the retention of the individuals services to us and to provide appropriate incentives to them. Executive Officer and Director Compensation No compensation of any kind, including finder s and consulting fees, will be paid to any of our officers, directors, Senior Advisors, or existing stockholders, or any of their respective affiliates (except as otherwise set forth herein), for services rendered prior to or in connection with a business combination. However, our officers, directors, Senior Advisors and existing stockholders will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf, such as attending Board of Directors meetings, participating in the offering process, identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of out-of-pocket expenses reimbursable by us and there will be no review of the reasonableness of the expenses by anyone other than our Board of Directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. To the extent such out-of-pocket expenses exceed the available proceeds not deposited in the trust account, such out-of-pocket expenses would not be reimbursed by us unless we complete a business combination. In addition, we intend to retain our existing management and enter into employment or other compensation arrangements with them following a business combination, the terms of which have not yet been determined. Despite our current intention to retain our existing management, and our existing management s current intention to remain actively involved with our business and operations in a management role following our initial business combination, we cannot assure you that our existing management will be retained in any significant role, or at all, and have no ability to determine what remuneration, if any, will be paid to them if they are retained following a business combination. Code of Ethics We will adopt a code of ethics that applies to our officers, directors, and employees. Table of Contents CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior Share Issuances On July 18, 2006, we effected a four-for-five reverse stock split of our common stock. Following the reverse stock split, there were 3,124,998 shares of common stock outstanding. The following share and purchase price per share amounts give effect to the reverse stock split: On March 1, 2006, we issued 3,099,998 shares of our common stock to Catalytic Capital Management Holdings LLC for $24,799.99 in cash at a purchase price of approximately $0.008 per share. On March 22, 2006, Catalytic Capital Management Holdings LLC sold 25% of an aggregate of 100,000 shares of our common stock held by it for $800.00 in cash, or 25,000 shares of common stock to each of Messrs. Bookshester and Felix and Drs. Garrett and Rayport, at a purchase price of approximately $0.008 per share. Catalytic Capital LLC, Jeff Goldstein, and John A. Moran each has an ownership interest in Catalytic Capital Management Holdings LLC. On March 1, 2006, we issued 6,250 shares of our common stock to Mr. Bookshester for $50.00 in cash, at a purchase price of approximately $0.008 per share. As described above, on March 22, 2006, Catalytic Capital Management Holdings LLC sold 25,000 shares of our common stock held by it to Mr. Bookshester for $200.00 in cash, at a purchase price of approximately $0.008 per share. On March 1, 2006, we issued 6,250 shares of our common stock to Mr. Felix for $50.00 in cash, at a purchase price of approximately $0.008 per share. As described above, on March 22, 2006, Catalytic Capital Management Holdings LLC sold 25,000 shares of our common stock held by it to Mr. Felix for $200.00 in cash, at a purchase price of approximately $0.008 per share. On March 1, 2006, we issued 6,250 shares of our common stock to Dr. Garrett for $50.00 in cash, at a purchase price of approximately $0.008 per share. As described above, on March 22, 2006, Catalytic Capital Management Holdings LLC sold 25,000 shares of our common stock held by it to Dr. Garrett for $200.00 in cash, at a purchase price of approximately $0.008 per share. On March 1, 2006, we issued 6,250 shares of our common stock to Dr. Rayport for $50.00 in cash, at a purchase price of approximately $0.008 per share. As described above, on March 22, 2006, Catalytic Capital Management Holdings LLC sold 25,000 shares of our common stock held by it to Dr. Rayport for $200.00 in cash, at a purchase price of approximately $0.008 per share. On March 22, 2006, we entered into an agreement with Russ Pillar, Jeff Goldstein, Matt Pillar, and Jon May pursuant to which such parties agreed to purchase an aggregate of 125,000 units at a purchase price of $8.00 per unit and 645,164 warrants at a purchase price of $1.55 per warrant for an aggregate purchase price of $2,000,004. These units and warrants will be purchased in a private placement pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933. The private placement will occur immediately prior to the completion of this offering. Catalytic Capital Management Holdings LLC will be entitled to make up to two demands that we register these shares, including the shares of common stock included in, or issued upon exercise of the warrants included in, any units purchased by it in the private placement, pursuant to an agreement to be signed prior to or on the date of this prospectus. Catalytic Capital Management Holdings LLC can elect to exercise these registration rights at any time beginning three months prior to the date on which the escrow period applicable to such shares expires. In addition, Catalytic Capital Management Holdings LLC, Messrs. Pillar, Goldstein, Pillar, May, Bookshester, and Felix, and Drs. Garrett and Rayport have certain piggy-back registration rights with respect to these shares on registration statements filed subsequent to such date. We will bear the expenses incurred in connection with the filing of any such registration statements. Table of Contents Conflicts of Interest Investors should be aware of the following potential conflicts of interest: None of our officers and directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating management time among various business activities. In the course of their other business activities, our officers and directors may become aware of investment and business opportunities that may be appropriate for presentation to us as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a complete description of our management s other affiliations, see the previous section entitled Management. In light of our existing stockholders involvement with other media, digital media, and technology businesses and our purpose to complete a business combination with one or more operating businesses in those same industries, we may decide to acquire one or more businesses affiliated with our existing stockholders. Despite our agreement to obtain an opinion from an independent investment banking firm that a business combination with one or more businesses affiliated with our existing stockholders is fair to our stockholders from a financial point of view, potential conflicts of interest may still exist, and as a result, the terms of the business combination may not be as advantageous to our public stockholders as it would be absent any conflicts of interest. Our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. The personal and financial interests of our officers and directors may influence their motivation in identifying and selecting target businesses and completing a business combination in a timely manner. These interests include their shares of our common stock and their indirect ownership of the shares of our common stock held by Catalytic Capital Management Holdings LLC, which will be released escrow prior to six months after a business combination only in limited circumstances, reimbursement of expenses incurred on our behalf if we have insufficient funds for such reimbursement, other than funds maintained in the trust account, possible employment with potential target businesses, a repurchase right in our favor that allows us to repurchase their shares of our stock if the services with us by our independent directors are terminated prior to the consummation of a business combination. Catalytic Capital LLC, an affiliate of Russ Pillar and Matt Pillar, has agreed that, commencing on the effective date of this prospectus through the acquisition of a target business, it will make available to us office space and certain general and administrative services, as we may require from time to time. We have agreed to pay Catalytic Capital LLC or its assignee $7,500 per month for these services. As a result of these affiliations, these individuals will benefit from the transaction to the extent of their interest in Catalytic Capital LLC. However, this arrangement is solely for our benefit and is not intended to provide any of our officers or directors compensation in lieu of a salary. We believe, based on rents and fees for similar services in Santa Monica, California area, that the fee charged by Catalytic Capital LLC is at least as favorable as we could have obtained from an unaffiliated third party. However, as our directors may not be deemed independent, we did not have the benefit of disinterested directors approving this transaction. In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if: the corporation could financially undertake the opportunity; the opportunity is within the corporation s line of business; and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. Total $ 1,500,000 Table of Contents Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to other entities. For example, Russ Pillar has preexisting fiduciary obligations that arise as a result of his affiliation with Playboy Enterprises, Inc.; Dennis Bookshester has preexisting fiduciary obligations that arise as a result of his affiliation with Northwestern Hospital Foundation and Playboy Enterprises, Inc.; Sharon Garrett has preexisting fiduciary obligations that arise as a result of her affiliation with Ross Stores, Inc.; and Jeffrey Rayport has preexisting fiduciary obligations that arise as a result of his affiliation with Andrews McMeel Universal, International Data Group, ValueClick, Inc., and GSI Commerce, Inc. In addition, conflicts of interest may arise when our Board of Directors evaluates a particular business opportunity with respect to the above-listed criteria. Except for the agreement with Catalytic Capital LLC described below, our officers and directors have not agreed to any prioritization in respect of their fiduciary duties and we expect them to prioritize their fiduciary duties to various companies in the order in which they became involved with each company. Thus, our officers and directors may present business combination opportunities to the other entities to which they owe a pre-existing fiduciary duty before presenting such opportunities to us. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor. Our existing stockholders, including all of our officers, directors, and Senior Advisors, have waived their rights to participate in any liquidating distributions occurring upon our failure to complete a business combination with respect to shares of common stock acquired by them prior to this offering, including those shares of common stock included in the units purchased in the private placement. Our existing stockholders will participate in any liquidating distributions with respect to any other shares of common stock acquired by them in connection with or following this offering. In addition, in connection with any vote required for our initial business combination, our existing stockholders have agreed to vote all of the shares of common stock owned by them immediately before the completion of this offering, including those shares of common stock included in the units purchased in the private placement, either for or against a business combination in the same manner that the shares of common stock are voted by our public stockholders. As a result, our existing stockholders will not have any conversion rights with respect to such shares. A stockholder is eligible to exercise its conversion rights only if it votes against the business combination that is ultimately approved and consummated. Catalytic Capital Management Holdings LLC, a stockholder and affiliate, has loaned a total of $200,000 to us for the payment of offering expenses. The loan bears interest at a rate of 3.6% per year and will be payable upon the consummation of this offering. The loan will be repaid out of the proceeds used to pay the offering expenses. Catalytic Capital Management Holdings LLC is managed by Catalytic Capital LLC. We will reimburse our officers, directors, Senior Advisors, and existing stockholders for any out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our Board of Directors or a court of competent jurisdiction if such reimbursement is challenged. To the extent such out-of-pocket expenses exceed the available proceeds not deposited in the trust account, such out-of-pocket expenses would not be reimbursed by us unless we complete a business combination. No compensation or fees of any kind, including finders and consulting fees, will be paid to any of our officers, directors, Senior Advisors, existing stockholders or any of their respective affiliates, other than under the repayment of the $200,000 loan described above, the general and administrative services arrangement with Catalytic Capital LLC for services rendered to us prior to or with respect to the business combination, any amount paid to our independent directors to repurchase the shares of our stock subject to repurchase rights, which amount will not exceed $1,000 in the aggregate, and any reimbursable out-of-pocket expenses payable to our officers and directors. All ongoing and future transactions between us and any of our officers and directors or their respective affiliates, including loans by our officers and directors, will be on terms believed by us to be no less favorable Table of Contents than are available from unaffiliated third parties and such transactions or loans, including any forgiveness of loans, will require prior approval in each instance by a majority of our uninterested independent directors (to the extent we have any) or the members of our Board of Directors who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. On October 2, 2004, Catalytic Capital LLC and its principals, Russ Pillar, Matt Pillar, and Jon May, and Monitor Group, entered into a Services Agreement providing for the provision of certain services and compensation by Monitor Group to Catalytic Capital LLC and its principals for an initial term of three years. These services include investment transaction sourcing, due diligence assistance, and access to and use of Monitor Group s consultants, global partnership network, business intelligence, and intellectual property. In addition, Monitor Group pays each principal of Catalytic Capital LLC monthly cash compensation, permits each principal to participate in Monitor Group s benefit plans available to senior employees of Monitor Group generally, and pays certain fees and expenses incurred by Catalytic Capital LLC in the organization and execution of its normal business activities in return for notice of investments to be made by Catalytic Capital LLC and a percentage of future profits that might be earned by Catalytic Capital LLC and its principals, including a percentage of Catalytic Capital LLC s interest in Catalytic Capital Management Holdings LLC. On May 26, 2006, the Services Agreement was amended to confirm that certain obligations thereunder, including the requirement that Catalytic Capital LLC and its principals provide Monitor Group with consulting opportunities, do not apply to any of our activities. Catalytic Capital LLC, which owns approximately 74.2% of the beneficial interests in, and is the managing member of Catalytic Capital Management Holdings LLC, our initial stockholder, is a private investment and consulting firm owned and operated by Russ Pillar, Matt Pillar, and Jon May, focusing on non-control investments in and/or providing consulting services to consumer-branded companies. As a result, we do not believe that there is a substantial risk of a conflict between our operations and Catalytic Capital LLC s operations other than any time that Russ Pillar and Matt Pillar may need to commit to the professional activities related to Catalytic Capital LLC s operations. Nonetheless to minimize any conflicts or the appearance of a conflict, Catalytic Capital LLC has agreed that, prior to entering into any definitive agreement to invest in or purchase any company or business in the media, digital media, or technology industries and only up until such time as we complete an initial business combination, it will present such investment or purchase opportunity to a committee of our independent directors for our review and shall not enter into such agreement or present such opportunity to any third party until we, through our committee of independent directors, have had a reasonable period of time to determine whether or not to pursue such opportunity. If we decide not to pursue the opportunity presented, Catalytic Capital LLC will be able to pursue the opportunity for its own account or to offer the opportunity to any third party. We consider Russ Pillar, Jeff Goldstein, and Matt Pillar to be our parents and promoters as these terms are defined under the federal securities laws. * Less than 1%. (1) Unless otherwise noted, the business address of each of the following is 100 Wilshire Boulevard, Suite 100, Santa Monica, CA 90401. (2) Catalytic Capital Management Holdings LLC is managed by Catalytic Capital LLC as managing member. Catalytic Capital LLC is managed by Russ Pillar and Matt Pillar as managing members. Catalytic Capital LLC may be deemed to be the beneficial owner of the shares of common stock held by Catalytic Capital Management Holdings LLC and Russ Pillar and Matt Pillar may be deemed to be the beneficial owners of the shares of common stock held by Catalytic Capital LLC. (3) Includes shares issued to Catalytic Capital Management Holdings LLC. See footnote (2) above. (4) Jeff Goldstein may be deemed to beneficially own 556,451 shares of our common stock through his ownership of units of Catalytic Capital Management Holdings LLC. Russ Pillar, Jeff Goldstein, Matt Pillar, and Jon May agreed to purchase an aggregate of 125,000 units and 645,164 warrants from us in a private placement that will occur immediately prior to the completion of this offering. Immediately after this offering and the private placement, Catalytic Capital Management Holdings LLC will beneficially own approximately 19.0% of the issued and outstanding shares of our common stock. Based on this ownership, Russ Pillar and Matt Pillar, as its managers, may be able to effectively exercise control over all matters, other than approval of a business combination, requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. Table of Contents If we increase the size of the offering, we may effect a stock dividend in such amount to maintain the existing stockholders collective ownership, excluding the shares issued in the private placement, at approximately 20% of our issued and outstanding shares of common stock upon consummation of the offering. On or before the date of this prospectus, all of our existing stockholders, including all of our officers, directors and Senior Advisors, will place the shares and warrants they owned before this offering, including the shares and warrants purchased in the private placement, into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death while remaining subject to the escrow agreement, these shares and warrants will not be transferable during the escrow period and will not be released from escrow until six months following the consummation of the initial business combination, unless we were to consummate a transaction after the consummation of the initial business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. The shares of our common stock issued to Messrs. Bookshester and Felix and Drs. Garrett and Rayport were issued pursuant to restricted stock purchase agreements allowing us to repurchase the shares subject to the agreements at a price per share equal to the lesser of the price per share paid by the individuals or the fair market value of the shares at the time of repurchase. These shares shall vest and be released from the right of repurchase over 24 months with fifty percent of the shares vesting on the first anniversary of the date of issuance and the remaining shares vesting ratably each month for the following 12 months until the right of repurchase has terminated. In the event that the individual s service with us terminates prior to that time, we will have the right to repurchase any or all of the unvested shares within 90 days of such termination. The maximum aggregate cost of repurchasing all of the shares of common stock subject to restricted stock purchase agreements will not exceed $1,000. This repurchase right is designed to ensure the retention of the individuals services to us and to provide appropriate incentives to them. In addition, in connection with any vote required for our initial business combination, our existing stockholders, including our officers and directors, have agreed to vote all of the shares of common stock held by them prior to the completion of this offering, including any shares of common stock included in the units purchased in the private placement, either for or against a business combination in the same manner that the shares of common stock are voted by our public stockholders. Our existing stockholders also have agreed that if they acquire shares of common stock in or following consummation of this offering, they will vote all such acquired shares in favor of our initial business combination. Table of Contents DESCRIPTION OF SECURITIES General We are authorized to issue 100,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. As of the date of this prospectus, 3,124,998 shares of common stock are outstanding, held by five record holders and no shares of preferred stock are outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. Each of the common stock and warrants will begin separate trading on the earlier to occur of the expiration of the underwriters option to purchase up to 1,875,000 additional units to cover over-allotments or 60 trading days after the exercise in full or in part by the underwriters of such option. In no event may the common stock and warrants be traded separately until we have filed with the SEC a Current Report on Form 8-K that includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K that includes this audited balance sheet upon the consummation of this offering, which is anticipated to take place three business days after the date of this prospectus. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option, if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K, and if such over-allotment option is exercised after such time, we will file an additional Current Report on Form 8-K including an audited balance sheet reflecting our receipt of the gross proceeds from such exercise of the over-allotment. The Current Report on Form 8-K will be publicly available on the SEC s website at http://www.sec.gov. Common Stock Our stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. In connection with any vote required for our initial business combination, our existing stockholders, including our officers and directors, have agreed to vote all of the shares of common stock held by them prior to the completion of this offering, including any shares of common stock included in the units purchased in the private placement, either for or against a business combination in the same manner that the shares of common stock are voted by our public stockholders. Our existing stockholders also have agreed that if they acquire shares of common stock in or following consummation of this offering, they will vote all such acquired shares in favor of our initial business combination. However, our existing stockholders, officers and directors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 20% of the shares sold in this offering exercise their conversion rights discussed above. Our Board of Directors will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. However, if we are subject to Section 2115(b) of the California Corporations Code, all of our directors will be selected at each annual meeting of stockholders and will hold office until the next annual meeting. For more information, see the section entitled Management Number and Terms of Directors. To the extent that we are subject to Section 2115(b), we will permit cumulative voting in the election of directors if any stockholder properly requests to cumulate his or her votes. See the section entitled Applicability of Provisions of California Corporate Law. If we are required to dissolve and to liquidate prior to a business combination, a public stockholder will be entitled to receive funds from the trust account (including interest earned on its portion of the trust account, Table of Contents net of taxes payable on the interest income of the funds in the trust account). Our existing stockholders, including all of our officers, directors and Senior Advisors, have waived their rights to participate in any liquidating distributions occurring upon our failure to complete a business combination with respect to shares of common stock acquired by them prior to this offering, including those shares of common stock included in the units purchased in the private placement, and have agreed to vote all of their shares in favor of any such plan of liquidation and dissolution. However, our existing stockholders will participate in any liquidating distributions with respect to any other shares of common stock acquired by them in connection with or following this offering. Our stockholders have no conversion, preemptive, or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders, other than our existing stockholders, have the right to have their shares of common stock converted to cash equal to their pro rata share of the trust account if they vote against the business combination and the business combination is approved and completed. Public stockholders who convert their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units. Preferred Stock Our certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our Board of Directors. No shares of preferred stock have been or are being issued or registered in this offering. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust account, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants No warrants are currently outstanding. Each warrant entitles the registered holder to purchase one share of our common stock at a price of $6.00 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of the initial business combination; or one year from the date of this prospectus. The warrants will expire 4 years from the date of this prospectus at 5:00 p.m., New York City time; provided that if, during the period in which the warrants are exercisable, a registration statement under the Securities Act of 1933 relating to the shares of common stock issuable upon exercise of the warrants is not effective, or a prospectus relating to the shares of common stock issuable upon exercise of the warrants is not available for use, the expiration date for the warrants will be extended by the number of days during which such a registration statement was not effective or such prospectus was not available for use. We may call the warrants for redemption, in whole and not in part; at a price of $0.01 per warrant at any time after the warrants become exercisable; upon not less than 30 days prior written notice of redemption to each warrant holder; and if, and only if, (a) the reported last sale price of the common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day before we Table of Contents send the notice of redemption to warrant holders, and (b) a registration statement under the Securities Act of 1933 relating to the shares of common stock issuable upon exercise of the warrants is effective and expected to remain effective to and including the redemption date and a prospectus relating to the shares of common stock issuable upon exercise of the warrants is available for use and expected to remain available for use to and including the redemption date. The right to exercise the warrants will be forfeited unless they are exercised before the date specified in the notice of redemption. From and after the redemption date, the record holder of a warrant will have no further rights except to receive, upon surrender of the warrants, the redemption price. The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger, or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. No warrants will be exercisable unless at the time of exercise a registration statement relating to shares of common stock issuable upon exercise of the warrants is effective and prospectus relating to shares of common stock issuable upon exercise of the warrants is available for use and those shares of common stock have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of our warrants. Holders of the warrants are not entitled to net cash settlement and the warrants may only be settled by delivery of shares of our common stock and not cash. Under the terms of a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us, we have agreed to use our reasonable best efforts to maintain an effective registration statement and a prospectus available for use relating to common stock issuable upon exercise of the warrants until the expiration of the warrants, and to take such action as is necessary to qualify the common stock issuable upon exercise of the warrants for sale in those states in which this offering was initially qualified. However, we cannot assure you that we will be able to do so. We have no obligation to settle the warrants in the absence of an effective registration statement or a prospectus available for use. Warrantholders sole remedy for our failure to maintain an effective registration statement or a prospectus available for use is an extension of the expiration date for the warrants. Notwithstanding any extension of the expiration date, the warrants may never become exercisable if we never comply with these registration requirements. In any case, the warrants may be deprived of value and the market for the warrants may be limited if a registration statement relating to the common stock issuable upon the exercise of the warrants is not effective, a prospectus relating to the common stock issuable upon the exercise of the warrants is not available for use or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. Currently, the Company has registered the sale of securities (including the issuance of shares of common stock upon exercise of the warrants) or is able to rely on exemptions from state registration requirements in Colorado, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Iowa, Louisiana, Minnesota, Nebraska, New York, Rhode Island, Wisconsin and Wyoming. The Company is not obligated and does not intend to register such exercise in any other state. If you are a resident of Alabama, Table of Contents Alaska, Arizona, Arkansas, California, Connecticut, Georgia, Idaho, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington or West Virginia, the Company may not be able to issue to you shares of common stock upon the exercise of warrants. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. Private Placement Warrants The warrants issued in the private placement (including warrants included in the private placement units) will be identical to the warrants included in the units to be sold and issued in this offering, except that upon a redemption of warrants, Russ Pillar, Jeff Goldstein, Matt Pillar, and Jon May will have the right to exercise those warrants on a cashless basis. Exercising the warrants on a cashless basis means that in lieu of paying the aggregate exercise price for the shares of common stock being purchased upon exercise of the warrant in cash, the holder will forfeit a number of shares underlying the warrant with a market value equal to such aggregate exercise price. Accordingly, we would not receive additional proceeds to the extent the warrants are exercised on a cashless basis. Warrants included in the units issued in this offering will not be exercisable on a cashless basis. The private placement warrants will not be exercisable at any time when a registration statement is not effective and a prospectus is not available for the public warrantholders. Dividends We have not paid any dividends on our common stock to date. It is the present intention of our Board of Directors to retain all earnings, if any, for use in our business operations and, accordingly, our Board of Directors does not anticipate declaring any dividends in the foreseeable future. The payment of dividends, if any, will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. We do not intend to pay dividends prior to the completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then Board of Directors. Applicability of Provisions of California Corporate Law Although we are incorporated in Delaware, we may be subject to Section 2115(b) of the California Corporations Code, which imposes various requirement of California corporate law on non-California corporations if they have characteristics of ownership and operations indicating significant contacts with California. Public companies listed or qualified for trading on a recognized national securities exchange, such as the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market, are generally exempt from Section 2115(b). However, because our securities are not listed or qualified for trading on such an exchange, we may subject to the Section 2115(b). Among the key provisions of California corporate law that may apply to us is the right of our stockholders to cumulate votes in the election of directors, limitations on the effectiveness of super-majority voting provisions contained in a corporation s charter documents and limitations on a corporation s ability to have a staggered Board of Directors. In May 2005, the Delaware Supreme Court in Vantage Point Venture Partners 1996 v. Examen, Inc. held that Section 2115(b) violates the internal affairs doctrine and thus does not apply to Delaware corporations. If followed by California courts, this ruling would mean that the cumulative voting requirements and other sections of the California Corporations Code do not apply to us. However, until the impact the of the Delaware Supreme Court s decision has become clear, we will permit cumulative voting in the election of directors if any stockholder properly requests to cumulate his or her votes. In such a case, the stockholder will be entitled to as many votes as equals the number of shares of common stock held by such stockholder multiplied by the number of directors to be elected, and the stockholder will be permitted to cast all of such votes for a single nominee or to distribute these votes among two or more nominees. In addition, certain provisions of California law limit the effectiveness of supermajority voting provisions to a period of two years from the filing of the most recent Table of Contents CAPITALIZATION The following table sets forth our capitalization at August 15, 2006 and as adjusted to give effect to a four-for-five reverse stock split effected on July 18, 2006, the sale of our units and the application of the estimated net proceeds derived from the sale of our units in this offering and the sale of units and warrants in the private placement: August 15, 2006 Table of Contents charter amendment or certificate of determination that adopted or readopted the super majority voting provision, and these provisions may also apply to us as a result of Section 2115(b). Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is Continental Stock Transfer & Trust Company. Shares Eligible for Future Sale Immediately after the completion of this offering and the private placement, we will have 15,749,998 shares of common stock outstanding, or 17,624,998 shares if the underwriters over-allotment option is exercised in full. Of these shares, the 12,500,000 shares sold in this offering, or 14,375,000 shares if the over-allotment option is exercised in full, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining 3,249,998 shares are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. All of those shares are subject to an escrow agreement and will not be transferable until six months after a business combination and will only be transferred prior to that date subject to certain limited exceptions. None of those shares will be eligible for resale under Rule 144 prior to March 6, 2008. For more information about these exceptions, see the section entitled Principal Stockholders. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1% of the number of shares of common stock then outstanding, which will equal 157,500 shares immediately after this offering and the private placement (or 176,250 if the underwriters exercise their over-allotment option); and the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. SEC position on Rule 144 sales The SEC has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act of 1933 when reselling the securities of a blank check company. Accordingly, the SEC believes that those securities can be resold only through a registered offering and that Rule 144 would not be available for those resale transactions despite technical compliance with the requirements of Rule 144. Registration rights Catalytic Capital Management Holdings LLC will be entitled to make up to two demands that we register the 2,999,998 shares of common stock held by it pursuant to an agreement to be signed prior to the date of this prospectus. Catalytic Capital Management Holdings LLC can elect to exercise these registration rights at any time beginning on the date three months prior to the date on which the escrow period applicable to such shares expires, although it may not sell or otherwise transfer any of those securities until the date that is six months after the date of a business acquisition. In addition, our other existing stockholders and private placement investors have certain piggy-back registration rights with respect to the shares held by them on registration statements filed on or subsequent to such date. We will bear the expenses incurred in connection with the filing of any such registration statements. Actual The underwriters have agreed to purchase all of the units sold under the purchase agreement if any of these units are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The underwriters are offering the units, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the units, and other conditions contained in the purchase agreements, such as the receipt by the underwriters of officer s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel, or modify offers to the public, and to reject orders in whole or in part. Determination of Offering Price We have been advised by the representative that the underwriters propose to offer the units to the public at the initial offering price set forth on the cover page of this prospectus. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business in the media, digital media, or technology industry at attractive values; our capital structure; an assessment of our management of companies in the media, digital media, or technology industry and their experience in identifying acquisition targets and structuring acquisitions; As Adjusted (1) Excludes deferred underwriting discounts and commissions equal to 3.0% of the gross proceeds, or $3,000,000 ($3,450,000 if the underwriters overallotment option is exercised in full), which will be deposited in the trust account and which the underwriters have agreed to defer until the consummation of our initial business combination. These funds, less the amounts the underwriters have agreed to forego with respect to any shares public stockholders convert into cash pursuant to their conversion rights, will be released to the underwriters upon our consummation of a business acquisition. The expenses of the offering, not including the underwriting discount, are estimated at $750,000 and are payable by us. Overallotment Option We have granted options to the underwriters to purchase up to 1,875,000 additional units at the public offering price less the underwriting discount. The underwriters may exercise these options for 45 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise these options, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional units proportionate to that underwriter s initial amount reflected in the above table. Escrow of Existing Stockholders Shares and Warrants On or before the date of this Prospectus, all of our existing stockholders, including all of our officers, directors, and Senior Advisors, will place the shares and warrants they owned before this offering, including the shares and warrants purchased in the private placement, into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death while remaining subject to the escrow agreement, these shares and warrants will not be transferable during the escrow period and will not be released from escrow until six months following the consummation of the initial business combination, unless we were to consummate a transaction after the consummation of the initial business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, Note payable to stockholders $ 200,000 $ Table of Contents securities or other property. As a result, our existing stockholders will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Maxim Group LLC, and Merriman Curhan Ford & Co., directly or indirectly, prior to the release of the shares and warrants from escrow: offer, pledge, sell, or contract to sell any units, common stock, or warrants; sell any option or contract to purchase any units, common stock, or warrants; purchase any option or contract to sell any units, common stock, or warrants; grant any option, right, or warrant for the sale of any units, common stock, or warrants; lend or otherwise dispose of or transfer any units, common stock, or warrants; request or demand that we file a registration statement related to the units, common stock, or warrants, except as set forth above under the caption Shares Eligible for Future Sale Registration Rights; or enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any units, common stock, or warrants whether any such swap or transaction is to be settled by delivery of units or other securities, in cash or otherwise. This escrow applies to units, common stock, or warrants and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It does not, however, apply to units, common stock, or warrants purchased by these individuals and entities in the secondary market. State Blue Sky Information We will offer and sell the units to retail customers only in Colorado, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Iowa, Louisiana, Minnesota, Nebraska, New York, Rhode Island, Wisconsin and Wyoming. In the District of Columbia, Hawaii, Iowa, Louisiana, Minnesota, Nebraska, and New York, we have relied on exemptions from the state registration requirements. In the other states, we have applied to have the units registered for sale and will not sell the units to retail customers in these states unless and until such registration is effective (including in Colorado, pursuant to 11-51-302(6) of the Colorado Revised Statutes). If you are not an institutional investor, you may purchase our securities in this offering only in the jurisdictions described directly above. Institutional investors in every state except in Idaho may purchase the units in this offering pursuant to exemptions under the Blue Sky laws of various states. The definition of an institutional investor varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. We will file periodic and annual reports under the Securities Exchange Act of 1934. Therefore, under the National Securities Markets Improvement Act of 1996, the resale of the units, from and after the effective date, and the common stock and warrants comprising the units, once they become separately transferable, are exempt from state registration requirements. However, states are permitted to require notice filings and collect fees with regard to these transactions, and a state may suspend the offer and sale of securities within such state if any such required filing is not made or fee is not paid. Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Dakota, Utah, the Virgin Islands, Virginia, Washington, West Virginia, Wisconsin, and Wyoming either do not presently require any notice filings or fee payments or have not yet issued rules or regulations indicating whether notice filings or fee payments will be required. The District of Columbia, Illinois, Maryland, Michigan, Montana, New Hampshire, North Dakota, Oregon, Puerto Rico, Rhode Island, South Carolina, Tennessee, Texas, and Vermont currently permit the resale of the units, and the common stock and warrants comprising the units, once they become separately transferable, if the proper notice filings have been submitted and the required fees have been paid. Table of Contents As of the date of this prospectus, we have not determined in which, if any, of these states we will submit the required filings or pay the required fee. Additionally, if any of these states that has not yet adopted a statute relating to the National Securities Markets Improvement Act adopts such a statute in the future requiring a filing or fee or if any state amends its existing statutes with respect to its requirements, we would need to comply with those new requirements in order for the securities to continue to be eligible for resale in those jurisdictions. Under the National Securities Markets Improvement Act, the states retain the jurisdiction to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with the sale of securities. Although we are not aware of a state having used these powers to prohibit or restrict resales of securities issued by blank check companies generally, certain state securities commissioners view blank check companies unfavorably and might use these powers, or threaten to use these powers, to hinder the resale of securities of blank check companies in their states. Aside from the exemption from registration provided by the National Securities Markets Improvement Act, we believe that the units, from and after the effective date, and the common stock and warrants comprising the units, once they become separately transferable, may be eligible for sale on a secondary market basis in various states based on the availability of another applicable exemption from state registration requirements, in certain instances subject to waiting periods, notice filings or fee payments. Price Stabilization, Short Positions, and Penalty Bids Until the distribution of the units is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representative may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix, or maintain that price. If the underwriters create a short position in the units in connection with the offering, i.e., if they sell more units than are listed on the cover of this prospectus, the representative may reduce that short position by purchasing units in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option described above. Purchases of the units to stabilize its price or to reduce a short position may cause the price of the units to be higher than it might be in the absence of such purchases. The representative may also impose a penalty bid on underwriters and selling group members. This means that if the representative purchase units in the open market to reduce the underwriter s short position or to stabilize the price of such units, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those units. The imposition of a penalty bid may also affect the price of the units in that it discourages resales of those units. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the representative or the lead managers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. Pursuant to Regulation M promulgated under the Securities Exchange Act of 1934, the distribution will end and this offering will be completed when all of the units have been distributed and after any stabilization arrangements in connection with the distribution of the units have been terminated by the underwriters. Since the underwriters have agreed that they may only exercise the over-allotment option to cover the underwriting syndicate s actual short position, if any, exercise of the over-allotment option by the underwriters will not affect the completion of the distribution. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make in this respect. Table of Contents LEGAL MATTERS Cooley Godward LLP, Palo Alto, California, will pass upon the validity of the securities offered in this prospectus for us. Certain legal matters with respect to this offering will be passed upon for the underwriters by Sidley Austin LLP, New York, New York.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001359059_crossfire_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001359059_crossfire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..682c5b5846ca3a6f54a4bea04efe6bc3bdcc6286
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001359059_crossfire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Davies Ward Phillips & Vineberg LLP, New York, New York. Gersten Savage LLP is acting as counsel for the underwriters in this offering.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001359827_hyco_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001359827_hyco_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b75d7e3a26fbbd3161b1040f7ce2d8944a7f8c43
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001359827_hyco_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered hereby will be passed upon for us by O Melveny & Myers LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Mayer, Brown, Rowe & Maw LLP, Chicago, Illinois.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001360395_vs-direct_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001360395_vs-direct_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1cd02a213a7d70aa8a61e5360a3019bafa72c94b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001360395_vs-direct_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by Kirkland & Ellis LLP, New York, New York. Certain partners of Kirkland & Ellis LLP collectively indirectly hold less than 1% of each of the common stock and preferred stock of VS Holdings, Inc., our parent company.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001360602_centertain_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001360602_centertain_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aa439e56eeee77c569f5ec9982f15c0e37ab1e90
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001360602_centertain_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and guarantees will be passed upon for us by Latham & Watkins LLP, New York, New York. The due authorization by certain guarantors of their guarantees under the laws of their respective states of organization will be passed upon for us by Quarles & Brady Streich Lang LLP, Cohn Birnbaum & Shea P.C., Hackman Hulett & Cracraft, LLP, Ballard Spahr Andrews & Ingersoll, LLP, Ropes & Gray LLP, Warner Norcross & Judd LLP, Lathrop & Gage L.C., Porter, Wright, Morris & Arthur LLP, and Fulbright & Jaworski LLP.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001361561_santana_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001361561_santana_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001361561_santana_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001361859_el-pollo_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001361859_el-pollo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..caee4a41873fbf2b1052a9db9867e711eb301545
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001361859_el-pollo_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York and for the underwriters by Shearman & Sterling LLP, New York, New York. Certain partners of Skadden, Arps, Slate, Meagher & Flom LLP are, directly or indirectly, investors in Trimaran Fund II, L.L.C., an affiliate of Trimaran, and certain affiliated funds of Trimaran.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001362108_yam_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001362108_yam_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..60f0a7fd3959c376f8ed6bfbdbc009956ff5bcc0
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001362108_yam_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our Class A common stock offered by this prospectus will be passed upon for us by Wilson Sonsini Goodrich Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Fenwick West LLP, Mountain View, California.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001363381_hiland_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001363381_hiland_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6916436fd6dcc9d1c294c246f55663996a0d36d7
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001363381_hiland_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common units will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in connection with the common units offered hereby will be passed upon for the underwriters by Baker Botts L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001363619_jwh_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001363619_jwh_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6390200d6a3f46dd7baf7a9afb9705e020ee2ba8
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001363619_jwh_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters in connection with the offering of the units, including the discussion of the material federal income tax considerations, have been passed upon for the Fund and JWH by Cadwalader, Wickersham & Taft LLP, One World Financial Center, New York, New York 10281. Cadwalader, Wickersham & Taft LLP also has acted as counsel for JWH Securities, Inc. in connection with the offering of units. Cadwalader, Wickersham & Taft LLP may advise JWH with respect to its responsibilities as general partner of, and with respect to matters relating to, the Fund.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001363908_hawkeye_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001363908_hawkeye_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..577ccc9a991f661e55143ea15b2e0811d2f95794
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001363908_hawkeye_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities issued in this offering will be passed upon for us by Gibson, Dunn & Crutcher LLP, New York, NY. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, NY.
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diff --git a/parsed_sections/legal_matters/2006/CIK0001363985_gw_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001363985_gw_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b12cad834a58c676dc482ad6a41f894715b151a9
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001363985_gw_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the guarantee, the junior subordinated debentures and certain matters relating thereto will be passed upon on our behalf by King Spalding LLP. Certain matters of Delaware law relating to the validity of the trust preferred securities, the enforceability of the declaration and the creation of the trust will be passed upon on behalf of us and the trust by Richards, Layton Finger, P.A., special Delaware counsel to us and the trust. Certain legal matters will be passed upon on behalf of the underwriters by Hunton Williams LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001365295_hostopia_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001365295_hostopia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ed7c701fd7cedb94b5d0253196dbb2a600ca6a65
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001365295_hostopia_legal_matters.txt
@@ -0,0 +1,7141 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the shares of common stock offered hereby will be passed upon for us by Dorsey & Whitney LLP. Certain matters regarding
+Canadian law will be passed upon for us by Gowling Lafleur Henderson LLP, and for the underwriters by Cassels Brock & Blackwell LLP. 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The consolidated financial statements for the years ended March 31, 2006, 2005 and 2004 included in this prospectus have been so included in reliance on
+the report of KPMG LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. 
+
+95
+
+ 
+
+ 
+ 
+
+WHERE YOU CAN FIND ADDITIONAL INFORMATION 
+ 
+
+ We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to
+the shares of common stock offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information set forth in the registration statement
+or the exhibits and schedules filed therewith. For further information with respect to us and the common stock offered by this prospectus, please see the registration statement and the exhibits and
+schedules filed with the registration statement. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration
+statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration
+statement. A copy of the registration statement and the exhibits and schedules filed with the registration statement may be inspected without charge at the public reference room maintained by the SEC,
+located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the
+payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also
+maintains an Internet Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the Website
+is www.sec.gov. 
+
+96
+
+ 
+
+ 
+ 
+
+Index to Financial Statements 
+ 
+
+ 
+
+ 
+Page
+
+Report of Independent Registered Public Accounting Firm
+ 
+F-2
+
+Consolidated Balance Sheets
+ 
+F-3
+
+Consolidated Statements of Operations
+ 
+F-4
+
+Consolidated Statements of Stockholders' Equity (Deficiency)
+ 
+F-5
+
+Consolidated Statements of Cash Flows
+ 
+F-6
+
+Notes to the Consolidated Financial Statements
+ 
+F-7
+
+F-1
+
+ 
+ 
+ 
+
+REPORT OF INDEPENDENT REGISTERED
+ PUBLIC ACCOUNTING FIRM 
+ 
+
+To
+the Board of Directors and Stockholders of Hostopia.com Inc. 
+
+ We
+have audited the accompanying consolidated balance sheets of Hostopia.com Inc. as of March 31, 2006 and 2005, and the related consolidated statements of operations,
+stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended March 31, 2006. These consolidated financial statements are the responsibility
+of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 
+
+ We
+conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
+audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
+disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
+statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+
+ In
+our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hostopia.com Inc. as of
+March 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2006, in conformity with
+U.S. generally accepted accounting principles. 
+
+/s/ KPMG LLP 
+
+Toronto,
+Canada
+
+June 26, 2006, except as to note 16
+
+which is as of September 8, 2006 
+
+F-2
+
+ 
+
+ 
+ 
+
+HOSTOPIA.COM INC. 
+ 
+ CONSOLIDATED BALANCE SHEETS 
+ 
+ (Expressed in U.S. dollars) 
+ 
+
+ 
+
+ 
+March 31,
+ 
+ 
+
+ 
+
+ 
+
+ 
+June 30,
+
+2006
+ 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+ 
+
+Assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Current assets:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Cash and cash equivalents
+ 
+$
+3,038,217
+ 
+$
+1,897,230
+ 
+$
+3,604,043
+ 
+
+ 
+Trade accounts receivable, net of allowance for doubtful accounts of $48,650 (2005 $54,316); (June 30, 2006 $76,107)
+ 
+ 
+1,568,103
+ 
+ 
+625,087
+ 
+ 
+1,379,785
+ 
+
+ 
+Deferred tax assets (note 7)
+ 
+ 
+83,000
+ 
+ 
+70,000
+ 
+ 
+83,000
+ 
+
+ 
+Prepaid expenses
+ 
+ 
+268,969
+ 
+ 
+223,289
+ 
+ 
+357,978
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total current assets
+ 
+ 
+4,958,289
+ 
+ 
+2,815,606
+ 
+ 
+5,424,806
+ 
+
+Property and equipment, net of accumulated amortization of $4,273,828
+
+(2005 $2,810,338) (June 30, 2006 $4,656,573) (note 3)
+ 
+ 
+3,173,715
+ 
+ 
+2,376,268
+ 
+ 
+3,044,287
+ 
+
+Other assets
+ 
+ 
+60,699
+ 
+ 
+23,308
+ 
+ 
+61,829
+ 
+
+Intangible assets, net of accumulated amortization of $842,272 (2005 $510,030) (June 30, 2006 $1,000,694) (note 4)
+ 
+ 
+1,608,605
+ 
+ 
+596,423
+ 
+ 
+1,456,093
+ 
+
+Deferred tax assets (note 7)
+ 
+ 
+481,000
+ 
+ 
+1,108,000
+ 
+ 
+552,000
+ 
+
+Deferred initial public offering costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+616,595
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total assets
+ 
+$
+10,282,308
+ 
+$
+6,919,605
+ 
+$
+11,155,610
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Liabilities and Stockholders' Equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Current liabilities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Accounts payable
+ 
+$
+272,456
+ 
+$
+281,272
+ 
+$
+564,543
+ 
+
+ 
+Accrued liabilities
+ 
+ 
+511,525
+ 
+ 
+393,175
+ 
+ 
+684,962
+ 
+
+ 
+Payroll and other taxes payable
+ 
+ 
+25,881
+ 
+ 
+32,262
+ 
+ 
+14,204
+ 
+
+ 
+Income taxes payable
+ 
+ 
+155,000
+ 
+ 
+ 
+ 
+ 
+66,000
+ 
+
+ 
+Current portion of deferred lease inducements (note 12)
+ 
+ 
+79,900
+ 
+ 
+29,443
+ 
+ 
+79,900
+ 
+
+ 
+Deferred revenue
+ 
+ 
+923,206
+ 
+ 
+588,795
+ 
+ 
+939,698
+ 
+
+ 
+Current portion of long-term liability (note 2(a))
+ 
+ 
+260,000
+ 
+ 
+ 
+ 
+ 
+260,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total current liabilities
+ 
+ 
+2,227,968
+ 
+ 
+1,324,947
+ 
+ 
+2,609,307
+ 
+
+Deferred lease inducements (note 12)
+ 
+ 
+298,538
+ 
+ 
+105,503
+ 
+ 
+286,410
+ 
+
+Long-term liability (note 2(a))
+ 
+ 
+243,639
+ 
+ 
+ 
+ 
+ 
+212,430
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total liabilities
+ 
+ 
+2,770,145
+ 
+ 
+1,430,450
+ 
+ 
+3,108,147
+ 
+
+Series A redeemable, convertible preferred shares (note 8):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Authorized:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+10,000,000 Series A redeemable, convertible preferred shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Issued and outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+2,127,658 Series A shares, redeemable at $2.35 per share
+ 
+ 
+5,170,448
+ 
+ 
+5,055,656
+ 
+ 
+5,199,529
+ 
+
+Stockholders' equity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Capital stock (note 9):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Authorized:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+30,000,000 common shares, par value $0.0001
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Issued and outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+4,032,336 common shares
+ 
+ 
+216,362
+ 
+ 
+216,362
+ 
+ 
+216,362
+ 
+
+ 
+Additional paid-in capital
+ 
+ 
+3,384,339
+ 
+ 
+3,499,131
+ 
+ 
+3,386,178
+ 
+
+ 
+Deferred stock-based compensation
+ 
+ 
+(26,179
+)
+ 
+(46,135
+)
+ 
+ 
+ 
+
+ 
+Accumulated other comprehensive loss
+ 
+ 
+(43,881
+)
+ 
+(43,881
+)
+ 
+(43,881
+)
+
+ 
+Deficit
+ 
+ 
+(1,188,926
+)
+ 
+(3,191,978
+)
+ 
+(710,725
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total stockholders' equity
+ 
+ 
+2,341,715
+ 
+ 
+433,499
+ 
+ 
+2,847,934
+ 
+
+Commitments, contingencies and guarantees (note 13)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Subsequent event (note 16)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total liabilities and stockholders' equity
+ 
+$
+10,282,308
+ 
+$
+6,919,605
+ 
+$
+11,155,610
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+On behalf of the Board: 
+
+/S/ COLIN CAMPBELL
+
+Director
+
+/S/ ROBERT KIDD
+
+Director
+
+See accompanying notes to consolidated financial statements. 
+
+F-3
+
+ 
+ 
+ 
+
+ HOSTOPIA.COM INC. 
+ 
+ CONSOLIDATED STATEMENTS OF OPERATIONS 
+ 
+ (Expressed in U.S. dollars, except per share amounts) 
+ 
+
+ 
+
+ 
+Years Ended March 31,
+ 
+Three Months Ended June 30,
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+2006
+ 
+2005
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+Revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Webhosting and applications services
+ 
+$
+17,295,329
+ 
+$
+13,351,322
+ 
+$
+8,268,710
+ 
+$
+5,219,420
+ 
+$
+3,912,166
+
+ 
+Other services
+ 
+ 
+661,578
+ 
+ 
+953,147
+ 
+ 
+621,411
+ 
+ 
+182,116
+ 
+ 
+159,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total revenues
+ 
+ 
+17,956,907
+ 
+ 
+14,304,469
+ 
+ 
+8,890,121
+ 
+ 
+5,401,536
+ 
+ 
+4,071,166
+
+Cost of revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Webhosting and application services
+ 
+ 
+1,756,263
+ 
+ 
+1,945,516
+ 
+ 
+1,596,295
+ 
+ 
+562,772
+ 
+ 
+385,733
+
+ 
+Other services
+ 
+ 
+246,353
+ 
+ 
+397,168
+ 
+ 
+229,757
+ 
+ 
+84,716
+ 
+ 
+58,198
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total cost of revenues
+ 
+ 
+2,002,616
+ 
+ 
+2,342,684
+ 
+ 
+1,826,052
+ 
+ 
+647,488
+ 
+ 
+443,931
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+15,954,291
+ 
+ 
+11,961,785
+ 
+ 
+7,064,069
+ 
+ 
+4,754,048
+ 
+ 
+3,627,235
+
+Expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Sales and marketing(a)
+ 
+ 
+3,898,904
+ 
+ 
+3,012,065
+ 
+ 
+2,269,062
+ 
+ 
+1,202,350
+ 
+ 
+1,052,012
+
+ 
+Research and development(a)
+ 
+ 
+2,107,626
+ 
+ 
+2,167,822
+ 
+ 
+1,379,827
+ 
+ 
+712,485
+ 
+ 
+489,218
+
+ 
+Project management(a)
+ 
+ 
+1,393,215
+ 
+ 
+826,469
+ 
+ 
+585,008
+ 
+ 
+416,458
+ 
+ 
+313,712
+
+ 
+Technical support(a)
+ 
+ 
+2,258,511
+ 
+ 
+1,518,443
+ 
+ 
+784,137
+ 
+ 
+678,876
+ 
+ 
+501,166
+
+ 
+General and administrative(a)
+ 
+ 
+1,451,251
+ 
+ 
+1,149,621
+ 
+ 
+1,277,481
+ 
+ 
+391,319
+ 
+ 
+332,556
+
+ 
+Amortization of intangible assets
+ 
+ 
+332,242
+ 
+ 
+265,117
+ 
+ 
+232,914
+ 
+ 
+158,422
+ 
+ 
+58,783
+
+ 
+Amortization of property and equipment
+ 
+ 
+1,463,490
+ 
+ 
+969,148
+ 
+ 
+657,897
+ 
+ 
+398,260
+ 
+ 
+333,735
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+12,905,239
+ 
+ 
+9,908,685
+ 
+ 
+7,186,326
+ 
+ 
+3,958,170
+ 
+ 
+3,081,182
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Income (loss) before the undernoted
+ 
+ 
+3,049,052
+ 
+ 
+2,053,100
+ 
+ 
+(122,257
+)
+ 
+795,878
+ 
+ 
+546,053
+
+Interest income
+ 
+ 
+27,566
+ 
+ 
+6,023
+ 
+ 
+1,965
+ 
+ 
+21,529
+ 
+ 
+4,147
+
+Interest (expense)
+ 
+ 
+(4,566
+)
+ 
+(21,326
+)
+ 
+(24,097
+)
+ 
+(4,206
+)
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Income (loss) before income taxes
+ 
+ 
+3,072,052
+ 
+ 
+2,037,797
+ 
+ 
+(144,389
+)
+ 
+813,201
+ 
+ 
+550,200
+
+Income taxes (recovery) (note 7):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Current
+ 
+ 
+455,000
+ 
+ 
+777,058
+ 
+ 
+ 
+ 
+ 
+406,000
+ 
+ 
+187,000
+
+ 
+Deferred
+ 
+ 
+614,000
+ 
+ 
+(1,955,058
+)
+ 
+ 
+ 
+ 
+(71,000
+)
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+1,069,000
+ 
+ 
+(1,178,000
+)
+ 
+ 
+ 
+ 
+335,000
+ 
+ 
+187,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net income (loss)
+ 
+$
+2,003,052
+ 
+$
+3,215,797
+ 
+$
+(144,389
+)
+$
+478,201
+ 
+$
+363,200
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net income (loss) per share (note 11):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Basic
+ 
+$
+0.47
+ 
+$
+0.77
+ 
+$
+(0.06
+)
+$
+0.11
+ 
+$
+0.08
+
+ 
+Diluted
+ 
+ 
+0.28
+ 
+ 
+0.47
+ 
+ 
+(0.06
+)
+ 
+0.07
+ 
+ 
+0.05
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Weighted average number of common shares outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Basic
+ 
+ 
+4,032,336
+ 
+ 
+4,032,336
+ 
+ 
+4,008,704
+ 
+ 
+4,032,336
+ 
+ 
+4,032,336
+
+ 
+Diluted
+ 
+ 
+6,683,836
+ 
+ 
+6,577,829
+ 
+ 
+4,008,704
+ 
+ 
+6,774,521
+ 
+ 
+6,617,560
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (a) Stock-based compensation is included in
+
+ operating expenses as follows:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Sales and marketing
+ 
+$
+19,956
+ 
+$
+24,118
+ 
+$
+33,440
+ 
+$
+34,315
+ 
+$
+4,989
+
+ Research and development
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,443
+ 
+ 
+ 
+
+ Project management
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,036
+ 
+ 
+ 
+
+ Technical support
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,544
+ 
+ 
+ 
+
+ General and administrative
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+9,761
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+19,956
+ 
+$
+24,118
+ 
+$
+33,440
+ 
+$
+57,099
+ 
+$
+4,989
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+See accompanying notes to consolidated financial statements.
+
+F-4
+
+ 
+
+ 
+ 
+
+HOSTOPIA.COM INC. 
+ 
+ CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) 
+ 
+ (Expressed in U.S. dollars)
+ Years ended March 31, 2006, 2005 and 2004
+ and Three Months Ended
+June 30, 2006 (unaudited) 
+ 
+
+ 
+
+ 
+
+Capital stock
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Accumulated
+
+other
+
+comprehensive
+
+loss
+ 
+ 
+
+ 
+Total
+
+stockholders'
+
+equity
+
+(deficiency)
+ 
+
+ 
+
+ 
+Additional
+
+paid-in
+
+capital
+ 
+Deferred
+
+stock-based
+
+compensation
+ 
+ 
+
+ 
+
+ 
+
+ 
+Number
+ 
+Amount
+ 
+Deficit
+ 
+
+Balance, March 31, 2003
+ 
+4,002,485
+ 
+ 
+96,608
+ 
+$
+3,162,345
+ 
+$
+(31,743
+)
+$
+(43,881
+)
+$
+(6,263,386
+)
+$
+(3,080,057
+)
+
+Stock-based compensation (note 9(b))
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+25,050
+ 
+ 
+(25,050
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Amortization of stock-based compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+33,440
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+33,440
+ 
+
+Issuance of warrants on acquisition of customer list (note 2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+102,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+102,000
+ 
+
+Issuance of warrants to customers (note 9(a))
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+405,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+405,000
+ 
+
+Issuance of common shares on exercise of warrants (note 9(a))
+ 
+29,851
+ 
+ 
+119,754
+ 
+ 
+(19,754
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+100,000
+ 
+
+Present value of future dividends on preferred shares (note 8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(110,026
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(110,026
+)
+
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(144,389
+)
+ 
+(144,389
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, March 31, 2004
+ 
+4,032,336
+ 
+ 
+216,362
+ 
+ 
+3,564,615
+ 
+ 
+(23,353
+)
+ 
+(43,881
+)
+ 
+(6,407,775
+)
+ 
+(2,694,032
+)
+
+Stock-based compensation (note 9(b))
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+46,900
+ 
+ 
+(46,900
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Amortization of stock-based compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+24,118
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+24,118
+ 
+
+Present value of future dividends on preferred shares (note 8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(112,384
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(112,384
+)
+
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,215,797
+ 
+ 
+3,215,797
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, March 31, 2005
+ 
+4,032,336
+ 
+ 
+216,362
+ 
+ 
+3,499,131
+ 
+ 
+(46,135
+)
+ 
+(43,881
+)
+ 
+(3,191,978
+)
+ 
+433,499
+ 
+
+Amortization of stock-based compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+19,956
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+19,956
+ 
+
+Present value of future dividends on preferred shares (note 8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(114,792
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(114,792
+)
+
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,003,052
+ 
+ 
+2,003,052
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, March 31, 2006
+ 
+4,032,336
+ 
+$
+216,362
+ 
+$
+3,384,339
+ 
+$
+(26,179
+)
+$
+(43,881
+)
+$
+(1,188,926
+)
+$
+2,341,715
+ 
+
+(Unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stock-based compensation adjustment under FAS 123R
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(26,179
+)
+ 
+26,179
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Amortization of stock-based compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+57,099
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+57,099
+ 
+
+Present value of future dividends on preferred shares (note 8)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(29,081
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(29,081
+)
+
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+478,201
+ 
+ 
+478,201
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, June 30, 2006
+ 
+4,032,336
+ 
+$
+216,362
+ 
+$
+3,386,178
+ 
+$
+ 
+ 
+$
+(43,881
+)
+$
+(710,725
+)
+$
+2,847,934
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+See accompanying notes to consolidated financial statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+HOSTOPIA.COM INC. 
+ 
+ CONSOLIDATED STATEMENTS OF CASH FLOWS 
+ 
+ (Expressed in U.S. dollars) 
+ 
+
+ 
+
+ 
+Years ended March 31,
+ 
+June 30,
+ 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+2006
+ 
+2005
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+(unaudited)
+
+ 
+
+Cash flows from operating activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income (loss)
+ 
+$
+2,003,052
+ 
+$
+3,215,797
+ 
+$
+(144,389
+)
+$
+478,201
+ 
+$
+363,200
+ 
+
+ 
+Items which do not involve cash:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Amortization
+ 
+ 
+1,795,732
+ 
+ 
+1,234,265
+ 
+ 
+890,811
+ 
+ 
+556,682
+ 
+ 
+392,518
+ 
+
+ 
+ 
+Stock-based compensation
+ 
+ 
+19,956
+ 
+ 
+24,118
+ 
+ 
+33,440
+ 
+ 
+57,099
+ 
+ 
+4,989
+ 
+
+ 
+ 
+Warrant issue expense included in general and administration
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+405,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Non-cash interest
+ 
+ 
+ 
+ 
+ 
+21,326
+ 
+ 
+24,097
+ 
+ 
+4,206
+ 
+ 
+ 
+ 
+
+ 
+ 
+Deferred income taxes
+ 
+ 
+614,000
+ 
+ 
+(1,178,000
+)
+ 
+ 
+ 
+ 
+(71,000
+)
+ 
+137,000
+ 
+
+ 
+ 
+Deferred lease inducements
+ 
+ 
+63,492
+ 
+ 
+(29,443
+)
+ 
+(29,443
+)
+ 
+(12,128
+)
+ 
+(7,362
+)
+
+ 
+Change in operating assets and liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Trade accounts receivable
+ 
+ 
+(1,098,741
+)
+ 
+(144,709
+)
+ 
+(271,030
+)
+ 
+188,318
+ 
+ 
+(509,139
+)
+
+ 
+ 
+Prepaid expenses
+ 
+ 
+(17,821
+)
+ 
+(94,016
+)
+ 
+50,746
+ 
+ 
+(89,009
+)
+ 
+(43,219
+)
+
+ 
+ 
+Increase in other assets
+ 
+ 
+(36,542
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(13,234
+)
+
+ 
+ 
+Accounts payable
+ 
+ 
+(17,259
+)
+ 
+(152,534
+)
+ 
+267,975
+ 
+ 
+292,087
+ 
+ 
+(102,842
+)
+
+ 
+ 
+Accrued liabilities
+ 
+ 
+108,412
+ 
+ 
+(82,357
+)
+ 
+184,507
+ 
+ 
+173,437
+ 
+ 
+(39,608
+)
+
+ 
+ 
+Payroll taxes and other taxes payable
+ 
+ 
+(10,535
+)
+ 
+4,660
+ 
+ 
+(9,291
+)
+ 
+(11,677
+)
+ 
+(5,051
+)
+
+ 
+ 
+Income taxes payable
+ 
+ 
+155,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(89,000
+)
+ 
+ 
+ 
+
+ 
+ 
+Deferred revenue
+ 
+ 
+78,163
+ 
+ 
+88,371
+ 
+ 
+95,868
+ 
+ 
+16,492
+ 
+ 
+40,794
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Cash flows from operating activities
+ 
+ 
+3,656,909
+ 
+ 
+2,907,478
+ 
+ 
+1,498,291
+ 
+ 
+1,493,708
+ 
+ 
+218,046
+ 
+
+Cash flows from financing activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Issue of common shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+100,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Repayment of long-term liabilities
+ 
+ 
+(38,864
+)
+ 
+(308,793
+)
+ 
+ 
+ 
+ 
+(35,415
+)
+ 
+ 
+ 
+
+ 
+Deferred initial public offering costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(616,595
+)
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Cash flows from (used in) financing activities
+ 
+ 
+(38,864
+)
+ 
+(308,793
+)
+ 
+100,000
+ 
+ 
+(652,010
+)
+ 
+ 
+ 
+
+Cash flows from investing activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Acquisition of property and equipment
+ 
+ 
+(2,080,937
+)
+ 
+(1,824,680
+)
+ 
+(998,655
+)
+ 
+(268,832
+)
+ 
+(357,452
+)
+
+ 
+Acquisition of customer lists (note 2)
+ 
+ 
+(151,400
+)
+ 
+(220,556
+)
+ 
+(239,826
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Acquisition of intellectual property
+ 
+ 
+(240,454
+)
+ 
+(111,424
+)
+ 
+(17,735
+)
+ 
+(5,910
+)
+ 
+(88,174
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Cash flows used in investing activities
+ 
+ 
+(2,472,791
+)
+ 
+(2,156,660
+)
+ 
+(1,256,216
+)
+ 
+(274,742
+)
+ 
+(445,626
+)
+
+Effect of currency translation on cash balances
+ 
+ 
+(4,267
+)
+ 
+34,821
+ 
+ 
+33,246
+ 
+ 
+(1,130
+)
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Increase in cash and cash equivalents
+ 
+ 
+1,140,987
+ 
+ 
+476,846
+ 
+ 
+375,321
+ 
+ 
+565,826
+ 
+ 
+(227,580
+)
+
+Cash and cash equivalents, beginning of year
+ 
+ 
+1,897,230
+ 
+ 
+1,420,384
+ 
+ 
+1,045,063
+ 
+ 
+3,038,217
+ 
+ 
+1,897,230
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash and cash equivalents, end of year
+ 
+$
+3,038,217
+ 
+$
+1,897,230
+ 
+$
+1,420,384
+ 
+$
+3,604,043
+ 
+$
+1,669,650
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Supplemental cash flow information:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest paid
+ 
+$
+4,566
+ 
+$
+ 
+ 
+$
+101
+ 
+$
+ 
+ 
+$
+ 
+ 
+
+ 
+Income taxes paid
+ 
+ 
+300,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+495,000
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+See accompanying notes to consolidated financial statements.
+
+F-6
+
+ HOSTOPIA.COM INC. 
+
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+
+ (Expressed in U.S. dollars)
+
+Years ended March 31, 2006, 2005 and 2004
+
+(Information pertaining to the three months ended June 30, 2006 and 2005 is unaudited) 
+
+Hostopia.com Inc. (the "Company") was incorporated in the State of Delaware and has developed application software for webhosting and applications services, e-mail and
+e-commerce that is marketed to users via the Internet. 
+
+1. SIGNIFICANT ACCOUNTING POLICIES: 
+
+(a)Basis
+of presentation: 
+
+These
+consolidated financial statements include the accounts of the Company and its subsidiaries, BlueGenesis.com Corp. and Internet Names for Business Inc., which are wholly owned. All
+material intercompany accounts and transactions and balances have been eliminated. 
+
+These
+consolidated financial statements are stated in U.S. dollars. They have been prepared in accordance with accounting principles generally accepted in the United States
+of America. 
+
+ Unaudited Financial Information 
+
+The
+accompanying unaudited interim consolidated balance sheet at June 30, 2006, the consolidated statements of operations and cash flows for the three months ended
+June 30, 2006 and 2005 and the consolidated statement of stockholders' equity for the three months ended June 30, 2006 are unaudited. These unaudited interim consolidated
+financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In the opinion of the Company's management, the unaudited interim consolidated financial
+statements have been prepared on the same basis as the audited consolidated financial statements except for stock based compensation as described in note 1(l), exchange of non-monetary assets
+as described in note 1(u)(i) and accounting changes and error corrections as described in note 1(u)(ii). These unaudited interim consolidated financial statements include all adjustments
+including normal recurring adjustments, necessary for the fair presentation of the Company's statement of financial position at June 30, 2006 and its results of operations and its cash
+flows for the three months ended June 30, 2006 and 2005. The results for the three months ended June 30, 2006 are not necessarily indicative of the results to be
+expected for the year ending March 31, 2007. 
+
+(b)Revenue
+recognition: 
+
+The
+Company's revenue is derived from webhosting and applications services, Internet private label domain name registration and services. 
+
+Webhosting
+and applications services revenue consists of fixed fees earned and recognized on a monthly basis by leasing server space and web services to companies and individuals wishing to have a web
+or e-commerce presence. Incremental fees for excess bandwidth usage or data storage are billed and recognized as revenue in the period customers utilize such services. Up-front
+set-up fees are deferred and recognized in income on a straight-line basis over the term of the underlying service contract. 
+
+Other
+services revenue consists of registration fees and other service income. Registration fees charged to end-users for domain name registration services are recognized upon registration
+of the domain name. End-users typically pay for domain registrations with credit cards. A provision for chargebacks from credit card carriers is included in accrued liabilities and
+deducted from gross registration fees. Service revenue is earned and recognized as revenue on a time and materials basis as the services are provided. 
+
+Fees
+that have been prepaid but do not yet qualify for recognition as revenue under the Company's revenue recognition policy are presented as deferred revenue on the Company's consolidated
+balance sheets. 
+
+(c)Cash
+and cash equivalents: 
+
+Cash
+and cash equivalents include highly liquid instruments with an original maturity of less than 90 days. The carrying amount of cash equivalents is stated at cost which approximates its
+fair value. 
+
+(d)Allowance
+for doubtful accounts: 
+
+The
+Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The Company conducts on-going credit evaluations
+of its customers' payment history and current credit worthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not specifically identified
+as uncollectible, an allowance is maintained for a specific percentage of those receivables based upon the aging accounts, the Company's historical collection experience and current
+economic expectations. 
+
+F-7
+
+ 
+
+(e)Property
+and equipment: 
+
+Property
+and equipment are recorded at cost less accumulated amortization. Amortization is recorded on a straight-line basis over the following estimated useful lives: 
+
+Computer hardware and software
+ 
+3 years
+
+Furniture and fixtures
+ 
+3 - 5 years
+
+Leasehold improvements
+ 
+Lesser of term of lease or
+
+estimated useful life
+
+(f)Intangible
+assets: 
+
+Intangible
+assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives as follows: 
+
+Customer lists
+ 
+3 - 5 years
+
+Intellectual property
+ 
+3 years
+
+(g)Impairment
+of long-lived assets: 
+
+Long-lived
+assets, including property and equipment and intangible assets with finite lives, are amortized over their useful lives. The Company periodically reviews the useful lives and
+the carrying values of its long-lived assets for continued appropriateness. The Company performs an impairment assessment of long-lived assets held for use whenever events or
+changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows from the use and eventual disposition of the
+asset group is less than its carrying amount, it is considered to be impaired. An impairment loss is measured at the amount by which the carrying amount of the asset group exceeds its fair value,
+which is estimated as the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. 
+
+(h)Prepaid
+expenses: 
+
+Included
+in prepaid expenses is the cost of domain names, tradeshows and insurance which is paid for in advance. 
+
+(i)Lease
+inducements: 
+
+Lease
+inducements are deferred and amortized against rent expense on a straight-line basis over the term of the applicable lease. 
+
+(j)Functional
+currency: 
+
+The
+U.S. dollar is the functional currency of the Company and of its subsidiaries as the majority of their revenues and expenditures are denominated in U.S. dollars. In addition, the
+Company's financing is primarily denominated in U.S. dollars. Exchange gains and losses resulting from transactions denominated in currencies other than U.S. dollars are included in the
+result of operations in the year in which they are incurred. 
+
+(k)Research
+and development costs: 
+
+Costs
+related to research, design and development of software products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a
+product's technological feasibility has been established, which generally occurs upon completion of a working model, and ending when a product is available for general release to customers. To date,
+completing a working model of the Company's product and the general release of the product has substantially coincided. As a result, the Company has not capitalized any software development costs
+since such costs have not been significant. 
+
+(l)Stock-based
+compensation: 
+
+ Prior to April 1, 2006 
+
+The
+Company accounted for stock options issued to employees using the intrinsic value method of Accounting Principles Board ("APB") Opinion No. 25. Compensation expense was recorded on the date
+stock options were granted only if the current fair 
+
+F-8
+
+ 
+
+value
+of the underlying stock exceeds the exercise price. Deferred stock-based compensation was amortized over the vesting period of the individual options in accordance with Financial Accounting
+Standards Board ("FASB") Interpretation No. 44. 
+
+ Post April 1, 2006 
+
+On
+April 1, 2006, we adopted the provisions of SFAS No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"),
+which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123").
+SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
+("APB Opinion No. 25"). SFAS No. 123R requires companies to recognize in the income statement the estimated fair value of stock-based compensation. 
+
+In
+adopting SFAS No. 123R, we have chosen to apply the "modified prospective method". Under this method, unvested awards at the date of adoption will be amortized based on the grant date
+fair value estimated in accordance with the original provisions of SFAS No. 123. Hostopia will, as it did under SFAS No. 123, provide disclosure of the compensation amount
+it would have otherwise
+booked in its notes to the financial statements. Based upon our analysis of the requirements of SFAS No. 123R, we reclassified the unamortized deferred compensation related to the
+issuance of unvested common stock awards to consultants that was previously reported as a contra amount in the equity section of the balance sheet to additional paid-in capital. 
+
+All
+employee stock option grants since inception have been accounted for using the intrinsic value method as defined in APB Opinion No. 25 and accordingly, prior to April 1, 2006,
+compensation expense for employee stock options was measured as the excess, if any, of the fair value of Hostopia's common stock at the date of grant over the amount an employee must pay to acquire
+the stock. Since Hostopia has issued all stock options with an exercise price equal to the estimated fair value of the stock on the grant date, no compensation expense in respect of stock options
+granted to employees was recorded prior to April 1, 2006. 
+
+Under
+SFAS No. 123R, Hostopia is required to select a valuation technique or option-pricing model that meets the criteria as stated in the standard. We are continuing to use the
+Black-Scholes model. SFAS No. 123R also requires us to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing forfeitures and
+the corresponding reduction in expense as they occur. Stock-based compensation expense is recognized using a straight-line amortization method over the vesting period. 
+
+During
+the three months ended June 30, 2006, we granted 10,000 options to employees having an exercise price of $10.95 per share, which amount was determined to be the fair value at the
+date of the grant. We determined the future expense related to this issue to be approximately $66,000. The risk-free interest rate was based on the currently available rate on a
+U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The expected volatility of stock options was based on an average of historical
+volatility of a peer group of companies comparable to us. The expected life of our options was based on the "simplified method" in accordance with SEC Staff Accounting Bulletin SAB 107 for
+companies with limited historical exercise experience. Under the "simplified method" the expected term is equal to the mean of the vesting term and the term to expiry. The dividend yield is based on
+the fact that Hostopia has never declared or paid any cash dividends and does not currently anticipate paying cash dividends in the future. The forfeiture rate was based on our historical experience
+in respect of employee turnover and consequent cancellation of option grants. 
+
+As
+a result of the adoption of SFAS No. 123R, stock-based compensation expense, which previously was applied to consultants only, increased from $4,989 in the three months ended
+June 30, 2005 to $57,099 in the three months ended June 30, 2006. 
+
+The
+Company has provided the pro forma disclosures required by FASB Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"), as amended by FASB
+Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. 
+
+F-9
+
+ 
+
+The
+table below sets out the pro forma amounts of net income (loss) and net income (loss) per share that would have resulted if the Company had accounted for its employee stock plans under the
+fair value recognition provisions of Statement 123: 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Three months ended June 30,
+ 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+2005
+ 
+
+Net income (loss), as reported
+ 
+$
+2,003,052
+ 
+$
+3,215,797
+ 
+$
+(144,389
+)
+$
+363,200
+ 
+
+Cumulative dividends on redeemable, convertible preferred shares
+ 
+ 
+(114,792
+)
+ 
+(112,384
+)
+ 
+(110,026
+)
+ 
+(28,470
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Basic and diluted net income (loss)
+ 
+ 
+1,888,260
+ 
+ 
+3,103,413
+ 
+ 
+(254,415
+)
+ 
+334,730
+ 
+
+Stock-based compensation expense
+ 
+ 
+(126,506
+)
+ 
+(121,202
+)
+ 
+(152,206
+)
+ 
+(31,627
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Pro forma net income (loss)
+ 
+$
+1,761,754
+ 
+$
+2,982,211
+ 
+$
+(406,621
+)
+$
+303,103
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net income (loss) per share basic:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+As reported
+ 
+$
+0.47
+ 
+$
+0.77
+ 
+$
+(0.06
+)
+$
+0.08
+ 
+
+ 
+Pro forma
+ 
+ 
+0.44
+ 
+ 
+0.74
+ 
+ 
+(0.10
+)
+ 
+0.08
+ 
+
+Net income (loss) per share diluted:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+As reported
+ 
+ 
+0.28
+ 
+ 
+0.47
+ 
+ 
+(0.06
+)
+ 
+0.05
+ 
+
+ 
+Pro forma
+ 
+ 
+0.26
+ 
+ 
+0.45
+ 
+ 
+(0.10
+)
+ 
+0.05
+ 
+
+The
+estimated fair value of options is amortized over the vesting period, on a straight-line basis, and is determined using the Black-Scholes option pricing model with the
+following assumptions: 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Three months ended June 30,
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+2006
+ 
+2005
+
+Risk-free rate
+ 
+2.75%-3.75%
+ 
+4.0%-4.4%
+ 
+3.9%-5.3%
+ 
+4.77%
+ 
+3.25%
+
+Expected option life
+ 
+7 years
+ 
+7 years
+ 
+7 years
+ 
+5 years
+ 
+7 years
+
+Dividend yield
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Weighted average grant date fair value of option granted
+ 
+$3.45
+ 
+$3.15
+ 
+$2.95
+ 
+$3.52
+ 
+$3.11
+
+Volatility factor
+ 
+75%
+ 
+80%
+ 
+69.5%-95.6%
+ 
+67%
+ 
+75%
+
+Forfeiture rate
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+25%
+ 
+ 
+
+Volatility
+factors were based on comparable public companies in our industry. 
+
+(m)Net
+income (loss) per share: 
+
+Basic
+net income (loss) per share is calculated using the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is calculated using the weighted
+average number of common shares plus the dilutive potential common shares outstanding during the year. Anti-dilutive potential common shares are excluded. Potential common shares consist
+of stock options (note 10) and warrants issued (note 2(b)), for which the potential dilutive effect is computed using the treasury stock method, and redeemable convertible
+preferred shares (note 8). 
+
+(n)Income
+taxes: 
+
+The
+Company provides for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to
+differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
+expected to be recovered or settled. A valuation allowance is recorded to reduce deferred income tax assets to an amount, in the opinion of management, that is more likely than not to be realized.
+Management considers factors, such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies and other factors
+in the determination of the valuation allowance. The effect on deferred tax assets and 
+
+F-10
+
+ 
+
+liabilities
+of a change in tax rates is recognized in the consolidated statements of operations in the year that includes the enactment date. 
+
+(o)Financial
+instruments and concentration of credit risk: 
+
+The
+carrying values of cash and cash equivalents, trade accounts receivable, accounts payable, accrued liabilities and payroll and other taxes payable approximate their fair values due to their
+short-term nature. 
+
+The
+fair value of the long-term liability approximates its carrying value as it has been discounted at a market interest rate. 
+
+Financial
+instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company performs periodic credit evaluations of the
+financial condition of its customers. Allowances are maintained for potential credit losses consistent with the credit risk of specific customers. As at March 31, 2006, four customers had a
+balance greater than 10% of the Company's total accounts receivable, totalling 71%. As at March 31, 2005, two customers had a balance greater than 10% of the Company's total accounts
+receivable, totalling 51%. As at June 30, 2006 three customers had a balance greater than 10% of the Company's total accounts receivable, totalling 62%. 
+
+(p)Use
+of estimates: 
+
+The
+preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and
+liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant items subject to
+such estimates and assumptions include the carrying amount of property and equipment, intangible assets, valuation of allowances for accounts receivable and deferred income taxes. Actual results could
+differ from those estimates. 
+
+(q)Asset
+retirement obligations: 
+
+The
+Company accounts for asset retirement obligations in accordance with FASB Statement No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of an
+asset retirement obligation be recorded as a liability in the period in which the Company incurs the obligation. The Company did not have any asset retirement obligations in 2006, 2005 or 2004. 
+
+(r)Guarantees: 
+
+The
+Company accounts for guarantees in accordance with FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and
+Indebtedness of Others, which requires certain disclosures of obligations under guarantees and the recognition of a liability by a guarantor at the inception of certain guarantees entered into or
+modified after December 31, 2002, based on the fair value of the guarantee. 
+
+(s)Consolidation
+of variable interest entities: 
+
+The
+Company accounts for variable interest entities in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities Revised ("FIN 46R"). FIN 46R
+addresses the consolidation of certain entities that are subject to control on a basis other than ownership of voting interests. The Company held no interest in any entities subject to control on a
+basis other than ownership of voting interests in 2006, 2005, 2004 or June 30, 2006. 
+
+(t)Comprehensive
+income: 
+
+Comprehensive
+income includes all changes in equity (net assets) during a period from non-owner sources. During each of the years in the three-year period ended
+March 31, 2006, and the three month period ended June 30, 2006 comprehensive income was equal to the net income (loss). 
+
+(u)Changes
+in accounting policies effective April 1, 2006:
+
+(i)Exchange
+of non-monetary assets: 
+
+In
+December 2004, the FASB issued Statement No. 153, Exchange of Non-Monetary Assets an Amendment of APB Opinion 29 ("Statement 153").
+Accounting Principles Board Opinion No. 29 ("APB 29") is based on the principle that exchanges of non-monetary assets generally should be measured based on the fair value of
+assets exchanged, except in certain circumstances. Statement 153 amends APB 29 to eliminate the exception from fair value measurement for 
+
+F-11
+
+ 
+
+non-monetary
+exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The
+standard is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005 and will be applied prospectively. The adoption of this standard did not
+have a material impact on our consolidated financial statements. 
+
+(ii)Accounting
+changes and error corrections: 
+
+In
+May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 ("APB 20") and FASB Statement
+No. 3 ("Statement 154"). Statement 154 requires retrospective application for voluntary changes in accounting principles unless it is impracticable to do so. In addition, Statement
+154 requires that a change in depreciation method be accounted for as a change in estimate, not as a change in accounting principle, as previously required by APB 20. However, a change
+in depreciation methods must continue to be justified by its preferability and related disclosures must be provided. Statement 154 is effective for accounting changes made in fiscal years
+beginning after December 15, 2005. The adoption of this standard did not have a material impact on our consolidated financial statements. 
+
+(v)Recent
+accounting pronouncement not yet adopted: 
+
+In
+June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB statement
+No. 109" ("FIN 48"). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained, assuming
+examination by tax authorities. The amount recognized would be the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability
+would be recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if
+applicable) on the excess. Discussion will also be required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next
+12 months. FIN 48 is effective for fiscal years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 on the Company's consolidated financial statements
+is currently being evaluated by management. 
+
+2. ASSET ACQUISITIONS: 
+
+(a)On
+January 31, 2006, the Company entered into an agreement to purchase a customer list from one of its customers for $1,132,000 and assume the liability for future services.
+The Company paid $151,400 on closing. 
+
+Future
+payments to be applied against the purchase price will be determined as a percentage of actual webhosting revenue generated by the purchased accounts as follows: the Company will pay out 37.5%
+of collected revenue from the customer during the first six months following closing, 25.0% for the following six months, and 12.5% thereafter, until such time as the total payments equal the
+purchase price. 
+
+After
+deducting the value of the account receivable owed from the customer and the liability for future services assumed associated with the hosted accounts, the remaining amount of $570,533 has been
+recorded as a non-interest bearing liability. This amount has, therefore, been discounted at the rate of 5% per annum. Accordingly, the value of the customer list and the
+long-term liability has been reduced by $28,030, being the estimated interest over the expected two-year life of the long-term liability. This amount is accreted as
+interest expense over the expected two-year life of the long-term liability. 
+
+At
+March 31, 2006, the remaining liability is as follows: 
+
+Total
+ 
+$
+503,639
+
+Less current portion
+ 
+ 
+260,000
+
+ 
+ 
+
+ 
+ 
+$
+243,639
+
+ 
+ 
+
+F-12
+
+ 
+
+The
+customer list is being amortized on a straight-line basis over its three-year estimated useful life commencing February 1, 2006. 
+
+Purchase price:
+ 
+ 
+ 
+ 
+
+ 
+Customer list
+ 
+$
+1,103,970
+ 
+
+ 
+Liability for future services
+ 
+ 
+(243,468
+)
+
+ 
+ 
+
+ 
+
+ 
+ 
+$
+860,502
+ 
+
+ 
+ 
+
+ 
+
+Consideration given:
+ 
+ 
+ 
+ 
+
+ 
+Cash
+ 
+$
+151,400
+ 
+
+ 
+Trade receivables
+ 
+ 
+166,599
+ 
+
+ 
+Long-term liability
+ 
+ 
+542,503
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+$
+860,502
+ 
+
+ 
+ 
+
+ 
+
+(b)On
+June 11, 2003, the Company entered into an agreement with one of its customers to purchase its customer list and certain capital assets for a minimum purchase price equal to
+$711,924, plus the issuance of warrants to purchase 60,000 common shares at $3.20 per share. The warrants will expire on December 28, 2006. 
+
+The
+Company paid 20% of the minimum purchase price on closing which was partly satisfied by the liquidation of all amounts owed by the customer and the assumed liability for future services. The
+Company agreed to pay 50% of the gross revenue derived from the customer list for the next two years and 40% in the third year. In the event the initial deposit and subsequent payments do not equal
+the minimum purchase price of $711,924, the Company will pay 40% of subsequent revenue until such time as total payments equal the minimum purchase price. 
+
+The
+difference between the minimum purchase price of $711,924 and payments made during the year is recorded as a liability and is non-interest bearing. This amount has, therefore, been
+discounted at the rate of 7% per annum. Accordingly, the value of the customer list and the long-term liability has been reduced by $54,056, being the estimated interest over the expected
+three-year life of the long-term liability. This amount is accreted as interest expense over the expected three-year life of the
+long-term liability. 
+
+Purchase price (excluding contingent consideration):
+ 
+ 
+ 
+ 
+
+Computer hardware and software
+ 
+$
+46,526
+ 
+
+Customer list
+ 
+ 
+713,342
+ 
+
+Liability for future services
+ 
+ 
+(51,590
+)
+
+ 
+ 
+
+ 
+
+ 
+ 
+$
+708,278
+ 
+
+ 
+ 
+
+ 
+
+Consideration given:
+ 
+ 
+ 
+ 
+
+Trade accounts receivable
+ 
+$
+103,082
+ 
+
+Long-term liability
+ 
+ 
+515,483
+ 
+
+Warrants included in paid-in capital
+ 
+ 
+102,000
+ 
+
+Cash receivable from vendor on closing
+ 
+ 
+(12,287
+)
+
+ 
+ 
+
+ 
+
+ 
+ 
+$
+708,278
+ 
+
+ 
+ 
+
+ 
+
+The
+customer list is being amortized on a straight-line basis over a three-year period. 
+
+In
+March 2005, the Company paid $260,000 in full satisfaction of the remaining obligation. After discharging the remaining long-term liability and interest payable totalling
+$39,444, $220,556 was applied to the customer list. 
+
+F-13
+
+ 
+
+3. PROPERTY AND EQUIPMENT: 
+
+2006 
+ 
+Cost
+ 
+Accumulated amortization
+ 
+Net book value
+
+Computer hardware and software
+ 
+$
+6,293,008
+ 
+$
+3,626,400
+ 
+$
+2,666,608
+
+Furniture and fixtures
+ 
+ 
+659,635
+ 
+ 
+457,948
+ 
+ 
+201,687
+
+Leasehold improvements
+ 
+ 
+494,900
+ 
+ 
+189,480
+ 
+ 
+305,420
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+7,447,543
+ 
+$
+4,273,828
+ 
+$
+3,173,715
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+2005 
+ 
+Cost
+ 
+Accumulated amortization
+ 
+Net book value
+
+Computer hardware and software
+ 
+$
+4,345,551
+ 
+$
+2,460,452
+ 
+$
+1,885,099
+
+Furniture and fixtures
+ 
+ 
+543,821
+ 
+ 
+229,084
+ 
+ 
+314,737
+
+Leasehold improvements
+ 
+ 
+297,234
+ 
+ 
+120,802
+ 
+ 
+176,432
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+5,186,606
+ 
+$
+2,810,338
+ 
+$
+2,376,268
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+June 30, 2006 (unaudited) 
+ 
+Cost
+ 
+Accumulated amortization
+ 
+Net book value
+
+Computer hardware and software
+ 
+$
+6,548,311
+ 
+$
+3,984,901
+ 
+$
+2,563,410
+
+Furniture and fixtures
+ 
+ 
+673,164
+ 
+ 
+478,074
+ 
+ 
+195,090
+
+Leasehold improvements
+ 
+ 
+479,385
+ 
+ 
+193,598
+ 
+ 
+285,787
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+7,700,860
+ 
+$
+4,656,573
+ 
+$
+3,044,287
+
+ 
+ 
+
+ 
+
+ 
+
+4. INTANGIBLE ASSETS: 
+
+2006 
+ 
+Cost
+ 
+Accumulated amortization
+ 
+Net book value
+
+Customer lists
+ 
+$
+2,037,868
+ 
+$
+677,742
+ 
+$
+1,360,126
+
+Intellectual property
+ 
+ 
+413,009
+ 
+ 
+164,530
+ 
+ 
+248,479
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+2,450,877
+ 
+$
+842,272
+ 
+$
+1,608,605
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+2005 
+ 
+Cost
+ 
+Accumulated amortization
+ 
+Net book value
+
+Customer lists
+ 
+$
+933,898
+ 
+$
+455,086
+ 
+$
+478,812
+
+Intellectual property
+ 
+ 
+172,555
+ 
+ 
+54,944
+ 
+ 
+117,611
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+1,106,453
+ 
+$
+510,030
+ 
+$
+596,423
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+June 30, 2006 (unaudited) 
+ 
+Cost
+ 
+Accumulated amortization
+ 
+Net book value
+
+Customer lists
+ 
+$
+2,037,868
+ 
+$
+807,775
+ 
+$
+1,230,093
+
+Intellectual property
+ 
+ 
+418,919
+ 
+ 
+192,919
+ 
+ 
+226,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+2,456,787
+ 
+$
+1,000,694
+ 
+$
+1,456,093
+
+ 
+ 
+
+ 
+
+ 
+
+F-14
+
+ 
+
+The
+following table shows the estimated amortization expense for each of the next five years ending March 31, assuming no further additions to acquired intangible assets are made: 
+
+2007
+ 
+$
+642,959
+
+2008
+ 
+ 
+628,763
+
+2009
+ 
+ 
+336,883
+
+2010
+ 
+ 
+ 
+
+2011
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+$
+1,608,605
+
+ 
+ 
+
+5. CREDIT FACILITY: 
+
+The
+Company has obtained a revolving demand operating line of credit of Cdn. $1,000,000, bearing interest at Canadian prime plus 1.5% from a Canadian chartered bank. This facility is secured by a
+General Security Agreement on the assets of the Company and is subject to certain financial and non-financial covenants, the most significant of which include current ratio, tangible net
+worth and leverage ratio. There are no borrowings under this facility at March 31, 2006 and 2005 and June 30, 2006. 
+
+6. RELATED PARTY TRANSACTIONS: 
+
+The
+Company completed transactions with one of its stockholders in the normal course of operations. The transactions have been recorded at the exchange amount, representing the amount of consideration
+established and agreed to by the related parties as set out below. In addition, the Company has a commitment to purchase future services from the stockholder, as described in note 13. 
+
+In
+March 2005, the Company's principal stockholders purchased a majority interest in a supplier of templates, images and outsourced operations to the Company (the "Supplier"). Templates
+and images purchased by the Company are recorded as intellectual property and amortized over their estimated useful lives (note 4). The Company and the Supplier have entered into an agreement,
+whereby each company is obligated to jointly develop images for use in the business of the Company and for sale to others. The transactions have been recorded at the exchange amount, representing the
+amount of consideration established and agreed to by the related parties, as set out below. The Company will earn a 10% commission on sales of these images by the Supplier to the Company's customer
+base. Each company has indemnified the other for losses on claims against either company. 
+
+Aggregate
+related party transactions and balances are as follows: 
+
+ 
+
+ 
+ 
+
+ 
+2006
+ 
+2005
+ 
+June 30, 2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+Balance sheets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accounts receivable
+ 
+$
+26,654
+ 
+$
+ 
+ 
+$
+13,949
+
+ Accounts payable
+ 
+ 
+17,990
+ 
+ 
+67,412
+ 
+ 
+41,659
+
+ 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+Three Months Ended June 30,
+
+2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+Statements of operations
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Webhosting and applications services revenue
+ 
+$
+1,890,339
+ 
+$
+1,640,124
+ 
+$
+1,319,459
+ 
+$
+527,541
+
+Bandwidth
+ 
+ 
+592,996
+ 
+ 
+821,272
+ 
+ 
+700,544
+ 
+ 
+182,249
+
+Outsourced services
+ 
+ 
+890,152
+ 
+ 
+406,260
+ 
+ 
+99,810
+ 
+ 
+300,121
+
+Telephone services
+ 
+ 
+119,980
+ 
+ 
+120,099
+ 
+ 
+52,941
+ 
+ 
+50,328
+
+F-15
+
+ 
+
+7. INCOME TAXES: 
+
+The
+provision for income taxes differs from the amount computed by applying the statutory income tax rates to net income (loss) before income taxes. The sources and tax effects of the differences are
+as follows: 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+
+Income (loss) before provision for income taxes
+ 
+$
+3,072,052
+ 
+$
+2,037,797
+ 
+$
+(144,389
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Basic rate applied to income (loss) before provision for income taxes
+ 
+$
+1,156,013
+ 
+$
+766,824
+ 
+$
+(53,453
+)
+
+Non-deductible amounts
+ 
+ 
+24,259
+ 
+ 
+10,234
+ 
+ 
+175,453
+ 
+
+Increase (decrease) in valuation allowance
+ 
+ 
+ 
+ 
+ 
+(1,955,058
+)
+ 
+55,000
+ 
+
+Unrecognized benefit of net operating loss carried forward
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(177,000
+)
+
+Other
+ 
+ 
+(111,272
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Deferred income taxes (recovery)
+ 
+$
+1,069,000
+ 
+$
+(1,178,000
+)
+$
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Income
+tax expense attributable to income from continuing operations consists of: 
+
+ 
+
+ 
+Current
+ 
+Deferred
+ 
+Total
+ 
+
+Year ended December 31, 2006:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+U.S. federal
+ 
+$
+408,000
+ 
+$
+550,578
+ 
+$
+958,578
+ 
+
+ 
+State and local
+ 
+ 
+47,000
+ 
+ 
+63,422
+ 
+ 
+110,422
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+455,000
+ 
+$
+614,000
+ 
+$
+1,069,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Year ended December 31, 2005:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+U.S. federal
+ 
+$
+701,539
+ 
+$
+(1,765,055
+)
+$
+(1,063,516
+)
+
+ 
+State and local
+ 
+ 
+75,519
+ 
+ 
+(190,003
+)
+ 
+(114,484
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+777,058
+ 
+$
+(1,955,058
+)
+$
+(1,178,000
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Pre-tax
+income from foreign operations was $1,877,635, $112,665 and $1,981,394 for the years ended March 31, 2006, 2005 and 2004, respectively. 
+
+Significant
+components of the Company's deferred tax assets are as follows: 
+
+ 
+
+ 
+2006
+ 
+2005
+
+Net benefit of operating losses carried forward
+ 
+$
+ 
+ 
+$
+690,000
+
+Property and equipment
+ 
+ 
+320,000
+ 
+ 
+294,000
+
+Intellectual property
+ 
+ 
+161,000
+ 
+ 
+124,000
+
+Other
+ 
+ 
+83,000
+ 
+ 
+70,000
+
+ 
+ 
+
+ 
+
+Deferred tax assets
+ 
+$
+564,000
+ 
+$
+1,178,000
+
+ 
+ 
+
+ 
+
+In
+assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
+realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected
+future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. In order to fully realize the net deferred tax asset
+recognized at March 31, 2006, the Company will need to generate future taxable income in the appropriate jurisdictions of approximately $1,600,000. Based upon the level of historical taxable
+income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the
+benefits of these deductible differences, net of the existing valuation allowances. 
+
+The
+Company does not have any non-capital losses at March 31, 2006. 
+
+F-16
+
+ 
+
+8. REDEEMABLE, CONVERTIBLE PREFERRED SHARES: 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+June 30, 2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+Authorized:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+10,000,000 Series A redeemable, convertible preferred shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Issued:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+2,127,658 Series A redeemable, convertible preferred shares
+ 
+$
+5,170,448
+ 
+$
+5,055,656
+ 
+$
+5,199,529
+
+In
+December 2001, the Company issued 851,063 Series A redeemable, convertible preferred shares for proceeds of $2,000,000, and incurred share issuance costs of $301,046, resulting
+in net proceeds of $1,698,954. An additional 1,276,595 Series A redeemable, convertible preferred shares were issued on conversion of stockholders' advances and loans payable
+of $3,000,000. 
+
+The
+holders of the redeemable preferred shares are entitled to receive dividends, when declared by the Board of Directors of the Company, at the annual rate of 8%. Dividends on the Series A
+preferred shares shall not be cumulative, except that if the Company has not consummated a Qualified Liquidity Event, as defined, prior to December 1, 2006, the dividends shall become
+cumulative after December 1, 2006. To date, there have been no dividends paid or declared by the Company. 
+
+The
+holders of the redeemable, convertible preferred shares are entitled to the number of votes equal to the number of common shares into which the shares are then convertible and are entitled to
+elect two directors to the Board of Directors of the Company. The holders of Series A preferred shares may require the Company to redeem the outstanding shares if there has not been a Qualified
+Liquidity Event on or before December 31, 2008. Upon redemption, the holders of the redeemable, convertible preferred shares would receive proceeds equal to $2.35 per share plus all unpaid
+cumulative dividends. In the event that the holder requests redemption and the Company fails to redeem such shares, the conversion rate shall increase by 10% at the end of each
+three-month period. 
+
+The preferred shares are convertible into common shares at the option of the holder at any time, on a one-for-one basis. Upon the completion of a Qualified Liquidity Event,
+such as a closing of an initial public offering, the convertible preferred shares automatically convert into common shares. The Company shall reserve sufficient common shares to effect the conversion
+of all outstanding shares of the redeemable, convertible preferred shares. As noted in 15(c), the Company intends to enter into an underwriting agreement relating to a proposed initial
+public offering.
+
+The
+Series A preferred shares are being accreted annually at a rate of 2.2%, with a charge to additional paid-in capital, for the cumulative dividends that will begin to accrue
+after December 1, 2006 and total $800,000 by December 31, 2008. The Company has accreted dividends of $114,792, $112,384 and $110,026 in 2006, 2005 and 2004, respectively. For the
+three month period ended June 30, 2006 and June 30, 2005, the Company has accreted dividends of $29,081 and $28,470, respectively. 
+
+9. CAPITAL STOCK: 
+
+All
+common share amounts have been restated to give effect to the one-for-five share consolidation and other modifications to the Company's share structure as described in
+note 15(a). 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+June 30,
+
+2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+Authorized:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+30,000,000 common shares, par value $0.0001
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Issued:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+4,032,336 common shares
+ 
+$
+216,362
+ 
+$
+216,362
+ 
+$
+216,362
+
+(a)There
+are 60,000 (2005 60,000) common stock purchase warrants outstanding at June 30, 2006 (note 2(b)).
+
+(b)On
+August 29, 2003, the Company issued warrants to purchase 612,000 common shares to a customer that has significant revenue generation potential. The warrants had an
+exercise price of $3.35 per share. The Company ascribed a fair value to the warrants on the date of issuance of $405,000, which has been charged to general and administration expense in the 
+
+F-17
+
+ 
+
+consolidated
+statements of operations in fiscal 2004 and has been added to the additional paid-in capital. The Company estimated the fair value of the warrants using the Black-Scholes fair
+value option pricing model. The following assumptions were used to calculate the fair value: 
+
+Risk-free rate
+ 
+2.6%
+
+Dividend yield
+ 
+ 
+
+Volatility factor
+ 
+80.0%
+
+Expected option life (in days)
+ 
+139
+
+On
+January 15, 2004, the customer exercised warrants and acquired 29,851 common shares for total proceeds of $100,000. The remaining warrants expired unexercised. 
+
+(c)The
+Company entered into agreements with consultants to provide services to the Company in exchange for stock options. The Company measures the compensation cost of these options
+based on the estimated fair value at the grant date using the Black-Scholes fair value option pricing model. The Company did not issue any stock options to consultants in 2006. During 2005 and 2004,
+the Company issued 10,000 stock options to consultants each year. The following assumptions were used to calculate the fair values: 
+
+ 
+
+ 
+2005
+ 
+2004
+
+Number of options issued
+ 
+10,000
+ 
+10,000
+
+Risk-free rate
+ 
+4.0%
+ 
+3.9%
+
+Dividend yield
+ 
+ 
+ 
+ 
+
+Volatility factor
+ 
+80.0%
+ 
+80.0%
+
+Expected option life (in years)
+ 
+7.0
+ 
+7.0
+
+Weighted average grant date fair value of options granted
+ 
+$4.70
+ 
+$2.50
+
+10. STOCK OPTION PLANS 
+
+ 2000 Stock Option Plan: 
+
+All
+common share amounts have been restated to give effect to the one-for-five share consolidation and other modifications to the Company's share structure as described in
+note 15(a). 
+
+Under
+the terms of the Company's 2000 Stock Option Plan the Board of Directors of the Company were able to grant options to its employees, non-employees and officers for up to
+900,000 common shares. The exercise price of each option equals a price that 
+
+F-18
+
+ 
+
+is
+not less than the price of the Company's stock on the date of grant and an option's maximum term is seven years. Options vest over a three-year period from the date of grant. 
+
+ 
+
+ 
+Number of common shares under stock option plan
+ 
+Weighted average exercise price per share
+
+Outstanding, March 31, 2003
+ 
+749,840
+ 
+$
+2.90
+
+Granted
+ 
+93,560
+ 
+ 
+3.95
+
+Forfeited
+ 
+(78,760
+)
+ 
+2.90
+
+ 
+ 
+
+ 
+
+Outstanding, March 31, 2004
+ 
+764,640
+ 
+ 
+2.90
+
+Granted
+ 
+68,200
+ 
+ 
+6.25
+
+Forfeited
+ 
+(14,440
+)
+ 
+3.80
+
+ 
+ 
+
+ 
+
+Outstanding, March 31, 2005
+ 
+818,400
+ 
+ 
+3.15
+
+Granted
+ 
+58,040
+ 
+ 
+8.87
+
+Forfeited
+ 
+(37,160
+)
+ 
+5.25
+
+ 
+ 
+
+ 
+
+Outstanding, March 31, 2006
+ 
+839,280
+ 
+ 
+3.45
+
+Granted
+ 
+10,000
+ 
+ 
+10.95
+
+Forfeited
+ 
+(10,300
+)
+ 
+5.35
+
+ 
+ 
+
+ 
+
+Outstanding, June 30, 2006
+ 
+838,980
+ 
+ 
+3.52
+
+ 
+ 
+
+ 
+
+In
+2006, the Company granted 6,740 options on June 3, 2005, 32,800 options on November 18, 2005, and 18,500 on February 17, 2006 at exercise prices of $7.70,
+$8.75, and $9.50, respectively, being the fair value of the common shares at that date. In the quarter ended June 30, 2006, the Company granted 10,000 options on May 18, 2006 at a
+price of $10.95 being the estimated fair value of the common shares at that date. 
+
+The
+following table summarizes the information about stock options outstanding and exercisable at June 30, 2006: 
+
+ 
+
+ 
+Outstanding
+ 
+Exercisable
+
+Exercise price per share 
+ 
+Weighted average remaining contractual life (years)
+ 
+Number outstanding
+ 
+Weighted average exercise price per share
+ 
+Number outstanding
+ 
+Weighted average exercise price per share
+
+$2.75
+ 
+1.29
+ 
+637,480
+ 
+$
+2.75
+ 
+637,480
+ 
+$
+2.75
+
+$3.05
+ 
+3.48
+ 
+26,860
+ 
+ 
+3.05
+ 
+26,860
+ 
+ 
+3.05
+
+$3.35
+ 
+4.08
+ 
+15,720
+ 
+ 
+3.35
+ 
+15,720
+ 
+ 
+3.35
+
+$3.75
+ 
+4.17
+ 
+40,780
+ 
+ 
+3.75
+ 
+27,187
+ 
+ 
+3.75
+
+$5.00
+ 
+4.42
+ 
+4,860
+ 
+ 
+5.00
+ 
+3,240
+ 
+ 
+5.00
+
+$5.50
+ 
+4.67
+ 
+6,100
+ 
+ 
+5.50
+ 
+4,067
+ 
+ 
+5.50
+
+$5.75
+ 
+5.17
+ 
+22,560
+ 
+ 
+5.75
+ 
+7,520
+ 
+ 
+5.75
+
+$6.50
+ 
+5.42
+ 
+13,780
+ 
+ 
+6.50
+ 
+4,593
+ 
+ 
+6.50
+
+$7.00
+ 
+5.67
+ 
+10,800
+ 
+ 
+7.00
+ 
+ 
+ 
+ 
+ 
+
+$7.70
+ 
+6.00
+ 
+2,740
+ 
+ 
+7.70
+ 
+ 
+ 
+ 
+ 
+
+$8.75
+ 
+6.42
+ 
+28,800
+ 
+ 
+8.75
+ 
+ 
+ 
+ 
+ 
+
+$9.50
+ 
+6.67
+ 
+18,500
+ 
+ 
+9.50
+ 
+ 
+ 
+ 
+ 
+
+$10.95
+ 
+6.82
+ 
+10,000
+ 
+ 
+10.95
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+838,980
+ 
+ 
+3.52
+ 
+726,667
+ 
+ 
+2.89
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+F-19
+
+ 
+
+ 2006 Stock Option Plan 
+
+As
+described in note 15(b), on June 26, 2006, the Company's Board of Directors approved, for presentation to the shareholders, the termination and replacement of the Company's 2000 Stock
+Option Plan with the 2006 Stock Option Plan. Under the terms of the 2006 Stock Option Plan, the Company is permitted to issue stock options and stock appreciation rights to eligible participants for
+up to 10% of the total outstanding shares of common stock. The exercise price of each option equals a price that is not less than the price of the Company's stock on the date of grant and an option's
+maximum term is seven years. Options vest over a three-year period from the date of grant. No options have been issued under the 2006 Stock Option Plan. 
+
+11. NET INCOME (LOSS) PER SHARE: 
+
+All
+common share amounts have been restated to give effect to the one-for-five share consolidation and other modifications to the Company's share structure as described in
+note 15(a). 
+
+The
+following table sets forth the computation of net income (loss) per share: 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Three Months Ended
+
+June 30,
+ 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+2006
+ 
+2005
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+ 
+
+Basic and diluted net income (loss) per share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income (loss)
+ 
+$
+2,003,052
+ 
+$
+3,215,797
+ 
+$
+(144,389
+)
+$
+478,201
+ 
+$
+363,200
+ 
+
+ 
+Cumulative dividends on redeemable, convertible preferred shares
+ 
+ 
+(114,792
+)
+ 
+(112,384
+)
+ 
+(110,026
+)
+ 
+(29,081
+)
+ 
+(28,470
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Basic and diluted net income (loss)
+ 
+$
+1,888,260
+ 
+$
+3,103,413
+ 
+$
+(254,415
+)
+$
+449,120
+ 
+$
+334,730
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Basic net income (loss) per share
+ 
+$
+0.47
+ 
+$
+0.77
+ 
+$
+(0.06
+)
+$
+0.11
+ 
+$
+0.08
+ 
+
+Diluted net income (loss) per share
+ 
+ 
+0.28
+ 
+ 
+0.47
+ 
+ 
+(0.06
+)
+$
+0.07
+ 
+$
+0.05
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Weighted average number of shares outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Basic
+ 
+ 
+4,032,336
+ 
+ 
+4,032,336
+ 
+ 
+4,008,704
+ 
+ 
+4,032,336
+ 
+ 
+4,032,336
+ 
+
+ 
+ 
+Effect of dilutive securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+Series A redeemable, convertible preferred shares
+ 
+ 
+2,127,658
+ 
+ 
+2,127,658
+ 
+ 
+ 
+ 
+ 
+2,127,658
+ 
+ 
+2,127,658
+ 
+
+ 
+ 
+ 
+Stock options
+ 
+ 
+487,993
+ 
+ 
+390,104
+ 
+ 
+ 
+ 
+ 
+572,061
+ 
+ 
+424,995
+ 
+
+ 
+ 
+ 
+Warrants
+ 
+ 
+35,849
+ 
+ 
+27,731
+ 
+ 
+ 
+ 
+ 
+42,466
+ 
+ 
+32,571
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Diluted
+ 
+ 
+6,683,836
+ 
+ 
+6,577,829
+ 
+ 
+4,008,704
+ 
+ 
+6,774,521
+ 
+ 
+6,617,560
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+During
+2006 and 2005, the calculation did not include 32,560 and 71,320 options, respectively, as the effect would have been anti-dilutive. 
+
+12. DEFERRED LEASE INDUCEMENTS: 
+
+In
+August 2005, the Company entered into a long-term lease agreement for office space that included certain lease inducements. These inducements included leasehold improvements
+funded by the lessor in the amount of $180,000, a rent-free period of six months, and rent escalation. 
+
+F-20
+
+ 
+
+13. COMMITMENTS, CONTINGENCIES AND GUARANTEES: 
+
+The
+Company is committed to payments under operating leases for its premises through August 2012 and certain minimum payments with respect to its lease of data centre space, the purchase of
+bandwidth and certain contracts. Annual payments for the fiscal years ending March 31 are as follows: 
+
+2007
+ 
+$
+1,741,059
+
+2008
+ 
+ 
+1,164,041
+
+2009
+ 
+ 
+644,214
+
+2010
+ 
+ 
+481,946
+
+2011
+ 
+ 
+264,763
+
+2012
+ 
+ 
+89,862
+
+ 
+ 
+
+ 
+ 
+$
+4,385,885
+
+ 
+ 
+
+Rent
+expense recorded in 2006 was $487,282 (2005 $359,655; 2004 $322,068). Rent expense recorded during the three months
+ended June 30, 2006 was $139,978. 
+
+In
+the ordinary course of business, and included in the above commitment schedule, the Company has entered into an agreement with one of its stockholders to acquire bandwidth and data centre services
+from December 2004 to November 2007 for an aggregate minimum amount of $1,867,140. 
+
+In
+the normal course of its operations, the Company may be subject to litigation and claims from time to time. Management believes that adequate provisions have been recorded in the accounts where
+required. Although it is not possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse affect
+on the Company's results of operations, financial position or on its liquidity. 
+
+The
+Company has agreed to indemnify our directors, officers and other employees and agents as determined by our Board of Directors against certain legal and other expenses. We maintain directors' and
+officers' insurance coverage to protect against any such losses. We have recorded no liability associated with these indemnifications as we are not aware of any pending or threatened actions or claims
+against any directors, officers or other employees and agents. As a result of the insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. 
+
+14. SEGMENTED INFORMATION: 
+
+The
+Company operates in a single reportable operating segment, that is, the development of application software for webhosting and applications services, e-mail and e-commerce
+that is marketed to users via the Internet. The single reportable operating segment primarily derives its revenue from the provision of webhosting and applications services, domain name registrations
+and services. As at March 31, 2006, 35% (2005 35%; 2004 37%) of all assets related to the Company's operations
+were located in Canada and the remainder located in the U.S. As at March 31, 2006, 70% (2005 68%;
+2004 60%) of all long-lived assets related to the Company's operations were located in Canada and the remainder located in the U.S. As at
+June 30, 2006, 36% of all assets related to the Company's operations were located in Canada and the remainder located in the U.S. As at June 30, 2006, 72% of all long-lived assets
+related to the Company's operations were located in Canada and the remainder located in the U.S. Revenue is attributable to geographic location based on the location of the customer,
+as follows: 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Three Months Ended
+
+June 30,
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+2004
+ 
+2006
+ 
+2005
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+
+Canada
+ 
+$
+8,534,493
+ 
+$
+7,462,184
+ 
+$
+5,182,045
+ 
+$
+2,348,766
+ 
+$
+2,021,681
+
+United States
+ 
+ 
+9,348,410
+ 
+ 
+6,842,285
+ 
+ 
+3,708,076
+ 
+ 
+2,988,533
+ 
+ 
+2,049,485
+
+United Kingdom
+ 
+ 
+74,004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+64,237
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+17,956,907
+ 
+$
+14,304,469
+ 
+$
+8,890,121
+ 
+$
+5,401,536
+ 
+$
+4,071,166
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+F-21
+
+ 
+
+15. SIGNIFICANT EVENTS OCCURRING AFTER MARCH 31, 2006, PRECEDING A PROPOSED INITIAL PUBLIC OFFERING 
+
+(a)On
+May 18, 2006, a special meeting of stockholders was held to approve modifications to the Company's share structure, including the following:
+
+(i)A
+one-for-five consolidation of authorized common stock, including common stock reserved for conversion of preferred stock.
+
+(ii)Approval
+of a Restated and Amended Certificate of Incorporation to reflect the following amendments:
+
+(a)Amending
+the number of authorized shares of capital stock from 52,000,000 shares to 40,000,000 shares, consisting of 30,000,000 shares of common stock
+(post-consolidation), par value $0.0001 per share and 10,000,000 shares of preferred stock (post-consolidation), par value $0.0001 per share.
+
+(b)Provisions
+that directors may be removed by stockholders only for cause and that Board vacancies and newly created directorships resulting from an increase in the number of directors
+will be filled by the Board, and that no stockholder action may be taken without a stockholders' meeting.
+
+(b)On
+June 26, 2006, the Company's Board of Directors approved, for presentation to the shareholders, the termination and replacement of the Company's 2000 Stock Option Plan with
+the 2006 Stock Option Plan, that permits the Company to issue stock options and stock appreciation rights to eligible participants for up to 10% of the total outstanding shares of common stock. No
+further options may be issued by the Company under the 2000 Stock Option Plan. No options have been issued under the 2006 Stock Option Plan.
+
+(c)The
+Company intends to enter into an underwriting agreement relating to a proposed initial public offering of common shares to be sold by the Company. The closing of an initial public
+offering will constitute a Qualified Liquidity Event resulting in the automatic conversion of the issued and outstanding Series A redeemable, convertible preferred stock into shares of common
+stock on a one-to-one basis.
+
+16. SUBSEQUENT EVENT 
+
+Effective
+July 17, 2006, the Company entered into an agreement with Web.com, Inc. ("Web.com") providing for a five year, non-exclusive license agreement with Web.com which
+grants certain patent rights covering website building and web hosting panel controls. In exchange, the Company made a one time royalty payment of $650,000 and granted a cross-license to Web.com that
+provided for non-exclusive perpetual rights to 2,750 templates that can be used to build websites. In addition, the Company and Web.com have mutually covenanted not to sue each
+other or each other's customers for patent infringement during the life of all existing Web.com patents or patents issued from existing patent applications. The Company will capitalize the $650,000
+payment as an intangible asset and will amortize this amount over the shorter of its estimated useful life and the five year license term. 
+
+F-22
+
+ 
+
+4,000,000 Shares
+
+Hostopia.com Inc. 
+
+Common Stock 
+
+ 
+
+RBC Capital Markets
+
+TD Securities Inc.
+
+GMP Securities L.P.
+
+Haywood Securities Inc. 
+
+ PART II
+
+INFORMATION NOT REQUIRED IN PROSPECTUS 
+
+Item 13. Other Expenses of Issuance and Distribution. 
+
+ The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the Company in connection with the sale
+of the shares of common stock being registered. All amounts are estimates except the Securities and Exchange Commission (SEC) registration fee, the National Association of Securities
+Dealers, Inc. (NASD) filing fees and the Toronto Stock Exchange (TSX) listing fees. 
+
+ 
+
+ 
+Amount to be Paid
+
+SEC registration fee
+ 
+$
+4,280
+
+NASD filing fee
+ 
+ 
+4,500
+
+TSX listing fee
+ 
+ 
+125,000
+
+Legal fees and expenses
+ 
+ 
+800,000
+
+Accounting fees and expenses
+ 
+ 
+400,000
+
+Printing expenses
+ 
+ 
+100,000
+
+Blue sky fees and expenses (including legal fees)
+ 
+ 
+5,000
+
+Transfer agent and registrar fees
+ 
+ 
+5,000
+
+Miscellaneous
+ 
+ 
+56,220
+
+ 
+ 
+
+ 
+Total
+ 
+$
+1,500,000
+
+ 
+ 
+
+Item 14. Indemnification of Directors and Officers. 
+
+ The Company's Bylaws and Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") provide that: 
+
+1.Subject
+to the limits created by Delaware law, the Company shall indemnify any person who is or was involved or threatened to be involved in any matter (including, without limitation,
+as a party witness) in any action or proceeding (including, without limitation one by or in the right of the Company to procure a judgment in its favor) whether civil or criminal, by reason of the
+fact that he or she, or a person of whom he or she was the legal representative, is or was a director or officer of the Company, or is or was serving at the request of the Company as a director,
+officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any judgments, fines amounts paid in settlement and reasonable
+expenses, including attorney's fees, actually and reasonably incurred as a result of such action or proceeding or any appeal therein.
+
+2.Expenses
+incurred in defending any proceeding may be paid by the Company in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf
+of such director or officer to repay such amount as, and to the extent, required by Section 145 of the Delaware General Corporation Law (the "DGCL") or any
+successor thereto. 
+
+Section 145
+of the DGCL provides, in part, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending
+or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of another
+corporation or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action,
+suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or
+proceeding, had no reasonable cause to believe his conduct was unlawful. 
+
+ Similar
+indemnity is authorized for such persons against expenses (including attorneys' fees) actually and reasonably incurred in defense or settlement of any threatened, pending or
+completed action or suit by or in 
+
+II-1
+
+ 
+
+the
+right of the corporation, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and provided further that
+(unless a court of competent jurisdiction otherwise provides) such person shall not have been adjudged liable to the corporation. Any such indemnification may be made only as authorized in each
+specific case upon a determination by the stockholders or disinterested directors that indemnification is proper because the indemnitee has met the applicable standard of conduct. 
+
+ 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
+Securities Act of 1933 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. 
+
+II-2
+
+ 
+
+Item 15. Recent Sales of Unregistered Securities. 
+
+ During the last three years, we have issued unregistered securities to a limited number of persons as described below: 
+
+(1)On
+January 15, 2004, 29,851 shares of common stock (after taking into account the one-for-five reverse share split) were issued to
+Register.com, Inc. on the exercise of warrants at an exercise price of $3.35 per share. The total proceeds to the Company were $100,000. 
+
+We
+believe the offers, sales and issuances of the above securities were exempt from the registration requirements of the Securities Act of 1933 in reliance on Section 4(2) under the Securities
+Act of 1933, as amended, as a transaction by an issuer not involving a public offering. 
+
+(2)Since
+April 1, 2003, we have issued options to purchase an aggregate of 229,800 shares of our common stock under our 2000 Stock Option Plan to 46 employees with
+exercise prices ranging from $3.35 to $10.95 per share. 
+
+None
+of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. We believe the offers, sales and issuances of the securities described
+above were exempt from registration under the Securities Act of 1933 in reliance on Rule 701 because the transactions were pursuant to compensatory benefit plans or contracts relating to
+compensation as provided under such rule and/or in reliance on Section 4(2) of the Securities Act of 1933 because the issuance of securities to the recipients did not involve a public offering.
+The recipients of securities under compensatory benefit plans and contracts relating to compensation were our employees or directors and received the securities as compensation for services. Each of
+the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us. The sales of these securities were made without
+general solicitation or advertising. 
+
+II-3
+
+ 
+
+Item 16. Exhibits and Financial Statement Schedules. 
+
+(a)Exhibits.
+
+ The
+following is a list of exhibits filed as part of this Registration Statement: 
+
+Exhibit Number
+ 
+ 
+Description
+ 
+
+1.1*
+ 
+Form of Underwriting Agreement
+
+3.1**
+ 
+Amended and Restated Certificate of Incorporation of Hostopia.com Inc.
+
+3.2**
+ 
+Amended and Restated Bylaws of Hostopia.com Inc.
+
+4.1**
+ 
+Shareholder Agreement dated as of December 27, 2001
+
+4.2**
+ 
+Registration Rights Agreement dated as of December 27, 2001
+
+4.3**
+ 
+Warrant dated July 1, 2003 exercisable for 60,000 shares of common stock
+
+4.4**
+ 
+Specimen Stock Certificate
+
+5.1**
+ 
+Opinion of Dorsey & Whitney LLP
+
+10.1**
+ 
+Hostopia.com Inc. 2000 Stock Option Plan and forms of related agreements
+
+10.2**
+ 
+Hostopia.com Inc. 2006 Stock Option Plan and forms of related agreements
+
+10.3**
+ 
+Employment Agreement with William Campbell, dated June 1, 2006
+
+10.4**
+ 
+Employment Agreement with Colin Campbell, dated June 1, 2006
+
+10.5**
+ 
+Employment Agreement with Michael Mugan, dated April 1, 2006
+
+10.6**
+ 
+Employment Agreement with Paul Engels, dated April 1, 2006
+
+10.7**
+ 
+Employment Agreement with Dirk Bhagat, dated June 1, 2006
+
+10.8**
+ 
+Management Services Agreement with John Nemanic, dated June 1, 2006
+
+10.9**
+ 
+Form of Indemnification Agreement between the registrant and each of its directors and executive officers
+
+10.10**
+ 
+Asset Purchase Agreement between the registrant and FortuneCity.com Inc., dated as of January 31, 2006
+
+10.11**
+ 
+Services Agreement between the registrant and Geeksforless Inc., dated as of July 1, 2005
+
+10.12**
+ 
+Template Purchase Agreement between the registrant and Geeksforless Inc., dated as of February 1, 2005
+
+10.13**
+ 
+Image Library Agreement between the registrant and Geeksforless Inc., dated as of January 2, 2005
+
+10.14**
+ 
+Lease between Badenhurst-Airway Centre Ltd. and the registrant dated September 30, 2002, as amended
+
+10.15**
+ 
+Revolving Line of Credit Facility
+
+21.1**
+ 
+List of Subsidiaries
+
+23.1
+ 
+Consent of KPMG LLP
+
+23.2**
+ 
+Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
+
+23.3**
+ 
+Consent of International Data Corporation
+
+24.1**
+ 
+Powers of Attorney
+
+*Replaces
+Exhibit of same description as previously filed.
+
+**Previously
+filed. 
+
+(b)Financial
+Statement Schedules. 
+
+ Schedule II Valuation
+and Qualifying Accounts 
+
+ All
+other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore,
+have been omitted. 
+
+II-4
+
+ 
+
+Item 17. Undertakings. 
+
+ The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such
+denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. 
+
+ Insofar
+as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant
+pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as
+expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant
+of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or
+controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of
+appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended and will be governed by the final adjudication
+of such issue. 
+
+ The
+undersigned Registrant hereby undertakes that: 
+
+(1) For
+purposes of determining any liability under the Securities Act of 1933 the information omitted from the form of prospectus filed as part of this registration statement in reliance
+upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
+be deemed to be part of this registration statement as of the time it was declared effective. 
+
+(2) For
+the purpose of determining any liability under the Securities Act 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. 
+
+II-5
+
+ 
+SIGNATURES 
+
+ Pursuant to the requirements of the Securities Act of 1933, as amended, Hostopia.com Inc. has duly caused this Amendment No. 7 to the Registration
+Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto authorized, in the City of Fort Lauderdale and the State of Florida, on the 30th day of October, 2006.
+
+ 
+
+ 
+ 
+HOSTOPIA.COM INC.
+
+ 
+
+ 
+
+By:
+
+/s/ COLIN CAMPBELL Colin Campbell
+ Chief Executive Officer
+
+POWER OF ATTORNEY 
+
+ Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 7 to the Registration Statement on Form S-1 has been signed by
+the following persons in the capacities and on the dates indicated.
+
+ 
+
+Signature
+ 
+Title
+ 
+Date
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+/s/ COLIN CAMPBELL Colin Campbell
+ 
+Chief Executive Officer, Chief Operating Officer and Director (Principal Executive Officer)
+ 
+October 30, 2006
+
+/s/ MICHAEL MUGAN Michael Mugan
+
+ 
+
+Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)
+
+ 
+
+October 30, 2006
+
+* John Nemanic
+
+ 
+
+Chairman of the Board
+
+ 
+
+October 30, 2006
+
+* William Campbell
+
+ 
+
+President and Director
+
+ 
+
+October 30, 2006
+
+* Michael Cytrynbaum
+
+ 
+
+Director
+
+ 
+
+October 30, 2006
+
+* Mathew George
+
+ 
+
+Director
+
+ 
+
+October 30, 2006
+
+* Robert Kidd
+
+ 
+
+Director
+
+ 
+
+October 30, 2006
+
+ 
+ 
+ 
+ 
+ 
+
+II-6
+
+ 
+
+* David McMahon
+
+ 
+
+Director
+
+ 
+
+October 30, 2006
+
+* Christopher Scatliff
+
+ 
+
+Director
+
+ 
+
+October 30, 2006
+
+ * By:
+
+/s/ COLIN CAMPBELL Colin Campbell
+ Attorney-in-Fact
+
+ 
+
+ 
+
+II-7
+
+ 
+ 
+
+EXHIBIT INDEX 
+ 
+
+Exhibit Number
+ 
+ 
+Description
+ 
+
+1.1*
+ 
+Form of Underwriting Agreement
+
+3.1**
+ 
+Amended and Restated Certificate of Incorporation of Hostopia.com Inc.
+
+3.2**
+ 
+Amended and Restated Bylaws of Hostopia.com Inc.
+
+4.1**
+ 
+Shareholder Agreement dated as of December 27, 2001
+
+4.2**
+ 
+Registration Rights Agreement dated as of December 27, 2001
+
+4.3**
+ 
+Warrant dated July 1, 2003 exercisable for 60,000 shares of common stock
+
+4.4**
+ 
+Specimen Stock Certificate
+
+5.1**
+ 
+Opinion of Dorsey & Whitney LLP
+
+10.1**
+ 
+Hostopia.com Inc. 2000 Stock Option Plan and forms of related agreements
+
+10.2**
+ 
+Hostopia.com Inc. 2006 Stock Option Plan and forms of related agreements
+
+10.3**
+ 
+Employment Agreement with William Campbell, dated June 1, 2006
+
+10.4**
+ 
+Employment Agreement with Colin Campbell, dated June 1, 2006
+
+10.5**
+ 
+Employment Agreement with Michael Mugan, dated April 1, 2006
+
+10.6**
+ 
+Employment Agreement with Paul Engels, dated April 1, 2006
+
+10.7**
+ 
+Employment Agreement with Dirk Bhagat, dated June 1, 2006
+
+10.8**
+ 
+Management Services Agreement with John Nemanic, dated June 1, 2006
+
+10.9**
+ 
+Form of Indemnification Agreement between the registrant and each of its directors and executive officers.
+
+10.10**
+ 
+Asset Purchase Agreement between the registrant and FortuneCity.com Inc., dated as of January 31, 2006
+
+10.11**
+ 
+Services Agreement between the registrant and Geeksforless Inc., dated as of July 1, 2005
+
+10.12**
+ 
+Template Purchase Agreement between the registrant and Geeksforless Inc., dated as of February 1, 2005
+
+10.13**
+ 
+Image Library Agreement between the registrant and Geeksforless Inc., dated as of January 2, 2005
+
+10.14**
+ 
+Lease between Badenhurst-Airway Centre Ltd. and the registrant dated September 30, 2002, as amended
+
+10.15**
+ 
+Revolving Line of Credit Facility
+
+21.1**
+ 
+List of Subsidiaries
+
+23.1
+ 
+Consent of KPMG LLP
+
+23.2**
+ 
+Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
+
+23.3**
+ 
+Consent of International Data Corporation
+
+24.1**
+ 
+Powers of Attorney
+
+*Replaces
+Exhibit of same description as previously filed.
+
+**Previously
+filed. 
+
+QuickLinks
+
+TABLE OF CONTENTS
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001365998_boomerang_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001365998_boomerang_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b914d7490b4d07f82a9a2a43bf4b07f526765915
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001365998_boomerang_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Sonnenschein Nath & Rosenthal LLP, St. Louis, Missouri. Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001366455_tube-city_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001366455_tube-city_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c96bb3afb67d859a403465a382ee18fec18b871a
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001366455_tube-city_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, will pass upon the validity of the securities offered in this offering and other legal matters for us. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001367209_pantheon_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001367209_pantheon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cc132b41eadab09850563dad082838584ce625fa
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001367209_pantheon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Graubard Miller, New York, New York. We have paid Graubard Miller a retainer of $25,000 for such services. Graubard Miller has agreed that the balance of the legal fees that we will owe to it for these services ($275,000) will be paid by us only upon the successful consummation of this offering. Foley & Lardner LLP, Boston, Massachusetts, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001367996_neg-oil_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001367996_neg-oil_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001367996_neg-oil_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001368811_ishares_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001368811_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001368811_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001369271_neg_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001369271_neg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001369271_neg_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001369278_ngx_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001369278_ngx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001369278_ngx_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001369279_mid-river_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001369279_mid-river_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001369279_mid-river_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001369639_granahan_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001369639_granahan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9afb2dadac6305f4f47c268bf5d4d58e195d508f
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001369639_granahan_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Bingham McCutchen LLP, New York, New York. Debevoise & Plimpton LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001369817_onebeacon_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001369817_onebeacon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1c7eb900bda4a7d1f5a91beae3ed7643fb36b05f
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001369817_onebeacon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of our Class A common shares offered by this prospectus will be passed upon for us by Conyers Dill & Pearman, Hamilton, Bermuda. Certain legal matters of U.S. and New York law will be passed upon for us by Cravath, Swaine & Moore LLP, New York, New York. The underwriters have been represented by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York and by Appleby Hunter Bailhache, Bermuda.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001369848_national_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001369848_national_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001369848_national_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001369849_national_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001369849_national_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001369849_national_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001370442_offshore_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001370442_offshore_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001370442_offshore_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001370443_onshore_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001370443_onshore_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001370443_onshore_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001370444_onshore_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001370444_onshore_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001370444_onshore_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001370445_neg_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001370445_neg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001370445_neg_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001370447_ngx-lp-of_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001370447_ngx-lp-of_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001370447_ngx-lp-of_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001370448_shana_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001370448_shana_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54790ba3c3556c36aec43479229353597ac72480
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001370448_shana_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Dealers, Inc. When a NASD member participates in a public offering of securities in which it, or its affiliates, together with the other underwriters and their affiliates, will receive more than 10% of the net proceeds of the public offering, then the public offering price per share can be no higher than that recommended by a qualified independent underwriter as defined by Rule 2720 of the NASD. Accordingly, we have obtained to assume the responsibilities of acting as a qualified independent underwriter, which responsibilities include participating in due diligence investigation and in the preparation of this prospectus. We have agreed to indemnify against liabilities incurred in connection with it acting as qualified independent underwriter, including liabilities under the Securities Act, or to contribute to payments it may be required to make with respect to those liabilities. will not receive any additional compensation in connection with its acting as qualified independent underwriter. A prospectus in electronic format may be made available by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The lead managers may agree to allocate a number of notes to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Table of Contents LEGAL MATTERS The validity of the notes offered hereby will be passed upon for us by DLA Piper Rudnick Gray Cary US LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001370828_vanguard_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001370828_vanguard_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..64dab82c8502103b0db73ca8542bb3e0a3b52506
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001370828_vanguard_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the issuance of the shares of common stock to be sold in this offering will be passed upon for us by Schulte Roth & Zabel LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001372411_acologix_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001372411_acologix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1e2a6e987c08b87ffe72995354990a487e35fb02
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001372411_acologix_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered by this prospectus will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Mori Hamada & Matsumoto, Tokyo, Japan is advising us with respect to certain matters of Japanese law in connection with the offering. Certain members of, and persons associated with, Wilson Sonsini Goodrich & Rosati own an aggregate of 100,000 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001372791_wsb_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001372791_wsb_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b06739189d8a851abf702b426ee8f10e1f2623db
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001372791_wsb_legal_matters.txt
@@ -0,0 +1 @@
+CERTAIN LEGAL MATTERS Keller Rohrback L.L.P., Seattle, Washington, has advised us in connection with certain legal matters in connection with this offering, and will pass upon the validity of our common stock offered by this prospectus. Stoel Rives LLP, Seattle Washington, will pass upon certain legal matters in connection with this offering for the underwriter.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001373561_first_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001373561_first_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d1c3e8b8b4bf8e4c2d0b5e050a9ee0879c80e85a
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001373561_first_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Weil, Gotshal & Manges LLP, New York, New York, has passed upon the validity of the common stock offered hereby on behalf of us. Certain legal matters will be passed upon on behalf of the underwriters by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001375829_rr-media_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001375829_rr-media_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7982df4bd42878e9b31a4c9ed72780caf0f9d5a0
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001375829_rr-media_legal_matters.txt
@@ -0,0 +1 @@
+Where You Can Find More Information We have filed a registration statement on Form F-1 with the SEC in connection with this offering. In addition, upon completion of the offering, we will be required to file annual reports on Form 20-F, current reports on Form 6-K and other information with the SEC. You may read and copy the registration statement and any other documents we have filed at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SEC's Internet site at "http://www.sec.gov". As a foreign private issuer, we will be exempt from the rules under the Exchange Act regarding the delivery and content of proxy statements. Our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Under the Exchange Act, we will not be required to publish financial statements as frequently or as promptly as U.S. companies. However, we will furnish to the SEC unaudited quarterly financial statements prepared in accordance with U.S. GAAP. This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to any of our contracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement. After the offering, we expect to provide annual reports to our shareholders that include financial information examined and reported on by our independent public accountant. Where You Can Find More Information We have filed a registration statement on Form F-1 with the SEC in connection with this offering. In addition, upon completion of the offering, we will be required to file annual reports on Form 20-F, current reports on Form 6-K and other information with the SEC. You may read and copy the registration statement and any other documents we have filed at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SEC's Internet site at "http://www.sec.gov". As a foreign private issuer, we will be exempt from the rules under the Exchange Act regarding the delivery and content of proxy statements. Our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Under the Exchange Act, we will not be required to publish financial statements as frequently or as promptly as U.S. companies. However, we will furnish to the SEC unaudited quarterly financial statements prepared in accordance with U.S. GAAP. This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to any of our contracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement. After the offering, we expect to provide annual reports to our shareholders that include financial information examined and reported on by our independent public accountant. Adjusted net income $ 2,203 $ 4,224 $ 5,171 $ 2,546 $ 3,472 A reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure, is set forth below: Year ended December 31, Six months ended June 30, (in thousands) Reconciliation of Net Income to Adjusted EBITDA: Net income - as reported $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 Adjusted EBITDA $ 4,362 $ 7,649 $ 9,234 $ 4,372 $ 5,836 As of June 30, 2006 Actual Pro forma* (Unaudited) Liabilities regarding employees $ 613 $ 455 $ 328 Government institutions 451 20 38 Accrued expenses 1,609 1,109 1,068 Other 112 98 Capitalization The following table summarizes our capitalization as of June 30, 2006: on an actual basis; and on a pro forma basis to give effect to our receipt of net proceeds of $39.0 million from this offering at an assumed initial public offering price of $12.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if these events had occurred as of June 30, 2006. As of June 30, 2006 Actual Pro Forma Total shareholders' equity $ 12,879 $ 51,894 (Unaudited) Government debentures $ 175 $ 201 $ 307 Corporate debentures 330 312 389 Mutual funds 455 536 589 Short-term treasury notes 206 Dilution If you invest in our ordinary shares, your interest will be diluted to the extent of the difference between the public offering price per ordinary share and the pro forma net tangible book value per ordinary share after this offering. At June 30, 2006, we had a net tangible book value of $12.9 million, or $0.99 per ordinary share. Net tangible book value per share is equal to our total tangible assets less total liabilities, divided by the number of our outstanding ordinary shares. After giving effect to the sale of 3,625,000 ordinary shares offered by us pursuant to this prospectus at an assumed initial public offering price of $12.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, our pro forma net tangible book value as of June 30, 2006 would have been approximately $51.9 million, or approximately $3.11 per ordinary share. This represents an immediate dilution of $8.89 per share to new investors in this offering. If the initial public offering price is higher or lower than $12.00 per share, the dilution to new shareholders will be higher or lower, respectively. The following table illustrates this per share dilution: Assumed initial public offering price per share $ 12.00 Historical net tangible book value per share as of June 30, 2006 $ 0.99 Increase in net tangible book value per share attributable to new investors 2.12 Pro forma net tangible book value per share after this offering 3.11 Dilution per share to new investors $ 8.89 If the underwriters exercise their over-allotment option in full, pro forma net tangible book value after the offering will increase to $3.38 per share, representing an immediate dilution of $8.62 per share to new investors. The following table summarizes, on a pro forma basis as of June 30, 2006, the differences between existing shareholders and new investors with respect to: the number of ordinary shares purchased from us; the total consideration paid to us; and the average price per share investors pay when they buy ordinary shares in this offering. The calculation in this table with respect to shares to be purchased by new investors in this offering reflects an assumed initial public offering price of $12.00 per share, the midpoint of the range set forth on the cover page of this prospectus. Shares purchased Total consideration Average price per share Number Percent Amount (Unaudited) (Unaudited) Cash flows from operating activities Net income $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 Adjustments required to reconcile net profit to netcash provided by operating activities: Deprecation and amortization 958 1,311 1,760 811 1,033 Deferred taxes 127 478 (283 ) (368 ) 23 Changes in liability for employee severance Payments, net (28 ) 18 4 27 87 Capital losses (gains) on sale of fixed assets, net 1 (184 ) (36 ) (9 ) (4 ) Decrease (increase) in value of marketable securities (102 ) (16 ) 27 (70 ) Expenses in relation to options granted 21 21 21 10 24 Changes in fair value of embedded currency conversion derivatives (1,465 ) 1,375 1,321 (196 ) Changes in assets and liabilities: Increase in accounts receivable trade (816 ) (1,681 ) (1,421 ) (1,232 ) (2,850 ) Decrease (increase) in accounts receivable other (10 ) (336 ) (376 ) 117 90 Decrease (increase) in prepaid expenses (113 ) (52 ) (55 ) 167 149 Decrease (increase) in deposits and long-term receivables (336 ) (198 ) 30 (284 ) (269 ) Increase (decrease) in accounts payable 874 1,965 (215 ) (89 ) 180 Increase in deferred income 992 728 851 Percent Existing shareholders 13,047,300 78.3 % 3,952,288 8.3 % $ 0.30 New investors 3,625,000 21.7 43,500,000 91.7 12.00 Operating income 3,383 24.1 6,317 26.6 Interest and marketable securities income 20 0.0 75 0.3 Currency fluctuation and other financial income (expenses), net 1 0.0 (115 ) (0.4 ) Changes in fair value of embedded currency conversion derivatives 1,465 6.2 Other income (expenses), net (1 ) Selected Financial Data The following selected financial data, which is presented in accordance with U.S. GAAP, should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2004 and 2005 and the selected statements of operations data for each of the three years in the period ended December 31, 2005 have been derived from our audited financial statements included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2003 have been derived from our audited financial statements not included in this prospectus. The selected balance sheet data as of December 31, 2001 and 2002 and the selected statements of operations data for the years ended December 31, 2001 and 2002, have been derived from our financial statements not included in this prospectus, which were prepared and audited in accordance with Israeli GAAP and which reconciliation to U.S. GAAP has been reviewed but not audited. The selected balance sheet data as of June 30, 2006 and the selected statement of operations data for the six months ended June 30, 2005 and 2006 have been derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements. Historical results are not necessarily indicative of the results to be expected in the future, and the results for the six months ended June 30, 2006 should not be considered indicative of results expected for the full fiscal year. Year ended December 31, (Unaudited) Current assets Cash and cash equivalents 1C; 2 $ 1,689 $ 2,060 $ 714 Marketable securities 1D; 3 1,166 1,222 1,285 Accounts receivable: Trade (net of provision for doubtful accounts of $406, $369 and $563 as of December 31, 2004, 2005 and June 30, 2006, (unaudited) respectively) 1E 4,204 5,625 8,475 Other 4 446 822 732 Fair value of embedded currency conversion derivatives 1O 1,853 279 684 Deferred taxes 1J; 14 86 115 Prepaid expenses 287 342 Six months ended June 30, Cash flows from financing activities Dividend paid $ $ (4,540 ) $ (2,472 ) $ (1,364 ) $ (1,235 ) Proceeds on account of shares previously issued 560 Stock issuance costs (88 ) Proceeds from issuance of Ordinary Shares 50 1,395 58 Repayment of long-term loans (17 ) Bank credit, net (Unaudited) (in thousands, except share and per share data) Statements of Operations Data: Revenues $ 7,383 $ 10,899 $ 14,036 $ 23,767 $ 31,311 $ 14,240 $ 19,704 Cost of revenue 4,720 5,946 8,839 14,065 19,798 8,560 12,427 Gross profit 2,663 4,953 5,197 9,702 11,513 5,680 7,277 Currency fluctuation and other financial income (expenses), net (186 ) (234 ) 1 (115 ) (2 ) 90 Gross deferred tax assets $ 255 $ 143 $ Deferred tax assets $ 255 $ 143 $ Net income $ 1,065 $ 2,172 $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 Basic income per ordinary share $ 0.12 $ 0.23 $ 0.23 $ 0.47 $ 0.33 $ 0.13 $ 0.27 Diluted income per ordinary share $ 0.12 $ 0.23 $ 0.22 $ 0.46 $ 0.33 $ 0.13 $ 0.27 Weighted average number of ordinary shares used to compute basic income per ordinary share 8,990,100 9,513,000 9,594,900 11,050,200 12,921,300 12,908,700 13,047,300 Weighted average number of ordinary shares used to compute diluted income per ordinary share 9,046,800 9,582,300 9,708,300 11,289,600 13,034,700 13,028,400 13,047,300 Cash dividend per ordinary share $ $ 0.08 $ $ 0.39 $ 0.19 $ 0.11 $ 0.09 Year ended December 31, Six months ended June 30, (in thousands) Other Data: Adjusted net income(1) $ 1,086 $ 2,193 $ 2,203 $ 4,224 $ 5,171 $ 2,546 $ 3,472 Adjusted EBITDA(1) 2,267 4,198 4,362 7,649 9,234 4,372 5,836 Depreciation and amortization 464 552 958 1,311 1,760 811 1,033 Capital expenditures 728 526 3,031 3,278 3,051 1,342 3,218 Contracted backlog (as of period end) * * 32,659 41,877 91,185 74,114 101,712 *No data available. As of December 31, As of June 30, Reconciliations of adjusted net income and adjusted EBITDA to net income, the most directly comparable GAAP financial measure, are set forth below: December 31, Six months ended June 30, (Unaudited) (Unaudited) (Unaudited) (Unaudited) North America $ 2,086 $ 2,411 $ 5,298 $ 2,250 $ 3,859 $ 1,155 $ 1,992 Europe 4,321 10,301 12,674 5,828 7,863 3,021 4,190 Asia 2,152 4,423 5,160 2,539 2,576 1,321 1,290 Israel 3,942 4,355 4,784 2,237 2,799 1,157 1,381 Middle East (other than Israel) 1,535 2,165 2,866 1,130 2,013 423 1,106 Rest of the world 112 529 256 594 139 (in thousands) Reconciliation of Net Income to Adjusted Net Income: Net income as reported $ 1,065 $ 2,172 $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 Long term liabilities Deferred income 1L; 8 2,263 2,861 3,650 Liability in respect of employee severance payments 9 315 370 533 Deferred taxes 1J; 14 229 291 Adjusted net income $ 1,086 $ 2,193 $ 2,203 $ 4,224 $ 5,171 $ 2,546 $ 3,472 Year ended December 31, Six months ended June 30, (in thousands) Reconciliation of Net Income to Adjusted EBITDA: Net income as reported $ 1,065 $ 2,172 $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 (Unaudited) Communications equipment $ 9,985 $ 12,738 $ 15,390 Office furniture and equipment 264 282 289 Motor vehicles 319 377 Adjusted EBITDA $ 2,267 $ 4,198 $ 4,362 $ 7,649 $ 9,234 $ 4,372 $ 5,836 dollars. The services we render are not necessarily rendered in the same geographic areas as those in which the customers are located. Year ended December 31, Six months ended June 30, (as a percentage of total revenues) North America 14.9 % 10.1 % 16.9 % 15.8 % 19.6 % Europe 30.8 43.3 40.5 40.9 39.9 Asia 15.3 18.6 16.5 17.8 13.1 Israel 28.1 18.3 15.3 15.7 14.2 Middle East (other than Israel) 10.9 9.1 9.1 7.9 10.2 Rest of world 0.5 1.7 1.9 3.0 Recent Accounting Pronouncements. We examined the recently issued accounting standards and believe that the adoptions of these standards will not have a significant impact on our financial statements. Results of Operations The following table sets forth selected statements of operations data for each of the periods: Year ended December 31, Six months ended June 30, (Unaudited) (in thousands, except share and per share data) Statement of Operations Data: Revenues $ 14,036 $ 23,767 $ 31,311 $ 14,240 $ 19,704 Cost of revenues 8,839 14,065 19,798 8,560 12,427 Gross profit 5,197 9,702 11,513 5,680 7,277 Total operating expenses 1,814 3,385 4,060 2,129 2,498 Net income $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 Basic income per ordinary share $ 0.23 $ 0.47 $ 0.33 $ 0.13 $ 0.27 Diluted income per ordinary share $ 0.22 $ 0.46 $ 0.33 $ 0.13 $ 0.27 Weighted average number of ordinary shares used to compute basic income per ordinary share 9,594,900 11,050,200 12,921,300 12,908,700 13,047,300 Weighted average number of ordinary shares used to compute diluted income per ordinary share 9,708,300 11,289,600 13,034,700 13,028,400 13,047,300 Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2006 Six months ended June 30, 2005 June 30, 2006 Gross profit 5,680 39.9 7,277 36.9 Total operating expenses 2,129 15.0 2,498 12.78 Net income $ 1,664 11.7 $ 3,583 18.1 2005 to 1.271 U.S. dollar/EURO as of June 30, 2006 and the respective change in the value of the U.S. Dollar-EURO forward contracts. Income Taxes. Income taxes were $1.7 million in the six month period ended June 30, 2006, an increase of 137.2% from $720 thousand in the same period of 2005. The increase is primarily due to the increase in income before taxes on income. In addition, the taxes on income in the six month period ended June 30, 2006 include an expense of $100 thousand for previous years taxes as a result of a settlement agreement signed with the Israeli tax authorities with respect to the years 2001 to 2003. Net Income. Net income was $3.6 million in the six month period ended June 30, 2006, an increase of 115.6% from $1.7 million in the same period of 2005. The increase is due to an increase in operating income of $1.2 million and a decrease of non cash change in fair value of embedded currency conversion derivative net of deferred taxes of $1.0 million which was only partially offset by an increase in income taxes. Year Ended December 31, 2004 Compared to Year Ended December 31, 2005 Year ended December 31, 2004 December 31, 2005 Gross profit 9,702 40.8 11,513 36.8 Operating expenses: Sales and marketing 1,383 5.8 1,704 5.4 General and administrative 2,002 8.4 2,356 7.5 Total operating expenses 3,385 14.2 4,060 13.0 Income before taxes on income 7,926 33.3 6,252 20.0 Income taxes 2,756 11.6 2,007 6.4 Net income $ 5,170 21.8 $ 4,245 13.6 Changes in Fair Value of Embedded Currency Conversion Derivatives. The change in fair value of embedded currency conversion derivatives was an expense of $1.4 million in the year ended December 31, 2005, compared to income of $1.5 million in 2004. This change is due to the decrease of the exchange rate between the U.S. dollar and the EURO from 1.3565 U.S. dollar/EURO at the end of 2004 to 1.1839 U.S. dollar/EURO at the end of 2005, and the respective change in the value of the U.S. dollar-EURO forward contracts. Income Taxes. Income taxes were $2.0 million in the year ended December 31, 2005, a decrease of 27.2% from $2.8 million in the same period of 2004. The decrease is primarily due to the decrease in income before taxes on income as well as the decrease in tax rates from 35% in 2004 to 34% in 2005. Net Income. Net income was $4.2 million in the year ended December 31, 2005, a decrease of 17.9% from $5.2 million in 2004. The decrease is due to the non cash change in fair value of embedded currency conversion derivative net of deferred taxes of $1.9 million, which was only partially offset by an increase in operating income of $1.1 million. Year Ended December 31, 2003 Compared to Year Ended December 31, 2004 Year ended December 31, 2003 December 31, 2004 Gross profit 5,197 37.0 9,702 40.8 Operating expenses: Sales and marketing 508 3.6 1,383 5.8 General and administrative 1,306 9.3 2,002 8.4 Total operating expenses 1,814 12.9 3,385 14.2 Income before taxes on income 3,403 24.2 7,926 33.3 Income taxes 1,221 8.7 2,756 11.6 Net income $ 2,182 15.5 $ 5,170 21.8 Selected Quarterly Financial Information The following tables set forth our unaudited quarterly statements of operations for each of the 10 quarters ended June 30, 2006 as well as this data expressed as a percentage of our revenues for the quarter presented. You should read these tables in conjunction with our financial statements and accompanying notes included in this prospectus. We have prepared this unaudited information on the same basis as our audited financial statements. Quarter ended (Unaudited) (in thousands) Revenues $ 5,279 $ 5,404 $ 6,078 $ 7,006 $ 7,024 $ 7,216 $ 7,853 $ 9,218 $ 9,423 $ 10,281 Cost of revenues 3,516 3,412 3,764 3,373 4,184 4,376 5,321 5,917 5,913 6,514 Gross profit 1,763 1,992 2,314 3,633 2,840 2,840 2,532 3,301 3,510 3,767 Closing balance $ 411 $ 406 $ 369 $ 231 $ Income before taxes on income 817 1,178 1,805 4,126 1,517 867 1,730 2,137 2,388 2,903 Income taxes (251 ) (498 ) (622 ) (1,385 ) (474 ) (246 ) (569 ) (717 ) (828 ) (880 ) Increase (decrease) in cash and cash equivalents 2,633 (1,546 ) 371 (440 ) (1,346 ) Cash and cash equivalents beginning of period Increase (decrease) in cash and cash equivalents $ 2,633 $ (1,546 ) $ 371 $ (440 ) $ (1,346 ) Balance of cash and cash equivalents at beginning of period As a Percentage of Revenues Quarter ended (Unaudited) Revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100 % Cost of revenues 66.6 63.1 61.9 48.1 59.6 60.6 67.8 64.2 62.8 63.4 Net income $ 566 $ 680 $ 1,183 $ 2,741 $ 1,043 $ Net income $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 $ (Unaudited) (Unaudited) (Unaudited) (Unaudited) Income per Ordinary Share (see Note 11C) Net income attributable to Ordinary Shares $ 2,182 $ 5,170 $ 4,245 $ 1,664 $ 3,583 $ Gross profit 33.4 36.9 38.1 51.9 40.4 39.4 32.2 35.8 37.2 36.6 Operating expenses: Sales and marketing 6.2 5.7 6.1 5.4 6.4 6.8 4.4 4.6 5.2 3.8 General and administrative 9.1 8.9 7.4 8.5 7.9 8.8 6.7 6.9 8.6 7.9 Total operating expenses 15.3 14.6 13.5 13.9 14.3 15.5 11.1 11.5 13.8 11.6 A. Non-cash transactions Conversion of shareholders' loans into share capital $ Operating income 18.1 22.2 24.6 38.0 26.1 23.8 21.2 24.3 23.4 24.9 Interest and marketable securities income 0.1 0.4 (0.3 ) 0.7 0.7 0.0 0.9 0.1 0.6 0.3 Currency fluctuation and other financial income (expenses), net (1.2 ) (5.2 ) 0.4 3.1 1.8 (0.5 ) 0.5 (1.4 ) 0.0 2.2 Changes in fair value of embedded currency conversion derivatives (3.7 ) 1.8 4.4 18.4 (7.2 ) (11.3 ) (0.6 ) (0.1 ) 1.3 0.7 Other income (expenses), net 2.1 2.6 0.5 (1.4 ) 0.1 0.0 0.0 0.3 0.0 0.0 Income before taxes on income 15.5 21.8 29.7 58.9 21.6 12.0 22.0 23.2 25.4 28.1 Income taxes (4.8 ) (9.2 ) (10.2 ) (19.8 ) (6.8 ) (3.4 ) (7.3 ) (7.8 ) (8.8 ) (8.6 ) Net income 10.7 12.6 19.5 39.1 14.8 8.6 14.8 15.4 16.6 19.5 Liquidity and Capital Resources Principal Sources and Uses of Liquidity. Our principal sources of liquidity are cash from operations and our cash and cash equivalents and marketable securities. Our current principal liquidity requirements consist of capital expenditures and amounts owed to suppliers. We usually use our working capital to pay our suppliers, although we may utilize the lines of credit provided to us by Bank Igud (approximately $2.2 million) and Bank Leumi (approximately $0.8 million) when an obligation to pay a supplier precedes the receipt of payments from customers. At present we only utilize small portions of these lines of credit ( 650 thousand from the Bank Leumi credit line and NIS400 thousand from the Bank Igud credit line) to provide guarantees required under four of our long term contracts with our suppliers. Our capital expenditures consist primarily of transmission and playout equipment as required to provide services to new customers. We believe that our present working capital is sufficient for our present requirements. Following this offering, we intend to expand our presence in the United States, Asia and other markets where we already operate through subcontractors, by establishing or selectively pursuing the acquisition of local teleports and playout centers, and connecting them to our global network. The cost of acquiring or establishing such operations will include the cost of fixed assets related to transmission equipment and playout equipment and can vary between $5 to $15 million per teleport, depending, among other things, on the location of the teleport and the time it will take to establish the local teleport. Taking into account our expansion plans, we believe that, following this offering, our cash generated from operations and cash balances, including the proceeds of this offering, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Cash and Cash Equivalents; Marketable Securities. Cash and cash equivalents were $700 thousand at June 30, 2006, a decrease of $1.3 million from December 31, 2005. Cash and cash equivalents were $2.1 million at December 31, 2005, which is an increase of $370 thousand from December 31, 2004. This increase is primarily attributable to cash provided by operating activities off set by cash used for investment activities and for dividend paid to shareholders. Year ended December 31, Six months ended June 30, Operating expenses: Sales and marketing 188 255 508 1,383 1,704 938 877 General and administrative Investing Activities For the six months ended June 30, 2006, we used $3.2 million for capital expenditures related to our new studio facilities in Jerusalem as well as for teleport and playout equipment. For the years 2005 and 2004, we used $3.0 million and $4.0 million, respectively. For the years 2005 and 2004, we used $3.1 million and $3.3 million respectively for capital expenditure of teleport and playout equipment. We expect that our capital expenditures will be approximately $4.2 million in 2006, mainly relating to our new studio facilities, playout equipment and teleport equipment. We have financed our capital expenditures with cash generated from operations. Financing Activities We paid dividends to our shareholder in the amounts of $2.5 million and $4.5 million for the fiscal years 2005 and 2004, respectively. During the six month period ended June 30, 2006, we paid a dividend to our shareholders in the amount of $1.2 million. For fiscal years 2004 and 2003 we generated cash from proceeds received upon issuance of shares in the amount of $1.4 million and $600 thousand, respectively. Contractual Obligations We have lease agreements for our facilities. One agreement ends on December 31, 2011 and has a five-year extension option. Another agreement will end on June 30, 2008 and another one ends on July 31, 2010 and has an extension option of either five or ten years. In May 2006, we entered into another lease agreement that ends in December 31, 2007 and has an eight-year extension option. We lease cars for employees under operating leases. Those leases are for terms of three years each with a right to terminate with payment of certain cancellation fee. We enter into long term contracts with suppliers for leases of network (satellite and fiber optic) and teleport services. Approximately 84% of these contractual commitments as of June 30, 2006 do not provide for early termination, or impose a significant penalty for early termination. The remaining commitments are either terminable each month or allow termination if our corresponding contract with a customer is terminated. The following are the contractual commitments at June 30, 2006, associated with lease obligations and contractual commitments: Total Less than 1 year 2-3 years Cash and cash equivalents end of period $ 3,235 $ 1,689 $ 2,060 $ 1,249 $ 4-5 years Balance of cash and cash equivalents at end of period $ 3,235 $ 1,689 $ 2,060 $ 1,249 $ $ 1,689 $ 2,060 $ More than 5 years (in thousands) Operating Leases $ 812 $ 217 $ 352 $ 216 $ 27 Operating Car Leases 142 94 48 Operating Network Leases 72,611 19,262 31,668 16,444 5,237 Income before taxes on income 3,403 7,926 6,252 2,384 5,291 Income taxes 1,221 2,756 2,007 Income before taxes on income 1,639 3,442 3,403 7,926 6,252 2,384 5,291 Income taxes 574 1,270 1,221 2,756 2,007 Income before taxes on income 3,403 7,926 6,252 2,384 5,291 Income taxes 1,221 2,756 2,007 Income before taxes on income 2,384 16.7 5,291 26.8 Income taxes Total $ 73,565 $ 19,573 $ 32,068 $ 16,660 $ 5,264 $ 446 $ 822 $ 24 hours a day, 7 days a week on a continuous basis, while for others we provide transmission services for a portion of their content or we transmit their content on an occasional basis. The following table alphabetically lists the top 7-9 channels to which we provide services in each category (based on the amount of revenues we generate from servicing each channel; in cases where these channels acquire our services through intermediaries, the ranking is based on the amounts that we receive per channel, rather than the amounts that may be paid by the channels to the intermediaries): Representative Channels Channels for which we provide Continuous Services Channels for which we provide Occasional Services Commercial Channels Governmental Channels Religious Channels News Channels Management Executive Officers and Directors The following table sets forth the name, age, position(s) and a brief account of the business experience of each of our executive officers and directors as of October 1, 2006: Name Age Position(s) Principal and Selling Shareholders The following table sets forth information concerning the beneficial ownership of our ordinary shares as of September 15, 2006, and as adjusted to give effect to the sale of 3,625,000 ordinary shares by us and 175,000 ordinary shares by the selling shareholder in this offering for: each person we know to be the beneficial owner of 5% or more of the outstanding shares of our ordinary shares; each of our executive officers and directors; all of our executive officers and directors as a group; and the shareholder who is selling shares pursuant to this prospectus. The column entitled "Beneficial Ownership Prior to Offering" is based on 13,047,300 ordinary shares outstanding as of September 15, 2006. The column entitled "Beneficial Ownership After the Offering" is based on 16,672,300 ordinary shares to be outstanding after the closing of this offering, including the 3,625,000 shares that we are selling in this offering. The column entitled "Beneficial Ownership After the Offering Assuming Exercise of the Over-allotment Option in Full" is based on 17,242,300 ordinary shares to be outstanding after the closing of this offering, including the 4,195,000 shares that we are selling in this offering assuming that the underwriters purchase 570,000 shares upon the exercise of the over-allotment option in full. For purposes of the table below, we deem shares subject to options that are currently exercisable or exercisable within 60 days of September 15, 2006, to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, the persons or entities in this table have sole voting and investing power with respect to all of the ordinary shares beneficially owned by them, subject to community property laws, where applicable. Except as otherwise set forth below, the street address of the beneficial owners is c/o RRSat Global Communications Network Ltd., 4 Hagoren Street, Industrial Park, Omer 84965, Israel. None of our shareholders are residents of the United States. Beneficial Ownership After the Offering Assuming Exercise of the Over-allotment Option in Full Beneficial Ownership Prior to Offering Beneficial Ownership After the Offering Name of Beneficial Owner Shares to be Sold Shares Percentage Shares Percentage Shares Percentage 5% Shareholders: Del-Ta Engineering Equipment Ltd.(2) 8 Shaul Hamelech Blvd. Tel-Aviv 64733, Israel 6,085,800 46.64 % 6,085,800 36.50 % 6,085,800 35.30 % Kardan Communications Ltd.(3) 154 Menachem Begin Road Tel-Aviv 64921, Israel 4,233,600 32.45 % 4,233,600 25.39 % 4,233,600 24.55 % (Unaudited) Long-term deposits (1) $ 10 $ 2 $ 4 Prepaid expenses (2) 811 $ 821 $ (Unaudited) (in thousands) Statement of Cash Flows Data: Net cash provided by operating activities $ 3,852 $ 5,673 $ 5,884 $ 2,343 $ 3,183 Net cash used in investing activities (2,013 ) (3,953 ) (3,019 ) (1,353 ) (3,206 ) Net cash provided by (used in) financing activities Net cash provided by (used in) financing activities $ tax rate is the result of a weighted combination of the applicable rates. The tax benefits from any certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved Enterprise must be allocated among the different Approved Enterprises and therefore does not enjoy tax benefits. A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a foreign investor's company. A foreign investor's company eligible for benefits is essentially a company that is more than 49% owned (measured by both share capital, and combined share and loan capital) by non-Israeli residents. A company which qualifies as a foreign investor's company and has an Approved Enterprise program is eligible for tax benefits for a ten year benefit period. Income derived from the Approved Enterprise program will be subject to a reduced tax rate for those ten years, provided that the company qualifies as a foreign investor's company. The tax rates and related levels of foreign investments are set forth in the following table Rate of Reduced Tax Reduced Tax Period Percent of Foreign Ownership Underwriting We and the selling shareholder have entered into an underwriting agreement with the underwriters named below. CIBC World Markets Corp., Thomas Weisel Partners LLC, William Blair & Company, C.E. Unterberg, Towbin, LLC and Maxim Group LLC are acting as representatives of the underwriters. The underwriting agreement provides for the purchase of a specific number of ordinary shares by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of ordinary shares set forth opposite its name below: Underwriter Number of Shares CIBC World Markets Corp. Thomas Weisel Partners LLC William Blair & Company C.E. Unterberg, Towbin, LLC. Maxim Group LLC Total 3,800,000 Operating expenses: Sales and marketing 328 310 370 375 450 488 343 423 490 387 General and administrative 479 482 448 593 557 634 526 639 812 Operating expenses Sales and marketing 508 1,383 1,704 938 877 488 387 General and administrative 1,306 2,002 2,356 1,191 1,621 634 The following table provides information regarding the amount of the discount to be paid to the underwriters by us and the selling shareholder: Per Share Interest and marketable securities (income) (20 ) (75 ) (140 ) (55 ) (83 ) Currency fluctuation and other financial (income) expenses, net (1 ) 115 2 (90 ) (229 ) Changes in fair value of embedded currency conversion derivatives (1,465 ) 1,375 1,321 (196 ) Other expenses (income), net 1 (184 ) (36 ) (9 ) (4 ) Income tax expense 1,221 2,756 2,007 720 1,708 Non-cash equity-based compensation charge 21 21 21 10 24 Depreciation and amortization 958 1,311 1,760 Interest and marketable securities (income) (48 ) (51 ) (20 ) (75 ) (140 ) (55 ) (83 ) Currency fluctuation and other financial (income) expenses, net 186 234 (1 ) 115 2 (90 ) (229 ) Changes in fair value of embedded currency conversion derivatives (1,465 ) 1,375 1,321 (196 ) Other expenses (income), net 5 1 (184 ) (36 ) (9 ) (4 ) Income tax expense 574 1,270 1,221 2,756 2,007 720 1,708 Non-cash equity-based compensation charge 21 21 21 21 21 10 24 Depreciation and amortization 464 552 958 1,311 1,760 Total Without Exercise of Over-Allotment Option Total With Full Exercise of Over-Allotment Option Company has not applied for a listing of the ordinary shares being offered pursuant to this prospectus on the SWX Swiss Exchange or on any other regulated securities market, and consequently, the information presented in this prospectus does not necessarily comply with the information standards set out in the relevant listing rules. The ordinary shares being offered pursuant to this prospectus have not been registered with the Swiss Federal Banking Commission as foreign investment funds, and the investor protection afforded to acquirers of investment fund certificates does not extend to acquirers of shares. Investors are advised to contact their legal, financial or tax advisers to obtain an independent assessment of the financial and tax consequences of an investment in the ordinary shares. Legal Matters The validity of the ordinary shares offered by this prospectus will be passed upon for us by Naschitz, Brandes & Co., Tel-Aviv, Israel, our Israeli counsel. We are also being represented by Morrison & Foerster LLP, San Francisco, California, as to U.S. legal matters. Certain legal matters in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain matters relating to Israeli law will be passed upon for the underwriters by Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., Tel-Aviv, Israel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001376830_cme2-inc_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001376830_cme2-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c177be2a752baaf9c3d43f38150464f209994125
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001376830_cme2-inc_legal_matters.txt
@@ -0,0 +1,2283 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the notes offered hereby will be passed upon for Advanstar by Davis Polk & Wardwell, New York, New York. 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The financial statements as of December 31, 2004 and 2005 and for each of the three years in the period ended December 31, 2005 included in this
+Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing
+and accounting. 
+
+123
+
+ 
+ 
+ 
+
+WHERE YOU CAN FIND MORE INFORMATION 
+ 
+
+ We have filed with the SEC, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to our offering
+of the notes. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. You will find additional information about us and
+the notes in the registration statement. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to the company and the notes, reference
+is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are
+not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the
+registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at
+the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at
+1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration
+statement, including the exhibits and any schedules thereto. 
+
+ If
+for any reason we are not required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, we are still required under the indenture to furnish
+the holders of the notes with the information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. In addition, we have agreed that, for so long as any notes remain
+outstanding, we will furnish to the holders of the notes and to securities analysts and prospective investors, upon their request, the information required to be delivered by Rule 144A(d)(4)
+under the Securities Act. We also maintain an Internet site at http://www.advanstar.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated
+into this prospectus or the registration statement of which it forms a part. 
+
+124
+
+ 
+
+ 
+
+INDEX TO FINANCIAL STATEMENTS 
+ 
+
+ 
+
+Reports of Independent Registered Public Accounting Firm
+
+ 
+
+F-2
+
+Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Consolidated Balance Sheets as of December 31, 2004 and 2005
+
+ 
+
+F-3
+
+ 
+
+Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-4
+
+ 
+
+Consolidated Statements of Stockholder's Equity for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-5
+
+ 
+
+Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005
+
+ 
+
+F-6
+
+ 
+
+Notes to Consolidated Financial Statements
+
+ 
+
+F-7
+
+Condensed Consolidated Financial Statements:
+
+ 
+
+ 
+
+ 
+
+Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2005 and June 30, 2006
+
+ 
+
+F-40
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2005 and 2006
+
+ 
+
+F-41
+
+ 
+
+Condensed Consolidated Statements of Operations (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-42
+
+ 
+
+Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2005 and 2006
+
+ 
+
+F-43
+
+ 
+
+Notes to Condensed Consolidated Financial Statements (Unaudited)
+
+ 
+
+F-44
+
+F-1
+
+ 
+
+ 
+ 
+
+Report of Independent Registered Public Accounting Firm 
+ 
+
+To
+the Stockholder and Board of Directors
+
+of Advanstar Communications Inc. 
+
+ In
+our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholder's equity and of cash flows present fairly, in all
+material respects, the financial position of Advanstar Communications Inc., a wholly owned subsidiary of Advanstar, Inc., and its subsidiaries at December 31, 2005 and 2004, and
+the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United
+States of America. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
+consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
+financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board
+(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
+examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
+evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+
+/s/ PricewaterhouseCoopers
+LLP
+
+Minneapolis, Minnesota 
+
+March 1,
+2006, except as to the seventh paragraph of Note 14, and the change in operating segments described in Notes 1, 3, 4, and 11 for which the dates are March 14, 2006
+and October 4, 2006, respectively. 
+
+F-2
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Balance Sheets 
+ 
+ December 31, 2004 and 2005 
+ 
+
+ 
+
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands, except share and per share data)
+
+ 
+
+Assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash and cash equivalents
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+Accounts receivable, net of allowance of $785 and $1,076 at December 31, 2004 and 2005
+ 
+ 
+26,699
+ 
+ 
+24,607
+ 
+
+ 
+Prepaid expenses
+ 
+ 
+6,406
+ 
+ 
+7,871
+ 
+
+ 
+Other
+ 
+ 
+2,450
+ 
+ 
+1,965
+ 
+
+ 
+Current assets of discontinued operations
+ 
+ 
+2,690
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current assets
+ 
+ 
+79,468
+ 
+ 
+81,052
+ 
+
+Due from parent
+ 
+ 
+ 
+ 
+ 
+2,232
+ 
+
+Property, plant and equipment, net
+ 
+ 
+18,717
+ 
+ 
+21,306
+ 
+
+Intangible and other assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Goodwill
+ 
+ 
+586,967
+ 
+ 
+594,982
+ 
+
+ 
+Intangibles and other, net
+ 
+ 
+91,948
+ 
+ 
+62,644
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total intangible and other assets, net
+ 
+ 
+678,915
+ 
+ 
+657,626
+ 
+
+Non-current assets of discontinued operations and assets held for sale
+ 
+ 
+135,837
+ 
+ 
+4,620
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Liabilities and Stockholder's Equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Current maturities of long-term debt
+ 
+$
+1,300
+ 
+$
+201
+ 
+
+ 
+Accounts payable
+ 
+ 
+13,451
+ 
+ 
+12,342
+ 
+
+ 
+Accrued compensation
+ 
+ 
+7,451
+ 
+ 
+7,236
+ 
+
+ 
+Other accrued expenses
+ 
+ 
+32,979
+ 
+ 
+30,758
+ 
+
+ 
+Deferred revenue
+ 
+ 
+39,282
+ 
+ 
+46,472
+ 
+
+ 
+Current liabilities of discontinued operations
+ 
+ 
+15,886
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current liabilities
+ 
+ 
+110,349
+ 
+ 
+97,009
+ 
+
+Long-term debt, net of current maturities
+ 
+ 
+612,919
+ 
+ 
+461,786
+ 
+
+Deferred income taxes
+ 
+ 
+18,250
+ 
+ 
+31,500
+ 
+
+Other long-term liabilities
+ 
+ 
+4,229
+ 
+ 
+4,933
+ 
+
+Due to parent
+ 
+ 
+2,698
+ 
+ 
+ 
+ 
+
+Long-term liabilities of discontinued operations
+ 
+ 
+3,627
+ 
+ 
+ 
+ 
+
+Commitments and contingencies (Note 10)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stockholder's equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Common stock, $.01 par value, 3,500,000 shares authorized; 1,000,000 shares issued and outstanding at December 31, 2004 and 2005
+ 
+ 
+10
+ 
+ 
+10
+ 
+
+ 
+Capital in excess of par value
+ 
+ 
+447,367
+ 
+ 
+447,367
+ 
+
+ 
+Accumulated deficit
+ 
+ 
+(292,757
+)
+ 
+(284,182
+)
+
+ 
+Accumulated other comprehensive income
+ 
+ 
+6,245
+ 
+ 
+8,413
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total stockholder's equity
+ 
+ 
+160,865
+ 
+ 
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+912,937
+ 
+$
+766,836
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-3
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Consolidated Statements of Operations 
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+
+(in thousands)
+
+ 
+
+Revenue
+ 
+$
+190,698
+ 
+$
+270,412
+ 
+$
+288,913
+ 
+
+Operating expenses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cost of production (excluding depreciation)
+ 
+ 
+35,292
+ 
+ 
+50,859
+ 
+ 
+56,326
+ 
+
+ 
+Selling, editorial and circulation (excluding depreciation)
+ 
+ 
+69,293
+ 
+ 
+106,771
+ 
+ 
+112,373
+ 
+
+ 
+General and administrative (excluding depreciation)
+ 
+ 
+29,654
+ 
+ 
+39,419
+ 
+ 
+40,916
+ 
+
+ 
+Restructuring charge
+ 
+ 
+2,692
+ 
+ 
+ 
+ 
+ 
+4,771
+ 
+
+ 
+Funding of affiliated dot.com company operations (Note 13)
+ 
+ 
+1,121
+ 
+ 
+3,283
+ 
+ 
+ 
+ 
+
+ 
+Amortization of intangibles
+ 
+ 
+35,841
+ 
+ 
+34,809
+ 
+ 
+29,750
+ 
+
+ 
+Depreciation
+ 
+ 
+7,689
+ 
+ 
+7,815
+ 
+ 
+8,005
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total operating expenses
+ 
+ 
+181,582
+ 
+ 
+242,956
+ 
+ 
+252,141
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Operating income
+ 
+ 
+9,116
+ 
+ 
+27,456
+ 
+ 
+36,772
+ 
+
+Other income (expense)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest expense
+ 
+ 
+(59,086
+)
+ 
+(70,974
+)
+ 
+(63,058
+)
+
+ 
+Interest income
+ 
+ 
+470
+ 
+ 
+468
+ 
+ 
+1,476
+ 
+
+ 
+Loss on extinguishment of debt (Note 6)
+ 
+ 
+(11,324
+)
+ 
+ 
+ 
+ 
+(12,581
+)
+
+ 
+Other income, net
+ 
+ 
+918
+ 
+ 
+1,251
+ 
+ 
+80
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before income taxes and cumulative effect of accounting change
+ 
+ 
+(59,906
+)
+ 
+(41,799
+)
+ 
+(37,311
+)
+
+ 
+Income tax (benefit) provision
+ 
+ 
+(6,724
+)
+ 
+6,518
+ 
+ 
+(2,732
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loss from continuing operations before cumulative effect of accounting change
+ 
+ 
+(53,182
+)
+ 
+(48,317
+)
+ 
+(34,579
+)
+
+ 
+Income (loss) from operations of discontinued businesses, net of tax (Note 4)
+ 
+ 
+3,734
+ 
+ 
+(2,846
+)
+ 
+38,536
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(Loss) income before cumulative effect of accounting change
+ 
+ 
+(49,448
+)
+ 
+(51,163
+)
+ 
+3,957
+ 
+
+ 
+Cumulative effect of accounting change (Note 13)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,618
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these condsolidated financial statements. 
+
+F-4
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Stockholder's Equity
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+Common Stock
+ 
+ 
+
+ 
+ 
+
+ 
+Accumulated
+
+Other
+
+Comprehensive
+
+Income (Loss)
+ 
+ 
+
+ 
+
+ 
+
+ 
+Capital in
+
+Excess of
+
+Par Value
+ 
+Accumulated
+
+Deficit
+ 
+ 
+
+ 
+
+ 
+
+ 
+Shares
+ 
+Amount
+ 
+Total
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Balances at December 31, 2002
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+387,367
+ 
+$
+(192,146
+)
+$
+(9,078
+)
+$
+186,153
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(49,448
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,283
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,308
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(36,857
+)
+
+Contribution of capital from parent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2003
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(241,594
+)
+ 
+3,513
+ 
+ 
+209,296
+ 
+
+Comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(51,163
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,587
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+145
+ 
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(48,431
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2004
+ 
+1,000,000
+ 
+ 
+10
+ 
+ 
+447,367
+ 
+ 
+(292,757
+)
+ 
+6,245
+ 
+ 
+160,865
+ 
+
+Comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,575
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Translation adjustment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,271
+ 
+ 
+ 
+ 
+
+ 
+Change in unrealized gain on derivative financial instruments
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(103
+)
+ 
+ 
+ 
+
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+10,743
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balances at December 31, 2005
+ 
+1,000,000
+ 
+$
+10
+ 
+$
+447,367
+ 
+$
+(284,182
+)
+$
+8,413
+ 
+$
+171,608
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+The
+accompanying notes are an integral part of these consolidated financial statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc.
+ 
+ Consolidated Statements of Cash Flows
+ 
+ Years Ended December 31, 2003, 2004 and 2005 
+ 
+
+ 
+
+ 
+2003
+ 
+2004
+ 
+2005
+ 
+
+ 
+
+ 
+(in thousands)
+ 
+
+ 
+
+Cash flows from operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net (loss) income
+ 
+$
+(49,448
+)
+$
+(51,163
+)
+$
+8,575
+ 
+
+Adjustments to reconcile net loss to net cash provided by operating activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cumulative effect of accounting change
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(4,618
+)
+
+ 
+Impairment of goodwill
+ 
+ 
+ 
+ 
+ 
+15,570
+ 
+ 
+ 
+ 
+
+ 
+Impairment of intangible assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,272
+ 
+
+ 
+Write-off of deferred financing costs
+ 
+ 
+11,324
+ 
+ 
+ 
+ 
+ 
+3,517
+ 
+
+ 
+Depreciation and amortization
+ 
+ 
+56,603
+ 
+ 
+49,968
+ 
+ 
+40,718
+ 
+
+ 
+Gain on derivative financial instruments
+ 
+ 
+(772
+)
+ 
+(1,391
+)
+ 
+(103
+)
+
+ 
+Losses of minority interest holders
+ 
+ 
+627
+ 
+ 
+562
+ 
+ 
+566
+ 
+
+ 
+Non-cash interest expense
+ 
+ 
+3,363
+ 
+ 
+3,264
+ 
+ 
+2,843
+ 
+
+ 
+Loss (gain) on disposition of business and other
+ 
+ 
+661
+ 
+ 
+(1,179
+)
+ 
+(52,710
+)
+
+ 
+Provision for bad debts
+ 
+ 
+578
+ 
+ 
+872
+ 
+ 
+1,417
+ 
+
+ 
+Deferred income taxes
+ 
+ 
+6,990
+ 
+ 
+11,260
+ 
+ 
+13,250
+ 
+
+ 
+Changes in operating assets and liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Accounts receivable
+ 
+ 
+(365
+)
+ 
+6,190
+ 
+ 
+(224
+)
+
+ 
+ 
+Inventories
+ 
+ 
+188
+ 
+ 
+(708
+)
+ 
+507
+ 
+
+ 
+ 
+Prepaid expenses
+ 
+ 
+844
+ 
+ 
+(583
+)
+ 
+24
+ 
+
+ 
+ 
+Accounts payable and accrued expenses
+ 
+ 
+16,167
+ 
+ 
+(8,165
+)
+ 
+(1,958
+)
+
+ 
+ 
+Deferred revenue
+ 
+ 
+1,525
+ 
+ 
+(6,860
+)
+ 
+(3,926
+)
+
+ 
+ 
+Other
+ 
+ 
+(2,437
+)
+ 
+649
+ 
+ 
+(1,842
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by operating activities
+ 
+ 
+45,848
+ 
+ 
+18,286
+ 
+ 
+8,308
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from investing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Additions to property, plant and equipment
+ 
+ 
+(7,608
+)
+ 
+(8,981
+)
+ 
+(9,564
+)
+
+Acquisitions of publications and shows, net of cash acquired
+ 
+ 
+(137,728
+)
+ 
+(7,915
+)
+ 
+(15,561
+)
+
+Proceeds from sale of assets
+ 
+ 
+ 
+ 
+ 
+24,418
+ 
+ 
+174,067
+ 
+
+Acquisitions of intangibles, contingent payments, and other
+ 
+ 
+3
+ 
+ 
+(1,920
+)
+ 
+17
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash (used in) provided by investing activities
+ 
+ 
+(145,333
+)
+ 
+5,602
+ 
+ 
+148,959
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from financing activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds from revolving credit loan
+ 
+ 
+21,000
+ 
+ 
+6,000
+ 
+ 
+ 
+ 
+
+Payments on revolving credit loan
+ 
+ 
+(50,100
+)
+ 
+(14,000
+)
+ 
+ 
+ 
+
+Proceeds from long-term debt
+ 
+ 
+431,050
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Payments of long-term debt
+ 
+ 
+(333,525
+)
+ 
+(3,700
+)
+ 
+(152,167
+)
+
+Capital contribution from parent
+ 
+ 
+60,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred financing costs
+ 
+ 
+(16,962
+)
+ 
+(315
+)
+ 
+(168
+)
+
+Project grant refunds received
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+600
+ 
+
+Dividends paid to minority interest holders
+ 
+ 
+(1,227
+)
+ 
+(500
+)
+ 
+(900
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net cash provided by (used in) financing activities
+ 
+ 
+110,236
+ 
+ 
+(12,515
+)
+ 
+(152,635
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Effect of exchange rate changes on cash
+ 
+ 
+(407
+)
+ 
+576
+ 
+ 
+754
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Net increase in cash and cash equivalents
+ 
+ 
+10,344
+ 
+ 
+11,949
+ 
+ 
+5,386
+ 
+
+Cash and cash equivalents
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning of year
+ 
+ 
+18,930
+ 
+ 
+29,274
+ 
+ 
+41,223
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+End of year
+ 
+$
+29,274
+ 
+$
+41,223
+ 
+$
+46,609
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of these consolidated financial statements. 
+
+F-6
+
+ 
+
+ 
+ 
+
+Advanstar Communications Inc. 
+ 
+ Notes to Consolidated Financial Statements 
+ 
+ December 31, 2003, 2004 and 2005 
+ 
+
+1. Nature of Business 
+
+ The accompanying consolidated financial statements include the accounts of Advanstar Communications Inc., a wholly owned subsidiary of
+Advanstar, Inc., and its majority owned subsidiaries (collectively, "Advanstar" or the "Company"). All intercompany accounts and transactions between consolidated entities have been eliminated. 
+
+ The
+Company operates and manages shows and conferences; publishes controlled and paid circulation trade, professional and consumer periodicals; and markets a broad range of marketing,
+direct mail and database products and services. The Company's MAGIC tradeshows and Life Sciences segment (see Note 11) generated approximately 27% and 51% of total revenue in 2005. 
+
+ The
+Company has restated its consolidated financial statements and footnotes from those included in the Company's annual report on Form 10-K for the year ended December 31,
+2005, filed with the Securities and Exchange Commission on March 30, 2006, only to reflect the Company's change in operating segments as described in Note 11. 
+
+2.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001377966_madison_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001377966_madison_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e0e520e78833c308502205c69da8f65b283325df
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001377966_madison_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, Illinois. Certain legal matters relating to this offering will be passed upon for the underwriters by Shearman & Sterling LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001380225_edgen_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001380225_edgen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d22ea9dc88d5263ac7f2ba2ac31df25fa80b675f
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001380225_edgen_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Certain legal matters in connection with the offering with respect to the US federal securities laws, New York law and the laws of England and Wales will be passed upon for us by Dechert LLP, London, England and for the underwriters by Vinson & Elkins LLP, Houston, Texas and Vinson & Elkins, RLLP, London, England.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CIK0001382399_northernst_legal_matters.txt b/parsed_sections/legal_matters/2006/CIK0001382399_northernst_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bd7cc6d187ae15d297f4690ba823abe17c708220
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CIK0001382399_northernst_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Milbank, Tweed, Hadley McCloy LLP, New York, New York. Certain legal matters in connection with the offering will be passed upon for the underwriters by Baker Botts L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CROX_crocs-inc_legal_matters.txt b/parsed_sections/legal_matters/2006/CROX_crocs-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..76728aa05efd2463bb8b8ec7dacc8eea3464bdda
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CROX_crocs-inc_legal_matters.txt
@@ -0,0 +1 @@
+increases their appeal to people whose jobs require them to stand for long periods of time, such as those in the medical and food service industries. We intend to expand the range of uses of our footwear products with the introduction of new models, reinforcing our reputation for producing broadly functional and comfortable footwear. Although we believe our fun styles are an important element of our products and our brand image, we believe that the functionality and comfort of our products are key competitive advantages in the market. Maintain a flexible, low-cost manufacturing model. Our strategy is to maintain a flexible, globally diversified, low-cost manufacturing base. We manufacture a portion of our footwear product volume in facilities that we operate in North America and obtain the remainder from third party manufacturers located around the world. We believe this enables us to rapidly change our production schedule to meet changing customer demand throughout the year, while capitalizing on the efficiencies and cost benefits of contract manufacturing. In addition, we recently began compounding a portion of our supply of croslite in-house, to further reduce costs in our supply chain and to provide maximum flexibility in our manufacturing process, such as quickly increasing production of in-demand colors to meet consumer preferences. We believe that this production strategy will enable us to continue to minimize our production costs, shorten production and development times to better serve our retail customers, and increase overall operating efficiencies. Focus on product design innovation. We believe we have introduced an innovative range of footwear products that is highly differentiated from lines of products offered by our competitors in terms of functionality, comfort and style. We believe continued product innovation will be required to maintain differentiation of our products and will be key to maintaining a competitive advantage in the marketplace. By refining existing models and introducing new models, we expect to continue to offer our consumers and retailers a broad selection of fun and functional styles that remain current with consumer trends. We also believe product innovation will enable us to successfully expand the crocs brand into additional footwear categories. Enhance our crocs brand. Our initial focus has been to introduce a range of innovative footwear products that appeal to a broad group of men, women and children, and we have taken a grassroots approach to marketing our products in defined target markets. A core element of our strategy is to expand our brand by capitalizing on market opportunities arising from the versatility of croslite, while offering our existing consumer base an expanded line of crocs products. We also believe that our retail kiosks help to increase brand awareness. In addition, we intend to employ targeted marketing strategies to continue to expand market awareness of our crocs products, and recently became title sponsor of the AVP Pro Beach Volleyball Tour. We have also introduced a line of branded apparel and accessories to further support our marketing efforts. Provide a compelling value proposition to retailers. We believe we offer our customers a compelling value proposition that helps to differentiate us from other footwear vendors. We offer retailers a line of footwear products that we believe are unique in appearance and functionality and retail at attractive price points yet provide compelling profit margins for our retailers. We believe our attractive, space-efficient merchandising display and our brightly colored products can result in increased consumer traffic and high sales per square foot for our retail customers. Additionally, we expect that our flexible production model will enable us to offer our customers timely inventory fulfillment of high-demand products throughout the year. We believe this will enable our retail customers to experience less time out of stock of key products and to maximize their inventory turns and sales volumes. We expect these factors will allow us to continue to add new customers and to extend our relationships with our current retailers into additional store locations and expanded shelf space. Growth Strategy We seek to increase our market share and drive further growth in our business by pursuing the following strategies: Introduce new footwear models. Since we began marketing our first model in November 2002, we have expanded our footwear product portfolio to include 18 models in a wide variety of colors, color combinations and patterns. We plan to continue introducing new models and additional colors at various price points in order to meet the evolving needs of consumers and our retail customers. Our new footwear models will also be designed to further expand the appeal of our products to diverse demographic audiences. As a part of this strategy, we are now offering refined versions of previous models, such as the Endeavor and the Professional, and we are expanding into new footwear categories with models such as the Athens, a flip-flop with a soft footbed, the Islander, a water resistant deck shoe with a stitched leather upper, the Georgie, a calf-high rain boot and shoes specifically designed for medical and institutional uses. Expand domestic distribution. We believe we have significant opportunities to add new retailers and to increase sales to existing retail customers at additional store locations. We intend to continue to expand our domestic distribution by augmenting our domestic sales force, extending our product offering, and providing high quality service to our customers. We also intend to expand our direct retail sales domestically by opening additional company-operated kiosks in malls and other strategic locations throughout the U.S. and by expanding our internet sales. Further develop international distribution. We believe that international markets represent a significant opportunity for our products and our brand. We continue to establish a sales presence in major foreign markets and have initiated direct sales efforts in Australia, Austria, the Caribbean, Chile, France, Germany, Hong Kong, Japan, the Netherlands, Singapore, and the United Kingdom. We also market our products in approximately 60 countries through third party distributors, and we will continue to establish distributor relationships in countries where we believe they offer a preferable alternative to a direct sales force. Expand complementary apparel and accessories offerings. Apparel and accessories present us with an attractive opportunity to increase awareness of the crocs brand by leveraging our distribution network. We have recently introduced branded accessory items, including a line of crocs sunglasses, and branded apparel such as t-shirts, sweatshirts, hats and socks. Product Overview Our primary product line is crocs-branded footwear for men, women and children, which we first introduced in 2002 with a single model in six colors. We have since expanded our line of footwear to include 18 models in a wide variety of colors, color combinations and patterns and a range of sizes, representing over 5,800 stock keeping units, or SKUs, and we intend to continue diversifying our footwear portfolio with new model introductions. In addition to our footwear products, we market a line of crocs branded apparel and accessory items that are intended to increase awareness of our brand and our products. We also selectively use croslite to manufacture a variety of other non-branded products, such as spa pillows and kayak seats, which are marketed to original equipment manufacturers. Footwear A key differentiating feature of our footwear products is croslite, which is uniquely suited for comfort and functionality. We have carefully formulated croslite to be of a density that creates a comfortable shoe with a high coefficient of friction, allowing for slip-resistant, non-marking footwear that is extremely lightweight. For example, a size large Beach weighs approximately six ounces, which is significantly lighter than more traditional casual footwear products. Croslite softens as it warms to better conform to the wearer's feet. Our shoes are also non-absorbent, which makes them water resistant and virtually odor-free, and allows them to be cleaned simply with water or bleach. We have combined the unique properties of croslite with designs that are intended to be functional across a broad range of activities. As a result, we believe our products appeal to a wide range of consumers. We introduced crocs as a footwear brand in the U.S. with the launch of our Beach model in 2002. Based on our initial success, we made refinements to the Beach model and introduced a second generation of footwear that incorporated a broader range of sizing, provided different levels of ventilation for various climates and offered slightly different styling. We have further broadened our footwear line into new product categories, such as the Athens, a flip-flop with a soft footbed; the Scutes, an open toe sport slide; the Off Road, an evolution of our Beach model with a rugged sole for added traction; and the Islander, a deck shoe integrating a base made from croslite with a stitched leather upper. We have also introduced several other new models in 2006. Additionally, we have introduced three footwear models marketed under our Crocs Rx line. These new models have been designed for consumers who require specialized footwear that provides relief from certain medical conditions. We recently entered into an arrangement with Disney under which we will introduce a limited edition line of footwear featuring some of Disney's most popular characters. The new line will be called "Disney by CROCS." The Disney by CROCS line, which is targeted towards children and adults, will debut with special-edition Mickey Mouse die-cut adult Beach and children's Cayman models. These styles will be available in a broad range of two-toned color combinations, including Mickey Mouse's signature black and red. Other models include an array of unique designs emphasizing the distinctive personalities of Disney's characters including Mickey and Friends, Winnie the Pooh and Friends, Disney Princess, Disney Fairies, as well as Pirates of the Caribbean and Disney*Pixar's Toy Story and Cars. We have also entered into licensing agreements to market a line of shoes featuring the names and logos of various universities and colleges. These shoes will also feature the school colors and will be sold on college campuses and through our sales and distribution network. In addition, we have entered into sponsorship and marketing agreements with various colleges and universities, which will allow us to advertise in their arenas and stadiums and sell our products on campus and at sporting events. We currently sell our shoes in an assortment of colors, styles and sizes to provide consumers and retailers a wide variety of options at suggested retail prices ranging from $19.99 to $49.99. We have designed our shoes to offer a number of beneficial structural features to provide maximum comfort and functionality, such as Italian-designed orthotic heels, built-in arch supports and tarsal bars. We also offer models that are based on either general shoe sizing ranging from XXS through 4XL, or specific shoe sizing ranging from children's 6-7 through men's 13. This allows retailers to offer a complete range of sizes or carry a more limited number of SKUs, enabling them to tailor their offerings to their particular clientele and more efficiently allocate limited floor space. As
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/CSIQ_canadian_legal_matters.txt b/parsed_sections/legal_matters/2006/CSIQ_canadian_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6d5613ac00b11586d0b4dc3cc0b9af857721bc36
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/CSIQ_canadian_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters as to the United States federal and New York law in connection with this offering will be passed upon for us by Latham Watkins LLP. Certain legal matters as to the United States federal and New York law in connection with this offering will be passed upon for the underwriters by Simpson Thacher Bartlett LLP. The validity of the common shares offered in this offering and certain other legal matters as to Canadian law will be passed upon for us by WeirFoulds LLP. Certain legal matters as to Canadian law will be passed upon for the underwriters by Davies Ward Phillips Vineberg LLP. Legal matters as to PRC law will be passed upon for us by Chen Co. Law Firm and for the underwriters by Haiwen Partners. Latham Watkins LLP may rely upon WeirFoulds LLP with respect to matters governed by Canadian law and Chen Co. Law Firm with respect to matters governed by PRC law. Simpson Thacher Bartlett LLP may rely upon Davies Ward Phillips Vineberg LLP with respect to matters governed by Canadian law and Haiwen Partners with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/DBI_designer_legal_matters.txt b/parsed_sections/legal_matters/2006/DBI_designer_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8e72f19c405d999532ac1ec17cde0612b03af3ff
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/DBI_designer_legal_matters.txt
@@ -0,0 +1 @@
+Other Legal Matters Lehman Brothers Inc., as underwriter, has represented and agreed that it will comply with applicable laws and regulations in each jurisdiction (including each jurisdiction in the European Economic Area that has not, as of the date of this prospectus, implemented the Prospectus Directive) in which it acquires, offers, sells or delivers the PIES or our Class A Common Shares, or has in its possession or distributes any free writing prospectus and any preliminary prospectus or final prospectus relating to the PIES or our Class A Common Shares. LEGAL MATTERS DSW is represented by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York and Vorys, Sater, Seymour Pease LLP, Columbus, Ohio, and the underwriter for the offering of the PIES by Retail Ventures is represented by Debevoise Plimpton LLP, New York, New York. The validity of the Class A Common Shares offered in this offering upon exchange of the PIES will be passed upon for DSW by Vorys, Sater, Seymour Pease LLP, Columbus, Ohio.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/DXCM_dexcom-inc_legal_matters.txt b/parsed_sections/legal_matters/2006/DXCM_dexcom-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1fa690652c8ae1e343f20a89fbab89ec31c62a4e
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/DXCM_dexcom-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Fenwick & West LLP, Mountain View, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. The underwriters have been represented by Latham & Watkins LLP, Costa Mesa, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/ESOA_energy_legal_matters.txt b/parsed_sections/legal_matters/2006/ESOA_energy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..996cfa03ad75f4cd8912e7a312d995c8b3a7e0bf
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/ESOA_energy_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Luse Gorman Pomerenk Schick, P.C., Washington, D.C. Venable LLP, Vienna, Virginia, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/EXLS_exlservice_legal_matters.txt b/parsed_sections/legal_matters/2006/EXLS_exlservice_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5bae20bb571932894e005e1d3b897015947e6a65
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/EXLS_exlservice_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, will pass on the validity of the common stock offered by this prospectus for us. Cleary Gottlieb Steen & Hamilton LLP will pass upon the validity of the common stock for the underwriters. Paul, Weiss, Rifkind, Wharton & Garrison LLP has represented the Oak Hill Partnerships and their related parties from time to time and certain members of Paul, Weiss, Rifkind, Wharton & Garrison LLP own an indirect interest in Oak Hill Capital Management Partners, L.P. Luthra & Luthra Law Offices acted as our Indian counsel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/FNF_fidelity_legal_matters.txt b/parsed_sections/legal_matters/2006/FNF_fidelity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b0014ec5f71c8234a715533cf819e82cef88bfd8
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/FNF_fidelity_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock distributed hereby will be passed upon for us by LeBoeuf, Lamb, Greene MacRae LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/GIII_g-iii_legal_matters.txt b/parsed_sections/legal_matters/2006/GIII_g-iii_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..491cfcf29a803f4730e09c90b44a1b8a8c16aed2
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/GIII_g-iii_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters 13
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/HURN_huron_legal_matters.txt b/parsed_sections/legal_matters/2006/HURN_huron_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..76798e308b412f2a36ea5188f74b3d36b4613687
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/HURN_huron_legal_matters.txt
@@ -0,0 +1 @@
+legal matters arising out of the ordinary course of business. Although the outcome of these matters cannot presently be determined, in the opinion of management, disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company. 11. Segment Information Segments are defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, as components of a company in which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company provides services through two segments: Financial Consulting and Operational Consulting. The Financial Consulting segment provides services that help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. The Operational Consulting segment provides services that help clients improve the overall efficiency and effectiveness of their operations by enhancing revenue, reducing costs, managing regulatory compliance and maximizing procurement efficiency. Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a Total operating expenses 15,576 32,181 46,698 47,434 33,681 41,464 41,733 Income (loss) before provision (benefit) for income taxes (6,863 ) (1,185 ) 18,992 22,238 14,384 23,874 24,705 Provision (benefit) for income taxes (2,697 ) (122 ) 8,128 9,810 6,042 10,624 11,084 Net cash provided by (used in) financing activities Balance at September 30, 2005 17,276,693 $ Operating expenses: Selling, general and administrative 36,251 172 (101 )(6) 36,322 Stock-based compensation 1,352 1,352 Depreciation and amortization 3,861 1 Net income (loss) attributable to common stockholders $ (4,812 ) $ (2,129 ) $ 9,933 $ 11,497 $ 7,485 $ 13,250 $ 13,621 Nine Months Ended September 30, Other operating data (unaudited): 2003 2004 2004 2005 Number of consultants (at end of period)(4) 262 477 483 489 626 Average number of consultants (for the period) 247 361 485 485 543 Utilization rate(5) 57.3 % 66.1 % 72.2 % 70.5 % 76.2 % Average billing rate per hour(6) $ 206 $ 217 $ 239 $ 237 $ 249 Consolidated balance sheet data: As of September 30, 2005 (unaudited) (in thousands) Cash and cash equivalents $ 21,875 Working capital $ 46,341 Total assets $ 115,402 Long-term debt(7) $ 2,000 Total stockholders equity $ 69,607 Total operating expenses 6,116 7,635 9,776 8,654 10,900 10,154 12,627 13,017 12,570 13,215 15,679 Operating income (loss) 3,515 326 (3,315 ) (743 ) 4,253 8,731 2,135 4,565 8,229 8,150 7,218 Other expense (income) 199 331 217 221 245 270 Intangible assets as of September 30, 2005 consisted of the following: Gross Carrying Amount Accumulated Amortization Customer contracts $ 1,900 $ 1,624 Customer relationships 700 Table of Contents Risk factors Investing in our common stock involves a high degree of risk. You should carefully consider the risks below before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. In such an event, the trading price of our common stock could decline, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS Our inability to retain our senior management team and other managing directors would be detrimental to the success of our business. We rely heavily on our senior management team, including Gary Holdren, our Chief Executive Officer, George Massaro, our Vice Chairman, Daniel Broadhurst, our Vice President of Operations, Gary Burge, our Chief Financial Officer and Treasurer, and other managing directors, and our ability to retain them is particularly important to our future success. During 2006, Mr. Massaro intends to reduce his workload to a part time, or approximately one-third, basis and to dedicate his efforts to strategic initiatives for us, including major client assignments. Given the highly specialized nature of our services, these people must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage an organization consisting of a diverse group of professionals. In addition, we rely on our senior management team and other managing directors to generate and market our business. Further, in light of our limited operating history, our senior management s and other managing directors personal reputations and relationships with our clients are a critical element in obtaining and maintaining client engagements. Although we enter into non-solicitation agreements with our senior management team and other managing directors, we do not enter into non-competition agreements. Accordingly, members of our senior management team and our other managing directors are not contractually prohibited from leaving or joining one of our competitors, and some of our clients could choose to use the services of that competitor instead of our services. In addition, our executive officers holding interests in HCG Holdings LLC consist of Messrs. Massaro, Broadhurst and Burge. These individuals collectively hold 0.3% of the common interests in HCG Holdings LLC. If any of the above-described individuals realize substantial financial benefits as a result of their securities ownership in HCG Holdings LLC, their financial incentive to stay with us may be reduced. If one or more members of our senior management team or our other managing directors leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in securing and successfully completing engagements and managing our business properly, which could harm our business prospects and results of operations. Our inability to hire and retain talented people in an industry where there is great competition for talent could have a serious negative effect on our prospects and results of operations. Our business involves the delivery of professional services and is highly labor-intensive. Our success depends largely on our general ability to attract, develop, motivate and retain highly skilled consultants. The loss of a significant number of our consultants or the inability to attract, hire, develop, train and retain additional skilled personnel could have a serious negative effect on us, including our ability to manage, staff and successfully complete our existing engagements and obtain new engagements. Qualified consultants are in great demand, and we face significant competition for both senior and junior consultants with the requisite credentials and experience. Our principal competition for talent comes from other consulting firms, accounting firms and technical and economic advisory firms, as well as from organizations seeking to staff their internal professional positions. Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices, career paths or geographic locations than we do. Therefore, we may not be successful in attracting and Table of Contents Risk factors retaining the skilled consultants we require to conduct and expand our operations successfully. Increasing competition for these consultants may also significantly increase our labor costs, which could negatively affect our margins and results of operations. We have experienced net losses for a significant portion of our history, and our limited operating history makes evaluating our business difficult. We have been operating since May 2002. For the period from March 19, 2002 (inception) through December 31, 2002 and for the year ended December 31, 2003, we experienced net losses of $4.2 million and $1.1 million, respectively. Although we generated net income of $10.9 and $13.3 million for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively, we may not sustain profitability in the future. Our net losses, among other things, have had, and should net losses occur in the future, will have, an adverse effect on our stockholders equity and working capital. To sustain profitability, we must: attract, integrate, retain and motivate highly qualified consultants; achieve and maintain adequate utilization and suitable billing rates for our consultants; expand our existing relationships with our clients and identify new clients in need of our services; maintain and enhance our brand recognition; and adapt to meet changes in our markets and competitive developments. We may not be successful in accomplishing these objectives. Further, our limited operating history makes it difficult to evaluate our business and prospects. Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in highly competitive industries. The historical information in this prospectus may not be indicative of our future financial condition and future performance. For example, we expect that our future annual growth rate in revenues will moderate and likely be less than the growth rates experienced in 2003 and 2004. If we are unable to manage the growth of our business successfully, we may not be able to sustain profitability. We have grown significantly since we commenced operations, nearly tripling the number of our consultants from 213 on May 31, 2002 to 632 as of December 31, 2005. As we continue to increase the number of our consultants, we may not be able to successfully manage a significantly larger workforce. Additionally, our significant growth has placed demands on our management and our internal systems, procedures and controls and will continue to do so in the future. To successfully manage growth, we must add administrative staff and periodically update and strengthen our operating, financial, accounting and other systems, procedures and controls, which will increase our costs and may adversely affect our gross profits and our ability to sustain profitability if we do not generate increased revenues to offset the costs. This need to augment our support infrastructure due to growth is compounded by our becoming a public reporting company and the increased expense incurred in complying with existing and new regulatory requirements. As a public company, our information and control systems must enable us to prepare accurate and timely financial information and other required disclosure. If we discover deficiencies in our existing information and control systems that impede our ability to satisfy our reporting requirements, we must successfully implement improvements to those systems in an efficient and timely manner. Table of Contents Risk factors Our financial results could suffer if we are unable to achieve or maintain adequate utilization and suitable billing rates for our consultants. Our profitability depends to a large extent on the utilization and billing rates of our consultants. Utilization of our consultants is affected by a number of factors, including: the number and size of client engagements; the timing of the commencement, completion and termination of engagements, which in many cases is unpredictable; our ability to transition our consultants efficiently from completed engagements to new engagements; the hiring of additional consultants because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate; unanticipated changes in the scope of client engagements; our ability to forecast demand for our services and thereby maintain an appropriate level of consultants; and conditions affecting the industries in which we practice as well as general economic conditions. The billing rates of our consultants that we are able to charge are also affected by a number of factors, including: our clients perception of our ability to add value through our services; the market demand for the services we provide; introduction of new services by us or our competitors; our competition and the pricing policies of our competitors; and general economic conditions. If we are unable to achieve and maintain adequate overall utilization as well as maintain or increase the billing rates for our consultants, our financial results could materially suffer. A significant portion of our revenues is derived from a limited number of clients, and our engagement agreements, including those related to our largest clients, can be terminated by our clients with little or no notice and without penalty, which may cause our operating results to be unpredictable. As a consulting firm, we have derived, and expect to continue to derive, a significant portion of our revenues from a limited number of clients. Our ten largest clients accounted for 36.3% of our revenues in the partial year ended December 31, 2002, 32.1% of our revenues in the year ended December 31, 2003, 27.8% of our revenues in the year ended December 31, 2004 and 37.8% of our revenues in the nine months ended September 30, 2005. One of our clients accounted for 11.6% of our revenues in the nine months ended September 30, 2005 and represented 10.2% of our receivables and unbilled services balance as of September 30, 2005. Our clients typically retain us on an engagement-by-engagement basis, rather than under fixed-term contracts; the volume of work performed for any particular client is likely to vary from year to year and a major client in one fiscal period may not require or decide to use our services in any subsequent fiscal period. Moreover, a large portion of our new engagements come from existing clients. Accordingly, the failure to obtain new large engagements or multiple engagements from existing or new clients could have a material adverse effect on the amount of revenues we generate. Table of Contents Risk factors In addition, almost all of our engagement agreements can be terminated by our clients with little or no notice and without penalty. For example, in engagements related to litigation, if the litigation were to be settled, our engagement for those services would no longer be necessary and therefore would be terminated. In client engagements that involve multiple engagements or stages, there is a risk that a client may choose not to retain us for additional stages of an engagement or that a client will cancel or delay additional planned engagements. For clients in bankruptcy, a bankruptcy court could elect not to retain our interim management consultants, terminate our retention, require us to reduce our fees for the duration of an engagement or approve claims against fees earned by us prior to or after the bankruptcy filing. For example, shortly after we acquired Speltz & Weis LLC, its largest client, which accounted for approximately 82.8% of its 2004 revenues and which accounted for approximately $10.3 million of our revenues in the nine months ended September 30, 2005, filed for bankruptcy. While the Bankruptcy Court approved our retention, it did so subject to certain fee reductions that we negotiated with the client and certain other interested parties. Depending on the outcome of the bankruptcy proceeding, we may not receive the full amount of these negotiated amounts. Moreover, several parties to the bankruptcy case have reserved their right to challenge fees earned by us and Speltz and Weis prior to the bankruptcy filing on July 5, 2005. Although no such claim has been brought to date, if a claim is brought in the future, the claim could have a material adverse impact on our financial position, results of operations, earnings per share or cash flows in the period in which such claim were resolved. Terminations of engagements, cancellations of portions of the project plan, delays in the work schedule or reductions in fees could result from factors unrelated to our services. When engagements are terminated or reduced, we lose the associated future revenues, and we may not be able to recover associated costs or redeploy the affected employees in a timely manner to minimize the negative impact. In addition, our clients ability to terminate engagements with little or no notice and without penalty makes it difficult to predict our operating results in any particular fiscal period. Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our consultants and the quality of our services. As a professional services firm, our ability to secure new engagements depends heavily upon our reputation and the individual reputations of our consultants. Any factor that diminishes our reputation or that of our consultants, including not meeting client expectations or misconduct by our consultants, could make it substantially more difficult for us to attract new engagements and clients. Similarly, because we obtain many of our new engagements from former or current clients or from referrals by those clients or by law firms that we have worked with in the past, any client that questions the quality of our work or that of our consultants could impair our ability to secure additional new engagements and clients. The consulting services industry is highly competitive, and we may not be able to compete effectively. The consulting services industry in which we operate includes a large number of participants and is intensely competitive. We face competition from other business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms and the internal professional resources of organizations. In addition, because there are relatively low barriers to entry, we expect to continue to face additional competition from new entrants into the business operations and financial consulting industries. We have six core offices and two smaller offices in the United States and do not have any international offices. Many of our competitors have a greater national presence and are also international in scope, as well as have significantly greater personnel, financial, technical and marketing resources. In addition, these competitors may generate greater revenues and have greater name recognition than we do. Our ability to compete also depends in part on the ability of our competitors to hire, retain and Table of Contents Risk factors motivate skilled consultants, the price at which others offer comparable services and our competitors responsiveness to their clients. If we are unable to compete successfully with our existing competitors or with any new competitors, our financial results will be adversely affected. Additional hiring and acquisitions could disrupt our operations, increase our costs or otherwise harm our business. Our business strategy is dependent in part upon our ability to grow by hiring individuals or groups of consultants and by potentially acquiring additional complementary businesses. However, we may be unable to identify, hire, acquire or successfully integrate new consultants and complementary businesses without substantial expense, delay or other operational or financial problems. Competition for future hiring and acquisition opportunities in our markets could increase the compensation we offer to potential consultants or the price we pay for businesses we wish to acquire. In addition, we may be unable to achieve the financial, operational and other benefits we anticipate from any hiring or acquisition, including with respect to Speltz &Weis LLC. Hiring additional consultants or acquiring complementary businesses could also involve a number of additional risks, including: the diversion of management s time, attention and resources from managing and marketing our company; the failure to retain key acquired personnel; the adverse short-term effects on reported operating results from the amortization or write-off of acquired goodwill and other intangible assets, such as described in Management s Discussion and Analysis Subsequent Event ; potential impairment of existing relationships with our clients, such as client satisfaction or performance problems, whether as a result of integration or management difficulties or otherwise; the creation of conflicts of interest that require us to decline or resign from engagements that we otherwise could have accepted; the potential need to raise significant amounts of capital to finance a transaction or the potential issuance of equity securities that could be dilutive to our existing stockholders; increased costs to improve, coordinate or integrate managerial, operational, financial and administrative systems; and difficulties in integrating diverse backgrounds and experiences of consultants, including if we experience a transition period for newly hired consultants that results in a temporary drop in our utilization rates or margins. If we fail to successfully address these risks, our ability to compete may be impaired. If the number of large bankruptcies declines or other factors cause a decrease in demand for our corporate advisory services, our revenues and profitability could suffer. Our corporate advisory services practice provides various turnaround, restructuring and bankruptcy services to companies in financial distress or their creditors or other stakeholders. This practice accounted for 23.4% and 12.9% of our revenues for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. The decrease is a result of the wind-up of several large bankruptcy engagements. We are typically engaged in connection with a bankruptcy case when the bankruptcy is of the size and complexity that generally requires the debtor or other constituents to retain Table of Contents Risk factors the services of financial advisors. A number of other factors also affect demand for this practice. These factors include: over-expansion by various businesses; management s inability to address critical operational and financial issues; the level of lending activity and over-leveraging of companies; and challenging general economic conditions in the United States, which have benefited our corporate advisory services practice since we commenced operations. If the number of large bankruptcies declines or other factors cause a decrease in demand for our corporate advisory services, the revenues from our turnaround, restructuring and bankruptcy services could decline, which could harm our ability to sustain profitability. The profitability of our fixed-fee engagements with clients may not meet our expectations if we underestimate the cost of these engagements. Fixed-fee engagements generated approximately 11.8% and 12.2% of our revenues for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. When making proposals for fixed-fee engagements, we estimate the costs and timing for completing the engagements. These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to deploy them on engagements. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our profit margin. Revenues from our performance-based engagements are difficult to predict, and the timing and extent of recovery of our costs is uncertain. From time to time, primarily in our corporate advisory services and strategic sourcing practices, we enter into engagement agreements under which our fees include a significant performance-based component. Performance-based fees are contingent on the achievement of specific measures, such as our clients meeting cost-saving or other contractually defined goals. The achievement of these contractually-defined goals is often impacted by factors outside of our control, such as the actions of our client or third parties. Because performance-based fees are contingent, revenues on such engagements, which are recognized when all revenue recognition criteria are met, are not certain and the timing of receipt is difficult to predict and may not occur evenly throughout the year. While performance-based fees comprised 5.1% and 2.5% of our revenues for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively, we intend to continue to enter into performance-based fee arrangements and these engagements may impact our revenues to a greater extent in the future. Should performance-based fee arrangements represent a greater percentage of our business in the future, we may experience increased volatility in our working capital requirements and greater variations in our quarter-to-quarter results, which could affect the price of our common stock. In addition, an increase in the proportion of performance-based fee arrangements may offset the positive effect on our operating results from increases in our utilization rate or average billing rate per hour. For example, net deferrals of $2.1 million of performance-based fees for services rendered had the effect of reducing our average billing rate per hour for the nine months ended September 30, 2005 by $7. Conflicts of interest could preclude us from accepting engagements thereby causing decreased utilization and revenues. We provide services in connection with bankruptcy proceedings and litigation proceedings that usually involve sensitive client information and frequently are adversarial. In connection with bankruptcy Table of Contents Risk factors proceedings, we are required by law to be disinterested and may not be able to provide multiple services to a particular client. In litigation, we would generally be prohibited from performing services in the same litigation for the party adverse to our client. In addition, our engagement agreement with a client or other business reasons may preclude us from accepting engagements with our clients competitors or adversaries. As we increase the size of our operations, the number of conflict situations can be expected to increase. Moreover, in many industries in which we provide services, there has been a continuing trend toward business consolidations and strategic alliances. These consolidations and alliances reduce the number of companies that may seek our services and increase the chances that we will be unable to accept new engagements as a result of conflicts of interest. If we are unable to accept new engagements for any reason, our consultants may become underutilized, which would adversely affect our revenues and results of operations in future periods. Expanding our service offerings or number of offices may not be profitable. We may choose to develop new service offerings or open new offices because of market opportunities or client demands. Developing new service offerings involves inherent risks, including: our inability to estimate demand for the new service offerings; competition from more established market participants; a lack of market understanding; and unanticipated expenses to recruit and hire qualified consultants and to market our new service offerings. In addition, expanding into new geographic areas and/or expanding current service offerings is challenging and may require integrating new employees into our culture as well as assessing the demand in the applicable market. For example, in August 2003, we established a small office in Palo Alto, California to service the Silicon Valley marketplace and, in September 2003, we established a small office in Miami, Florida to deepen our corporate finance capabilities. These offices did not meet our expectations and, therefore, we subsequently closed those offices and incurred a restructuring charge of $2.1 million in 2004. Also in 2004, we decided to eliminate a service offering of a practice area in our Operational Consulting segment that was not meeting our expectations and incurred a restructuring charge of $1.3 million. If we cannot manage the risks associated with new service offerings or new locations effectively, we are unlikely to be successful in these efforts, which could harm our ability to sustain profitability and our business prospects. Our engagements could result in professional liability, which could be very costly and hurt our reputation. Our engagements typically involve complex analyses and the exercise of professional judgment. As a result, we are subject to the risk of professional liability. If a client questions the quality of our work, the client could threaten or bring a lawsuit to recover damages or contest its obligation to pay our fees. Litigation alleging that we performed negligently or breached any other obligations to a client could expose us to significant legal liabilities and, regardless of outcome, is often very costly, could distract our management and could damage our reputation. We are not always able to include provisions in our engagement agreements that are designed to limit our exposure to legal claims relating to our services. Even if these limiting provisions are included in an engagement agreement, they may not protect us or may not be enforceable under some circumstances. In addition, we carry professional liability insurance to cover many of these types of claims, but the policy limits and the breadth of coverage may be inadequate to cover any particular claim or all claims plus the cost of legal defense. For example, we provide services on engagements in which the impact on a client may substantially exceed the limits of Operating income 23,597 679 189 24,465 Other income (expense) 277 6 (43 ) Table of Contents Risk factors our errors and omissions insurance coverage. If we are found to have professional liability with respect to work performed on such an engagement, we may not have sufficient insurance to cover the entire liability. Our intellectual property rights in our Huron Consulting Group name are important, and any inability to use that name could negatively impact our ability to build brand identity. We believe that establishing, maintaining and enhancing the Huron Consulting Group name is important to our business. We are, however, aware of a number of other companies that use names containing Huron. There could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have trade name or service mark rights that are senior to ours. If another company were to successfully challenge our right to use our name, or if we were unable to prevent a competitor from using a name that is similar to our name, our ability to build brand identity could be negatively impacted. We or some of our consultants could be named in lawsuits because we were founded by former Arthur Andersen LLP partners and professionals and contracted with Arthur Andersen for releases from non-competition agreements. We were founded by a core group of consultants that consisted primarily of former Arthur Andersen LLP partners and professionals, and we entered into a contract with Arthur Andersen to release these partners and professionals from non-competition agreements with Arthur Andersen. These circumstances might lead creditors of Arthur Andersen and other parties to bring claims against us or some of our managing directors or other consultants seeking recoveries for liabilities of Arthur Andersen and we may not be able to successfully avoid liability for such claims. In addition, litigation of this nature or otherwise could divert the time and attention of our managing directors and consultants, and we could incur substantial defense costs. As a holding company, we are totally dependent on distributions from our operating subsidiaries to pay dividends or other obligations and there may also be other restrictions on our ability to pay dividends in the future. We are a holding company with no business operations. Our only significant asset is the outstanding equity interests of our two wholly-owned operating subsidiaries. As a result, we must rely on payments from our subsidiaries to meet our obligations. We currently expect that the earnings and cash flow of our subsidiaries will primarily be retained and used by them in their operations, including servicing any debt obligations they may have now or in the future. Accordingly, although we do not anticipate paying any dividends in the foreseeable future, our subsidiaries may not be able to generate sufficient cash flow to distribute funds to us in order to allow us to pay future dividends on, or make any distribution with respect to, our common stock. Our future credit facilities, other future debt obligations and statutory provisions may also limit our ability to pay dividends or make any distribution in respect of our common stock. RISKS ASSOCIATED WITH PURCHASING OUR COMMON STOCK IN THIS OFFERING As a new investor, you will incur immediate and substantial dilution. If you purchase shares of our common stock in this offering, you will experience an immediate and substantial dilution of $ in pro forma net tangible book value per share of your investment. This means that the price you pay for the shares you acquire in this offering will be significantly higher than their net tangible book value per share. If we issue additional shares of common stock in the future, you Other operating data: Number of consultants (at period end)(2) 289 344 446 477 480 488 489 483 498 557 626 Utilization rate(3) 75.8 % 69.4 % 60.6 % 62.7 % 73.4 % 71.8 % 66.3 % 77.8 % 76.3 % 76.1 % 76.2 % Average billing rate per hour(4) $ 228 $ 220 $ 215 $ 210 $ 229 $ 248 $ 235 $ 243 $ 250 $ 254 $ Table of Contents Risk factors may experience further dilution in the net tangible book value of your shares. Likewise, you will incur additional dilution if the holders of outstanding options to purchase shares of our common stock at prices below our net tangible book value per share exercise their options after this offering. As of December 31, 2005, there were 1,304,688 shares of common stock issuable upon the exercise of outstanding stock options, with a weighted average exercise price of $2.15 per share. Sales of a substantial number of shares of our common stock following this offering may adversely affect the market price of our common stock, and the issuance of additional shares will dilute all other stockholdings. Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities. Of the 17,248,379 shares of our common stock expected to be outstanding upon consummation of this offering: (1) approximately 78.3% will be freely tradable without restriction or further registration under the federal securities laws and (2) approximately 4,100,000 shares will be restricted securities under the Securities Act, subject to certain restrictions on the timing, manner and volume of sales of those shares. After consummation of this offering, HCG Holdings LLC and Gary E. Holdren will continue to be entitled to certain registration rights with respect to 4,106,534 restricted shares. In addition, our certificate of incorporation permits the issuance of up to 500,000,000 shares of common stock. As of December 31, 2005, we had an aggregate of approximately 482,602,688 shares of our common stock authorized but unissued. Thus, we have the ability to issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by the investors who purchase our shares in this offering. We, each member of our board of directors, each of our executive officers and the selling stockholder have agreed for a period of at least 90 days after the date of this prospectus, to not, without the prior written consent of UBS Securities LLC, directly or indirectly, offer to sell, pledge or otherwise dispose of any shares of our common stock, subject to certain permitted exceptions. Following the expiration of the lock-up period, 4,819,263 shares of common stock subject to these agreements, including shares issuable upon the exercise of vested options 90 days after the date of this prospectus, will be available for sale in the public market, subject to vesting of restricted common stock during the lock-up period and the restrictions on sales of restricted securities under the Securities Act. We have adopted four equity incentive plans, one of which was adopted immediately prior to the completion of our initial public offering. See Management Equity Incentive Plans for further information regarding our equity incentive plans. We filed a registration statement on Form S-8 under the Securities Act covering the 2,141,000 shares that are reserved for issuance under our newly adopted plan as well as 1,612,640 shares reserved for issuance upon the exercise of options outstanding under our three other plans. As of December 31, 2005, there were 1,304,688 shares of common stock issuable upon the exercise of outstanding stock options. Accordingly, subject to applicable vesting requirements with respect to options and shares of restricted common stock, exercise with respect to options, the provisions of Rule 144 with respect to affiliates and, if applicable, expiration of the 90 day lock-up agreements, shares registered under that registration statement will be available for sale in the open market. For a more detailed description of additional shares that may be sold in the future, see the sections of this prospectus captioned Shares eligible for future sale and Underwriting. Table of Contents Risk factors Because HCG Holdings LLC will have the ability to continue to significantly influence us after this offering, the influence of our public stockholders over significant corporate actions will be limited. After the completion of this offering, HCG Holdings LLC will control approximately 21.5% of our outstanding common stock, or approximately 17.2% if the underwriters exercise their over-allotment option in full. As a result, after this offering, HCG Holdings LLC will continue to have the power to significantly influence all matters submitted to our stockholders, including the election of our directors and amendments to our certificate of incorporation, and will have the ability to significantly influence any transaction that requires the approval of stockholders regardless of whether or not other stockholders believe that any such transactions are in their own best interests. So long as HCG Holdings LLC continues to own a significant amount of the outstanding shares of our common stock, it will continue to be able to strongly influence or effectively control our decisions. The trading history of our common stock is characterized by low trading volume which can result in price volatility. The value of your investment may be subject to sudden decreases due to the volatility of the price of our common stock. Our common stock trades on the NASDAQ National Market. Over the past three months, the average daily trading volume of our common stock was approximately 36,800 shares. We cannot predict the extent to which investor interest in us will lead to a more active trading market in our common stock or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and seller of our common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no control. The closing sales price of our common stock has ranged from a high of $28.40 per share to a low of $18.90 per share since our initial public offering in October 2004. The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including the factors discussed in other risk factors, which could also cause variations in our quarterly results of operations, and the following factors: press releases or publicity relating to us or our competitors or relating to trends in the industry; changes in the legal or regulatory environment affecting businesses to which we provide services; changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; the operating and stock performance of other companies that investors may deem comparable; inability to meet quarterly or annual estimates or targets of our performance; and general domestic or international economic, market and political conditions. These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the offering price. In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. In the past, some stockholders have brought securities class action lawsuits against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation, regardless of whether we are ultimately successful, could result in substantial costs and divert management s attention and resources. Other operating data (unaudited): 2003 2004 2004 2005 Number of consultants (at end of period)(4) 262 477 483 489 626 Average number of consultants (for the period) 247 361 485 485 543 Utilization rate(5) 57.3 % 66.1 % 72.2 % 70.5 % 76.2 % Average billing rate per hour(6) $ 206 $ 217 $ 239 $ 237 $ Total 247 361 485 485 543 Utilization rate(2): Financial Consulting 55.7 % 66.6 % 71.6 % 69.8 % 79.4 % Operational Consulting 60.5 % 65.3 % 73.0 % 71.4 % 72.9 % Total 57.3 % 66.1 % 72.2 % 70.5 % 76.2 % Average billing rate per hour(3): Financial Consulting 212 233 257 254 277 Operational Consulting 195 191 218 217 220 Total 206 217 239 237 Table of Contents Risk factors Provisions of our certificate of incorporation and our bylaws could delay or prevent a takeover of us by a third party. Our certificate of incorporation and bylaws could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the price of our common stock. For example, our charter and bylaws: permit our board of directors to issue one or more series of preferred stock with rights and preferences designated by our board; impose advance notice requirements for stockholder proposals and nominations of directors to be considered at stockholder meetings; stagger the terms of our board of directors into three classes; limit the ability of stockholders to remove directors; prohibit stockholders from filling vacancies on our board of directors, unless the board of directors submits an election to fill a vacancy to a vote of stockholders; prohibit stockholders from calling special meetings of stockholders and from taking action by written consent; grant our board of directors the authority to amend and repeal our bylaws without a stockholder vote and require the approval of at least two-thirds of the voting power of all of the shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class, for stockholders to amend or repeal our bylaws; and require the approval of not less than two-thirds of the voting power of all of the shares of our capital stock entitled to vote, voting together as a single class, to amend any provision of our charter described in the third through seventh bullet point above or the super majority provision described in this bullet point. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than the candidates nominated by our board. See Description of capital stock for additional information on the anti-takeover measures applicable to us. We do not anticipate paying any dividends. We currently expect that we will retain our future earnings, if any, for use in the operation and expansion of our business, and we do not anticipate paying any cash dividends. As a result, our stock may be less attractive to investors who seek dividend payments. Table of Contents Special note regarding forward-looking statements Some of the statements under Prospectus summary, Risk factors, Management s discussion and analysis of financial condition and results of operations, Business and elsewhere in this prospectus constitute forward-looking statements within the meaning of Section 27A of the Securities Act. These forward-looking statements reflect our current expectation about our future results, levels of activity, performance or achievements, including, without limitation, that our business continues to grow as currently expected, that we are able to expand our service offerings through our existing consultants and new hires, and that existing market conditions do not change from current expectations. In some cases, you can identify forward-looking statements by terminology such as may, will, should, could, expects, plans, intends, anticipates, believes, estimates, potential, or continue or the negative of such terms or other comparable terminology. These statements involve known and unknown risks, uncertainties and other factors, including, among others, those described under Risk factors and elsewhere in this prospectus, that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Therefore, you should not place undue reliance on our forward-looking statements. Except to the extent required by applicable securities laws, we are under no duty and do not intend to update any of the forward-looking statements after the date of this prospectus. Table of Contents Use of proceeds All of the shares of common stock offered by this prospectus are being sold by the selling stockholder. We will not receive any proceeds from the sale of shares by the selling stockholder. Price range of common stock Since October 13, 2004, our common stock has been trading on the NASDAQ National Market under the symbol HURN. The following table sets forth, on a per share basis and for the period indicated, the high and low closing sales prices for Huron s common stock as reported by the NASDAQ National Market. High Low 2004: Fourth Quarter (from October 13, 2004) $ 23.95 $ 18.90 2005: First Quarter 25.56 19.76 Second Quarter 25.25 19.46 Third Quarter 28.30 23.10 Fourth Quarter 28.40 23.45 2006: First Quarter (through February 1, 2006) 28.17 23.90 On February 1, 2006, the last reported sale price of our common stock as reported on the NASDAQ National Market was $27.03 per share. As of December 31, 2005, there were 66 holders of record of our common stock. Dividend policy On May 12, 2004, we declared a special dividend on each outstanding share of our common stock and 8% preferred stock payable to holders of record on May 25, 2004. We paid the special dividend on June 29, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.25 million, or $0.09 per share of common stock and $9.64 per share of 8% preferred stock. The payment of the special dividend was funded by our available cash balance and by borrowing availability under our credit agreement, which we repaid the following day. Other than the special dividend, we have not declared or paid any dividends on our common stock since our inception and do not intend to pay any dividends on our common stock in the foreseeable future. We currently expect that we will retain our future earnings, if any, for use in the operation and expansion of our business. Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon, among other things, our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors the board of directors may deem relevant. In addition, our bank credit agreement restricts dividends by requiring $45 million of permanent equity capital, which is defined as the sum of paid-in capital and net income less any distributions. Table of Contents Capitalization The following table sets forth our capitalization as of September 30, 2005. The information set forth below should be read in conjunction with Selected consolidated financial and other operating data, Management s discussion and analysis of financial condition and results of operations and our consolidated financial statements and related notes included elsewhere in this prospectus. As of September 30, 2005 (unaudited) (in thousands, except share data) Cash and cash equivalents $ 21,875 Total 262 477 483 489 626 Average number of consultants (for the period): Financial Consulting 163 219 279 281 280 Operational Consulting 84 142 206 204 Long-term debt(1) $ 2,000 Stockholders equity: Common stock, par value $0.01 per share; 500,000,000 shares authorized; 17,276,585 shares issued and 17,214,435 shares outstanding 173 Treasury stock, 62,150 shares, at cost (1,044 ) Additional paid-in capital 76,172 Deferred stock-based compensation (20,686 ) Retained earnings 14,992 Total stockholders equity 69,607 Total capitalization $ 71,607 (1) Consists of notes payable, net of current portion, issued in connection with the acquisition of Speltz & Weis LLC. The outstanding share information as of September 30, 2005 excludes 1,334,193 shares of common stock issuable upon the exercise of outstanding stock options issued under our equity incentive plans, with a weighted average exercise price of $2.20 per share. Table of Contents Selected consolidated financial and other operating data We have derived the following selected consolidated financial data as of the end of and for the period from March 19, 2002 (inception) to December 31, 2002 and as of and for the years ended December 31, 2003 and 2004 from our audited consolidated financial statements. We have derived the following selected consolidated financial data for the nine months ended September 30, 2004 and 2005 and as of September 30, 2005 from our unaudited interim consolidated financial statements. The historical consolidated statements of operations and other operating data for the nine months ended September 30, 2005 includes the results of operations and other operating data of Speltz & Weis LLC since May 9, 2005, its date of acquisition. In the opinion of management, the unaudited selected financial data presented below under the headings Consolidated statement of operations data and Consolidated balance sheet data reflect all adjustments of a normal recurring nature necessary to present fairly our results of operations and financial position for and as of the periods presented. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with Management s discussion and analysis of financial condition and results of operations and the consolidated financial statements and related notes included elsewhere in this prospectus. Table of Contents Selected consolidated financial and other operating data Nine Months Ended September 30, Consolidated statements of operations data 2003 2004 2004 2005 (unaudited) (in thousands, except per share and other operating data) Revenues $ 35,101 $ 101,486 $ 159,550 $ 118,713 $ 151,586 Reimbursable expenses 2,921 8,808 14,361 10,315 13,901 Total revenues and reimbursable expenses 38,022 110,294 173,911 129,028 165,487 Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in operating expenses)(1): Direct costs 26,055 69,374 92,270 69,672 81,653 Stock-based compensation 27 978 330 3,641 Intangible assets amortization 1,067 Reimbursable expenses 2,921 8,929 14,281 10,226 14,065 Total direct costs and reimbursable expenses 28,976 78,330 107,529 80,228 100,426 Other operating data (unaudited): Number of consultants (at end of period)(1): Financial Consulting 172 285 269 282 308 Operational Consulting 90 192 214 207 Income before provision for income taxes 23,874 685 146 24,705 Provision for income taxes 10,624 132 (3) 11,084 Total other expenses 692 968 Total operating expenses 15,576 32,181 46,698 33,681 41,464 Income (loss) before provision (benefit) for income taxes (6,863 ) (1,185 ) 18,992 14,384 23,874 Provision (benefit) for income taxes (2,697 ) (122 ) 8,128 6,042 10,624 Noncash transaction: Issuance of notes payable for purchase of business $ 3,000 $ Accrued dividends on 8% preferred stock $ $ 857 Supplemental disclosure of cash flow information: Cash paid for interest $ 69 $ Net income (loss) attributable to common stockholders $ (4,812 ) $ (2,129 ) $ 9,933 $ 7,485 $ 13,250 Net income (loss) attributable to common stockholders per share(2): Basic $ (0.41 ) $ (0.18 ) $ 0.77 $ 0.57 $ 0.85 Diluted $ (0.41 ) $ (0.18 ) $ 0.72 $ 0.53 $ 0.79 Weighted average shares used in calculating net income (loss) attributable to common stockholders per share(2): Basic 11,803 11,871 12,820 12,068 15,657 Diluted 11,803 11,871 13,765 13,045 16,801 Cash dividend per common share(3) $ $ $ 0.09 $ $ (See footnotes on the following page.) Table of Contents Selected consolidated financial and other operating data September 30, 2005 Consolidated balance sheet data (in thousands): 2002 2003 2004 (unaudited) Cash and cash equivalents $ 4,449 $ 4,251 $ 28,092 $ 21,875 Working capital $ 9,780 $ 10,159 $ 42,898 $ 46,341 Total assets $ 26,583 $ 39,889 $ 83,219 $ 115,402 Long-term debt(7) $ 10,076 $ 10,076 $ $ 2,000 Total 8% preferred stock(8) $ 13,146 $ 14,212 $ $ Total stockholders equity (deficit) $ (4,543 ) $ (6,624 ) $ 49,233 $ 69,607 Total operating expenses 46,698 318 (1) Intangible assets amortization relating to customer contracts is presented as a component of total direct costs. Depreciation, amortization of leasehold improvements and amortization of intangible assets relating to customer relationships are presented as a component of operating expenses. (2) Adjusted for a 1 for 2.3 reverse stock split effected on October 5, 2004. (3) On May 12, 2004, we declared a special dividend on each outstanding share of our common stock and 8% preferred stock payable to holders of record on May 25, 2004. We paid the special dividend on June 29, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.25 million, or $0.09 per share of common stock and $9.64 per share of 8% preferred stock. Other than the special dividend, we have not declared or paid any dividends on our common stock since our inception and do not intend to pay any dividends on our common stock in the foreseeable future. (4) Consultants consist of our billable professionals, excluding interns and independent contractors. (5) We calculate the utilization rate for our consultants by dividing the number of hours all of our consultants worked on client assignments during a period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. (6) Average billing rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. (7) Consists of 8% promissory notes at December 31, 2002 and 2003. Consists of notes payable, net of current portion, issued in connection with the acquisition of Speltz & Weis LLC at September 30, 2005. (8) On October 18, 2004, we used $15.1 million of the proceeds of the initial public offering to redeem all of the outstanding 8% preferred stock, plus cumulative dividends and a liquidation participation amount totaling $2.6 million. Table of Contents Management s discussion and analysis of financial condition and results of operations This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the risks described in Risk factors and elsewhere in this prospectus. You should read the following discussion with Selected consolidated financial and other operating data and our consolidated financial statements and related notes included elsewhere in this prospectus. OUR BUSINESS We are an independent provider of financial and operational consulting services. We commenced operations in May 2002 with a core group of experienced financial and operational consultants, composed primarily of former Arthur Andersen LLP partners and professionals. We have grown significantly since we commenced operations, nearly tripling the number of our consultants from 213 on May 31, 2002 to 632 as of December 31, 2005. In response to strong demand for our services, we began aggressively hiring consultants in the first quarter of 2003 and added over 200 new consultants during 2003. While this aggressive hiring reduced our 2003 utilization rate (determined by dividing the number of hours all of our consultants worked on client assignments during a period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days) as we integrated our new hires, we believe the early results of this growth initiative are evident in our financial results. Revenues in 2002 totaled $35.1 million for our first eight months of operations and rose to $101.5 million in 2003, our first full year of operations. Revenues in 2004 totaled $159.6 million, a 57.2% increase from 2003. Revenues for the nine months ended September 30, 2005 totaled $151.6 million, a 27.7% increase from revenues of $118.7 million in the nine months ended September 30, 2004. We provide our services through two segments: Financial Consulting and Operational Consulting. Our Financial Consulting segment provides services that help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. Our Operational Consulting segment provides services that help clients improve the overall efficiency and effectiveness of their operations, reduce costs, manage regulatory compliance and maximize procurement efficiency. Revenues We derive all of our revenues from providing financial and operational consulting services through three principal types of billing arrangements consisting of time-and-expense, fixed-fee and performance-based. We manage our business on the basis of revenues before reimbursable expenses. We believe this is the most accurate reflection of our consulting services because it eliminates the effect of reimbursable expenses that we bill to our clients at cost. Since our inception, most of our revenues have been generated from time-and-expense engagements. In time-and-expense engagements, fees are based on the hours incurred at agreed upon billing rates. Time-and-expense engagements represented approximately 83.1% of our revenues in 2004 and 85.3% of our revenues for the nine months ended September 30, 2005. In fixed-fee engagements, we agree to a pre-established fee in exchange for a pre-determined set of consulting services. We set the fees based on our estimates of the costs and timing for completing the fixed-fee engagements. It is the client s expectation in these engagements that the pre-established fee will Table of Contents Management s discussion and analysis of financial condition and results of operations not be exceeded except in mutually agreed upon circumstances. For the year ended December 31, 2004 and the nine months ended September 30, 2005, fixed-fee engagements represented approximately 11.8% and 12.2%, respectively, of our revenues. Performance-based fee engagements generally tie fees to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a result of adopting our recommendations for improving cost effectiveness in the procurement area. Second, we have performance-based engagements in which we earn a success fee when and if certain pre-defined outcomes occur. Often this type of success fee supplements time-and-expense or fixed-fee engagements. For example, our revenues for the second quarter of 2004 included a $1.6 million success fee earned on a time-and-expense engagement that included a performance-based component related to the completion of a series of asset sales transactions managed on behalf of a single Financial Consulting segment client over a two-year period. While performance-based fee revenues represented approximately 5.1% and 2.5% of our revenues in 2004 and the nine months ended September 30, 2005, respectively, such revenues in the future may cause significant variations in quarterly revenues and operating results due to the timing of achieving the performance-based criteria. Our quarterly results are impacted principally by our utilization rate, the number of business days in each quarter and the number of our consultants who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of spending on existing and new engagements, which would negatively affect our utilization rate. The number of business work days are also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have 10% to 15% fewer business work days available in the third and fourth quarters of the year, which can impact revenues during those periods. Reimbursable expenses Reimbursable expenses that are billed to clients, primarily relating to travel and out-of-pocket expenses incurred in connection with engagements, are included in total revenues and reimbursable expenses, and typically an equivalent amount of these expenses are included in total direct costs and reimbursable expenses. The amount of reimbursable expenses included in total revenues and reimbursable expenses may not always correspond with the amount of these expenses included in total direct costs and reimbursable expenses due to the fact that revenues from reimbursable expenses associated with performance-based engagements may be deferred and recognized at a later date when the revenue on these engagements is recognized. This treatment can result in a timing difference between when revenue from reimbursable expenses is recognized and when such expenses are recognized in the statement of operations. Such timing differences are eliminated when the performance-based engagement is completed, as total cumulative revenues from reimbursable expenses will equal the total cumulative reimbursable expenses incurred on the engagement. Total direct costs Our most significant expenses are costs classified as total direct costs. These total direct costs primarily include direct costs consisting of salaries, performance bonuses, payroll taxes and benefits for consultants, as well as fees paid to independent contractors that we retain to supplement consulting personnel, typically on an as needed basis for specific client engagements. Table of Contents Management s discussion and analysis of financial condition and results of operations Total direct costs also include stock-based compensation, which represents the cost of stock option and restricted stock awards granted to our consultants. Compensation expense for stock-based awards is amortized on a straight-line basis over the vesting period, which is generally four years. As a result of the granting of restricted common stock awards and anticipated future awards, annual stock-based compensation expense will increase in the future. Total direct costs also include intangible assets amortization relating to customer contracts. Operating expenses Our operating expenses include selling, general and administrative expenses, which consist primarily of salaries, performance bonuses, payroll taxes and benefits for non-billable professionals. Also included in this category are other sales and marketing related expenses, rent and other office related expenses, and professional fees. Other operating expenses include certain depreciation and amortization expenses not included in total direct costs and stock-based compensation, which represents the cost of stock option and restricted stock awards granted to our non-billable professionals. Compensation expense for stock-based awards is amortized on a straight-line basis over the vesting period, which is generally four years. As a result of the granting of restricted common stock awards and anticipated future awards, annual stock-based compensation expense will increase in the future. Pursuant to a registration rights agreement with HCG Holdings LLC, we are required to pay the expenses relating to this offering, excluding the underwriting discounts and commissions which will be borne by the selling stockholder. We expect these expenses to have an impact of approximately $0.8 million on our net income for the first quarter of 2006. Segment results Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include corporate office support costs, all office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology and company-wide business development functions, as well as costs related to overall corporate management. Beginning January 1, 2005, the forensic technology and discovery services group was moved from the Financial Consulting segment to the Operational Consulting segment to improve marketing synergies with the legal business consulting practice. Previously reported segment information has been reclassified to reflect this change, except for the year ended December 31, 2002 as the effect was immaterial. INITIAL PUBLIC OFFERING On October 18, 2004, we completed our initial public offering. In the initial public offering, we sold 3,333,333 shares of common stock and HCG Holdings LLC, the selling stockholder in this offering, sold 1,666,667 shares of common stock at an offering price of $15.50 per share. On October 22, 2004, the underwriters exercised in full their over-allotment option to purchase an additional 750,000 shares of common stock from HCG Holdings LLC. The initial public offering generated gross proceeds to us of $51.7 million, or $48.0 million net of underwriting discounts. We did not receive any proceeds from the shares sold by HCG Holdings LLC. On October 18, 2004, we used $15.1 million of the net proceeds to redeem the outstanding 8% preferred stock, including cumulative dividends and a liquidation participation amount totaling $2.6 million. Also on October 18, 2004, the Company used $10.7 million of the net offering proceeds to repay the notes payable to HCG Holdings LLC, including accrued and unpaid interest of $0.6 million. The costs associated with the initial public offering, which totaled $3.3 Table of Contents Management s discussion and analysis of financial condition and results of operations million, were paid from the proceeds. On May 9, 2005, we used a portion of the remaining net proceeds from the initial public offering to pay the cash portion of the purchase price for our acquisition of Speltz & Weis LLC. We are using the remaining initial public offering proceeds for general corporate purposes, including working capital and potential business acquisitions. ACQUISITION OF SPELTZ & WEIS LLC On May 9, 2005, Huron Consulting Group, Inc. acquired 100% of the outstanding membership interests of Speltz & Weis LLC, a specialized consulting firm that consisted of 26 consultants. With the acquisition of Speltz & Weis LLC, our Financial Consulting segment can provide interim management, organizational renewal and turnaround services and other crisis management services to distressed hospitals and other healthcare facilities. The aggregate purchase price of the acquisition was $17.2 million, which consisted of $14.0 million cash paid at closing, notes payable totaling $3.0 million payable in three equal annual installments of $1.0 million (together with accrued interest at 4% per annum) beginning on May 8, 2006, and $0.2 million of transaction costs. Additional purchase consideration may be payable based on the performance of Speltz & Weis LLC during the three-year period beginning June 1, 2005 and ending May 30, 2008. Also, additional payments may be made based on the amount of revenues we receive from certain referrals made by Speltz & Weis LLC employees. The acquisition has been accounted for under the purchase method of accounting and the results of Speltz & Weis operations have been included within the Financial Consulting segment in our consolidated financial statements since the date of the acquisition. CRITICAL ACCOUNTING POLICIES Management s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The notes to our consolidated financial statements include disclosure of our significant accounting policies. We review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate information relative to the current economic and business environment. The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results. While all decisions regarding accounting policies are important, we believe that there are five accounting policies that could be considered critical. These critical policies, which are presented in detail in the notes to our financial statements, relate to revenue recognition, allowances for doubtful accounts and unbilled services, carrying value of goodwill and other intangible assets, valuation of net deferred tax assets and stock-based compensation. Revenue recognition We recognize revenues in accordance with Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition. Revenue is recognized when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed and determinable and collectibility is reasonably assured. Our services are primarily rendered under engagements that require the client to pay on a time-and-expense basis. Fees are based on the hours incurred at agreed-upon rates and recognized as services are provided. Revenues related to fixed-fee engagements are recognized based on estimates of work completed versus the total services to Table of Contents Management s discussion and analysis of financial condition and results of operations be provided under the engagement. Losses, if any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. To date, such losses have not been significant. Revenues related to performance-based engagements are recognized when all performance-based criteria are met. We also have contracts with clients to deliver multiple services that are covered under both individual and separate engagement letters. These arrangements allow for our services to be valued and accounted for on a separate basis. Reimbursable expenses related to time-and-expense and fixed-fee engagements are recognized as revenue in the period in which the expense is incurred. Reimbursable expenses subject to performance-based criteria are recognized as revenue when all performance criteria are met. Direct costs incurred on all types of engagements, including performance-based engagements, are recognized in the period in which incurred. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenue. Revenues recognized for services performed but not yet billed to clients are recorded as unbilled services. Amounts billed to clients but not yet recognized as revenues are recorded as deferred revenue. Client prepayments and retainers that are unearned are also classified as deferred revenue and recognized over future periods as earned in accordance with the applicable engagement agreement. Allowances for doubtful accounts and unbilled services We maintain allowances for doubtful accounts and for services performed but not yet billed for estimated losses based on several factors, including the historical percentages of fee adjustments and write-offs by practice group, an assessment of a client s ability to make required payments and the estimated cash realization from amounts due from clients. The allowances are assessed by management on a quarterly basis. If the financial condition of a client deteriorates in the future, impacting the client s ability to make payments, an increase to our allowance might be required or our allowance may not be sufficient to cover actual write-offs. The provision for doubtful accounts and unbilled services is recorded as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client s inability to make required payments, the provision is recorded in operating expenses. Carrying value of goodwill and other intangible assets Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. Our goodwill balance as of September 30, 2005 was $14.6 million, which resulted from the acquisition of Speltz & Weis LLC in the second quarter of 2005. Under the provisions of Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets, goodwill is required to be tested for impairment on an annual basis and between annual tests whenever indications of impairment exist. We have elected and will begin to perform this annual impairment test in the second quarter of 2006 or earlier if indications of impairment arise, such as loss of key personnel, unanticipated competition, or other unforeseen developments. Impairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess. An impairment test involves considerable management judgment and estimates regarding future operating results and cash flows. Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill. Our intangible assets balances, net of accumulated amortization, totaled $0.8 million at September 30, 2005 and consist of customer contracts and relationships relating to the Speltz & Weis LLC acquisition. We obtained a third party valuation to assist us in estimating the initial fair value of acquired intangible assets. These valuations are primarily based on the present value of the estimated net Table of Contents Management s discussion and analysis of financial condition and results of operations cash flows expected to be derived from the client contracts and relationships, discounted for assumptions about future customer attrition. We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Therefore, higher or earlier-than-expected customer attrition may result in higher future amortization charges or an impairment charge for customer-related intangible assets. For example, during the third quarter of 2005, we wrote off a portion of the intangible assets pertaining to a customer contract as described in Subsequent Event below. Valuation of net deferred tax assets We have recorded net deferred tax assets as we expect to realize future tax benefits related to the utilization of these assets. Although we experienced net losses early in our history, no valuation allowance has been recorded relating to these deferred tax assets because we believe that it is more likely than not that future taxable income will be sufficient to allow us to utilize these assets. Should we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would need to establish a valuation allowance, which would be recorded as a charge to income in the period the determination was made. While utilization of these deferred tax assets will provide future cash flow benefits, they will not have an effect on future income tax provisions. Stock-based compensation The accounting for stock-based compensation is complex, and under certain circumstances, GAAP allows for alternative methods. As permitted, we account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and have elected the disclosure option of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires that companies either recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. Accordingly, we have measured compensation expense for stock options that we have granted to employees as the excess, if any, of the estimated fair value of our common stock at the date of grant over the exercise price. The calculated stock-based compensation is included as a component of stockholders equity and is amortized on a straight-line basis by charges to earnings over the vesting period of the applicable options. Given the lack of a public market for our common stock prior to our initial public offering, we established an estimated fair value of the common stock as well as the exercise price for the options to purchase this stock. We estimated the fair value of our common stock by evaluating our results of business activities and projections of our future results of operations. See Recent Accounting Pronouncements below. Table of Contents Management s discussion and analysis of financial condition and results of operations Nine Months Ended September 30, Segment and consolidated operating results: 2003 2004 2004 2005 (unaudited) (in thousands, except other operating data) Revenues and reimbursable expenses: Financial Consulting revenues $ 22,400 $ 68,028 $ 92,378 $ 69,345 $ 87,702 Operational Consulting revenues 12,701 33,458 67,172 49,368 63,884 Total revenues 35,101 101,486 159,550 118,713 151,586 Total reimbursable expenses 2,921 8,808 14,361 10,315 13,901 Total revenues and reimbursable expenses $ 38,022 $ 110,294 $ 173,911 $ 129,028 $ 165,487 Operating income (loss): Financial Consulting $ 3,912 $ 20,601 $ 34,365 $ 25,590 $ 35,844 Operational Consulting 3,527 6,793 23,009 16,781 22,499 Total segment operating income 7,439 27,394 57,374 42,371 58,343 Unallocated corporate costs 7,206 20,601 31,417 21,982 29,533 Depreciation and amortization expense 3,048 5,328 2,365 1,682 3,861 Other operating expenses 3,715 1,682 3,908 3,588 1,352 Total operating expenses 13,969 27,611 37,690 27,252 34,746 Operating (loss) income $ (6,530 ) $ (217 ) $ 19,684 $ 15,119 $ 23,597 (1) Consultants consist of our billable professionals, excluding interns and independent contractors. (2) We calculate the utilization rate for our consultants by dividing the number of hours all our consultants worked on client assignments during a period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. (3) Average billing rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. Table of Contents Management s discussion and analysis of financial condition and results of operations Nine months ended September 30, 2005 compared to nine months ended September 30, 2004 Revenues Revenues increased $32.9 million, or 27.7%, to $151.6 million for the nine months ended September 30, 2005 from $118.7 million for the nine months ended September 30, 2004. Revenues for the nine months ended September 30, 2005 included $6.6 million of revenues generated by Speltz &Weis LLC. Revenues from time-and-expense engagements increased $31.6 million, or 32.4%, to $129.2 million for the nine months ended September 30, 2005 from $97.6 million for the nine months ended September 30, 2004. Revenues from fixed-fee engagements increased $4.8 million, or 34.8%, to $18.6 million for the nine months ended September 30, 2005 from $13.8 million for the nine months ended September 30, 2004. Revenues from performance-based engagements decreased $3.5 million, or 47.9%, to $3.8 million for the nine months ended September 30, 2005 from $7.3 million for the nine months ended September 30, 2004. Of the overall $32.9 million increase in revenues, $14.4 million was attributable to an increase in the number of consultants and increased usage of independent contractors, $10.5 million was attributable to an increase in the utilization rate of our consultants, and $8.0 million was attributable to an increase in the average billing rate per hour. These increases were reflective of growing demand for our services from new and existing clients. The average number of consultants increased to 543 for the nine months ended September 30, 2005 from 485 for the nine months ended September 30, 2004, as we added a substantial number of consultants in our Operational Consulting segment. The increase in consultants was also reflective of the Speltz &Weis LLC acquisition. Revenues generated by independent contractors increased $2.1 million, or 131.3%, to $3.7 million for the nine months ended September 30, 2005 from $1.6 million for the same period last year. Our utilization rate increased to 76.2% for the nine months ended September 30, 2005 from 70.5% for the nine months ended September 30, 2004. The utilization rate for any given period is calculated by dividing the number of hours all our consultants worked on client assignments during the period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. Additionally, our average billing rate per hour increased 5.1% to $249 for the nine months ended September 30, 2005 from $237 for the nine months ended September 30, 2004. Average billing rate per hour for any given period is calculated by dividing revenues for the period by the number of hours worked on client assignments during the same period. Total direct costs Our direct costs increased $12.0 million, or 17.2%, to $81.7 million in the nine months ended September 30, 2005 from $69.7 million in the nine months ended September 30, 2004. This increase was primarily attributable to the increase in the average number of consultants described above and their related compensation and benefit costs, as well as a $1.4 million increase in retention and signing bonuses. Stock-based compensation expense increased to $3.6 million for the nine months ended September 30, 2005 from $0.3 million for the same period last year due to the granting of restricted stock awards to our consultants. On October 12, 2004, immediately prior to our initial public offering, we granted to our consultants a total of 489,500 shares of restricted common stock with an aggregate fair market value of $7.6 million. During the first nine months of 2005, we granted to our consultants an additional 509,600 shares of restricted common stock with an aggregate fair market value of $10.9 million. Total direct costs in the nine months ended September 30, 2005 included $1.1 million of intangible assets amortization expense relating to customer contracts valued at $1.9 million that were acquired as part of the Speltz &Weis acquisition. Table of Contents Management s discussion and analysis of financial condition and results of operations Operating expenses Selling, general and administrative expenses increased $7.9 million, or 27.6%, to $36.3 million in the nine months ended September 30, 2005 from $28.4 million in the nine months ended September 30, 2004. The increase was due in part to an increase in the average number of non-billable professionals to 135 for the nine months ended September 30, 2005 from 109 for the nine months ended September 30, 2004 and their related compensation and benefit costs of $14.9 million in the nine months ended September 30, 2005 compared to $11.9 million in the nine months ended September 30, 2004. We added a number of non-billable professionals during the past year in preparation for, and to continue to support, a public company infrastructure. The remaining increase in selling, general and administrative costs in the nine months ended September 30, 2005 compared to the same period in the prior year was due to increases in recruiting costs, promotion and marketing costs, rent and other facility costs, charitable contributions, and new costs associated with being a public company, including Sarbanes-Oxley compliance. Additionally, during the third quarter of 2005 in connection with a previously proposed secondary offering that was withdrawn, we incurred costs totaling $0.4 million after tax, or $0.02 per diluted share. These costs were expensed in the period incurred because we did not issue securities in the withdrawn proposed offering. These increases were partially offset by lower severance charges as compared to the nine months ended September 30, 2004, when we recorded $1.8 million of such charges. Stock-based compensation expense increased to $1.4 million for the nine months ended September 30, 2005 from $0.1 million for the same period last year due to the granting of restricted stock awards to our non-billable professionals. On October 12, 2004, immediately prior to our initial public offering, we granted to our non-billable professionals a total of 278,200 shares of restricted common stock with an aggregate fair market value of $4.3 million. During the first nine months of 2005, we granted to our non-billable professionals an additional 121,100 shares of restricted common stock with an aggregate fair market value of $2.6 million. Depreciation expense increased $1.4 million, or 82.4%, to $3.1 million in the nine months ended September 30, 2005 from $1.7 million in the nine months ended September 30, 2004 as computers, network equipment, furniture and fixtures, and leasehold improvements were added to support our increase in employees. In the nine months ended September 30, 2005, we recognized $0.2 million of intangible assets amortization. In conjunction with the Speltz & Weis LLC acquisition, we recorded $0.7 million of intangible assets representing customer relationships, which is being amortized over a weighted-average life of 15.1 months. Also included in amortization expense in the nine months ended September 30, 2005 is a $0.6 million charge relating to the write off of a portion of the intangible assets relating to a Speltz & Weis LLC customer contract, as described in Subsequent Event below. Operating expenses in the nine months ended September 30, 2004 also included a $2.1 million pre-tax restructuring charge associated with the closing of two small, underperforming offices in Miami, Florida and Palo Alto, California. The charge consisted of approximately $2.0 million for severance payments for the ten employees formerly employed at these locations, which were paid by April 30, 2004, and $0.1 million for office lease payments, which were paid by August 31, 2004. Additionally, during the nine months ended September 30, 2004, we eliminated a service offering in a practice area in the Operational Consulting segment that was not meeting our expectations and we recorded a pre-tax restructuring charge of $1.3 million. Operating income Operating income increased $8.5 million, or 56.1%, to $23.6 million for the nine months ended September 30, 2005 from $15.1 million for the nine months ended September 30, 2004. The increase in operating income was primarily due to the increase in revenues and the lack of restructuring charges, Table of Contents Management s discussion and analysis of financial condition and results of operations partially offset by the increases in direct costs and operating expenses as discussed above. Operating margin, which is defined as operating income expressed as a percentage of revenues, was 15.6% in the nine months ended September 30, 2005 compared to 12.7% in the nine months ended September 30, 2004. As described in Subsequent Event below, one of our clients filed for bankruptcy. As a result, new financial terms and conditions, including billing terms and rates for our services, were negotiated pursuant to a new engagement contract. These new terms will have a negative impact on our operating margins in the fourth quarter of 2005. Due to the factors listed below, we expect our direct costs and operating expenses to increase in 2006 as compared to 2005. Between April 1, 2005 and December 31, 2005, we increased our headcount by 140 employees, representing a 22% increase from March 31, 2005 to address continued demand for our services. The majority of our headcount growth was experienced in our Operational Consulting segment. During 2005, we increased the number of our managing directors who are consultants from 56 at December 31, 2004 to 75 at December 31, 2005. In addition, in January 2006, we promoted 11 of our employees to the managing director level, compared to 3 in January 2005. We anticipate that some of these managing directors will initially focus their time on sales efforts during the first part of 2006 and may not be fully productive until later in 2006. In 2006, we expect to hire additional managers, associates and analysts to expand support for our existing practices and better leverage our managing directors and directors. During the third and fourth quarters of 2005, we entered into new lease agreements for two of our offices, including one in New York City. As a result of the costs associated with these factors, combined with anticipated ongoing growth in our business activity and the reduced billing rates at a client who filed for bankruptcy as described in Subsequent Event below, we expect our operating margin for the first quarter of 2006 to be lower than the 17.6% operating margin we experienced in the first quarter of 2005, as we absorb these costs during the first part of 2006. Although we expect operating margins to increase over the remainder of the year as we fully integrate our new hires and leverage the lease investments we made in the second half of 2005, there can be no assurance that our expectations will be met and therefore our operating margins may be less than we expect. Net income attributable to common stockholders Net income attributable to common stockholders increased $5.8 million, or 77.0%, to $13.3 million for the nine months ended September 30, 2005 from $7.5 million for the nine months ended September 30, 2004. Earnings per diluted share increased 49.1% to $0.79 for the nine months ended September 30, 2005 from $0.53 for the comparable period last year. The increase was primarily attributable to an increase in net income, partially offset by an increase in weighted-average shares resulting from our initial public offering. Speltz & Weis LLC s operations, which included the negative impact of the charges described in Subsequent Event below, had the effect of reducing our earnings per diluted share by $0.06 during the nine months ended September 30, 2005. Segment results Financial Consulting Revenues Financial Consulting segment revenues, which includes revenues generated by Speltz & Weis LLC since the date of the acquisition, increased $18.4 million, or 26.5%, to $87.7 million for the nine months Table of Contents Management s discussion and analysis of financial condition and results of operations ended September 30, 2005 from $69.3 million for the nine months ended September 30, 2004. Revenues from time-and-expense engagements increased $20.8 million, or 33.0%, to $83.9 million for the nine months ended September 30, 2005 from $63.1 million for the nine months ended September 30, 2004. Revenues from fixed-fee engagements decreased $0.7 million, or 15.6%, to $3.8 million for the nine months ended September 30, 2005 from $4.5 million for the nine months ended September 30, 2004. There were no revenues from performance-based engagements for the nine months ended September 30, 2005 as compared to $1.7 million for the nine months ended September 30, 2004, which primarily consisted of fees recognized relating to the successful completion of a series of asset sales transactions managed on behalf of a single client over a two-year period. Of the overall $18.4 million increase in revenues, $9.5 million was attributable to an increase in the utilization rate of our consultants, $7.2 million was attributable to an increase in the average billing rate per hour, and $1.7 million primarily attributable to an increase in the usage of independent contractors. These increases were reflective of growing demand for our services from new and existing clients. Our utilization rate increased to 79.4% for the nine months ended September 30, 2005 from 69.8% for the nine months ended September 30, 2004. The average billing rate per hour increased 9.1% to $277 for the nine months ended September 30, 2005 from $254 for the nine months ended September 30, 2004. Independent contractor revenues increased to $1.7 million for the nine months ended September 30, 2005 from $0.2 million for the same period last year. Operating income Financial Consulting segment operating income increased $10.2 million, or 40.1%, to $35.8 million in the nine months ended September 30, 2005 from $25.6 million in the nine months ended September 30, 2004. Segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, increased to 40.9% in the nine months ended September 30, 2005 from 36.9% in the nine months ended September 30, 2004. Operational Consulting Revenues Operational Consulting segment revenues increased $14.5 million, or 29.4%, to $63.9 million for the nine months ended September 30, 2005 from $49.4 million for the nine months ended September 30, 2004. Revenues from time-and-expense engagements increased $10.7 million, or 30.9%, to $45.3 million for the nine months ended September 30, 2005 from $34.6 million for the nine months ended September 30, 2004. Revenues from fixed-fee engagements increased $5.6 million, or 60.9%, to $14.8 million for the nine months ended September 30, 2005 from $9.2 million for the nine months ended September 30, 2004. Revenues from performance-based engagements decreased $1.8 million, or 32.1%, to $3.8 million for the nine months ended September 30, 2005 from $5.6 million for the nine months ended September 30, 2004. Of the overall $14.5 million increase in revenues, $12.8 million was attributable to an increase in the number of consultants and increased usage of independent contractors, $1.0 million was attributable to an increase in the utilization rate of our consultants, and $0.7 million was attributable to an increase in the average billing rate per hour. These increases were reflective of growing demand for our services from new and existing clients. The average number of consultants increased to 263 for the nine months ended September 30, 2005 from 204 for the nine months ended September 30, 2004, as we added a significant number of consultants over the past year. Independent contractor revenues increased $0.8 million, or 61.5%, to $2.1 million for the nine months ended September 30, 2005 from $1.3 million for the same period last year. Our utilization rate increased slightly to 72.9% for the nine months ended September 30, 2005 from 71.4% for the nine months ended September 30, 2004. Additionally, the average billing rate per hour increased 1.4% to $220 for the nine months ended September 30, 2005 Table of Contents Management s discussion and analysis of financial condition and results of operations from $217 for the same period last year. Net deferrals of $2.1 million of performance-based fees for services rendered had the impact of reducing our average billing rate for the nine months ended September 30, 2005 by $7. We expect to recognize this revenue in the future when all the performance-based criteria specified in the engagement contract are met. Operating income Operational Consulting segment operating income increased $5.7 million, or 34.1%, to $22.5 million for the nine months ended September 30, 2005 from $16.8 million for the nine months ended September 30, 2004. Segment operating margin increased to 35.2% in the nine months ended September 30, 2005 from 34.0% in the same period last year. Year ended December 31, 2004 compared to year ended December 31, 2003 Revenues Revenues increased $58.1 million, or 57.2%, to $159.6 million for the year ended December 31, 2004 from $101.5 million for the year ended December 31, 2003. Revenues from time-and-expense engagements increased $46.5 million, or 54.0%, to $132.6 million for the year ended December 31, 2004 from $86.1 million for the year ended December 31, 2003. Revenues from fixed-fee engagements increased $6.7 million, or 55.4%, to $18.8 million for the year ended December 31, 2004 from $12.1 million for the year ended December 31, 2003. Revenues from performance-based engagements increased $4.9 million, or 148.5%, to $8.2 million for the year ended December 31, 2004 from $3.3 million for the year ended December 31, 2003. The overall $58.1 million increase in revenues resulted from a $32.3 million increase in revenues attributable to an increase in billable hours associated with new and existing client engagements and the hiring of additional consultants, a $16.7 million increase in revenues attributable to an increase in the average billing rate per hour and a $9.1 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 485 for the year ended December 31, 2004 from 361 for the year ended December 31, 2003 as we added a substantial number of consultants during the second half of 2003 to meet growing demand for our services and position us for future growth. The average billing rate per hour increased 10.1% to $239 for the year ended December 31, 2004 from $217 for the year ended December 31, 2003. In addition, our utilization rate increased to 72.2% for the year ended December 31, 2004 from 66.1% in the year ended December 31, 2003. Total direct costs Our direct costs increased $22.9 million, or 33.0%, to $92.3 million in the year ended December 31, 2004 from $69.4 million in the year ended December 31, 2003. This increase in cost was primarily attributable to the increase in the average number of consultants described above. Stock-based compensation expense increased to $1.0 million primarily due to the issuance of employee stock option awards with a higher intrinsic value during the first quarter of 2004 and the granting of restricted common stock awards to our consultants. On October 12, 2004, immediately prior to our initial public offering, we granted to our consultants a total of 489,500 shares of restricted common stock with an aggregate fair market value of $7.6 million. Operating expenses Selling, general and administrative expenses increased $15.2 million, or 60.3%, to $40.4 million in the year ended December 31, 2004 from $25.2 million in the year ended December 31, 2003. The increase was due in part to an increase in the average number of non-billable professionals to 113 for the year ended December 31, 2004 from 76 for the year ended December 31, 2003 and their related compensation and benefit costs of $16.5 million in the year ended December 31, 2004 compared to $9.0 million in the year ended December 31, 2003. Selling, general and administrative expenses in the year ended December 31, Table of Contents Management s discussion and analysis of financial condition and results of operations 2004 also included severance charges totaling $1.8 million as we eliminated the positions of certain managing directors and other senior level consultants. Severance charges included the settling of contractual obligations with certain managing directors. The remaining increase in selling, general and administrative expenses in 2004 compared to 2003 was due to increases in rent and other facility costs, promotion and marketing costs, and other administrative costs associated with the general growth in our business activity, as well as costs incurred to establish an infrastructure to support a public company. Stock-based compensation expense totaled $0.4 million for the year ended December 31, 2004 due to the granting of restricted stock awards to our non-billable professionals. On October 12, 2004, immediately prior to our initial public offering, we granted to our non-billable professionals a total of 278,200 shares of restricted common stock with an aggregate fair market value of $4.3 million. Depreciation expense increased $0.8 million, or 50.0%, to $2.4 million in the year ended December 31, 2004 from $1.6 million in the year ended December 31, 2003 as computers, furniture and fixtures, and leasehold improvements were added to support our increase in employees. There was no amortization expense in 2004 compared to $3.7 million in the year ended December 31, 2003. The amortization expense in 2003 related to $5.5 million in intangible costs paid in 2002 to obtain the release of certain of our employees from non-competition agreements with Arthur Andersen LLP, their former employer, and the related assumption of $0.8 million in liabilities, both of which were fully amortized by December 31, 2003. Operating expenses in 2004 included a $2.1 million pre-tax restructuring charge associated with the closing of two small, underperforming offices in Miami, Florida and Palo Alto, California. The charge consisted of approximately $2.0 million for severance payments for the ten employees formerly employed at these locations, which were paid by April 30, 2004, and $0.1 million for office lease payments, which were paid by August 31, 2004. We also incurred a $1.3 million pre-tax restructuring charge as we decided to eliminate a service offering of a practice area in the Operational Consulting segment that was not meeting our expectations. Other operating expenses in the year ended December 31, 2003 consisted of a $1.7 million charge for the loss associated with the abandonment of an office lease. Operating income (loss) Operating income in the year ended December 31, 2004 was $19.7 million compared to an operating loss of $0.2 million in the year ended December 31, 2003. The increase in operating income was primarily due to revenue growing at a higher rate as compared to the growth in direct costs and operating expenses. Operating margin was 12.2% in the year ended December 31, 2004. Segment results Financial Consulting Revenues Financial Consulting segment revenues increased $24.4 million, or 35.8%, to $92.4 million for the year ended December 31, 2004 from $68.0 million for the year ended December 31, 2003. Revenues from time-and-expense engagements increased $22.5 million, or 36.2%, to $84.7 million for the year ended December 31, 2004 from $62.2 million for the year ended December 31, 2003. Revenues from fixed-fee engagements increased $1.1 million, or 22.4%, to $6.0 million for the year ended December 31, 2004 from $4.9 million for the year ended December 31, 2003. Revenues from performance-based engagements increased $0.8 million, or 88.9%, to $1.7 million for the year ended December 31, 2004 from $0.9 million for the year ended December 31, 2003. Performance-based fee revenues for the year Table of Contents Management s discussion and analysis of financial condition and results of operations Total current liabilities 29,240 22,225 Non-current liabilities: Accrued expenses Total current liabilities 38,417 29,240 Non-current liabilities: Accrued expenses 353 ended December 31, 2004 consisted of a $1.6 million success fee recognized in the second quarter relating to the successful completion of a series of asset sale transactions managed on behalf of a single client over a two-year period. The overall $24.4 million increase in revenues resulted from a $10.8 million increase in revenues attributable to an increase in billable hours associated with new and existing client engagements and the hiring of additional consultants, a $8.5 million increase in revenues attributable to an increase in the average billing rate per hour and a $5.1 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 279 for the year ended December 31, 2004 from 219 for the year ended December 31, 2003 as we added a substantial number of consultants across all of our practices to meet growing demand for our services. The average billing rate per hour increased 10.3% to $257 for the year ended December 31, 2004 from $233 for the year ended December 31, 2003. In addition, our utilization rate increased to 71.6% for the year ended December 31, 2004 from 66.6% for the year ended December 31, 2003. Operating income Financial Consulting segment operating income increased $13.8 million, or 66.8%, to $34.4 million in the year ended December 31, 2004 from $20.6 million in the year ended December 31, 2003. Segment operating margin improved to 37.2% in the year ended December 31, 2004 from 30.3% in the year ended December 31, 2003, primarily as a result of the increase in revenues discussed above, partially offset by an increase in direct costs in 2004. Operational Consulting Revenues Operational Consulting segment revenues increased $33.7 million, or 100.8%, to $67.2 million for the year ended December 31, 2004 from $33.5 million for the year ended December 31, 2003. Revenues from time-and-expense engagements increased $24.0 million, or 100.4%, to $47.9 million for the year ended December 31, 2004 from $23.9 million for the year ended December 31, 2003. Revenues from fixed-fee engagements increased $5.6 million, or 77.8%, to $12.8 million for the year ended December 31, 2004 from $7.2 million for the year ended December 31, 2003. Revenues from performance-based engagements increased $4.1 million, or 170.8%, to $6.5 million for the year ended December 31, 2004 from $2.4 million for the year ended December 31, 2003. The overall $33.7 million increase in revenues resulted from a $21.5 million increase in revenues attributable to an increase in billable hours associated with new and existing client engagements and the hiring of additional consultants, a $8.3 million increase in revenues attributable to an increase in the average billing rate per hour and a $3.9 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 206 for the year ended December 31, 2004 from 142 for the year ended December 31, 2003. The average billing rate per hour increased 14.1% to $218 for the year ended December 31, 2004 from $191 for the year ended December 31, 2003. Our utilization rate of 73.0% for the year ended December 31, 2004 was up from 65.3% for the year ended December 31, 2003. Operating income Operational Consulting segment operating income increased $16.2 million, or 238.7%, to $23.0 million in the year ended December 31, 2004 from $6.8 million in the year ended December 31, 2003. Segment operating margin increased to 34.3% in the year ended December 31, 2004 from 20.3% in the year ended December 31, 2003, primarily due to the increase in revenues discussed above, partially offset by an increase in direct costs in 2004, as well as investments made during 2003 to start a new practice and expand our capabilities in an existing practice in this segment. Table of Contents Management s discussion and analysis of financial condition and results of operations Year ended December 31, 2003 compared to period from March 19, 2002 (inception) through December 31, 2002 Revenues Revenues increased $66.4 million, or 189.2%, to $101.5 million for the year ended December 31, 2003 from $35.1 million for the partial year ended December 31, 2002. Revenues from time-and-expense engagements increased $55.6 million, or 182.3%, to $86.1 million for the year ended December 31, 2003 from $30.5 million for the partial year ended December 31, 2002. Revenues from fixed-fee engagements increased $8.0 million, or 195.1%, to $12.1 million for the year ended December 31, 2003 from $4.1 million for the partial year ended December 31, 2002. Revenues from performance-based engagements increased $2.8 million to $3.3 million for the year ended December 31, 2003 from $0.5 million for the partial year ended December 31, 2002. The overall $66.4 million increase in revenues resulted from a $55.9 million increase in revenues attributable to an increase in billable hours associated with the hiring of additional consultants and 2003 having twelve months of operations versus the first eight months of our operations in the 2002 period, a $5.1 million increase in revenues attributable to an increase in the average billing rate per hour and a $5.4 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 361 for the year ended December 31, 2003 from 247 for the partial year ended December 31, 2002 as we added a substantial number of consultants across all of our practices to meet growing demand for our services. The average billing rate per hour increased to $217 for the year ended December 31, 2003 from $206 for the partial year ended December 31, 2002. In addition, our utilization rate increased to 66.1% for the year ended December 31, 2003 from 57.3% in the partial year ended December 31, 2002. Utilization for the year ended December 31, 2003 was influenced by two large time-sensitive engagements involving a large number of consultants. Total direct costs Our direct costs increased $43.3 million, or 165.9%, to $69.4 million in the year ended December 31, 2003 from $26.1 million in the partial year ended December 31, 2002. This increase in cost was primarily attributable to the increase in the average number of consultants described above. Operating expenses Selling, general and administrative expenses increased $16.4 million, or 186.4%, to $25.2 million in the year ended December 31, 2003 from $8.8 million in the partial year ended December 31, 2002. The increase was due in part to an increase in the average number of non-billable professionals to 76 for the year ended December 31, 2003 from 45 for the partial year ended December 31, 2002 and their related compensation and benefit costs of $9.0 million in the year ended December 31, 2003 compared to $3.2 million in the partial year ended December 31, 2002. Office and equipment rentals increased to $4.5 million in the year ended December 31, 2003 from $1.1 million in the partial year ended December 31, 2002 as a result of increased office space and other facility costs associated with our quickly growing consultant and administrative workforce. Depreciation expense increased $1.2 million to $1.6 million in the year ended December 31, 2003 from $0.4 million in the partial year ended December 31, 2002 as we added computers and leasehold improvements during 2003 to support our increase in employees. Amortization expense increased $1.1 million to $3.7 million in the year ended December 31, 2003 from $2.6 million in the partial year ended December 31, 2002. The increase in amortization expense was due to the amortization of the $5.5 million in intangible costs paid in 2002 to obtain the release of certain of our employees from non-competition agreements with Arthur Andersen LLP, their former employer, and the related assumption of $0.8 million in liabilities, both of which were fully amortized by December 31, 2003. Table of Contents Management s discussion and analysis of financial condition and results of operations Operating expenses in the year ended December 31, 2003 included a $1.7 million charge for the loss associated with the abandonment of an office lease. Operating expenses in the partial year ended December 31, 2002 included a $2.5 million expense related to management fees paid to an affiliate of Lake Capital Partners LP, which along with Lake Capital Management LLC controls HCG Holdings LLC, a $0.2 million expense related to advisory fees paid to an affiliate of PPM America, Inc., which is a member of HCG Holdings LLC, and $1.0 million in other organization costs associated with the formation of our company. Operating loss The operating loss for the year ended December 31, 2003 amounted to $0.2 million as compared to an operating loss of $6.5 million for the partial year ended December 31, 2002. Segment results Financial Consulting Revenues Financial Consulting segment revenues increased $45.6 million, or 203.7%, to $68.0 million for the year ended December 31, 2003 from $22.4 million for the partial year ended December 31, 2002. Revenues from time-and-expense engagements increased $42.4 million, or 214.1%, to $62.2 million for the year ended December 31, 2003 from $19.8 million for the partial year ended December 31, 2002. Revenues from fixed-fee engagements increased $2.3 million, or 88.5%, to $4.9 million for the year ended December 31, 2003 from $2.6 million for the partial year ended December 31, 2002. Revenues from performance-based engagements were $0.9 million for the year ended December 31, 2003, and there were no revenues from performance-based engagements in 2002. The overall $45.6 million increase in revenues resulted from a $35.2 million increase in revenues attributable to an increase in billable hours associated with the hiring of additional consultants and 2003 having twelve months of operations versus the first eight months of our operations in the 2002 period, a $6.0 million increase in revenues attributable to an increase in the average billing rate per hour and a $4.4 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 219 for the year ended December 31, 2003 from 163 for the partial year ended December 31, 2002 as we added a substantial number of consultants across all of our practices to meet growing demand for our services. The average billing rate per hour increased to $233 for the year ended December 31, 2003 from $212 for the partial year ended December 31, 2002. In addition, our utilization rate of 66.6% for the year ended December 31, 2003 was up from 55.7% for the partial year ended December 31, 2002. Operating income Financial Consulting segment operating income increased $16.7 million, or 426.6%, to $20.6 million in the year ended December 31, 2003 from $3.9 million in the partial year ended December 31, 2002. Segment operating margin improved to 30.3% in the year ended December 31, 2003 from 17.5% in the partial year ended December 31, 2002 due to increased revenues and improved utilization rates of 66.6% for the year ended December 31, 2003 from 55.7% for the partial year ended December 31, 2002. Operational Consulting Revenues Operational Consulting segment revenues increased $20.8 million, or 163.4%, to $33.5 million for the year ended December 31, 2003 from $12.7 million for the partial year ended December 31, 2002. Table of Contents Management s discussion and analysis of financial condition and results of operations Revenues from time-and-expense engagements increased $13.2 million, or 123.4%, to $23.9 million for the year ended December 31, 2003 from $10.7 million for the partial year ended December 31, 2002. Revenues from fixed-fee engagements increased $5.7 million to $7.2 million for the year ended December 31, 2003 from $1.5 million for the partial year ended December 31, 2002. Revenues from performance-based engagements increased $1.9 million to $2.4 million for the year ended December 31, 2003 from $0.5 million for the partial year ended December 31, 2002. The overall $20.8 million increase in revenues resulted from an $20.4 million increase in revenues attributable to an increase in billable hours associated with the hiring of additional consultants and 2003 having twelve months of operations versus the first eight months of our operations in the 2002 period and a $1.0 million increase in revenues attributable to an increase in our utilization rate, which were partially offset by a $0.6 million decrease in revenues attributable to a decrease in the average billing rate per hour. The average number of consultants increased to 142 for the year ended December 31, 2003 from 84 for the partial year ended December 31, 2002. Our utilization rate of 65.3% for the year ended December 31, 2003 was up from 60.5% for the partial year ended December 31, 2002. The average billing rate per hour decreased to $191 for the year ended December 31, 2003 from $195 for the partial year ended December 31, 2002. Operating income Operational Consulting segment operating income increased $3.3 million, or 92.6%, to $6.8 million in the year ended December 31, 2003 from $3.5 million in the partial year ended December 31, 2002. Segment operating margin decreased to 20.3% in the year ended December 31, 2003 from 27.8% in the partial year ended December 31, 2002 primarily due to investments made during 2003 to start a new practice and expand our capabilities in an existing practice in this segment. A total of 38 consultants were hired for the new and expanded practices during the course of 2003 and revenue generation lagged our investments in payroll and sales and marketing costs. Table of Contents Management s discussion and analysis of financial condition and results of operations Selected quarterly consolidated financial and other operating data The following table sets forth selected unaudited quarterly operating information for each of the eleven quarters during the period from January 1, 2003 to September 30, 2005. The following quarterly consolidated financial data has been prepared on the same basis as, and should be read together with, the consolidated financial statements and related notes contained elsewhere in this prospectus and reflects all adjustments of a normal recurring nature necessary for the fair presentation of the information for the periods presented. Results for any fiscal quarter are not necessarily indicative of results for the full year or for any future quarter. Three months ended Total 1,665 8.5 $ 1.86 (unaudited) (in thousands, except other operating data) Consolidated quarterly financial data: Revenues $ 23,212 $ 23,711 $ 25,549 $ 29,014 $ 40,101 $ 41,503 $ 37,109 $ 40,837 $ 46,760 $ 50,517 $ 54,309 Reimbursable expenses 2,069 1,837 2,105 2,797 3,443 3,647 3,225 4,046 4,370 4,691 4,840 STATEMENTS OF CASH FLOWS (In whole dollars) Year Ended December 31, 2004 Three Months Ended March 31, 2005 Three Months Ended March 31, 2004 (unaudited) (unaudited) Cash flows from operating activities: Net income $ 5,684,231 $ 1,627,913 $ 1,324,537 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,604 753 Changes in operating assets and liabilities: Decrease (increase) in receivables from clients 8,472 (38,009 ) (360,706 ) (Increase) decrease in unbilled services (152,329 ) 81,473 (5,645 ) (Increase) decrease in prepaid expenses (11,416 ) 11,416 Increase in accounts payable 156,681 175,194 173,527 Increase in accrued expenses 14,727 649,189 13,456 (Decrease) increase in deferred revenues (2,100 ) 69,318 123,174 Increase in retainers 23,366 Net income (loss) 10,864 (1,063 ) (4,166 ) Accrued dividends on 8% preferred stock 931 1,066 Total revenues and reimbursable expenses 25,281 25,548 27,654 31,811 43,544 45,150 40,334 44,883 51,130 55,208 59,149 Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in operating expenses)(1): Direct costs 13,581 15,739 19,037 21,017 24,856 22,549 22,267 22,598 24,945 27,514 29,194 Stock-based compensation 18 9 12 174 144 648 999 1,240 1,402 Intangible assets amortization 385 682 Reimbursable expenses 2,069 1,848 2,138 2,874 3,523 3,542 3,161 4,055 4,387 4,704 4,974 Total current assets 72,138 32,384 Property and equipment, net 8,975 4,498 Other assets: Deferred income taxes 1,450 2,333 Deposits 656 Net income $ 13,250 $ Total direct costs and reimbursable expenses 15,650 17,587 21,193 23,900 28,391 26,265 25,572 27,301 30,331 33,843 36,252 Operating expenses: Selling, general and administrative 4,826 6,267 6,607 7,471 8,156 9,624 10,631 12,014 11,312 11,650 13,289 Stock-based compensation 9 5 2 58 53 320 411 456 485 Depreciation and amortization 1,290 1,368 1,492 1,178 603 472 607 683 847 1,109 1,905 Other operating expenses 1,668 2,139 1,336 Total operating expenses 317,614 11,196 24,007 Operating income 5,668,616 1,622,044 1,323,814 Interest income 15,615 5,869 Total other (income) expense 333 968 692 796 Total other (income) expense 333 968 692 Total other (income) expenses (277 ) Statement of operations reconciliation: Segment operating income $ 58,343 $ 42,371 Charges not allocated at the segment level: Other selling, general and administrative expenses 29,533 21,982 Stock-based compensation expense 1,352 113 Depreciation and amortization expense 3,861 1,682 Restructuring charges 3,475 Other (income) expense (277 ) Total $ 36,879 $ Total direct costs and reimbursable expenses 14,704,192 5,472,593 2,282,462 Operating expenses: Selling, general and administrative 311,010 10,443 24,007 Depreciation and amortization 6,604 Total current assets 84,758 72,138 Property and equipment, net 11,855 8,975 Deferred income taxes 2,855 1,450 Deposits 541 656 Intangible assets, net Income (loss) before provision (benefit) for income taxes 3,316 (5 ) (3,532 ) (964 ) 4,008 8,461 1,915 4,608 8,395 8,214 7,265 Provision (benefit) for income taxes 1,375 76 (1,367 ) (206 ) 1,661 3,576 Net income (loss) attributable to common stockholders $ 1,688 $ (344 ) $ (2,440 ) $ (1,033 ) $ 2,074 $ 4,600 $ Liabilities and stockholders equity (deficit) Current liabilities: Accounts payable $ 2,809 $ 1,396 Accrued expenses 3,334 3,822 Accrued payroll and related benefits 20,494 13,914 Deferred revenue 2,603 2,273 Interest payable to HCG Holdings LLC AUDITED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2004 December 31, 2003 Assets Current assets: Cash and cash equivalents $ 28,092 $ 4,251 Receivables from clients, net 21,750 15,118 Unbilled services, net 10,830 7,946 Income tax receivable 494 2,286 Deferred income taxes 7,919 1,946 Other current assets 3,053 Outstanding, end of year 1,665 $ 1.86 1,599 $ 0.36 Net income (loss) (4,166 ) (1,063 ) 10,864 12,428 8,342 13,250 13,621 Accrued dividends on 8% preferred stock 646 1,066 931 931 Net income (loss) (4,166 ) (1,063 ) 10,864 8,342 13,250 Accrued dividends on 8% preferred stock 646 1,066 931 Net income 13,250 8,342 Accrued dividends on 8% preferred stock (1) Intangible assets amortization relating to customer contracts is presented as a component of total direct costs. Depreciation, amortization of leasehold improvements and intangible assets relating to customer relationships are presented as a component of operating expenses. (2) Consultants consist of our billable professionals, excluding interns and independent contractors. (3) We calculate the utilization rate for our consultants by dividing the number of hours all of our consultants worked on client assignments during a period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days. (4) Average billing rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. Table of Contents Management s discussion and analysis of financial condition and results of operations Our future operating results are difficult to predict and may vary significantly. Revenues and operating results fluctuate from quarter to quarter as a result of numerous factors, including the following: the size and number of client engagements commenced and completed during a quarter; utilization rates, which in turn can be affected by increased hiring, as there is generally a transition period for new consultants that results in a temporary drop in utilization; the number of business work days in a quarter; the number of consultants; and the achievement of milestones under performance-based engagements. Although our fee structure is variable, our direct costs, which include primarily consultant payroll costs, are fixed within the short-term. Consequently, a variation in the number or size of client engagements or the timing of the initiation or the completion of client engagements can cause significant variations in operating results from quarter-to-quarter. SUBSEQUENT EVENT On July 5, 2005, one of our clients filed for bankruptcy. Subsequent to the filing of the bankruptcy, we continued to provide interim management, revenue cycle management and strategic sourcing services under an engagement contract with the client. In addition, we continued to provide services pursuant to a separate engagement contract with the client s bankruptcy counsel to assist with the bankruptcy process. On October 21, 2005, the client filed an application with the Bankruptcy Court to authorize our retention during the bankruptcy process. In connection with the application, new financial terms and conditions of the engagement contracts, including billing terms and rates for our services, were negotiated and agreed to with the client and certain other interested parties retroactive to July 5, 2005 pursuant to a new engagement contract that superseded the original contracts. At a hearing held on October 28, 2005, the Bankruptcy Court approved on an interim basis our retention based on these agreed upon terms. On December 14, 2005, the Bankruptcy Court approved our retention on a permanent basis. There could be challenges during the bankruptcy process to the fees earned by us and Speltz & Weis LLC, as well as challenges during and after the bankruptcy process to fees earned by us and Speltz & Weis LLC prior to the bankruptcy filing on July 5, 2005, as several parties to the bankruptcy proceeding have reserved their right to challenge those fees. Although no such claim has been brought to date, if a claim is brought in the future, the claim could have a material adverse impact on our financial position, results of operations, earnings per share or cash flows in the period in which such claim were resolved. The effect of the change in financial terms approved by the Bankruptcy Court on December 14, 2005 was to reduce revenues in the nine months ended September 30, 2005 by $1.2 million from the amounts provided for under the original terms of the interim management contract with the client. The results for the nine months ended September 30, 2005 also reflect legal and related costs totaling approximately $0.4 million associated with the bankruptcy process. Based on the projected cash flows under the new financial terms and conditions approved by the Bankruptcy Court, the intangible value that we assigned to the interim management contract in connection with the Speltz & Weis LLC acquisition has decreased. Accordingly, we wrote off the remaining carrying value of this contract in the third quarter of 2005. This charge, totaling $0.6 million, is included in depreciation and amortization for the nine months ended September 30, 2005 and is attributable to the Financial Consulting segment. Table of Contents Management s discussion and analysis of financial condition and results of operations March 19, 2002 (inception) to December 31, 2002 2004 2003 Cash flows from operating activities: Net income (loss) $ 10,864 $ (1,063 ) $ (4,166 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,365 5,328 3,048 Loss on long-term deposits 111 Deferred income taxes (5,090 ) (1,568 ) (2,710 ) Stock-based compensation expense 1,412 42 Tax benefit from stock options exercised 980 Allowances for doubtful accounts and unbilled services 1,873 1,410 382 Changes in operating assets and liabilities: Increase in receivables from clients (7,943 ) (9,711 ) (6,441 ) Increase in unbilled services (3,446 ) (2,198 ) (6,506 ) Decrease (increase) in income tax receivable, net 2,741 (2,286 ) Increase in other current assets (2,114 ) (449 ) (388 ) Decrease (increase) in deposits 18 98 (883 ) Increase in accounts payable and accrued expenses 4,721 3,661 1,557 Increase in accrued payroll and related benefits 6,580 9,289 4,625 (Decrease) increase in interest payable to HCG Holdings LLC (820 ) 477 343 Increase in deferred revenue 330 RECENT DEVELOPMENTS For the fourth quarter of 2005, we expect to report revenues of approximately $55 million to $56 million compared to $40.8 million for the fourth quarter of 2004, operating income of approximately $7.5 million to $8.5 million compared to $4.6 million for the fourth quarter of 2004, and GAAP earnings per diluted share of approximately $0.26 to $0.27 compared to $0.15 for the comparable quarter last year. These preliminary results are after deducting offering costs payable by us totaling approximately $0.1 million, or $0.005 per share, for the fourth quarter of 2005. These offering costs include costs for both the offering that was withdrawn in November 2005 and this current offering. These preliminary results are also after deducting stock-based compensation expense of approximately $2 million for the fourth quarter of 2005. For this period, we did not adopt Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which would not have had a material impact on fourth quarter 2005 results. Our utilization rate for the fourth quarter was 77.4% compared to 77.8% in the fourth quarter of 2004. Average billing rate per hour for the quarter is expected to be in the range of $246 to $250 compared to $243 for the fourth quarter of 2004. For the year ended December 31, 2005, we expect to report revenues of approximately $206 million to $207 million compared to $159.6 million for the year ended December 31, 2004, operating income of approximately $31 million to $32 million compared to $19.7 million for 2004, and GAAP earnings per diluted share of approximately $1.05 to $1.06 compared to $0.72 for 2004. These preliminary results are after deducting offering costs payable by us totaling approximately $0.5 million, or $0.03 per share, for the year. These offering costs include costs for both the offering that was withdrawn in November 2005 and this current offering. These preliminary results are also after deducting stock-based compensation expense of approximately $7 million for the year. For this period, we did not adopt SFAS No. 123R, which would not have had a material impact on full year 2005 results. Our utilization rate for the full year 2005 was 76.5% compared to 72.2% for the prior year. Average billing rate per hour is expected to be in the range of $248 to $249 compared to $239 for the prior year. We finished the year with 632 billable consultants versus 483 billable consultants at the end of 2004. The final financial results for the fourth quarter and the year ended 2005 may differ, and may be materially different, from the preliminary financial results we are reporting due to completion of annual audit procedures, final adjustments and other developments that may arise between now and the time the financial results are finalized for these periods. Accordingly, you should not place undue reliance on these preliminary financial results. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash flows from operations, proceeds generated by our initial public offering and debt capacity available under our credit facility. Cash and cash equivalents, consisting of demand deposits and short-term commercial paper, increased $23.8 million, from $4.3 million at December 31, 2003, to $28.1 million at December 31, 2004 primarily due to cash generated by our initial public offering and growth in our business. Cash and cash equivalents decreased $6.2 million, from $28.1 million at December 31, 2004, to $21.9 million at September 30, 2005 primarily due to the acquisition of Speltz & Weis LLC. Operating activities Cash flows generated by operating activities totaled $12.1 million for the nine months ended September 30, 2005 and $7.3 million for the same period last year. Our operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable and accrued expenses, Table of Contents Management s discussion and analysis of financial condition and results of operations and accrued payroll and related benefits. The volume of billings and timing of collections and payments affect these account balances. The increase in cash provided by operations for the nine months ended September 30, 2005 was primarily attributable to an increase in revenues and improved financial results due to the general growth of our business, which was partially offset by growth in our receivables from clients and unbilled services. Receivables from clients and unbilled services increased $15.9 million during the nine months ended September 30, 2005, as compared to $8.9 million during the same period last year. Cash flows generated by operating activities totaled $12.5 million for the year ended December 31, 2004 and $4.0 million for the year ended December 31, 2003. The increase in cash provided by operations for the year ended December 31, 2004 was primarily attributable to higher revenues and improved financial results due to the general growth in our business. Receivables from clients and unbilled services increased $11.4 million during the year ended December 31, 2004 primarily due to increased revenues generated and billed. This increase in client balances was substantially offset by a $11.3 million increase in accounts payable and accrued expenses and accrued payroll and related benefits. Accrued payroll and related benefits at December 31, 2004 included $16.3 million of accrued bonuses, which we paid out in the first quarter of 2005. Cash flow generated by operating activities totaled $4.0 million for the year ended December 31, 2003 compared to cash used in operating activities of $9.8 million for the partial year ended December 31, 2002. The increase in cash provided by operations for the year ended December 31, 2003 was primarily attributable to revenue growth in excess of the growth in operating expenses when compared to the partial year ended December 31, 2002, which had eight months of operations, and various start-up costs associated with the commencement of operations. Investing activities Cash used in investing activities was $18.4 million for the nine months ended September 30, 2005 and $4.4 million for the same period last year. During the nine months ended September 30, 2005, we used $12.5 million to acquire Speltz & Weis LLC, net of cash acquired of $1.8 million. Use of cash in both periods also pertained to the purchase of computer hardware and software, furniture and fixtures and leasehold improvements needed to meet the ongoing needs relating to the hiring of additional employees and the expansion of office space. We estimate that our capital expenditure in 2005 was approximately $8.5 million for the purchase of additional computers, network equipment, furniture and fixtures and leasehold improvements as our business continues to expand. Cash used by investing activities was $6.9 million for the year ended December 31, 2004 and $4.2 million for the year ended December 31, 2003. Use of cash in both periods pertained to the purchase of computer hardware and software, furniture and fixtures and leasehold improvements needed to meet the ongoing needs relating to the hiring of additional employees and the expansion of office space. Cash used by investing activities was $4.2 million for the year ended December 31, 2003 and $8.6 million for the partial year ended December 31, 2002. In the partial year ended December 31, 2002, we paid $5.5 million to obtain the release of certain employees from non-competition agreements with Arthur Andersen LLP, their former employer, and $0.8 million of certain related liabilities. In addition, we paid $2.3 million in the partial year ended December 31, 2002 for the purchase of computer hardware and software, furniture and fixtures and leasehold improvements relating to the hiring of employees and establishment of new offices. Capital expenditures for the purchase of property and equipment, including computer hardware and software, furniture and fixtures and leasehold improvements, were the primary use of cash in the year ended December 31, 2003, as business expansion and the hiring of new employees continued during the course of the year. Table of Contents Management s discussion and analysis of financial condition and results of operations Financing activities During the nine months ended September 30, 2005, we issued notes payable totaling $3.0 million relating to our acquisition of Speltz & Weis LLC. The notes accrue interest at 4% per annum and are payable in three equal annual installments beginning on May 8, 2006. Cash provided by financing activities was $18.3 million for the year ended December 31, 2004 primarily due to cash proceeds generated by our initial public offering, which we used a portion of to redeem the outstanding 8% preferred stock and repay the 8% promissory notes as discussed below. On June 29, 2004, we paid a special dividend to our stockholders. The special dividend was declared on May 12, 2004 for each outstanding share of common stock and 8% preferred stock payable to holders of record on May 25, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.3 million, or $0.09 per share of common stock and $9.64 per share of 8% preferred stock. The payment of the special dividend was funded by our available cash balance and by borrowing availability under our credit agreement described below, which we repaid the following day. Between April and June 2002, in connection with our initial capitalization, we issued to our parent, HCG Holdings LLC, an aggregate of 12,500 shares of our 8% preferred stock for an aggregate consideration of $12.5 million and an aggregate of approximately 11,281,243 shares of our common stock at a purchase price of $0.02 per share for an aggregate consideration of approximately $0.3 million. Proceeds of approximately $10.1 million were also received from the issuance of 8% promissory notes to HCG Holdings LLC. After the consummation of our initial public offering on October 18, 2004, we used $15.1 million of our net proceeds from the initial public offering to redeem the outstanding 8% preferred stock, plus cumulative dividends and a liquidation participation amount totaling $2.6 million. Also on October 18, 2004, we used $10.7 million of our net proceeds from the initial public offering to repay the 8% promissory notes, including accrued and unpaid interest of $0.6 million. Huron Consulting Services LLC had a bank credit agreement that expired on February 10, 2005 that allowed it to borrow up to the lesser of $15.0 million or the sum of (a) 75% of eligible accounts receivable and (b) the lesser of 30% of unbilled services and $3.0 million. Borrowings under the agreement were limited by any outstanding letters of credit. Borrowings under the credit agreement bore interest at either the prime rate or LIBOR, rounded up to the nearest whole percentage, plus 2.75%, and were secured by substantially all of Huron Consulting Services LLC s assets. The bank credit agreement included covenants for minimum equity and maximum annual capital expenditures as well as covenants restricting our ability to incur additional indebtedness or engage in certain types of transactions outside of the ordinary course of business. As of December 31, 2004, we were in compliance with the bank credit agreement debt covenants and had no borrowings outstanding. The balance available under the agreement was $13.3 million after the calculation of eligible accounts receivable and unbilled services balances and a reduction of approximately $1.7 million for letters of credit outstanding. Prior to the expiration of the bank credit agreement described above, we established a new facility. The new bank credit agreement, expiring on February 10, 2006, allows us to borrow up to the lesser of $25.0 million or the sum of (a) 85% of eligible accounts receivable and (b) the lesser of 40% of unbilled services and $5.0 million. Borrowings under the agreement will be limited by any outstanding letters of credit, will bear interest at LIBOR plus 1.75%, and will be secured by substantially all of our assets. The bank credit agreement includes covenants for minimum equity and maximum annual capital expenditures, as well as covenants restricting our ability to incur additional indebtedness or engage in certain types of transactions outside of the ordinary course of business. As of September 30, 2005, we were in compliance with the bank credit agreement debt covenants and had no borrowings outstanding. The balance available under the agreement was $22.6 million after the calculation of eligible accounts Table of Contents Management s discussion and analysis of financial condition and results of operations Total revenues and reimbursable expenses 165,487 10,056 (990 ) 174,553 Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in operating expenses): Direct costs 81,653 8,300 (2,110 )(5) 87,843 Stock-based compensation 3,641 3,641 Intangible assets amortization 1,067 957 (1) 2,024 Reimbursable expenses 14,065 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (In thousands, except per share amounts) Company Speltz & Weis LLC Jan. 1-May 8, 2005 Pro Forma Adjustments Pro Forma Consolidated Revenues and reimbursable expenses: Revenues $ 151,586 $ 9,149 $ (868 )(5) $ 159,867 Reimbursable expenses 13,901 Total contractual obligations $ 5,764 $ 9,198 $ 8,688 $ 14,601 $ 38,251 We lease our facilities and certain equipment under operating lease arrangements expiring on various dates through 2014, with various renewal options. We lease office facilities under noncancelable operating leases that include fixed or minimum payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases provide for monthly payments of real estate taxes, insurance and other operating expense applicable to the property. Some of the leases contain provisions whereby the future rental payments may be adjusted for increases in operating expenses above the specified amount. In addition, we lease equipment under noncancelable operating leases. Purchase obligations include information technology and telecommunication obligations, as well as other commitments to purchase services where we cannot cancel or would be required to pay a termination fee in the event of cancellation. We also have fixed cash flow requirements relating to the notes payable we issued in conjunction with the acquisition of Speltz & Weis LLC during the nine months ended September 30, 2005. The notes totaled $3.0 million and are payable in three equal annual installments beginning on May 8, 2006, together with accrued interest at 4% per annum. During 2005, we entered into operating lease agreements for office facilities located in New York, New York and Boston, Massachusetts. In connection with these leases, we issued letters of credit in the amounts of approximately $4.0 million and $691,000 for the New York lease and the Boston lease, respectively. Rental payments under these new arrangements commenced in 2006. Our contractual obligations to make future rental payments under these agreements total $1.8 million in 2006, $4.0 million in 2007, $4.0 million in each of 2008, 2009 and 2010, and $21.6 million in the aggregate after 2010. Table of Contents Management s discussion and analysis of financial condition and results of operations OFF BALANCE SHEET ARRANGEMENTS We have not entered into any off-balance sheet arrangements. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to interest rates and changes in the market value of our investments. We do not enter into interest rate swaps, caps or collars or other hedging instruments. Our exposure to changes in interest rates is limited to borrowings under the bank credit agreement, which has a variable interest rate tied to the LIBOR or prime rate. We had no borrowings outstanding under our bank credit agreement as of December 31, 2004 and September 30, 2005; therefore, any change in interest rates would not have a material effect on our financial position or operating results. At September 30, 2005, we had notes payable totaling $3.0 million that are payable in three equal annual installments beginning on May 8, 2006. We are not exposed to interest rate risks in respect to these notes as they bear a fixed interest rate at 4% per annum. From time to time, we invest excess cash in marketable securities. These investments principally consist of overnight sweep accounts and short-term commercial paper. Due to the short maturity of our investments and debt obligations, we have concluded that we do not have material market risk exposure. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment, ( SFAS No. 123R ). In April 2005, the SEC adopted a new rule that amends the effective date of SFAS No. 123R. Under the new rule, we adopted SFAS No. 123R effective January 1, 2006. This statement requires that the costs of employee share-based payments be measured at fair value on the awards grant date and be recognized in the financial statements over the requisite service period. SFAS No. 123R supersedes APB 25 and its related interpretations, and eliminates the alternative to use APB 25 s intrinsic value method of accounting, which we are currently using. Additionally, SFAS No. 123R amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS No. 123R allows for two alternative transition methods. The first method is the modified prospective application whereby compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date will be recognized over the remaining service period. The compensation cost for that portion of awards will be based on the fair value of those awards on the grant date as calculated for pro forma disclosures under SFAS No. 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the adoption date will be accounted for under the provisions of SFAS No. 123R. The second method is the modified retrospective application, which requires that we restate prior period financial statements. The modified retrospective application may be applied either to all prior periods or only to prior interim periods in the year of adoption of this statement. We have adopted the modified prospective transition method and we do not expect the adoption of SFAS No. 123R to have a material impact on our financial position, results of operations, earnings per share or cash flows. Table of Contents Business OVERVIEW We are an independent provider of financial and operational consulting services. Our highly experienced and credentialed professionals employ their expertise in accounting, finance, economics and operations to provide our clients with specialized analysis and customized advice and solutions that are tailored to address each client s particular challenges and opportunities. Our financial consulting services help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. Our operational consulting services help clients improve the overall efficiency and effectiveness of their operations, reduce costs, manage regulatory compliance and maximize procurement efficiency. Our financial consulting services include: offering financial and economic analysis, forensic accounting and expert support and testimony services for organizations and their law firms in connection with litigation, business disputes and regulatory and internal investigations; providing restructuring, turnaround and bankruptcy advisory services for financially distressed organizations, creditors and other constituents; performing valuations of businesses or assets to assist clients with financial reporting, tax compliance, damage or purchase price assessments and restructuring efforts; and performing interim management, organizational renewal and turnaround services and other crisis management services for distressed hospitals and other healthcare facilities. Our operational consulting services include: assisting research universities and academic medical centers with research administration opportunities and challenges; assisting healthcare payors and providers to improve the effectiveness of operations and reduce costs; helping in-house legal departments and law firms improve their operations and reduce their costs and providing forensic technology and discovery services; developing and implementing procurement plans that provide savings throughout the sourcing process; and helping large and middle-market organizations that have recently undergone a change in leadership, are integrating acquisitions or are coping with a change in competitive dynamics to address performance challenges and take advantage of opportunities. Huron was formed in March 2002 and commenced operations in May 2002. We were founded by a core group of experienced financial and operational consultants that consisted primarily of former Arthur Andersen LLP partners and professionals, including our Chief Executive Officer, Gary E. Holdren, with equity sponsorship from a group of investors led by Lake Capital Management LLC. We created Huron because we believed that a financial and operational consulting business that is unaffiliated with a public accounting firm is better suited to serve its clients needs. As an independent consulting firm, Huron is not subject to the legal restrictions placed on public accounting firms that prohibit them from providing certain non-audit services to their audit clients. We also believe that many other consulting firms provide only a limited scope of services and, therefore, a company such as ours with a wide array of services would be better positioned to serve the diverse and complex needs of various organizations. Table of Contents Business Net income 10,864 5,684 (4,120 ) 12,428 Accrued dividends on 8% preferred stock 931 We have grown significantly since we commenced operations, nearly tripling the number of our consultants from 213 on May 31, 2002 to 632 on December 31, 2005. We have hired experienced professionals from a variety of organizations, including the four largest public accounting firms, referred to as the Big Four, and other consulting firms. Our highly credentialed consultants include certified public accountants, MBAs, accredited valuation specialists and forensic accountants. As of December 31, 2005, we had 75 managing directors who are consultants. These individuals have an average of 22 years of business experience. In addition to our headquarters in Chicago, we have five other core offices located in Boston, Houston, New York City, San Francisco and Washington, D.C. and two smaller offices located in Charlotte and Los Angeles. In October 2004, we completed our initial public offering and our common stock began trading on the NASDAQ National Market. On May 9, 2005, we acquired 100% of the outstanding membership interests of Speltz & Weis LLC, a specialized consulting firm that consisted of 26 consultants. Speltz & Weis LLC is now part of our Financial Consulting segment. We provide our services to a wide variety of both financially sound and distressed organizations, including Fortune 500 companies, medium-sized businesses, leading academic institutions, hospitals and healthcare organizations and the law firms that represent these various organizations. Since May 2002, we have conducted over 2,500 engagements for over 1,400 clients, and we have worked on engagements with 37 of the 40 largest U.S. law firms listed in The American Lawyer 2005 Am Law 100. INDUSTRY BACKGROUND We believe many organizations are facing increasingly large and complex business disputes and lawsuits, a growing number of regulatory and internal investigations and more intense public scrutiny. Concurrently, we believe increased competition and regulation are presenting significant operational and financial challenges for organizations. Distressed companies are responding to these challenges by restructuring and reorganizing their businesses and capital structures, while financially healthy organizations are striving to capitalize on opportunities by improving operations, reducing costs and enhancing revenue. Many organizations have limited dedicated resources to respond effectively to these challenges and opportunities. Consequently, we believe these organizations will increasingly seek to augment their internal resources with experienced independent consultants like us. We believe the demand for our services is driven by the following factors: SEC and internal investigations. The increased scrutiny of accounting practices, internal controls and disclosure has contributed to the large number of financial restatements by public companies. In response to a number of recent incidences of corporate malfeasance and accounting irregularities, the Securities and Exchange Commission, or SEC, has conducted an increasing number of public company investigations over the past few years. Between fiscal 2003 and 2004, the SEC increased its enforcement staffing by approximately 29% and initiated approximately 950 investigations. For fiscal year 2005, Congress approved a record $913 million budget, 13% above the prior fiscal year s appropriation, to hire more staff and continue to enhance SEC oversight and investigation initiatives. For fiscal 2006, the President has recommended a budget of $888 million. In addition, an increasing number of boards of directors, audit committees and special independent committees of companies that have had to review their historical financials or respond to complaints by whistleblowers have conducted internal forensic investigations to determine the underlying facts. These dynamics have driven demand for independent financial consultants like us who help clients respond to SEC investigations, evaluate restatements of financial statements and support internal investigations by combining investigative accounting and financial reporting skills with business and practical experience. Table of Contents Business Litigation and disputes. Litigation and business disputes are prevalent in the United States and, we believe, the volume of this activity does not necessarily correlate with the economic cycle. The breadth and magnitude of these matters is increasing. For example, antitrust investigation and enforcement activities by federal, state and local authorities present heightened complexities and risks for companies in the areas of mergers and acquisitions, pricing policies, distribution relationships and patent and intellectual property matters. In addition, private parties can bring antitrust claims asserting a variety of violations. In complex litigation and disputes, organizations and the law firms that represent them regularly engage experienced consultants to provide or support expert testimony or perform data analyses involving financial, economic and accounting issues. Sarbanes-Oxley and stockholder activism. The enactment of the Sarbanes-Oxley Act of 2002 has substantially limited the scope of non-audit services that large public accounting firms, such as the Big Four, can provide to their audit clients. We believe these limitations represent a significant opportunity for independent consulting firms. A study done by the Investor Responsibility Research Center in February 2002 of 1,224 public U.S. companies estimated that 72%, or approximately $4.0 billion, of the fees these companies paid to the accounting firm that conducted their audit in fiscal 2000 were for non-audit services. Although a substantial amount of this spending was for tax services, which we do not provide, we believe there is still a significant opportunity to provide the other non-audit services. Further, certain influential institutional investors, citing concerns over perceived conflicts of interest, have opposed the ratification of auditors and the election of directors of companies that engage their auditors to perform permissible non-audit services. We believe that the restrictions of Sarbanes-Oxley, stockholder opposition to auditors performing consulting services for their audit clients and the relatively small number of large public accounting firms will lead many clients to choose independent consulting firms over the Big Four when seeking providers of various consulting services. Operational challenges and opportunities. Organizations must constantly reevaluate business processes in order to manage change and risk and minimize or recover costs. For example, in the healthcare industry, the steady flow of changes that affect healthcare funding, treatments, delivery and administration increase the difficulty in managing a complex mix of factors, including rising healthcare costs and insurance premiums and the increasing number of uninsured citizens. In the higher education industry, research universities and academic medical centers must develop and maintain programs to effectively manage research compliance risks and implement systems that support the recovery of research costs. Additionally, the difficulties of managing a large number of legal matters compels in-house legal departments to seek ways to improve their efficiency and effectiveness, which drives demand for consultants specializing in legal department operations. In general, a variety of organizations seek to improve their procurement efficiencies, improve operational processes and reduce costs. We believe that in seeking to meet these challenges and capitalize on these opportunities, organizations will increasingly augment their internal resources with consultants who can provide a combination of industry expertise and strong technical skills. Improving economic conditions and merger and acquisition activity. Despite depressed levels in recent years, there was a rebound in merger and acquisition, or M&A, activity in 2004 amidst an improvement in general economic conditions. According to Dealogic, the aggregate dollar value of announced M&A transactions increased approximately 32% in 2005 compared to 2004. We believe M&A activity creates demand for financial consulting services, such as purchase price allocations and other similar valuation services and dispute and litigation services, as well as operational consulting services, such as performance improvement and strategic sourcing. Financial distress. Despite the recent decline in corporate bankruptcy filings, we believe there will continue to be a sufficient number of bankruptcies of the size and complexity that typically require Table of Contents Business debtors and other constituents to retain the services of financial advisors. Additionally, we believe there is an ongoing need for restructuring and turnaround consulting services to assist financially distressed, under-performing and debt-laden companies and their stakeholders outside of the bankruptcy process. OUR COMPETITIVE STRENGTHS We believe the following key strengths will enable us to take advantage of the industry trends described above and help us compete effectively in the consulting marketplace: Experienced and highly qualified consultants. We believe the principal reason clients choose a particular consulting firm is the experience of the firm s professionals. As of December 31, 2005, our 75 managing directors who are consultants have an average of 22 years of business experience and come from a wide array of organizations, including national accounting firms and other consulting firms. Our consultants combine proficiency in accounting, finance, economics and operations with deep knowledge of specific industries. In addition, many of our consultants are highly credentialed and include certified public accountants, MBAs, accredited valuation specialists and forensic accountants. Independent provider of financial and operational consulting services. We are not affiliated with an accounting firm and, therefore, we are not constrained by the provisions of Sarbanes-Oxley that limit an accounting firm s ability to provide non-audit services to its audit clients. We believe that these restrictions, together with the perceived conflicts of interests inherent with auditors providing consulting services to their audit clients, provide us with a competitive advantage over public accounting firms in securing consulting engagements. We also believe that the relatively small number of large public accounting firms leads some organizations to engage independent consultants like us to preserve their flexibility to hire large public accounting firms for audit or other attest services. Complementary service offerings and integrated approach. Many problems faced by organizations involve broad but interrelated operational and financial issues that require creative solutions drawn from various areas of expertise. We offer a broad array of financial and operational consulting services that can be delivered through teams of consultants from our different practices. Our integrated approach enables us to provide solutions tailored to specific client needs. For example, in a securities fraud lawsuit, we can deploy a team of forensic accountants to review a client s historical accounting and financial reporting practices and a valuation specialist to perform impairment analyses. In addition, our range of service offerings reduces our dependence on any one service offering or industry, provides a stimulating work environment for our consultants and enhances our flexibility in managing the utilization and career development of our directors, managers, associates and analysts. Distinctive culture. We believe we have been successful in attracting and retaining top talent because of our distinctive culture, which combines the energy and flexibility of a high-growth company with the professionalism of a major professional services firm. To preserve our distinctive culture, our Chief Executive Officer or Vice President of Operations has personally interviewed each managing director candidate prior to making an offer of employment. We believe our performance-based compensation program, which both recognizes individual performance and reinforces teamwork, also contributes to our recruiting and retention success. In our view, these elements combine to create an environment in which talented, self-directed professionals want to build a long-term career. Table of Contents Business OUR GROWTH STRATEGY Our strategy to increase our revenues and grow our company involves the following key elements: Attracting additional highly qualified consultants. From May 31, 2002 through December 31, 2005, we nearly tripled the number of our consultants from 213 to 632. We have seven human resource professionals dedicated to recruiting employees who will complement and add depth to our broad array of existing consulting skills. We believe our stimulating work environment, performance-based compensation program and distinctive culture will enable us to attract additional top talent from other consulting firms, accounting firms, targeted industries and on-campus recruiting. Although we do not expect to add employees at our historical growth rate, we expect to continue to hire a meaningful number of new consultants in the future as demand for our various services continues to grow. The actual number and experience level of consultants to be hired will be in response to our assessments of future market conditions and demand for our services. In the near term, our focus will primarily be on hiring and developing additional managers, associates and analysts to expand support for our existing practices and better leverage the managing directors and directors that we have hired. We will also continue in the near term to hire talented managing directors to build our business. Growing our existing relationships and developing new relationships. We work hard to maintain and grow our existing client and law firm relationships. The goodwill created from these relationships leads to referrals from satisfied clients and their law firms, which also enables us to secure engagements with new clients. We intend to focus on the following principal client areas: (1) lawyers and their law firms; (2) the general counsel of Fortune 1000 companies; (3) higher education and research institutions; (4) the healthcare sector (which includes providers, payors and pharmaceutical companies); (5) distressed companies and industries; and (6) the CFOs and COOs of companies with revenues of $1 billion to $20 billion. Continuing to promote and deliver an integrated approach to service delivery. We will continue to utilize our experience with the financial and operational challenges facing our clients to identify and provide additional value-added services as part of an integrated solution. Frequently, a particular engagement is expanded or a new engagement secured with an existing client as a direct result of our quality work for that client. To promote the teamwork required to provide integrated solutions, we evaluate and compensate individuals based on their contributions to our entire organization, not just on the performance of their particular engagements or practices. Continuing to build our brand. We intend to continue to build our reputation and a common identity for the services we provide under the Huron brand name. We believe that using a common brand name and identity for our services enhances our visibility in the marketplace and improves our ability to compete for new business. To enhance our brand, we actively promote our name and capabilities through our sales and marketing activities, such as participation in seminars, sponsorship of client events and publication of articles in industry periodicals. We also are continuing to develop internal quality assurance programs to support our goal of consistently providing high quality, client-focused services. Expanding our service offerings. We believe there will be opportunities to expand our current capabilities or broaden the scope of our existing services, and we will evaluate these in response to client and general market demands. If we choose to expand our service offerings, we believe that we can grow our business to address such expansion with our existing consultants or a combination of existing consultants and new hires. For example, given the challenges faced by general counsels regarding legal compliance and litigation management, we believe the general counsel market represents a large growth opportunity. Table of Contents Business Pursuing strategic acquisitions. We also intend to evaluate select acquisitions of complementary businesses as another means to broaden the scope or depth of our capabilities and expand our client base. For example, our recent acquisition of Speltz & Weis LLC has enabled us to provide a greater scope of services in the healthcare provider space by bolstering our capabilities to include interim management and related services to distressed hospitals and other healthcare providers. Our ability to implement our growth strategy is subject to a number of risks, including those described under the section of this prospectus entitled Risk Factors concerning our consultants, our reputation, new service offerings and our intellectual property. OUR SERVICES We provide our services through two segments: Financial Consulting and Operational Consulting. For both the year ended December 31, 2004 and the nine months ended September 30, 2005, we derived 57.9% of our revenues from Financial Consulting and 42.1% of our revenues from Operational Consulting. For further financial information on our segment results, see Management s discussion and analysis of financial condition and results of operations and note 15, Segment Information in the notes to our audited consolidated financial statements included elsewhere in this prospectus. Financial Consulting Our Financial Consulting segment provides highly specialized financial and economic analysis and advice to help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. Our Financial Consulting segment consisted of 306 consultants as of December 31, 2005. This segment s practices and the services they offer include: Disputes and investigations. Our disputes and investigations practice provides financial and economic analysis to support law firms and corporations in connection with business disputes, lawsuits and regulatory or internal investigations. We have extensive experience in the areas of financial investigations and forensic accounting, including matters involving the SEC or other regulatory inquiries or investigations, financial restatements and special accounting projects. We provide specialized accounting services to gather and analyze voluminous financial data and reconstruct complex transactions and events. In addition, we apply economic and econometric analyses in the areas of antitrust and anticompetitive practices, securities fraud, insurance claims and damages, as well as deliver or support independent expert testimony in such cases. Corporate advisory services. Our corporate advisory services practice provides consulting assistance to financially distressed companies, creditor constituencies and other stakeholders in connection with bankruptcy proceedings and out-of-court restructurings. For distressed companies, we assess the viability of their business and work closely with management to develop and implement a turnaround plan to improve cash flow and a debt-restructuring plan to improve their balance sheet. In some instances, we serve in interim management roles. When out-of-court solutions are not achievable, we assist clients with preparing for a Chapter 11 bankruptcy filing and with all aspects of the bankruptcy process by gathering, analyzing and presenting financial and business information needed to achieve a successful reorganization. We also provide claims management services to help companies process and analyze complex and voluminous claims filed in bankruptcies. For creditor constituencies, including committees of unsecured creditors, we provide similar financial analyses designed to maximize the recovery of amounts owed to creditors and assess the viability of a debtor s reorganization plan. Weighted average common shares outstanding basic 12,820 11,871 11,803 Weighted average common stock equivalents Table of Contents Business Valuation services. Our valuation services practice delivers expert valuation analysis to clients and their advisors. We perform valuations of businesses, financial interests, intellectual property, real property, machinery and equipment and other tangible and intangible assets. We anticipate combining this practice with our disputes and investigations practice in 2006. Our valuation services practice typically supports client needs in the following contexts: Transactions: supporting clients financial and tax reporting, especially in the context of acquisitions and other corporate transactions; Litigation or disputes: valuing businesses or assets; and Bankruptcies: supporting the restructuring process or the sale of business assets. Interim management/Focused consulting. With our acquisition of Speltz and Weis LLC, we can provide additional services to distressed hospitals and other healthcare facilities. Our interim management/focused consulting practice typically provides the following services: Interim management: serving as on-site senior management, including Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, with a specialization in managing distressed hospital systems and facilities; also provide chief restructuring officers to facilities in bankruptcy; Focused consulting: the interim managers are supported by consultants that provide revenue cycle improvements, cost reduction initiatives, clinical support, revenue generation/business development, financial planning and analysis and litigation support; and Bankruptcies, workouts and restructuring: in addition to providing chief restructuring officers to facilities in bankruptcy, we provide creditor relations and facilitation and reorganization planning and out-of-court workouts. Operational Consulting Our Operational Consulting segment provides services designed to help clients improve the overall efficiency and effectiveness of their operations by enhancing revenue, reducing costs, managing regulatory compliance and maximizing procurement efficiencies. Our Operational Consulting segment consisted of 326 consultants as of December 31, 2005. This segment s practices and the services they offer include: Higher education. Our higher education practice provides operational consulting services to colleges, universities and academic medical centers. We provide financial modeling, operational process redesign, strategic planning and assessments and advice on software selection and implementation, especially in connection with helping research universities address the challenges and complexities of administering research programs, including the complex requirements of federally-funded research. Our research administration services include compliance assessments, cost recovery services and operations assistance. We also have extensive experience implementing the PeopleSoft Grants Suite as a technology solution to sponsored research administration challenges. Our experience is in the areas of Grants, Projects, Contracts, Billings, and Accounts Receivable applications. Healthcare. Our healthcare practice helps healthcare providers and payors effectively address their strategic, operational, management, and financial challenges. On the provider side, we help hospitals, physicians and other healthcare providers improve operations by performing assessments and implementing solutions designed to reduce costs and increase effectiveness. Our engagements typically focus on revenue cycle and cash acceleration, supply chain improvements, strategic growth and planning, financial planning and physician/ancillary services. Additionally, we provide risk management and regulatory compliance solutions. For healthcare payors, we focus on compliance and government contracting issues related to federal healthcare programs. Our Medicare contract services include Medicare contract transition and termination assistance, implementation of cost accounting standards, secondary payer analyses, strategic assessments, proposal support services and assistance related to implementation of the Medicare Modernization Act. We assist pharmaceutical companies Table of Contents Business with pricing analyses and related aspects of regulatory disclosures and calculations. We also assist health plans with various operational issues including claims processing over and under-payments, Pharmacy Benefit Manager audits and business performance reporting. Legal business consulting. Our legal business consulting practice helps both in-house legal departments and outside counsel enhance the quality of legal services while reducing costs by more efficiently aligning strategy, people, processes and technology. We provide strategic advice to help legal departments and law firms improve their organizational design, business processes, and management of outside counsel and we work with corporations and law firms to provide solutions to enhance their discovery process management and electronic discovery needs. One area of emphasis is helping clients to choose and implement technology-powered solutions that improve legal department operations. We provide a full array of forensic technology, discovery, and records management services that include discovery process execution, electronic discovery services, computer forensics, data management, records program development, records improvement planning and process, and program management, all aimed at reducing costs, coordinating matters and people and streamlining processes. We also have extensive experience in selecting, customizing and successfully rolling out matter management systems and E-Billing systems that help legal departments track and manage lawsuits and other legal matters. These systems are powerful tools for managing budgets, spending and resources. We provide similar services for document management systems and patent management applications. Strategic sourcing. Our strategic sourcing practice works with clients to drive sustainable non-salary cost reductions. We help clients achieve significant savings by addressing the entire procurement process, including contract negotiations, vendor selection, contract compliance, consumption patterns, total cost of ownership, performance measurement, knowledge transfer and make-versus-buy decisions. We identify opportunities for measurable savings, develop approved action plans and guide the implementation of those plans to final conclusion. We have achieved substantial savings for clients in a wide variety of spend categories, including office-related products, telecommunications, IT hardware, software and services, insurance, printing services, travel and industry-specific categories. Performance improvement. Our performance improvement practice works with executive officers and other senior managers of large and middle-market organizations that have recently undergone a change in leadership, are integrating acquisitions or are coping with a change in competitive dynamics to address performance challenges and take advantage of opportunities. Our engagements typically increase effectiveness of operations or decrease costs by developing and implementing solutions for clients in areas such as business alignment, operational improvement, selling, general and administrative cost efficiency, and organizational alignment. OUR CLIENTS We provide financial and operational consulting services to a wide variety of both financially sound and distressed organizations, including Fortune 500 companies, medium-sized businesses, academic institutions, healthcare organizations and the law firms that represent these various organizations. Our clients are in a broad array of industries, including education, professional services, transportation services, healthcare, telecommunications, financial services, electronics, consumer products, energy and utilities, industrial manufacturing and food and beverage. Since commencing operations in May 2002, we have conducted over 2,500 engagements for over 1,400 clients, and we have worked on engagements with 37 of the 40 largest U.S. law firms listed in The American Lawyer 2005 Am Law 100. Our top ten clients represented 27.8% and 37.8% of our revenues in the year ended December 31, 2004 and the nine months ended September 30, 2005. No single client accounted for more than 10% of our revenues in 2004. Revenues from one client represented 11.6% of our revenues in the nine months ended September 30, 2005. The following are examples of engagements that we have performed for our clients. Liabilities and stockholders equity Current liabilities: Accounts payable $ 3,011 $ 2,809 Accrued expenses 4,173 2,384 Accrued payroll and related benefits 24,607 20,494 Income tax payable 335 Table of Contents Business Financial Consulting Practice Client need Huron solution Disputes and investigations Assist legal counsel for an audit committee of a public software company in connection with an SEC investigation and class action litigation Forensic accounting experts conducted a large-scale, in-depth financial analysis of financial records and analyzed issues such as revenue recognition, acquisition accounting, capitalization of assets, complex transactions and goodwill impairment to identify accounting errors. Consultants specializing in GAAP assisted the client with preparation of the restatement of its financial statements and presentations to the SEC. Corporate advisory services Assist with Chapter 11 bankruptcy proceedings of an air transportation company Pre-petition, developed procedures and playbooks in the event the client had to file for bankruptcy protection, including implementation of policies and procedures relating to cash management, aircraft and supplier related issues, and financing related matters. Post-petition, participated in the restructuring office and provided a wide range of analyses, including: reporting requirements (monthly operation reports, statement and schedules and required reports from various creditor committees); business plan assistance; SOP 90-7 implementation; claims management and reconciliation; evaluation of potential courses of action related to preferences, executory contracts and lease negotiations; monitoring of other case constituents and their advisors; and the development of a joint plan of reorganization and disclosure statement. Valuation services Value assets of acquired company for purchase price allocation by a global media company Analyzed the fair market value of the assets of the acquired company, including tangible assets, customer relationships, favorable contracts, franchise value and goodwill. Determined the remaining life of the assets as well as tested for impairment of the assets in other operating units to support financial reporting requirements. Table of Contents Business Practice Client need Huron solution Interim management/ Focused consulting Provide interim management and performing focused consulting services for a large hospital system in the United States Provided experienced senior executive management, including the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer and various department managers. Made revenue cycle improvements by analyzing and correcting back-office operations, monitoring tools that report key metrics, improving coding and automation and analyzing and renegotiating payor contracts to improve performance including arranging for significant increases in cash flow, improved relations with trade creditors and system improvements for the long term. Operational Consulting Practice Client need Huron solution Higher education and strategic sourcing Assess research administration infrastructure of a leading university due to dramatic growth in research volume and increased scrutiny of federal regulators Evaluated current operations and provided a plan for implementation of improvements to research administration infrastructure, including: roles and responsibilities within central university units and departmental units; organizational structure of the research enterprise, including its relationship with other university entities; business processes; information systems; personnel; training and educational programs; and performance measures for central research units. Evaluated the exposure of the primary research support units to financial and operational risks relating to research universities. Assessed impact of plans to replace university-wide financial systems on research administration support services. Our strategic sourcing practice identified areas where the university could reduce its costs of procuring goods and services, such as through library services, scientific supplies or office-related products. Table of Contents Business Practice Client need Huron solution Healthcare Improve operating margins of healthcare provider Comprehensive assessment of performance levels related to operating costs, supply costs, revenue cycle and organizational structure efficiency. Quantified and prioritized areas of potential opportunity for change, growth and/or improvement, including revenue management, use of supplies and efficiency of information systems. Developed and implemented plans for sustained improvements in: supply chain; revenue cycle; and organizational effectiveness. Assist in recovering overpaid claims Assisted a large health insurance organization perform a detailed analysis of its coordination of benefits programs. Identified a significant number of claims that had been paid in error by the client and assisted the client in recovering these overpayments. Legal business consulting Develop cost saving initiatives for pharmaceutical company s recently expanded legal department Analyzed processing of legal matters through various phases and the distribution and management of legal work by internal and outside staff. Developed cost saving initiatives to improve organizational design, outside counsel management and business process. Assisted with the implementation of an interim matter management system for litigation and the selection of a new department-wide matter management system that will be implemented over a period of time. Implement an electronic discovery system and an enterprise-wide discovery management solution Evaluated existing electronic document and hard-copy/image-based discovery processes. Recommended and implemented an electronic document discovery solution to successfully reprocess documents and provide a review and production platform. Structured and managed the electronic review, including providing the on-site attorney training, system metrics and user reports. Developed end-to-end company wide solution for all discovery management needs from issuance of legal holds through case archival and record retention. Table of Contents Business Practice Client need Huron solution Performance improvement Devise an overarching strategy for the supply chain function for a large consumer products client Synthesized market research, customer feedback and industry benchmarks to provoke discussion about future direction and priorities in the supply chain arena. Facilitated a process to build consensus among senior management from across major business units leading to the development of a long-range plan and a series of near-term initiatives. EMPLOYEES Our ability to bring the right expertise together to address client issues requires a willingness to work and think outside the bounds of a single practice or specialty. Our success depends on our ability to attract and retain highly talented professionals by creating a work environment where both individuals and teams thrive and individuals are rewarded not only for their own contributions but also for the success of our organization as a whole. To accomplish those goals and recognize performance, we have adopted a comprehensive rewards program incorporating compensation, training and development opportunities, performance management and special recognition programs that motivates individual performance and promotes teamwork. As of December 31, 2005, we had 773 employees, consisting of 632 consultants and 141 non-billable professionals. The 632 consultants consisted of 75 managing directors, 95 directors, 144 managers and 318 associates and analysts. Of these consultants, 142 have a master s degree in business administration, 79 are certified public accountants and various others are accredited valuation specialists and forensic accountants. Our managing directors serve clients as advisors and engagement team leaders, originate revenue through new and existing client relationships, and work to strengthen our intellectual capital, develop our people and enhance our reputation. Our directors and managers manage day-to-day client relationships and oversee the delivery and overall quality of our work product. Our associates and analysts gather and organize data, conduct detailed analyses and prepare presentations that synthesize and distill information to support recommendations we deliver to clients. In addition to our consultants and non-billable professionals, in certain cases we also utilize independent contractors. Our 141 non-billable professionals at December 31, 2005 consisted of 10 managing directors, 27 directors, 23 managers, 41 associates and analysts and 40 assistants. Our non-billable professionals include our senior management team, senior client relationship managers and legal, finance, information technology, marketing and human resource personnel. We assimilate and support employees in their career progression through training and development programs. We have structured orientation and training programs for new analysts, milestone programs to help recently promoted employees quickly become effective in their new roles, and opportunities for self-directed training, including technical and consulting courses. We assign employees internal performance coaches to identify opportunities for development, formal training or certifications. Our compensation plan includes competitive base salary, incentives and benefits. Under our incentive plan, directors, managers, associates and analysts set goals each year with a performance coach. These goals are aligned with our business goals as well as individual interests and development needs. Managing directors set goals with their practice leader using a balanced scorecard. The incentive plan balances our value of teamwork with recognition of individual performance, and incentive compensation Table of Contents Business Operating expenses: Selling, general and administrative 8,813 25,171 40,425 40,736 28,411 36,251 36,322 Stock-based compensation 14 433 433 113 1,352 1,352 Depreciation and amortization 3,048 5,328 2,365 2,790 1,682 3,861 4,059 Restructuring charges 3,475 3,475 3,475 Management and advisory fees paid to related parties 2,750 Loss on lease abandonment 1,668 Organization costs Operating expenses: Selling, general and administrative 8,813 25,171 40,425 28,411 36,251 Stock-based compensation 14 433 113 1,352 Depreciation and amortization 3,048 5,328 2,365 1,682 3,861 Restructuring charges 3,475 3,475 Management and advisory fees paid to related parties 2,750 Loss on lease abandonment 1,668 Organization costs is tied to both team and individual performance. Incentives for managing directors are based on their individual performance and their contribution to their practice and to our business as a whole. Funding of the incentive pool is based on our achievement of annual financial goals and each practice s achievement of its financial goals. In addition, managing directors and certain high-performing directors are eligible for long-term equity incentives. BUSINESS DEVELOPMENT AND MARKETING Business development Our business development activities aim to build relationships and a strong brand reputation with key sources of business and referrals, especially top-tier law firms and the offices of the chief financial officer and general counsel of organizations. We believe that excellent service delivery to clients is critical to building relationships and our brand reputation, and we emphasize the importance of client service to all of our employees. We generate most of our new business opportunities through relationships that our managing directors have with individuals working in corporations, academic institutions, existing or former clients and top-tier law firms. Although some managing directors spend more time on service delivery than new business development, all of our managing directors understand their important role in ongoing relationship and business development, which is reinforced through our compensation and incentive program. We actively seek to identify new business opportunities, and we frequently receive referrals and repeat business from past and current clients and from the law firms with which we have worked. We also from time to time host conferences that facilitate client development opportunities. For example, in the third quarter of 2005 we hosted a corporate advisory services summit. In addition, to complement the business development efforts of our managing directors, we have a group of senior client relationship managers, who are focused exclusively on developing client relationships and generating new business through their extensive network of contacts. We also have formed relationships with prominent academics, which generate new business opportunities. Marketing We have a centralized marketing department with a marketing professional assigned to each of our practices. The centralized department coordinates these professionals activities, and also develops and coordinates traditional marketing programs, such as participation in seminars, sponsorship of client events and publication of articles in industry publications to actively promote our name and capabilities. The marketing department also manages public relations activities, develops printed marketing materials and performs research and database management to support sales efforts. COMPETITION The consulting services industry is extremely competitive, highly fragmented and subject to rapid change. The industry includes a large number of participants with a variety of skills and industry expertise, including other business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms and the internal professional resources of organizations. We compete with a large number of service providers in both of our segments. Our competitors often vary depending on the particular practice area. In addition, we also expect to continue to face competition from new entrants because the barriers to entry into consulting services are relatively low. Operating expenses: Selling, general and administrative 40,425 25,171 8,813 Stock-based compensation expense 433 14 Depreciation and amortization 2,365 5,328 3,048 Restructuring charges 3,475 Management and advisory fees paid to related parties 2,750 Loss on lease abandonment 1,668 Organization costs Table of Contents Business We believe the principal competitive factors in our market include firm and consultant reputations, client and law firm relationships and referrals, the ability to attract and retain top consultants, the ability to manage engagements effectively and the ability to be responsive and provide high quality services. There is also competition on price, although to a lesser extent due to the critical nature of many of the issues that the types of services we offer address. Many of our competitors have a greater geographic footprint, including an international presence, and name recognition, as well as have significantly greater personnel, financial, technical and marketing resources than we do. We believe that our independence, experience, reputation, industry focus and broad range of professional services enable us to compete favorably and effectively in the consulting marketplace. FACILITIES Our principal executive offices are located in Chicago, Illinois, consisting of approximately 82,668 square feet of office space, under a lease that expires in September 2014. We have two five-year renewal options under the lease that will allow us to continue to occupy this office space until September 2024. This facility accommodates our executive team and corporate departments, as well as consultants in each of our practices. We also occupy leased facilities for our five other core offices located in Boston, Houston, New York City, San Francisco and Washington, D.C., as well as smaller offices located in Charlotte and Los Angeles. We do not own any real property. We believe that our leased facilities are adequate to meet our current needs and that additional facilities are available for lease to meet future needs. LEGAL PROCEEDINGS From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this prospectus, we are not a party to or threatened with any litigation or other legal proceeding that, in our opinion, could have a material adverse effect on our business, operating results or financial condition. Table of Contents Management EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names and positions of our executive officers and board members and their ages as of February 1, 2006. Name Age Position(s) Gary E. Holdren 55 Chairman of the Board, Chief Executive Officer and President George E. Massaro 58 Vice Chairman of the Board Daniel P. Broadhurst 46 Vice President of Operations and Assistant Secretary Gary L. Burge 51 Vice President, Chief Financial Officer and Treasurer Natalia Delgado 52 General Counsel and Corporate Secretary Mary M. Sawall 50 Vice President, Human Resources DuBose Ausley 68 Director James D. Edwards 62 Director John McCartney 53 Director John S. Moody 56 Director The following is information regarding each of our executive officers and board members: Gary E. Holdren has served as our Chief Executive Officer and President and as a director since May 2004 and as Chief Executive Officer of Huron Consulting Services LLC since June 2003 and President of Huron Consulting Services LLC since we commenced operations in May 2002. He was elected Chairman of the board of directors on November 3, 2004. Previously, he was a partner and the Midwest director of global client services of Arthur Andersen LLP, where he also served on the U.S. management committee from 1991 to 1998, and the executive council of Andersen Worldwide from 1994 to 1998. Mr. Holdren has more than 30 years of experience consulting with corporations and legal counsels on complex financial and business matters as well as extensive experience serving as an expert witness. He has extensive consulting experience in international tax, antitrust and corporate civil damages and has testified as an accounting and industry expert in federal tax court and federal district courts. Mr. Holdren is a member of the board of directors of the Lyric Opera of Chicago and Cowboy Dreams, a Chicago-area charitable organization. He also serves on the executive committee and board of directors of The Joffrey Ballet of Chicago, and is a member of the Business Advisory Council of the Richard T. Farmer School of Business, Miami University-Ohio. Mr. Holdren is a certified public accountant. George E. Massaro has served as a director since May 2004 and as Vice Chairman since March 2005. He also has served as Vice Chairman of Huron Consulting Services LLC since March 2005. During 2006, Mr. Massaro intends to reduce his workload to a part time, or approximately one-third, basis and dedicate his efforts to strategic initiatives for us, including major client assignments. He served as our Chief Operating Officer and as Chief Operating Officer of Huron Consulting Services LLC from June 2003 until March 2005. Mr. Massaro joined Huron Consulting Services LLC in August 2002 as a managing director and subsequently became the leader of our disputes and investigations and valuation services practices. Previously, he served as the managing partner of Arthur Andersen LLP s 1,200 person New England practice from 1998 to 2002 and managing partner of the Boston office from 1995 to 1998. Mr. Massaro has served clients in the financial services and high technology industries. Mr. Massaro serves as a director of Charles River Laboratories, a provider of research products and preclinical services for the biomedical community, and of Eastern Bank Corporation, an independent mutual bank holding company in New England. He is a certified public accountant. Table of Contents Management Daniel P. Broadhurst has served as our Vice President of Operations since March 2005. He has served as Vice President and Assistant Secretary of Huron Consulting Services LLC since January 2004 and as a Managing Director of Huron Consulting Services LLC since May 2002. Mr. Broadhurst served as our Vice President, Quality and Corporate Development from May 2004 to March 2005 and as Assistant Secretary since May 2004. Mr. Broadhurst assists with the day-to-day operations and works closely with the Huron Consulting Services LLC practice group leaders regarding practice performance, resource planning and all other aspects of business planning. He also continues to serve as the Quality Officer for Huron Consulting Services LLC. His expertise covers large and complex accounting and litigation matters related to international and domestic tax law, regulatory issues, breach of contract, purchase price disputes, intellectual property, fraud, tort, environmental, and other claims against government agencies. Previously, Mr. Broadhurst served as managing partner of Arthur Andersen LLP s 450 person Central Region economic and financial consulting group from 1998 through 2002 and managing partner for the Central Region litigation consulting group from 1996 through 1997. Mr. Broadhurst serves as Treasurer and is a board member of the Illinois CPA Society. He is a certified public accountant. Gary L. Burge has served as our Vice President, Chief Financial Officer and Treasurer since May 2004 and as Vice President, Chief Financial Officer and Treasurer of Huron Consulting Services LLC since November 2002. Prior to joining us, he served as the chief financial officer for PrimeCo Wireless Communications from 2001 to 2002. From 1999 to 2001, Mr. Burge served as chief financial officer for Morningstar, Inc., a globally recognized provider of investment information and services to the individual and institutional marketplace. During his career, he has also held various senior management and leadership roles with 360 Communications Company, a wireless communications company, Sprint Corporation, a global communications company, and Centel Corporation, a telecommunications company, where he held positions in finance, information technology, engineering and mergers and acquisitions. Mr. Burge began his career in professional services with Deloitte & Touche LLP. He is a member of the Department of Accountancy Advisory Board of Northern Illinois University. Mr. Burge is a certified public accountant. Natalia Delgado has served as our General Counsel and Corporate Secretary since September 2004. From January 1999 to September 2004, she was a principal at the law firm of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. Prior to that, Ms. Delgado was a partner at the law firm of Jenner & Block. For more than 23 years, Ms. Delgado has represented clients in securities and corporate matters, including public offerings, mergers and acquisitions and corporate restructurings. Her practice has also involved advising clients regarding compliance with securities laws and corporate governance. Ms. Delgado is a member of the board of directors of the National Women s Law Center and is an active member of the Committee of Visitors of the University of Michigan Law School. Mary M. Sawall has served as our Vice President, Human Resources since May 2004, as Vice President, Human Resources of Huron Consulting Services LLC since January 2004 and as Managing Director and head of Human Resources of Huron Consulting Services LLC since May 2002 when we commenced operations. Previously, she was executive vice president of human resources at Encore Development, a technology solutions provider, from 2000 to 2002, and at marchFIRST Inc., a global business and technology solutions provider, from 1998 to 2000. She has also served as director of human resources for the Illinois practice of Deloitte & Touche LLP and has had financial and administrative management positions at Booz Allen Hamilton, a global strategy and technology consulting firm, and Cambridge Associates, a provider of investment and financial research and consulting services to nonprofit institutions. DuBose Ausley was appointed to our board of directors on October 12, 2004. He is an employee of Ausley & McMullen, a law firm in Tallahassee, Florida, where he was Chairman for more than 25 years prior to June 2002. Mr. Ausley is a director of Capital City Bank Group, Inc., a financial services holding Table of Contents Management company, Tampa Electric Co., Inc. and TECO Energy, Inc., public utilities operating in the State of Florida and Blue Cross and Blue Shield of Florida, Inc. He was also Chairman of the Capital City Bank Group, Inc. from 1982 to 2003. James D. Edwards was appointed to our board of directors on October 12, 2004. Mr. Edwards retired in 2002 as managing partner-global markets of Arthur Andersen LLP, a position he had held since 1998. Mr. Edwards began his career with Arthur Andersen LLP in 1964 and served in several positions after that time. Mr. Edwards is also a director of IMS Health Incorporated, a global provider of information solutions to the pharmaceutical and healthcare industries, Transcend Services, Inc., a provider of medical transcription services to the healthcare industry, and Crawford & Company, a global provider of claims management solutions. Mr. Edwards is a member of the American Institute of Certified Public Accountants. John McCartney was appointed to our board of directors on October 12, 2004. He has served as a director of Westcon Group, Inc., a specialty distributor of networking and communications equipment, since August 1998 and was elected chairman of the board of directors in January 2001. Mr. McCartney served as vice chairman of the board of directors of Datatec Limited, a networking technology and services company, from October 1998 until May 2004. Since December 2003, he has served as chairman of the board of First Circle Medical, Inc., a privately-held medical therapy company. Since 1998, Mr. McCartney has served as a director of A.M. Castle Corporation, a steel distributor, and he currently serves as lead director, chairman of the audit committee and a member of the governance committee. From June 1997 to March 1998, he held the position of president of 3Com Corporation s Client Access Unit. He joined the executive management team of US Robotics in March 1984 as vice president and chief financial officer and served in various executive capacities until serving as president and chief operating officer of US Robotics from January 1996 until its merger with 3Com Corporation in June 1997. Mr. McCartney is a certified public accountant. John S. Moody was appointed to our board of directors on November 8, 2005. He served as a director of CRIIMI MAE, Inc., a full-service, commercial, mortgage company that was structured as a publicly-held real estate investment trust ( REIT ) from 2004 to 2006 when it was acquired by a subsidiary of Caisee de depot et placement du Quebec. From 2001 to 2004, he served on the boards of director of two publicly held REITs: Keystone Property Trust and Equity Office Properties Trust. From 2004 until recently, Mr. Moody served as president and chief executive officer of HRO Asset Management, LLC, a real estate advisory business. Prior to that, from 2001 to 2004, Mr. Moody served as president of Marsh & McLennan Real Estate Advisors, Inc., a business that directed the execution of real estate projects and transactions for Marsh & McLennan. From 1995 to 2000, Mr. Moody was president and chief executive officer of Cornerstone Properties, Inc., a REIT that acquired, developed and operated large scale Class A office buildings in major markets throughout the United States and that merged into Equity Office Properties Trust. Mr. Moody received a law degree from The University of Texas School of Law. BOARD OF DIRECTORS Our certificate of incorporation provides that our board of directors will consist of such number of directors as from time to time fixed by resolution of the board. The number of directors is currently fixed at seven. Each of Messrs. Ausley, Edwards, McCartney and Moody is an independent director in accordance with the independence requirements of the NASDAQ National Market and the rules of the SEC. Our certificate of incorporation divides our board into three classes, with one class to be elected each year to serve for a three-year term. Class I directors have a term expiring in 2008, Class II directors have a term expiring in 2006 and Class III directors have a term expiring in 2007. Weighted average common shares outstanding basic 15,657 12,068 Weighted average common stock equivalents 1,144 Table of Contents Management Class I is composed of Mr. Massaro, Class II is composed of Messrs. Ausley and Moody and Class III is composed of Messrs. Edwards, Holdren and McCartney. Paul Yovovich resigned as a member of our board of directors as of January 31, 2006. BOARD COMMITTEES We have three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. Audit committee The audit committee is comprised of three directors elected by a majority of the board. The audit committee oversees our accounting and financial reporting processes, as well as the audits of our financial statements, including retaining and discharging our auditors. Our audit committee complies with the independence requirements of the NASDAQ National Market and the rules of the SEC under the Securities Exchange Act of 1934, as amended. The audit committee is comprised of Messrs. McCartney (Chairperson), Edwards and Ausley. Compensation committee The compensation committee is comprised of three directors elected by a majority of the board. The compensation committee oversees the administration of our benefit plans, reviews and administers all compensation arrangements for executive officers and establishes and reviews general policies relating to the compensation and benefits of our officers and employees. Our compensation committee complies with the independence requirements of the NASDAQ National Market. The compensation committee is comprised of Messrs. Moody (Chairperson), McCartney and Ausley. Nominating and corporate governance committee The nominating and corporate governance committee is comprised of three directors elected by a majority of the board. The nominating and corporate governance committee s responsibilities include identifying and recommending to the board appropriate director nominee candidates and providing oversight with respect to corporate governance matters. Our nominating and corporate governance committee complies with the independence requirements of the NASDAQ National Market. The nominating and corporate governance committee is comprised of Messrs. Edwards (Chairperson), Ausley and Moody. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers will serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Table of Contents Management COMPENSATION OF DIRECTORS We pay each of our non-employee directors $40,000 per year and $1,000 for each meeting of the board of directors or any committee of the board that he or she attends. Each new non-employee director receives a restricted stock award of 15,000 shares. Each non-employee director receives an additional 5,700 shares of restricted common stock annually. We also pay a fee of $10,000 to the chairman of the audit committee and a fee of $7,500 to the chairs of each of the compensation committee and nominating and corporate governance committee for acting as a committee chair. On October 18, 2004, we granted each independent director options exercisable for 12,903 shares of our common stock under our 2004 Omnibus Stock Plan. These options have a per share exercise price equal to $15.50. One third of the options granted to directors vested on the grant date, one third vested on the date of our 2005 annual meeting and the final one third will vest on the date of the 2006 annual meeting. On October 1, 2005, we granted 10,750 restricted shares of our common stock under our 2004 Omnibus Stock Plan to each of Messrs. Ausley, Edwards and McCartney. Mr. Moody, who was appointed to our board on November 8, 2005, was granted 15,000 restricted shares of our common stock on December 1, 2005. These restricted shares vest pro-ratably over a three-year period on the first day of each quarter beginning on January 1, 2006. All of our directors are reimbursed for out-of-pocket expenses for attending board and committee meetings. COMPENSATION OF EXECUTIVE OFFICERS The following table discloses the 2003 and 2004 annual and long-term compensation awarded to, earned by or paid by us to our Chief Executive Officer and to each of our other four highest paid executive officers whose total compensation exceeded $100,000 for the fiscal year ended December 31, 2004. We refer to these five executive officers as named executive officers. Summary compensation table Annual compensation Long-term compensation All other compensation ($)(3) Name and principal position Year Salary ($) Bonus ($) Other annual compensation ($)(1) Securities underlying options/SARs (#) Restricted stock award(s)(2) Gary E. Holdren Chief Executive Officer(4) 2004 2003 800,000 750,000 850,000 500,375 53,918 43,479 43,479 158,700 72,131 23,412 George E. Massaro Chief Operating Officer(5) 2004 2003 600,000 450,000 300,000 350,625 21,740 86,958 32,600 46,957 22,980 Daniel P. Broadhurst Vice President and Assistant Secretary(6) 2004 2003 485,000 485,000 142,000 184,167 2,174 6,522 10,900 21,866 18,963 Gary L. Burge Chief Financial Officer 2004 2003 250,000 225,000 175,000 75,000 6,522 2,174 10,900 32,021 16,649 Mary M. Sawall Vice President, Human Resources 2004 2003 250,000 225,000 150,000 100,000 6,522 8,696 6,500 24,617 15,540 (See footnotes on the following page.) Table of Contents Management (1) Other annual compensation consists of personal use of a corporate jet that we lease as needed. Other amounts, which are under the thresholds for reporting, were earned by Messrs. Massaro and Broadhurst in connection with the gross-up for taxes paid to multiple states and the payment for tax assistance services. (2) The aggregate holdings and market value of the unvested restricted common stock held as of December 31, 2004 by the individuals listed are: Mr. Holdren (158,700 shares, $3,523,140); Mr. Massaro (32,600 shares, $723,720); Mr. Broadhurst (10,900 shares, $241,980); Mr. Burge (10,900 shares, $241,980); and Ms. Sawall (6,500 shares, $144,300). The value is calculated according to SEC rules assuming all shares are vested as of December 31, 2004, which in fact, they have not. The shares vest 25% annually over four years from the grant date. (3) All other compensation consists of the following: Mr. Holdren Mr. Massaro Mr. Broadhurst Mr. Burge Ms. Sawall Long-term disability insurance premiums 2004 2003 $ 8,336 7,382 $ 6,577 5,988 $ 4,833 4,594 $ 1,768 1,621 $ 1,669 1,496 Life insurance premiums 2004 2003 4,030 4,030 5,052 4,992 2,369 2,369 3,049 3,028 2,065 2,044 Special payout for earned but unused paid time off 2004 2003 47,465 23,028 2,364 14,904 8,583 401(k) match 2004 2003 12,300 12,000 12,300 12,000 12,300 12,000 12,300 12,000 12,300 12,000 (4) Mr. Holdren has served as our Chief Executive Officer and President since May 2004 and as Chief Executive Officer of Huron Consulting Services LLC since June 2003 and President since we commenced operations in May 2002. During 2003, Paul G. Yovovich served as our named Chief Executive Officer, but received neither compensation nor equity grants from us. Mr. Yovovich resigned from his position as Chief Executive Officer in April 2004. (5) Mr. Massaro became Vice Chairman on March 15, 2005. (6) Mr. Broadhurst became Vice President of Operations on March 15, 2005. Option grants in last fiscal year The following table sets forth information regarding stock options granted to the named executive officers during fiscal 2004 pursuant to our stock option plans. Individual grants Number of securities underlying options granted(1) % of Total options granted to employees in fiscal year Exercise or base price ($/share) Expiration date Potential realizable value at assumed annual rates of stock appreciation for the option term(2) Name 0% 5% 10% Gary E. Holdren 43,479 7.92 % 1.9550 03/17/2014 $ 588,923 $ 1,012,843 $ 1,662,854 George E. Massaro 21,740 3.96 % 1.9550 03/17/2014 294,468 506,433 831,446 Daniel P. Broadhurst 2,174 0.40 % 1.9550 03/17/2014 29,447 50,643 83,145 Gary L. Burge 6,522 1.19 % 1.9550 03/17/2014 88,340 151,930 249,434 Mary M. Sawall 6,522 1.19 % 1.9550 03/17/2014 88,340 151,930 249,434 (1) All options vest 25% on each grant anniversary over four years, subject to the executive s continued employment. (2) Calculated on the assumption that the market value of the underlying stock increases at the stated values compounded annually for the ten-year term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. The potential realizable value is calculated based on assumed rates of stock appreciation of 0%, 5% and 10% compounded annually from the date the options were granted until their expiration date. The assumed 0%, 5% and 10% rates of stock appreciation are based on the initial public offering price of $15.50 per share. The numbers are calculated based on the requirements of the SEC and do not reflect our estimate of future stock price growth. Table of Contents Management Aggregated option exercises in last fiscal year and fiscal year end option values The following table sets forth information with respect to the named executive officers concerning the exercise of options during fiscal 2004 and unexercised options held as of the end of fiscal 2004. Name Number of shares acquired on exercise Value realized Number of securities underlying unexercised options at December 31, 2004 Value of unexercised in-the-money options at December 31, 2004(1) (1) Based on the market price of $22.20 per share, which was the closing price per share of our common stock on the NASDAQ National Market on the last day of 2004, less the exercise price payable for such shares. EMPLOYMENT AGREEMENTS Holdren senior management agreement Huron Consulting Services LLC has entered into a senior management agreement with Mr. Holdren. The agreement, which was effective as of May 13, 2002, has an initial term of three years and automatically renews for additional one-year periods on an annual basis unless, at least 60 days prior to the expiration of the then-current term, we or Mr. Holdren provide notice that the agreement shall not renew. The agreement provides that Mr. Holdren will report to our board of directors. Under the terms of the agreement, Mr. Holdren s annual base salary is $800,000 and his annual performance bonus target is set by the compensation committee. In 2005, his target annual performance bonus was $850,000. His compensation is subject to annual review. Mr. Holdren received a guaranteed minimum payment in the amount of $112,500 with respect to his annual bonus for the twelve months ended May 13, 2005. Additional bonus amounts for calendar 2005 may be paid to Mr. Holdren based on the achievement of performance goals set by our compensation committee. Mr. Holdren is also eligible for additional bonuses in the event that our annual earnings exceed targets set by the compensation committee, in amounts that the compensation committee determines to be appropriate. Mr. Holdren s agreement provides that if his employment is terminated by us without cause, if he resigns for good reason (as such terms are defined in the agreement) or if he is terminated in connection with a non-renewal of the agreement prior to the fifth anniversary of its execution, Mr. Holdren will be entitled to severance pay of $1,500,000, payable over the twelve-month period following termination, along with continuation of medical and dental benefits during such twelve-month period. All other company provided perquisites and benefits will be subject to the treatment provided under the terms of the applicable plans or programs. Mr. Holdren or his estate is entitled to six months base salary over the six-month period following his death or disability, along with continuation of medical benefits. In order to receive any of these severance payments, Mr. Holdren must execute a general release in favor of us. Mr. Holdren is also entitled to coverage under our directors and officers insurance policy for six years following his termination, subject to specified exceptions and limitations. Mr. Holdren has agreed to certain restrictive covenants that will survive for a period of one to three years following the termination of his employment pursuant to which he will not solicit our clients or interfere with our relationships with our employees or customers. Table of Contents Management Mr. Holdren s agreement provided for the purchase by him of 391,305 shares of our common stock, on December 10, 2002, pursuant to a separate restricted shares award agreement under our 2002 Equity Incentive Plan. All of these shares became fully vested upon consummation of our initial public offering in October 2004. In addition, Mr. Holdren has the ability to exercise certain piggyback registration rights with respect to these shares. Pursuant to these piggyback registration rights, if we propose any underwritten public offering of our equity securities pursuant to an effective registration statement under the Securities Act (other than a registration statement relating to our employee benefit plans, exchange offers by us or a merger or acquisition of a business or assets by us), Mr. Holdren is entitled to include his shares of common stock in that registration, subject to cut back provisions in the event that, in connection with an underwritten offering, the managing underwriter advises us and Mr. Holdren that the inclusion of all the securities sought to be included in the registration by us, Mr. Holdren, any persons who have sought to have shares registered thereunder pursuant to demand registration rights and any other proposed sellers would adversely affect the marketability of the securities sought to be sold pursuant thereto. Pursuant to the agreement, we are obligated to pay all expenses incidental to our performance of, or compliance with, our obligations in connection with the piggyback registration rights. In September 2004, we adopted an amendment to Mr. Holdren s senior management agreement that provides Mr. Holdren with certain change of control benefits. Pursuant to the amendment, if Mr. Holdren s employment is terminated within the 24 months following a change of control, either by us without cause or by Mr. Holdren with good reason, which includes not being the Chief Executive Officer of the successor entity, all of his unvested equity awards will immediately become vested and exercisable and he will be entitled to severance pay of three times the total of his then-current base salary and target annual bonus. In the event of such termination, he will also be entitled to a pro-rata bonus for the year during which his termination occurs, 36 months of benefit continuation, and, if necessary, an excise tax gross-up payment. Massaro senior management agreement Huron Consulting Services LLC also entered into a senior management agreement with Mr. Massaro. Mr. Massaro s agreement, which was effective August 12, 2002, had an initial three-year term and automatically renews for additional one-year periods on an annual basis unless, at least 60 days prior to the expiration of the then-current term, we or Mr. Massaro provide notice that the agreement shall not renew. Under the terms of the agreement, Mr. Massaro received a minimum annual base salary, which generally could not be reduced once increased, and was eligible to participate in our annual performance bonus plan. His compensation is subject to annual review. For 2005, Mr. Massaro s annual base salary was set at $600,000 and his annual bonus target was set at $300,000. Mr. Massaro received a guaranteed minimum bonus payment of $37,500 with respect to his annual bonus for the twelve months ended August 12, 2005. Additional bonus amounts for calendar 2005 may be paid to Mr. Massaro based on the achievement of performance goals set by the compensation committee. Mr. Massaro is also eligible for additional bonuses in the event that our annual earnings exceed targets set by our compensation committee or the Chief Executive Officer, in amounts that the compensation committee determines to be appropriate. Mr. Massaro was also granted options to acquire 21,740 shares of our common stock under our 2002 Equity Incentive Plan at the time his employment commenced. In accordance with the original terms of the grants under our 2002 Equity Incentive Plan, options granted under that plan vested fully upon consummation of our initial public offering in October 2004. Mr. Massaro s agreement provides that if his employment is terminated by us without cause or if he resigns for good reason (as such terms are defined in the agreement), he will be entitled to severance pay equal to six months base salary and medical benefits, which amount is subject to offset for remuneration Table of Contents Management earned by Mr. Massaro during the six-month period following such a termination. In order to receive such severance payments, Mr. Massaro must execute a general release in favor of us. Mr. Massaro or his estate is entitled to severance pay of three months base salary payable over the three-month period following his death or disability, along with continuation of medical benefits. Mr. Massaro has also agreed to certain restrictive covenants that will survive for one year following the termination of his employment pursuant to which, among other things, he will not solicit our clients or interfere with our relationships with our employees or customers. In September 2004, we adopted an amendment to Mr. Massaro s senior management agreement that provided Mr. Massaro with certain change in control benefits. Pursuant to the amendment, if Mr. Massaro s employment were terminated within the 24 months following a change of control, either by us without cause or by Mr. Massaro for good reason (as provided in the agreement), all of his unvested equity awards that were granted prior to such change of control would immediately become vested and exercisable, and he would be entitled to severance pay of two times the total of his then-current base salary and target annual bonus. In the event of such a termination, he would also have been entitled to a pro-rata bonus for the year during which his termination occurred and 24 months of medical benefit continuation. In certain situations, Mr. Massaro would also have been entitled to an excise tax gross-up payment, or his severance benefits would have been reduced to limit his excise tax burden. During 2006, Mr. Massaro intends to reduce his workload to a part time, or approximately one-third, basis and dedicate his efforts to strategic initiatives for us, including major client assignments. We have adopted a second amendment to Mr. Massaro s senior management agreement. This second amendment to his agreement has an effective date of December 31, 2005 and allows for Mr. Massaro to work 60 hours per month on average during a calendar year. Under the second amendment, Mr. Massaro will receive a minimum annual base salary of $200,000 and is eligible for a discretionary incentive. All stock options held as of the effective date of the second amendment will continue to vest and the term of the awards will not change as long as Mr. Massaro remains employed by us or a member of the board. Unvested restricted stock from the October 12, 2004 grant will be cancelled as of March 1, 2006 and restricted stock granted March 17, 2005 will continue to vest as long as Mr. Massaro remains employed by us or a board member. Mr. Massaro is not eligible for future equity grants unless he is working on a full-time basis as defined by the company. Broadhurst senior management agreement Huron Consulting Services LLC has also entered into a senior management agreement with Mr. Broadhurst. Mr. Broadhurst s agreement, which was effective May 15, 2002, has an initial three-year term and automatically renews for additional one-year periods on an annual basis unless, at least 60 days prior to the expiration of the then-current term, we or Mr. Broadhurst provide notice that the agreement shall not renew. Under the terms of the agreement, Mr. Broadhurst receives an annual base salary of no less than $485,000 and an annual target bonus of $260,000. Mr. Broadhurst received a guaranteed minimum bonus payment of $65,000 with respect to such bonus for the twelve months ended May 15, 2005. Additional bonus amounts for calendar 2005 may be paid to Mr. Broadhurst based on the achievement of performance goals set by the Chief Executive Officer. Mr. Broadhurst is also eligible for additional bonuses in the event that our annual earnings exceed targets set by our compensation committee or the Chief Executive Officer, in amounts that the compensation committee determines to be appropriate. Mr. Broadhurst was also granted options to acquire 32,609 shares of our common stock under our 2002 Equity Incentive Plan at the time his employment commenced. In accordance with the original terms of the grant, these options vested fully upon consummation of our initial public offering in October 2004. Table of Contents Management Mr. Broadhurst s agreement provides that if his employment is terminated by us without cause or if he resigns for good reason (as such terms are defined in the agreement), he will be entitled to severance pay equal to six months base salary and medical benefits, which amount is subject to offset for remuneration earned by Mr. Broadhurst during the six-month period following such a termination. In order to receive such severance payments, Mr. Broadhurst must execute a general release in favor of us. Mr. Broadhurst or his estate is entitled to severance pay of three months base salary payable over the three-month period following his death or disability, along with continuation of medical benefits. Mr. Broadhurst has also agreed to certain restrictive covenants that will survive for one year following the termination of his employment pursuant to which, among other things, he will not solicit our clients or interfere with our relationships with our employees or customers. In September 2004, we adopted an amendment to Mr. Broadhurst s senior management agreement that provides Mr. Broadhurst with certain change in control benefits. Pursuant to the amendment, if Mr. Broadhurst s employment is terminated within the 24 months following a change of control, either by us without cause or by Mr. Broadhurst for good reason (as provided in the agreement), all of his unvested equity awards that were granted prior to such change of control will immediately become vested and exercisable, and he will be entitled to severance pay equal to the total of one year of his then-current base salary and his then current target annual bonus. In the event of such a termination, he will also be entitled to a pro-rata bonus for the year during which his termination occurs and 12 months of medical benefit continuation. In certain situations, these benefits may be reduced to limit Mr. Broadhurst s excise tax burden. Burge senior management agreement Huron Consulting Services LLC has also entered into a senior management agreement with Mr. Burge. Mr. Burge s agreement, which was effective November 25, 2002, has an initial one-year term and automatically renews for additional one-year periods on an annual basis unless, at least 60 days prior to the expiration of the then-current term, we or Mr. Burge provide notice that the agreement will not renew. Under the terms of the agreement, Mr. Burge receives an annual base salary, which generally cannot be reduced once increased, and is eligible to participate in our annual performance bonus plan. For 2005, Mr. Burge s annual base salary was set at $275,000 and his annual bonus target was set at $200,000. Mr. Burge is also eligible for additional bonuses in the event that our annual earnings exceed targets set by our compensation committee or the Chief Executive Officer, in amounts that the compensation committee determines to be appropriate. Mr. Burge was also granted options to acquire 26,087 shares of our common stock under our 2002 Equity Incentive Plan at the time his employment commenced. In accordance with the original terms of the grants under our 2002 Equity Incentive Plan, options granted under that plan vested fully upon consummation of our initial public offering in October 2004. Mr. Burge s agreement provides that if his employment is terminated by us without cause or if he resigns for good reason (as such terms are defined in the agreement), he will be entitled to severance pay equal to six months base salary, which amount is subject to offset for remuneration earned by Mr. Burge during the six-month period following such a termination, earned but unpaid annual bonus for the calendar year immediately preceding the termination, and continuation of medical benefits for six months. In order to receive such severance payments, Mr. Burge must execute a general release in favor of us. Mr. Burge or his estate is entitled to severance pay of three months base salary payable over the three-month period following his death or disability, along with continuation of medical benefits. Mr. Burge has also agreed to certain restrictive covenants that will survive for one year following termination of his employment pursuant to which, among other things, he will not interfere with our relationships with our employees or customers. Table of Contents Management In September 2004, we adopted an amendment to Mr. Burge s senior management agreement that provides Mr. Burge with certain change in control benefits. Pursuant to the amendment, if Mr. Burge s employment is terminated within 24 months following a change of control, either by us without cause or by Mr. Burge for good reason (as provided in the agreement), all of his unvested equity awards that were granted prior to such change of control will immediately become vested and exercisable, and he will be entitled to severance pay equal to the total of one year of his then-current base salary and his then-current target annual bonus. In the event of such a termination, he will also be entitled to a pro-rata bonus for the year during which his termination occurs and 12 months of medical benefit continuation. In certain situations, these benefits may be reduced to limit Mr. Burge s excise tax burden. Sawall senior management agreement Huron Consulting Services LLC has also entered into a senior management agreement with Ms. Sawall. Ms. Sawall s agreement, which was effective May 1, 2002, had an initial one-year term and automatically renews for additional one-year periods on an annual basis unless, at least 60 days prior to the expiration of the then-current term, we or Ms. Sawall provide notice that the agreement will not renew. Under the terms of the agreement, Ms. Sawall receives an annual base salary, which generally cannot be reduced once increased, and is eligible to participate in our annual performance bonus plan. For 2005, Ms. Sawall s annual base salary was set at $275,000 and her annual bonus target was set at $150,000. Ms. Sawall is also eligible for additional bonuses in the event that our annual earnings exceed targets set by our compensation committee or the Chief Executive Officer, in amounts that the compensation committee determines to be appropriate. Ms. Sawall was also granted options to acquire 16,305 shares of our common stock under our 2002 Equity Incentive Plan at the time her employment commenced. In accordance with the original terms of the grants under our 2002 Equity Incentive Plan, options granted under that plan vested fully upon consummation of our initial public offering in October 2004. Ms. Sawall s agreement provides that if her employment is terminated by us without cause or if she resigns for good reason (as such terms are defined in the agreement), she will be entitled to severance pay equal to six months base salary and medical benefits, which amount is subject to offset for remuneration earned by Ms. Sawall during the six-month period following such a termination. In order to receive such severance payments, Ms. Sawall must execute a general release in favor of us. Ms. Sawall or her estate is entitled to severance pay of three months base salary payable over the three-month period following her death or disability, along with continuation of medical benefits. Ms. Sawall has also agreed to certain restrictive covenants that will survive for one year following termination of her employment pursuant to which, among other things, she will not interfere with our relationships with our employees or customers. In September 2004, we adopted an amendment to Ms. Sawall s senior management agreement that provides Ms. Sawall with certain change in control benefits. Pursuant to the amendment, if Ms. Sawall s employment is terminated within the 24 months following a change of control, either by us without cause or by Ms. Sawall for good reason (as provided in the agreement), all of her unvested equity awards that were granted prior to such change of control will immediately become vested and exercisable, and she will be entitled to severance pay equal to the total of one year of her then-current base salary and her then-current target annual bonus. In the event of such a termination, she will also be entitled to a pro-rata bonus for the year during which her termination occurs and 12 months of medical benefit continuation. In certain situations, these benefits may be reduced to limit Ms. Sawall s excise tax burden. Table of Contents Management EQUITY INCENTIVE PLANS Existing equity incentive plans We adopted three equity incentive plans (our 2003 Equity Incentive Plan, our 2002 Equity Incentive Plan and our Amended and Restated 2002 Equity Incentive Plan (California)) prior to our initial public offering. These equity incentive plans provide for the grant of equity options, equity appreciation rights and equity awards to our officers, employees, third-party consultants and advisors. Since our initial public offering, no further awards have been or will be granted under these equity incentive plans. Since our initial public offering, we have and will continue to issue future equity-based awards only under our 2004 Omnibus Stock Plan, which we adopted immediately prior to the completion of our initial public offering, further described below. We have reserved 2,802,828 shares of common stock for issuance under our three existing equity incentive plans adopted prior to our initial public offering. Of that number, as of December 31, 2005, 521,740 shares have been issued as restricted stock awards, all of which are fully vested, and 686,356 shares have been issued upon the exercise of options. As of December 31, 2005, 1,187,142 shares of common stock are issuable upon the exercise of outstanding options, with a weighted average exercise price of $0.78 per share. As of December 31, 2005, options exercisable for 598,151 shares issued pursuant to these equity incentive plans are fully vested. Our compensation committee administers these equity incentive plans. Our compensation committee may amend the terms of any outstanding awards, except that any award amendment that would adversely affect the rights of an award holder must be consented to by the award holder, unless the amendment is made either to avoid an expense charge to our company or to allow us take a deduction under the tax code. 2004 Omnibus Stock Plan In connection with our initial public offering, we adopted our 2004 Omnibus Stock Plan, or the Omnibus Plan, which replaced our then existing plans for grants of equity-based awards. There are several types of awards that may be granted under the Omnibus Plan: stock options (including both incentive stock options, or ISOs, within the meaning of Section 422 of the Internal Revenue Code and nonqualified options, which are options that do not qualify as ISOs), stock appreciation rights, restricted stock, phantom stock, stock bonus awards, and other equity-based awards valued in whole or in part by reference to, or otherwise based on, our common stock. A total of 2,141,000 shares of common stock are reserved for issuance under the Omnibus Plan, subject to equitable adjustment upon certain corporate transactions or events. Of that number, as of December 31, 2005, 1,573,747 shares have been issued as restricted stock awards and 1,480,959 are outstanding, 201,754 of which are fully vested, and 893 shares have been issued upon the exercise of options. As of December 31, 2005, 117,546 shares of common stock are issuable upon the exercise of outstanding options, with a weighted average exercise price of $15.97 per share. As of December 31, 2005, options exercisable for 49,413 shares issued pursuant to the Omnibus Stock Plan are fully vested. Shares subject to an award that remain unissued upon the cancellation or termination of the award will again become available for award under the Omnibus Plan, as shall any shares subject to an award that are retained by us as payment of the exercise price or tax withholding obligations and previously owned shares surrendered to us as payment of the exercise price of an option or to satisfy tax withholding obligations. In addition, to the extent an award is paid or settled in cash, the number of shares previously subject to the award shall again be available for grants pursuant to the Omnibus Plan. The Omnibus Plan is administered by our compensation committee. Our officers, employees and non-employee directors and third-party consultants are eligible to receive awards under the Omnibus Table of Contents Management Plan in the discretion of the compensation committee. The compensation committee has the responsibility for interpreting the Omnibus Plan and determining all of the terms and conditions of awards made under the Omnibus Plan, including when they will become exercisable or otherwise vest. The compensation committee has the authority to accelerate the exercisability and/or vesting of any outstanding award at such times and under such circumstances as it deems appropriate. The Omnibus Plan may be amended by our board, subject to stockholder approval where necessary to satisfy legal or regulatory requirements. The Omnibus Plan will terminate not later than the tenth anniversary of its adoption. Awards granted before the termination of the Omnibus Plan may extend beyond that date in accordance with their terms. The Omnibus Plan is intended to permit the grant of performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code, which generally limits the deduction that we may take for compensation of our five most senior executive officers. Under Section 162(m), certain compensation, including compensation based on the attainment of performance goals, will not be subject to this limitation if certain requirements are met. The vesting of awards that are intended to qualify as performance-based compensation will be based upon business criteria as established by the compensation committee from time to time. We filed a registration statement on Form S-8 covering the shares of our common stock reserved for issuance under the Omnibus Plan and our existing equity incentive plans. Table of Contents Certain relationships and related transactions The following organizational chart sets forth the corporate structure and percentage ownership of common interests in HCG Holdings LLC and of our common stock after giving effect to this offering (without giving effect to the exercise of the underwriters over-allotment option). Our post-offering ownership structure does not give effect to 1,304,688 shares of common stock issuable upon the exercise of outstanding options at December 31, 2005. (1) The common interests in HCG Holdings LLC held by this group reflects the interests held by 23 of our managing directors that are not executive officers. None of these 23 managing directors owns more than 1.0% of the common interests in HCG Holdings LLC. (Footnotes continued on following page.) Table of Contents Certain relationships and related transactions (2) Lake Capital Partners LP and Lake Capital Management LLC own 40.9% and 0.1%, respectively, of the common interests in HCG Holdings LLC and collectively have investment and voting control over the shares of our common stock held by HCG Holdings LLC. Lake Capital Investment Partners LP is the sole general partner of Lake Capital Partners LP and Lake Partners LLC is the sole general partner of Lake Capital Investment Partners LP. Terence M. Graunke and Paul G. Yovovich are the members and managers of Lake Partners LLC as well as members of an investment committee of Lake Capital Investment Partners LP and, in such roles, these individuals have investment and voting control over, and may be deemed to be the beneficial owners of, the shares ultimately controlled by Lake Capital Investment Partners LP. Mr. Graunke is also the controlling member of Lake Capital Management LLC and, pursuant to the Lake Capital Management LLC operating agreement, has investment and voting control over, and may be deemed to be the beneficial owner of, the shares controlled by that entity. Each of Mr. Graunke and Mr. Yovovich disclaims beneficial ownership of the shares of common stock owned by HCG Holdings LLC. Each of Mr. Graunke and Mr. Yovovich individually own 4.0% and 3.0%, respectively, of the common interests in HCG Holdings LLC. (3) The PPM America Funds consist of PPM America Private Equity Fund, L.P. and a related fund, Old Hickory Fund I, LLC, which own 31.5% and 0.2%, respectively, of the common interests in HCG Holdings LLC. The Goldman Sachs Funds consist of seven related Goldman Sachs private equity funds, consisting of GS Private Equity Partners 2000, L.P., GS Private Equity Partners 2000 Offshore Holdings, L.P., GS Private Equity Partners 2000 Direct Investment Fund, L.P., GS Private Equity Partners 2002, L.P., GS Private Equity Partners 2002 Offshore Holdings, L.P., GS Private Equity Partners 2002 Direct Investment Fund, L.P. and GS Private Equity Partners 2002 Employee Fund, L.P., each of which owns 3.1%, 1.1%, 1.2%, 1.0%, 2.6%, 0.9% and 0.4%, respectively, of the common interests in HCG Holdings LLC. (4) This group consists of 28 other investors holding the interests. None of the holders in this group own more than 1.0% of the common interests in HCG Holdings LLC, except for The Hamilton Companies LLC, which owns 1.4% of the common interests. (5) For purposes of this chart, Mr. Holdren has been attributed with ownership of 5.1% of the common stock, which is held in a trust for the benefit of the family of Mr. Holdren. See Principal and selling stockholders. INCORPORATION TRANSACTIONS Initial capitalization On April 23, 2002, Lake Capital Management LLC, Lake Huron Investors LLC, PPM America Private Equity Fund, L.P., or PPM LP, and Old Hickory Fund I, LLC, or Old Hickory, organized our parent, HCG Holdings LLC, for the purpose of forming Huron Consulting Group Inc. with capital from these investors. Common stock. Between April and June 2002, HCG Holdings LLC acquired an aggregate of 11,281,243 shares of our common stock at a purchase price of $0.02 per share for an aggregate consideration of approximately $0.3 million. 8% preferred stock. Between April and June 2002, HCG Holdings LLC acquired an aggregate of 12,500 shares of our 8% preferred stock for an aggregate consideration of $12.5 million. The 8% preferred stock had a stated value of $1,000 and accrued dividends on a daily basis, compounded annually, at a rate of 8% of the stated value. 8% promissory notes. Between June and September 2002, we also received proceeds of approximately $10.1 million from the issuance of 8% promissory notes to HCG Holdings LLC. Interest on the promissory notes, which was payable annually, accrued at a rate of 8% per year. The 8% promissory notes were scheduled to mature five years and six months from the date of issuance, but were mandatorily prepaid upon the consummation of our initial public offering. HCG Holdings LLC currently owns approximately 50.5% of our outstanding common stock. HCG Holdings LLC is controlled by Lake Capital Partners LP and Lake Capital Management LLC. The remaining equity interests in HCG Holdings LLC are held by PPM LP, Old Hickory and seven related Goldman Sachs private equity funds, some of our executive officers and 23 of our other managing directors, two of our board members and 32 other holders. The executive officers and members of our board holding interests in HCG Holdings LLC are Messrs. Broadhurst, Burge, Massaro and McCartney who hold 0.09%, 0.09%, 0.17% and 0.09% respectively, of the common interests in HCG Holdings LLC. In addition, Paul Yovovich, who was a member of our board of directors until January 31, 2006, is president and a member of Lake Capital Management LLC and controls Lake Capital Partners LP. Mr. Yovovich also directly holds 3.0% of the common interests in HCG Holdings LLC. Table of Contents Certain relationships and related transactions SPECIAL DIVIDEND On May 12, 2004, we declared a special dividend on each outstanding share of our common stock and 8% preferred stock payable to holders of record on May 25, 2004. We paid the special dividend on June 29, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.25 million, or $0.09 per share of common stock and $9.64 per share of 8% preferred stock. HCG Holdings LLC used the proceeds it received from the special dividend together with other funds of HCG Holdings LLC to redeem a portion of its outstanding preferred interests on a pro rata basis. In connection with this redemption, Messrs. Broadhurst, Burge, Holdren, Massaro, McCartney and Yovovich, a member of our board of directors until January 31, 2006, (with respect to his direct interest) received an aggregate amount of approximately $4,540, $4,540, $90,790, $9,079, $4,540 and $46,530, respectively, of which approximately $1,097, $1,097, $21,933, $2,193, $1,097 and $11,242, respectively, was paid out of the proceeds of the dividend. On January 17, 2006, HCG Holdings LLC redeemed the 1.7% common membership interest formerly held by Mr. Holdren in exchange for 149,347 shares of our common stock owned by HCG Holdings LLC and cash consideration in the amount of approximately $2,200. REDEMPTION OF 8% PREFERRED STOCK AND REPAYMENT OF 8% PROMISSORY NOTES WITH INITIAL PUBLIC OFFERING PROCEEDS Upon consummation of the initial public offering, we used $15.1 million of our net proceeds to redeem our outstanding 8% preferred stock and $10.7 million to repay our outstanding 8% promissory notes. All of our 8% preferred stock and 8% promissory notes were owned by HCG Holdings LLC. HCG Holdings LLC distributed substantially all of the proceeds that it received in connection with its investment in us to its members in accordance with its organizational documents, including the proceeds it received from the sale of the shares in our initial public offering, the redemption of the outstanding 8% preferred stock and the repayment by us of the 8% promissory notes. As a result, Messrs. Broadhurst, Burge, Holdren, Massaro, McCartney and Yovovich, a member of our board of directors until January 31, 2006, received payments of approximately $53,380, $53,380, $1,067,600, $106,760, $53,380 and $1,261,877, respectively. INITIAL PUBLIC OFFERING EXPENSES In connection with our initial public offering, in which HCG Holdings LLC participated as a selling stockholder, we paid all of the offering expenses of HCG Holdings LLC, other than underwriting discounts and commissions and transfer taxes with respect to the shares sold by HCG Holdings LLC. MANAGEMENT AGREEMENT AND SERVICES On April 23, 2002, HCG Holdings LLC entered into a Management Agreement on our behalf with Lake Capital Management LLC, which led the group of investors that sponsored our formation. Pursuant to the agreement, Lake Capital Management LLC agreed to assist in our formation and provide general management services for us, including consultation, advice and assistance with respect to operations, strategic planning, financing and other aspects of our business. In 2002, Lake Capital Management LLC was paid fees of $1.5 million under this agreement, $0.5 million of which was paid by canceling a promissory note issued by Lake Capital Management LLC to HCG Holdings LLC on the date the management agreement was executed. The cancelled promissory note had a principal amount of $0.5 million, did not accrue interest and had a final maturity date of July 14, 2002. HCG Holdings LLC agreed to lend Lake Capital Management LLC the $0.5 million in order to induce Lake Capital Management LLC to enter into the agreement. In connection with the termination of the agreement in July 2002, HCG Holdings LLC agreed to lend Lake Capital Management LLC an additional $1.0 million pursuant to a promissory note issued by Lake Capital Management LLC to HCG Holdings LLC and to Table of Contents Certain relationships and related transactions pay $1.0 million to Lake Capital Management LLC upon the consummation of the investment of Lake Capital Partners LP in HCG Holdings LLC. Upon Lake Capital Partners LP s investment, the $1.0 million was paid by the cancellation of the promissory note. The cancelled promissory note had a principal amount of $1.0 million, did not accrue interest and had a final maturity date of January 5, 2003. HCG Holdings LLC agreed to lend Lake Capital Management LLC the $1.0 million in order to induce Lake Capital Management LLC to terminate the management agreement. The only provisions of the agreement surviving termination relate to the limitation of Lake Capital Management LLC s liability to us for any and all losses arising out of the services performed under the agreement, except for liability related to unlawful conduct or a failure to act in good faith and in a manner reasonably believed to be in our best interests, and our obligation to indemnify Lake Capital Management LLC and persons related to it against such losses or liabilities, subject to specified exceptions. Mr. Yovovich, a member of our board of directors until January 31, 2006, has been a member and served as a president of Lake Capital Management LLC since 1999. From time to time, Huron Consulting Services LLC reimburses Lake Capital Management LLC for its out-of-pocket expenses in connection with its provision of requested management advice. Under this arrangement, we paid approximately $195,600 for the partial year ended December 31, 2002, approximately $97,000 for the year ended December 31, 2003, approximately $105,000 for the year ended December 31, 2004 and approximately $7,000 for the nine months ended September 30, 2005. Certain employees of Lake Capital Management LLC served as officers and directors of Huron Consulting Group Inc. and Huron Consulting Services LLC until May 2004. ADVISORY SERVICES AGREEMENT On April 23, 2002, HCG Holdings LLC entered into an Advisory Services Agreement on our behalf with PPM LP, which owns approximately 31% of the equity interests in HCG Holdings LLC. Pursuant to the agreement, PPM LP agreed to provide general management and other corporate advisory services to us, including consultation, advice and assistance with respect to financing and other aspects of our business. In 2002, PPM LP was paid $0.3 million under this agreement. The agreement was terminated in July 2002. The only provision of the agreement surviving termination relates to the limitation of PPM LP s liability to us for any and all losses arising out of the services performed under the agreement, except for liability related to unlawful conduct or a failure to act in good faith and in a manner reasonably believed to be in our best interests. HOLDREN RESTRICTED COMMON STOCK In December 2002, we issued a total of 521,740 shares of restricted common stock to Mr. Holdren at a purchase price of $0.02 per share for aggregate consideration of $12,000. Mr. Holdren has transferred these shares to a trust for the benefit of his family. All of Mr. Holdren s shares of restricted common stock became vested as of the consummation of our initial public offering. As described below, Mr. Holdren has been granted certain piggyback registration rights with respect to 391,305 of his shares of restricted common stock. REGISTRATION RIGHTS Holdren registration rights On December 10, 2002, Mr. Holdren purchased 391,305 shares of our common stock, at a purchase price of $0.02 per share, pursuant to a restricted shares award agreement under our 2002 Equity Incentive Plan. The restricted shares award agreement grants Mr. Holdren certain piggyback registration rights with respect to these shares. Pursuant to these piggyback registration rights, if we propose any underwritten public offering of our equity securities pursuant to an effective registration statement under the Securities Act (other than a registration statement relating to our employee benefit plans, exchange offers by us or a merger or acquisition of a business or assets by us), Mr. Holdren is entitled to include Table of Contents Certain relationships and related transactions his shares of restricted common stock in that registration, subject to cut back provisions in the event that, in connection with an underwritten offering, the managing underwriter advises us and Mr. Holdren that the inclusion of all the securities sought to be included in the registration by us, Mr. Holdren, any persons who have sought to have shares registered thereunder pursuant to demand registration rights and any other proposed sellers would adversely affect the marketability of the securities sought to be sold pursuant thereto. Pursuant to the agreement, we are obligated to pay all expenses incident to our performance of, or compliance with, our obligations in connection with the piggyback registration rights. HCG Holdings LLC registration rights We and HCG Holdings LLC have entered into a registration rights agreement pursuant to which HCG Holdings LLC is entitled to certain demand, piggyback and shelf registration rights with respect to all 8,715,229 shares of our common stock held by it. These shares are referred to as registrable securities. Demand registrations. Pursuant to the demand registration rights, HCG Holdings LLC may require us to prepare and file a registration statement under the Securities Act of 1933, as amended, at our expense, covering all or a portion of the registrable securities if the shares to be included in that registration will generate anticipated aggregate net proceeds to HCG Holdings LLC of at least $20.0 million. Under these demand registration rights, we are required to use our best efforts to cause the shares requested to be included in the registration statement, subject to customary conditions and limitations. We are not obligated to effect more than six demand registrations. However, a registration will not count as one of the six permitted demand registrations unless HCG Holdings LLC is able to register and sell at least 70% of the registrable securities requested to be included in such registration. This offering constitutes a demand registration under the agreement. Shelf registration rights. Once we become eligible to file a registration statement on Form S-3, HCG Holdings LLC may also require us to register all or a portion of the registrable securities on a registration statement on Form S-3, subject to specific conditions and limitations. We are not obligated to effect more than two of these shelf registrations on Form S-3 in any twelve-month period. Piggyback registration rights. Pursuant to the piggyback registration rights, HCG Holdings LLC also has the right to include the registrable securities in an unlimited number of other registrations of our common stock initiated by us or on behalf of other stockholders, subject to cut back provisions in connection with an underwritten offering in the event the managing underwriters advise us that the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range that is acceptable. HCG Holdings LLC will have priority over any stockholder granted registration rights after the date of our initial public offering in any subsequent registration statement. Under the registration rights agreement, we are obligated to pay all expenses incident to our performance of or compliance with the agreement, as well as certain expenses of HCG Holdings LLC. Under the agreement, in connection with this offering, we will be responsible for all of the offering expenses, including the expenses of HCG Holdings LLC, other than underwriting discounts and commissions and transfer taxes with respect to the shares being sold by HCG Holdings LLC. Pursuant to the registration rights agreement, in connection with registrations thereunder, we and HCG Holdings LLC have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act, and to contribute to payments which may be required in respect thereof. MANAGEMENT RIGHTS LETTER AGREEMENT We have entered into a management rights letter agreement with Lake Capital Partners LP. Under the terms of this agreement, for so long as Lake Capital Partners LP owns membership interests in HCG Holdings LLC and thereafter if it owns shares of our stock, Lake Capital Partners LP is entitled to Table of Contents Certain relationships and related transactions (1) receive copies of our periodic reports filed with the SEC under the Exchange Act as soon as they are available and such other information relating to our financial condition, business, prospects and corporate affairs as Lake Capital Partners LP may request, provided that we are not obligated to provide information that we deem to be a trade secret or similar confidential information, (2) consult with and advise us on significant business issues, (3) examine our books and records and inspect our facilities, provided that we need not provide access to confidential information and facilities unless Lake Capital Partners LP executes a non-disclosure agreement in a form acceptable to us and (4) receive all materials distributed to our board members and address our board regarding significant business issues, subject to our ability to exclude Lake Capital Partners LP s access to materials or meetings as necessary to protect confidential information or for other similar reasons. Under the agreement, Lake Capital Partners LP agreed to customary confidentiality restrictions on the use of information provided to or learned by it in connection with its rights under the agreement. We have not and will not pay any fees to, or receive any fees from, Lake Capital Partners LP in connection with the agreement. OTHER RELATIONSHIPS AND RELATED TRANSACTIONS HCG Holdings LLC In connection with the initial public offering, in which HCG Holdings LLC participated as a selling stockholder, we paid all of the offering expenses of HCG Holdings, other than underwriting discounts and commissions and transfer taxes with respect to the shares sold by HCG Holdings LLC. We also paid costs associated with both the offering that was withdrawn in November 2005 and this offering. The total costs associated with these offerings were approximately $0.1 million for the fourth quarter of 2005 and $0.5 million for the year ended December 31, 2005. HCG Holdings LLC was named as an additional insured party on our directors and officers insurance policy through October 2005. We paid all of the expenses of this policy. Lake Capital Management LLC We have an arrangement whereby we share with Lake Capital Management LLC season tickets for a luxury suite at Soldier Field for home games of the Chicago Bears that we use to entertain current and prospective clients. Under this arrangement, we paid $65,000 for the 2003 season, $66,500 for the 2004 season and $68,900 for the 2005 season. Family relationships Mr. Massaro s son-in-law, Marc Mercier, is currently employed by us as a manager. In this capacity, he received total compensation of approximately $22,700, $61,250 and $73,500 for the partial year ended December 31, 2002 and the years ended December 31, 2003 and 2004, respectively. For the year ended December 31, 2005, Mr. Mercier has received compensation of approximately $80,000, not including a bonus, which amount has yet to be determined. Highline Technology LLC Huron Consulting Services LLC entered into an agreement, effective as of September 3, 2003, with Highline Technology LLC, an entity in which Mr. Yovovich, a member of our board of directors until January 31, 2006, owns 50%. Pursuant to the agreement, Highline Technology provides management of information technology services, including budgeting, network planning and management, purchasing and contract negotiation assistance, security and risk management and other requested information technology services. We pay quarterly fees of $31,250, plus expenses, during the term of the agreement. The agreement can be terminated by either party for any reason upon 30 days prior written notice to the other party. No payments were made under the agreement in 2003, and a total of $212,000 was paid in 2004. We have internalized the services performed for us by Highline Technology by hiring a Director of Information Technology in November 2004. We have terminated our original agreement with Highline Technology in accordance with its terms and have entered into an agreement with Highline to provide limited consulting services to our information technology group on a time and materials basis. We have paid a total of $35,270 for the nine months ended September 30, 2005 under the new agreement. Table of Contents Principal and selling stockholders The following table sets forth, as of January 18, 2006, certain information regarding the beneficial ownership of our common stock by: each person known by us to beneficially own 5% or more of our common stock; each member of our board of directors; each of our named executive officers; all directors and executive officers as a group; and the selling stockholder. Beneficial ownership is determined according to the rules of the SEC, and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options that are currently exercisable or exercisable within 60 days. Each director, officer, 5% or more stockholder or selling stockholder, as the case may be, has furnished us with information with respect to beneficial ownership. Except as otherwise indicated, we believe that the beneficial owners of common stock listed below, based on the information each of them has given to us, have sole investment and voting power with respect to their shares, except where community property laws may apply. Except as noted below, this table does not take into account the underwriters exercise of their over-allotment option. Beneficial ownership prior to offering Beneficial ownership post offering Name of beneficial owner(1) Shares % Shares offered Shares % 5% Holders, Directors and Executive Officers: HCG Holdings LLC(2) 8,715,229 50.5 % 5,000,000 3,715,229 21.5 % Terence M. Graunke(2) 8,715,229 50.5 5,000,000 3,715,229 21.5 Paul G. Yovovich(2) 8,715,229 50.5 5,000,000 3,715,229 21.5 Gary E. Holdren(3) 896,913 5.2 5.2 George E. Massaro(4) 125,575 * * Daniel P. Broadhurst(5) 62,858 * * Gary L. Burge(6) 62,935 * * Mary M. Sawall(7) 42,531 * * DuBose Ausley(8) 19,352 * * James D. Edwards(8) 22,552 * * John McCartney(8)(9) 19,352 * * John Moody (10) 19,000 * * All directors and executive officers as a group (11 persons)(11) 10,157,278 58.2 % 10,157,278 58.2 % * indicates less than 1% ownership. (1) The principal address of HCG Holdings LLC, Terence M. Graunke and Paul G. Yovovich is c/o Lake Capital Partners LP, 676 North Michigan Avenue, Suite 3900, Chicago, Illinois 60611. The principal address for each of the other stockholders listed below is c/o Huron Consulting Group Inc., 550 West Van Buren Street, Chicago, Illinois 60607. (Footnotes continued on following page.) Table of Contents Principal and selling stockholders (2) Lake Capital Partners LP and Lake Capital Management LLC are members of HCG Holdings LLC and collectively have investment and voting control over the shares of our common stock held by HCG Holdings LLC. Lake Capital Investment Partners LP is the sole general partner of Lake Capital Partners LP and Lake Partners LLC is the sole general partner of Lake Capital Investment Partners LP. Terence M. Graunke and Paul G. Yovovich are the members and managers of Lake Partners LLC as well as members of an investment committee of Lake Capital Investment Partners LP and, in such roles, these individuals have investment and voting control over, and may be deemed to be the beneficial owners of, the shares ultimately controlled by Lake Capital Investment Partners LP. Mr. Graunke is also the controlling member of Lake Capital Management LLC and, pursuant to the Lake Capital Management LLC operating agreement, has investment and voting control over, and may be deemed to be the beneficial owner of, the shares controlled by that entity. Each of Lake Capital Partners LP, Lake Capital Investment Partners LP, Lake Partners LLC, Lake Capital Management LLC, Mr. Graunke and Mr. Yovovich disclaim beneficial ownership of the shares of common stock owned by HCG Holdings LLC. If the underwriters over-allotment option is exercised in full, HCG Holdings LLC will sell an additional 750,000 shares. Immediately following the offering and assuming the exercise of the overallotment in full, HCG Holdings LLC will own 2,965,229 shares, or 17.2% of the total number of outstanding shares. (3) Includes 21,739 shares issuable upon exercise of options that are exercisable currently or within 60 days of January 18, 2006 and 158,325 shares of unvested restricted common stock. Also includes 671,087 shares held in trust for Mr. Holdren s wife and children as to which he disclaims beneficial ownership. (4) Includes 70,655 shares issuable upon exercise of options that are exercisable currently or within 60 days of January 18, 2006. Also includes 44,050 shares of unvested restricted common stock. Does not include any shares in respect of Mr. Massaro s ownership of 0.17% of the outstanding common interests in HCG Holdings LLC. (5) Includes 19,021 shares issuable upon exercise of options that are exercisable currently or within 60 days of January 18, 2006. Also includes 18,375 shares of unvested restricted common stock. Does not include any shares in respect of Mr. Broadhurst s ownership of 0.09% of the outstanding common interests in HCG Holdings LLC. (6) Includes 23,913 shares issuable upon exercise of option that are exercisable currently or within 60 days of January 18, 2006. Also includes 22,275 shares of unvested restricted common stock. Does not include any shares in respect of Mr. Burge s ownership of 0.09% of the outstanding common interests in HCG Holdings LLC. (7) Includes 26,359 shares issuable upon exercise of options that are exercisable currently or within 60 days of January 18, 2006. Also includes 15,075 shares of unvested restricted common stock. (8) Includes 8,602 shares issuable upon exercise of options that are exercisable currently or within 60 days of January 18, 2006. Also includes 9,856 shares of unvested restricted common stock. (9) Does not include any shares in respect of Mr. McCartney s ownership of 0.09% of the outstanding common interests in HCG Holdings LLC. (10) Includes 13,750 shares of unvested restricted common stock. (11) Includes an aggregate of 190,768 shares issuable upon exercise of options held by members of the group that are exercisable currently or within 60 days of January 18, 2006. Also includes 318,143 shares of unvested restricted common stock. Does not include any shares in respect of the 3.5% of the outstanding common interests in HCG Holdings LLC collectively held by members of the group. Table of Contents Description of capital stock The following is a description of the material terms of our certificate of incorporation and bylaws and of certain provisions of Delaware law. The following summary does not purport to be complete and is subject to, and is qualified in its entirety by, the provisions of our certificate of incorporation and bylaws, copies of which are incorporated by reference as exhibits to the registration statement of which this prospectus forms a part, and by the applicable provisions of Delaware law. As of December 31, 2005, there were 17,397,312 shares of our common stock issued, of which 17,248,379 were outstanding and held of record by 66 stockholders. Our authorized capital stock consists of: 500,000,000 shares of common stock, par value $0.01 per share; and 50,000,000 shares of preferred stock. We have no shares of our preferred stock issued and outstanding, nor will any shares of our preferred stock be issued and outstanding upon the closing of this offering. COMMON STOCK Voting The holders of our common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors. Dividends Subject to the rights and preferences of the holders of any series of preferred stock which may at the time be outstanding, holders of our common stock are entitled to such dividends as our board of directors may declare out of funds legally available. Liquidation rights In the event of any liquidation, dissolution or winding-up of our affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any series of our preferred stock, the holders of our common stock will be entitled to receive the distribution of any of our remaining assets. Other matters Holders of our common stock have no conversion, preemptive or other subscription rights and there are no redemption rights or sinking fund provisions with respect to the common stock. All outstanding shares of our common stock are, and the shares of our common stock to be sold in this offering when issued and paid for will be, validly issued, fully paid and non-assessable. PREFERRED STOCK We are authorized to issue up to 50,000,000 shares of preferred stock. Our certificate of incorporation authorizes our board, without any further stockholder action or approval, to issue these shares in one or more classes or series, to establish from time to time the number of shares to be included in each class or series and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series Table of Contents Description of capital stock and any of its qualifications, limitations or restrictions. Our board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. We currently have no plans to issue any shares of preferred stock. ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND OUR BYLAWS Provisions of our certificate of incorporation and bylaws, which are summarized below, may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in such stockholder s best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. Classified board of directors Our certificate of incorporation provides for a board of directors divided into three classes, with one class to be elected each year to serve for a three-year term. The provision for a classified board will have the effect of making it more difficult for stockholders to change the composition of our board. Number of directors; removal for cause; filling vacancies Our certificate of incorporation and our bylaws provide that our board of directors will consist of not less than five nor more than fifteen members, the exact number of which will be fixed from time to time by our board. Upon the closing of this offering, the size of our board will be fixed at seven directors. Under the General Corporation Law of the State of Delaware, or the DGCL, unless otherwise provided in our certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. Our certificate of incorporation provides that directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote in an election of directors. Our certificate of incorporation and bylaws also provide that any newly created directorships on our board may be filled by a majority of the board then in office, provided that a quorum is present, and any other vacancy occurring on the board may be filled by a majority of the board then in office, even if less than a quorum, or by a sole remaining director. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director s successor shall have been elected and qualified. No decrease in the number of directors constituting the board of directors shall have the effect of removing or shortening the term of any incumbent director. The director removal and vacancy provisions will make it more difficult for a stockholder to remove incumbent directors and simultaneously gain control of the board by filling vacancies created by such removal with its own nominees. Special meetings of stockholders Our certificate of incorporation and bylaws deny stockholders the right to call a special meeting of stockholders. Our certificate of incorporation and bylaws provide that a special meeting of stockholders may be called only by a majority of our entire board of directors, the chairman of our board or our President. Stockholder action by written consent Our certificate of incorporation requires all stockholder actions to be taken by a vote of the stockholders at an annual or special meeting, and denies the ability of stockholders to act by written consent without a meeting. Table of Contents Description of capital stock Stockholder proposals At an annual meeting of stockholders, only business that is properly brought before the meeting will be conducted or considered. To be properly brought before an annual meeting of stockholders, business must be specified in the notice of the meeting (or any supplement to that notice), brought before the meeting by or at the direction of the board (or any duly authorized committee of the board) or properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must: be a stockholder of record on the date of the giving of the notice for the meeting; be entitled to vote at the meeting; and have given timely written notice of the business in proper written form to our secretary. To be timely, a stockholder s notice must be delivered to or mailed and received at our principal executive offices not less than 90 days nor more than 120 days prior to the anniversary date of the last annual meeting; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after the anniversary date, notice by the stockholder must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder s notice to the secretary must set forth as to each matter the stockholder proposes to bring before the annual meeting: a brief description of the business desired to be brought before the annual meeting and the reasons for conducting the business at the annual meeting; the name and address, as they appear on our books, of the stockholder proposing such business; the class or series and number of our shares which are owned beneficially or of record by the stockholder proposing the business; a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in the business; and a representation that the stockholder is a holder of record of our stock entitled to vote at the meeting and that the stockholder intends to appear in person or by proxy at the meeting to bring the business before the meeting. Similarly, at a special meeting of stockholders, only such business as is properly brought before the meeting will be conducted or considered. To be properly brought before a special meeting, business must be specified in the notice of the meeting (or any supplement to that notice) given by or at the direction of a majority of the entire board of directors, the chairman of our board or our President. Nomination of candidates for election to our board Under our bylaws, only persons that are properly nominated will be eligible for election to be members of our board. To be properly nominated, a director candidate must be nominated at an annual meeting of the stockholders or any special meeting called for the purpose of electing directors by or at the direction of our board (or any duly authorized committee of the board) or properly nominated by a stockholder. To properly nominate a director, a stockholder must: be a stockholder of record on the date of the giving of the notice for the meeting; Table of Contents Description of capital stock be entitled to vote at the meeting; and have given timely written notice in proper written form to our secretary. To be timely, a stockholder s notice must be delivered to or mailed and received at our principal executive offices: in the case of an annual meeting, not less than 90 days nor more than 120 days prior to the anniversary date of the last annual meeting of our stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after the anniversary date of the last annual meeting, notice by the stockholder in order to be timely must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs; and in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of such meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder s notice to the secretary must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected and must set forth: as to each person whom the stockholder proposes to nominate for election as a director: the name, age, business address and residence address of the person; the principal occupation or employment of the person; the class or series and number of shares of our capital stock that are owned beneficially or of record by the person; and any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations promulgated thereunder; and as to the stockholder giving the notice: the name and record address of such stockholder; the class or series and number of shares of our capital stock that are owned beneficially or of record by such stockholder; a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder; a representation that such stockholder is a holder of record of our stock entitled to vote at the meeting and that the stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice; and any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Table of Contents Description of capital stock Amendment of certificate of incorporation and bylaws The DGCL provides generally that the affirmative vote of a majority of the outstanding shares entitled to vote is required to amend or repeal a corporation s certificate of incorporation or bylaws, unless the certificate of incorporation requires a greater percentage. Our certificate of incorporation generally requires the approval of the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote in connection with the election of directors to amend any provisions of our certificate of incorporation described in this section. Our certificate of incorporation and bylaws provide that the holders of at least two-thirds of the voting power of the issued and outstanding shares of our capital stock entitled to vote in connection with the election of directors have the power to amend or repeal our bylaws. In addition, our certificate of incorporation grants our board of directors the authority to amend and repeal our bylaws without a stockholder vote in any manner not inconsistent with the laws of the State of Delaware or our certificate of incorporation. LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS We have adopted provisions in our certificate of incorporation that limit or eliminate the personal liability of our directors to the maximum extent permitted by the DGCL. The DGCL expressly permits a corporation to provide that its directors will not be liable for monetary damages for a breach of their fiduciary duties as directors, except for liability: for any breach of the director s duty of loyalty to us or our stockholders; for any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; under Section 174 of the DGCL (relating to unlawful stock repurchases, redemptions or other distributions or payment of dividends); or for any transaction from which the director derived an improper personal benefit. These limitations of liability do not generally affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws also authorize us to indemnify our officers, directors and other agents to the fullest extent permitted under the DGCL and we may advance expenses to our directors, officers and employees in connection with a legal proceeding, subject to limited exceptions. As permitted by the DGCL, our certificate of incorporation and bylaws provide that: we must indemnify our board members and officers to the fullest extent permitted by the DGCL, subject to limited exceptions; and we may purchase and maintain insurance on behalf of our current or former board members, officers, employees or agents against any liability asserted against them and incurred by them in any such capacity, or arising out of their status as such. We may enter into separate indemnification agreements with each of our board members and officers that may be broader than the specific indemnification provisions contained in the DGCL. These indemnification agreements may require us, among other things, to indemnify our board members and officers against liabilities that may arise by reason of their status or service as board members and officers, other than liabilities arising from willful misconduct. These indemnification agreements may also require us to advance any expenses incurred by the board members and officers as a result of any proceeding against them as to which they could be indemnified and to obtain directors and officers insurance if available on reasonable terms. Table of Contents Description of capital stock The limited liability and indemnification provisions in our certificate of incorporation and bylaws and in any indemnification agreements we enter into may discourage stockholders from bringing a lawsuit against our board members for breach of their fiduciary duties and may reduce the likelihood of derivative litigation against our board members and officers, even though a derivative action, if successful, might otherwise benefit us and our stockholders. A stockholder s investment in us may be adversely affected to the extent we pay the costs of settlement or damage awards against our directors and officers under these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification by us is sought, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is LaSalle Bank National Association. LISTING Our common stock is quoted on the NASDAQ National Market under the symbol HURN. Table of Contents Shares eligible for future sale We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, a number of shares will not be available for sale after this offering due to contractual and legal restrictions on resale. However, sales of our common stock in the public market after the restrictions lapse, or the perception that these sales may occur, could cause the market price of our common stock to decline. Upon completion of this offering, we expect to have an aggregate of 17,248,379 outstanding shares of common stock, including 1,279,205 shares of unvested restricted common stock. As of December 31, 2005, we had outstanding stock options held by executive officers, employees, third-party consultants and board members for the purchase of an aggregate of 1,304,688 shares of common stock. The 5,000,000 shares of common stock being sold in this offering (or 5,750,000 shares if the underwriters exercise the over-allotment option in full) will be, and the 5,750,000 shares previously sold in our initial public offering are, freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by affiliates of our company, as that term is defined in Rule 144 of the Securities Act. Except for shares issued pursuant to the Form S-8 we have on file, all remaining shares were issued and sold by us in private transactions or issued by us in reliance on Rule 701 of the Securities Act and are eligible for public sale if registered under the Securities Act, or sold in accordance with Rule 144 or Rule 701 thereunder. LOCK-UP AGREEMENTS We have agreed, and each member of our board, each of our executive officers and the selling stockholder has signed a lock-up agreement under which, subject to certain permitted exceptions specified in each agreement, each has agreed, not to offer, sell, contract to sell, pledge, hedge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 90 days after the date of this prospectus. The 90-day lock-up period may be extended under certain circumstances where we announce or pre-announce earnings or material news or a material event occurs within approximately 18 days before, or approximately 16 days after, the termination of the 90-day period. UBS Securities LLC, in its sole discretion, may release some or all of these shares before the 90-day lockup period ends. Following the expiration of the lock-up period, 4,819,263 shares of common stock subject to these agreements, including shares issuable upon the exercise of vested options 90 days after the date of this prospectus, will be available for sale in the public market, subject in some cases to the vesting of restricted common stock during the lock-up period and to the volume and other restrictions of compliance with Rule 144, Rule 144(k) or Rule 701. ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET Rule 144 In general, under Rule 144, a person or persons whose shares are aggregated who has beneficially owned restricted securities for at least one year, including the holding period of any holder who is not an affiliate, and who files a Form 144 with respect to this sale, is entitled to sell within any three-month period a number of shares of common stock that does not exceed the greater of: 1% of the then outstanding shares of our common stock, or approximately 172,484 shares; and the average weekly trading volume during the four calendar weeks preceding the date of which notice of the sale is filed on Form 144. Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us. Table of Contents Shares eligible for future sale Rule 144(k) A person who is not deemed to have been our affiliate at any time during the 90 days immediately preceding a sale and who has beneficially owned his or her shares for at least two years, including the holding period of any prior owner who is not an affiliate, is entitled to sell these shares of common stock pursuant to Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information or notice requirements of Rule 144. Affiliates must always sell pursuant to Rule 144, even after the applicable holding periods have been satisfied. Rule 701 Rule 701 may be relied upon with respect to the resale of securities originally purchased from us by our employees, board members, officers, third-party consultants or advisers prior to the closing of our initial public offering and pursuant to written compensatory benefit plans or written contracts relating to the compensation of these persons. In addition, the SEC has indicated that Rule 701 will apply to stock options granted by us before our initial public offering, along with the shares acquired upon exercise of these options. Securities issued in reliance on Rule 701 are deemed to be restricted shares and may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with the holding period requirements. As of December 31, 2005, 379,936 of our outstanding shares of common stock had been issued in reliance on Rule 701 as a result of exercise of stock options. EQUITY COMPENSATION We filed a registration statement on Form S-8 under the Securities Act covering the 2,141,000 shares that are reserved for issuance under our 2004 Omnibus Stock Plan as well as 1,612,640 shares reserved for issuance upon the exercise of options outstanding under our three existing equity incentive plans. This Form S-8 registration statement automatically became effective upon filing. Accordingly, shares registered under this registration statement are, subject to Rule 144 provisions applicable to affiliates, available for sale in the open market, unless these shares are subject to vesting restrictions with us or are otherwise subject to the contractual restrictions described above. REGISTRATION RIGHTS Pursuant to a restricted shares award agreement, Mr. Holdren has been granted certain piggyback registration rights with respect to the 391,305 shares of our common stock that he purchased under the agreement. For further information regarding these registration rights, see the section of this prospectus entitled Management Holdren senior management agreement. We and HCG Holdings LLC have entered into a registration rights agreement pursuant to which HCG Holdings LLC is entitled to certain demand, piggyback and shelf registration rights with respect to all of the shares of our common stock held by it. For further information regarding these registration rights, see the section of this prospectus entitled Certain relationships and related transactions Registration rights HCG Holdings LLC registration rights. Table of Contents Material U.S. federal tax considerations for non-U.S. holders of our common stock The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of our common stock by a Non-U.S. Holder. For purposes of this discussion, a Non-U.S. Holder is a beneficial owner of our stock who is treated for the relevant U.S. federal tax purposes as a non-resident alien individual, or a foreign partnership, foreign corporation, foreign estate, or foreign trust. Because U.S. federal tax law uses different tests in determining whether an individual is a non-resident alien for income and estate tax purposes, some individuals may be Non-U.S. Holders for purposes of the U.S. federal income tax discussion below, but not for purposes of the U.S. federal estate tax discussion, and vice versa. This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended (the Code ), judicial decisions, and administrative regulations and interpretations in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. This discussion assumes that a Non-U.S. Holder holds our common stock as a capital asset as determined for U.S. federal income tax purposes (generally, property held for investment). This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to Non-U.S. Holders in light of their particular circumstances, including, without limitation, Non-U.S. Holders that are controlled foreign corporations, passive foreign investment companies, pass-through entities, or U.S. expatriates; Non-U.S. Holders that hold their common stock through pass-through entities; Non-U.S. Holders that acquire their common stock through the exercise of employee stock options or otherwise as compensation; and Non-U.S. Holders who own, directly, indirectly or constructively, more than 5% of our common stock. This discussion also does not address any tax consequences arising under the laws of any U.S. state or local, or non-U.S., jurisdiction. You should consult your own tax advisor regarding the U.S. federal income and estate tax consequences of holding and disposing of our common stock in light of your particular situation, as well as any consequences under state, local or non-U.S. law. DIVIDENDS Distributions on our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. In general, we will be required to withhold U.S. federal income tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, on dividends paid to a Non-U.S. Holder. To obtain a reduced rate of withholding under a treaty, you must provide us with appropriate documentation (typically, a properly-executed IRS Form W-8BEN certifying your entitlement to benefits under the treaty). You will not be required to furnish a U.S. taxpayer identification number in order to claim treaty benefits with respect to our dividends if our common stock is traded on an established financial market for U.S. federal income tax purposes. Treasury Regulations provide special rules to determine whether, for purposes of determining the applicability of an income tax treaty, dividends paid to a Non-U.S. Holder that is an entity should be treated as paid to the entity or to those holding an interest in that entity. We generally will not be required to withhold U.S. federal income tax from dividends that are effectively connected with your conduct of a trade or business within the United States, so long as you provide us with appropriate documentation (typically, a properly executed IRS Form W-8ECI, stating that the dividends are so effectively connected). Instead, such dividends will be subject to U.S. federal income tax Table of Contents Material U.S. federal tax considerations for non-U.S. holders of our common stock on a net income basis, generally in the same manner as if you were a resident of the United States. If you are a foreign corporation, your effectively-connected dividends may also be subject to an additional branch profits tax, which is imposed under certain circumstances at a rate of 30% (or such lower rate as may be specified by an applicable treaty), subject to certain adjustments and exceptions. GAIN ON SALE OR DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to any gain realized on a sale or other disposition of our common stock. However, you will be taxed on such gain if (1) the gain is effectively connected with a trade or business that you conduct in the United States (in the event that certain tax treaty provisions apply, the gain must also be attributable to a permanent establishment in the United States (or, in the case of an individual, a fixed place of business) in order to be subject to tax), (2) you are a non-resident alien individual, you are present in the United States for 183 or more days in the taxable year of the sale or disposition and certain other conditions are met, or (3) our stock is treated as a United States real property interest in your hands, within the meaning of Section 897(c) of the Code. Subject to the exception noted below, our stock will generally be treated as a U.S. real property interest if we are or have been a United States real property holding corporation within the meaning of Section 897(c) at any time that you held the stock within five years before the sale or disposition. We believe that we are not, and we do not anticipate becoming, a United States real property holding corporation. Moreover, even if we are treated as a United States real property holding corporation, so long as our common stock is regularly traded on an established securities market for U.S. federal income tax purposes, our common stock will not be treated as a U.S. real property interest in the hands of a Non-U.S. Holder who has owned no more than 5% of the common stock (assuming for this purpose that any options or shares of convertible preferred stock that you own have been exercised or converted and applying certain constructive ownership rules to determine your ownership) during the five years preceding a sale or disposition. If we are treated as a U.S. real property holding corporation and our common stock is not regularly traded on an established securities market, 10% of the amount realized by a Non-U.S. Holder on a sale or disposition of our common stock must be withheld by the purchaser and remitted to the U.S. Internal Revenue Service. The amount withheld may be applied to the Non-U.S. Holder s U.S. federal income tax liability or, if in excess thereof, refunded provided that the required information is timely furnished to the U.S. Internal Revenue Service. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING Generally, we must report to the U.S. Internal Revenue Service the amount of dividends we pay to you, your name and address, and the amount of any tax withheld. A similar report will be sent to you. Pursuant to tax treaties or other information-sharing agreements, the U.S. Internal Revenue Service may make its reports available to tax authorities in your country of residence. We generally will not be required to apply backup withholding to dividends that we pay to you if you have provided an appropriate certification of your U.S. federal taxpayer identification number, or of the fact that you are not a U.S. person, unless we or our paying agent otherwise have actual knowledge that you are a U.S. person. Generally, you will provide such certification on an IRS Form W-8BEN. Under current U.S. federal income tax law, information reporting and backup withholding imposed at a rate of 28% (increasing to 31% in 2011) will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of a broker unless the disposing holder certifies as to its non-U.S. status or otherwise establishes an exemption. Generally, U.S. information reporting and backup Table of Contents Material U.S. federal tax considerations for non-U.S. holders of our common stock withholding will not apply to a payment of disposition proceeds where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. U.S. federal information reporting requirements (but not backup withholding) generally will also apply to a payment of disposition proceeds by foreign offices of U.S. brokers or foreign brokers with certain types of relationships to the United States unless the Non-U.S. Holder establishes an exemption. Backup withholding is not an additional tax. Rather, the amount of tax withheld will be treated as a payment against your actual U.S. federal income tax liability (if any), and if the withholding results in an overpayment of tax, a refund may be obtained, provided that the required information is timely furnished to the U.S. Internal Revenue Service. Non-U.S. Holders should consult their own tax advisors regarding the application of information reporting and backup withholding to them, including the availability of and procedure for obtaining an exemption from backup withholding. FEDERAL ESTATE TAX An individual Non-U.S. Holder who at the time of his death is treated as the owner of an interest in our common stock will be required to include the value thereof in his gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise. Legislation enacted in the spring of 2001 provides for reductions in the U.S. federal estate tax through 2009 and the elimination of the estate tax entirely in 2010. Under this legislation, the U.S. federal estate tax would be fully reinstated, as in effect prior to the reductions, in 2011. Table of Contents Underwriting The selling stockholder is offering the shares of our common stock described in this prospectus through the underwriters named below. UBS Securities LLC, William Blair & Company, L.L.C. and Deutsche Bank Securities Inc. are acting as joint book-running managers and together with Robert W. Baird & Co. Incorporated are the representatives of the underwriters. We and the selling stockholder have entered into an underwriting agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase the number of shares of common stock listed next to its name in the following table: Underwriters Number of shares UBS Securities LLC William Blair & Company, L.L.C. Deutsche Bank Securities Inc. Robert W. Baird & Co. Incorporated Total 5,000,000 The underwriting agreement provides that the underwriters must buy all of the shares if they buy any of them. However, the underwriters are not required to take or pay for the shares covered by the underwriters over-allotment option described below. The common stock of the selling stockholder is offered subject to a number of conditions, including: receipt and acceptance of our common stock by the underwriters; and the underwriters right to reject orders in whole or in part. We have been advised by the representatives that the underwriters intend to make a market in our common stock, but that they are not obligated to do so and may discontinue making a market at any time without notice. In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically. OVER-ALLOTMENT OPTION The selling stockholder has granted the underwriters an option to buy up to 750,000 additional shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional shares approximately in proportion to the amounts specified in the table above. COMMISSIONS AND DISCOUNTS Shares sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $0. per share from the public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $0. per share from the public offering price. If all the shares are not sold at the public offering price, the Table of Contents Underwriting representatives may change the offering price and the other selling terms. Sales of shares made outside of the United States may be made by affiliates of the underwriters. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the shares at the prices and upon the terms stated therein, and, as a result, will thereafter bear any risk associated with changing the offering price to the public or other selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock to be offered. The following table shows the per share and total underwriting discounts and commissions that the selling stockholder will pay to the underwriters assuming both no exercise and full exercise of the underwriters option to purchase up to an additional shares. No exercise Full exercise Per Share $ $ Total $ $ Pursuant to a registration rights agreement with HCG Holdings LLC, we are required to pay the expenses relating to this offering, excluding the underwriting discounts and commissions which will be borne by the selling stockholder. NO SALES OF SIMILAR SECURITIES We, each member of our board, each of our executive officers and the selling stockholder have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of UBS Securities LLC, subject to certain permitted exceptions specified in the agreements, sell, offer to sell, contract or agree to sell, hypothecate, pledge, hedge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, our common stock or securities convertible into or exchangeable for our common stock. These restrictions will be in effect for a period of 90 days after the date of this prospectus. The 90-day lock-up period may be extended under certain circumstances where we announce or pre-announce earnings or material news or a material event occurs within approximately 18 days before, or approximately 16 days after, the termination of the 90-day period. At any time and without public notice, UBS Securities LLC, may, in its sole discretion, release all or some of the securities from these lock-up agreements. We and the selling stockholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments that the underwriters may be required to make in respect of those liabilities. We and the selling stockholder have also agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act, and to contribute to payments which may be required in respect thereof. NASDAQ NATIONAL MARKET QUOTATION Our common stock is quoted on the NASDAQ National Market under the symbol HURN. PRICE STABILIZATION, SHORT POSITIONS In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock including: stabilizing transactions; Table of Contents Underwriting short sales; purchases to cover positions created by short sales; imposition of penalty bids; and syndicate covering transactions. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. These transactions may also include making short sales of our common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be covered shorts, which are short positions in an amount not greater than the underwriters over-allotment option referred to above, or may be naked shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position by either exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, 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. Naked short sales are in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on the NASDAQ National Market, in the over-the-counter market or otherwise. AFFILIATIONS The underwriters and their affiliates have provided, and may, from time to time in the future, provide, certain commercial banking, financial advisory and investment banking services for us for which they have received and will receive customary fees. Table of Contents Notice to Investors European Economic Area With respect to each Member State of the European Economic Area which has implemented Prospectus Directive 2003/71/EC, including any applicable implementing measures, from and including the date on which the Prospectus Directive is implemented in that Member State, the offering of our common stock in this offering is only being made: (a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or (c) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. United Kingdom Shares of our common stock may not be offered or sold and will not be offered or sold to any persons in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses and in compliance with all applicable provisions of the FSMA with respect to anything done in relation to shares of our common stock in, from or otherwise involving the United Kingdom. Without limitation to the other restrictions referred to herein, this offering circular is directed only at (1) persons outside the United Kingdom, (2) persons having professional experience in matters relating to investments who fall within the definition of investment professionals in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005; or (3) high net worth bodies corporate, unincorporated associations and partnerships and trustees of high value trusts as described in Article 49(2) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. Without limitation to the other restrictions referred to herein, any investment or investment activity to which this offering circular relates is available only to, and will be engaged in only with, such persons, and persons within the United Kingdom who receive this communication (other than persons who fall within (2) or (3) above) should not rely or act upon this communication. Switzerland Shares of our common stock may be offered in Switzerland only on the basis of a non-public offering. This prospectus does not constitute an issuance prospectus according to articles 652a or 1156 of the Swiss Federal Code of Obligations or a listing prospectus according to article 32 of the Listing Rules of the Swiss exchange. The shares of our common stock may not be offered or distributed on a professional basis in or from Switzerland and neither this prospectus nor any other offering material relating to shares of our common stock may be publicly issued in connection with any such offer or distribution. The shares have not been and will not be approved by any Swiss regulatory authority. In particular, the shares are not and will not be registered with or supervised by the Swiss Federal Banking Commission, and investors may not claim protection under the Swiss Investment Fund Act. Table of Contents Legal matters The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Mayer, Brown, Rowe & Maw LLP, Chicago, Illinois, and for the underwriters by Katten Muchin Rosenman LLP, Chicago, Illinois. From time to time, Katten Muchin Rosenman LLP has acted as our counsel on various matters unrelated to this offering.
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+LEGAL MATTERS The validity of the securities offered by this prospectus will be passed upon for us by Latham Watkins LLP, San Diego, California.
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+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Sidley Austin LLP, Chicago, Illinois.
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+LEGAL MATTERS Certain legal matters in connection with the securities will be passed upon for us by the law firm of Pepper Hamilton LLP.
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+Legal Matters
+
+93
+
+Experts
+
+93
+
+Other Expenses of Issuance and Distribution
+
+93
+
+Where You Can Find Additional Information
+
+93
+
+Commission Position on Indemnification for Securities Act Liabilities
+
+94
+
+Index to Financial Statements
+
+F-1
+
+[This Page Intentionally Left Blank]
+
+PROSPECTUS SUMMARY
+
+The following summary does not contain all of the information you should consider before investing in our ordinary shares. You should read the following summary together with the entire prospectus including the more detailed information in our audited financial statements and related notes appearing elsewhere in this prospectus. You should consider carefully, among other matters, the matters we discuss in Risk Factors. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters over-allotment option and no exercise of the representative s purchase option to purchase ordinary shares.
+
+Overview 
+
+We design and market an integrated suite of customized and entertaining email software products for the consumer or home user markets. We believe we are a global technology leader in enriching email interactions by offering users the ability to design highly personalized email presentations. Our innovations in entertaining email technology, along with our large collection of multimedia content for email communication, we believe have made our website one of the top Internet destinations in the world for downloading entertaining email solutions. 
+
+Since we began operations in 2000, we have recorded approximately 56 million registered downloads of our free product in more than 100 countries, and since January 1, 2003, we have recorded more than one million registered downloads each month. As of September 30, 2005, we have more than 9.3 million active users, and currently, more than 240 million IncrediMail emails are sent by our users each month. Our users typically use our products for as long as three years. Through September 30, 2005, we have sold more than 805,000 products and content licenses worldwide to our registered users. We believe our historical track record of converting registered users to purchasing customers represents a convincing validation of our business strategy.
+
+We generate revenue by:
+
+ 
+
+selling our premium software products and services;
+
+ 
+
+licensing and co-branding our Incredi brand to operators of third party websites; and
+
+ 
+
+selling paid advertising and sponsored links on our website and email client.
+
+To date, we have relied mainly on viral growth to grow our user base. Our viral growth has resulted from recipients of our users emails clicking on the link at the bottom of emails sent with IncrediMail Xe and then downloading our products and also from word of mouth. Our revenues were $6.2 million in 2004 and $5.3 million in the nine months ended September 30, 2005. We have had net income every year since 2002. Since January 1, 2003, our gross profit has ranged between 91% and 93% of our gross revenues and our operating income has ranged between 40% and 42% of our gross revenues.
+
+When we use the term registered user in this prospectus, we mean an IncrediMail user who has downloaded one of our products and completed the registration process. Registrations are not necessarily indicative of the number of individual users as a user may register more than one time. In addition, the term active user as used in this prospectus means a registered user who has performed any activity using any IncrediMail product or service, including opening or sending emails using IncrediMail, downloading content or updating the product, in the 90 days prior to the measurement date.
+
+The IncrediMail Experience
+
+Our products are available in eight languages in addition to English. We offer the following products, all of which may be downloaded over the Internet through a personal computer running on a Microsoft Windows operating system:
+
+ 
+
+IncrediMail Xe, our flagship product, allows users to personalize their email messages by applying to them various creative features, such as letter backgrounds, email notifiers (animated indications that mail has been received), 3D effects, emoticons (animations that are intended to convey emotions) and other animations, sound effects and handwritten signatures. We distribute IncrediMail Xe over the Internet free of charge to promote our brand and to grow our user base. We generate revenue from distribution of IncrediMail Xe by placing embedded advertisement and promotional links on our website and in our email client. We registered the first free download of IncrediMail Xe in the third quarter of 2000. As of September 30, 2005, we have recorded approximately 56 million registered downloads of this program.
+
+1
+
+ 
+
+IncrediMail Premium, an enhanced version of IncrediMail Xe, offers a larger variety within the features provided by IncrediMail Xe as well as additional features such as software skins (a feature that allows users to create a particular look for the graphic interface), advanced account access and voice message recorder. In addition, IncrediMail Premium does not contain advertising banners or promotional links and its users have access to customer support.
+
+ 
+
+IncrediMail Letter Creator is a supplementary product that allows users to design and create their own personalized IncrediMail letter backgrounds and e-cards for use with IncrediMail Xe and IncrediMail Premium.
+
+ 
+
+IncrediBundle is a package of both Incredimail Premium and Letter Creator that is offered for a reduced price.
+
+ 
+
+The Gold Gallery is a content database that features a gallery of additional backgrounds, animation, sounds, graphics and email notifiers that can be applied to email messages generated by IncrediMail Xe or IncrediMail Premium.
+
+ 
+
+IncrediMail Super Pack is a special package of emoticons sold separately.
+
+ 
+
+Junk Filter Plus is an advanced anti-spam solution.
+
+Prices and license fees for our premium products vary based on market, the license period and whether the products are offered together. Our prices and fees range from less than $10 to about $60.
+
+Our Market
+
+In recent years, email has become one of the most important forms of electronic communication worldwide. In its June 2005 US Online User Consumer Survey, 2005, Jupiter Research stated that email is the most popular online activity and that 88% of respondents indicate they use email regularly. The next closest activity referenced in such report was search engines/portals at 76%. All other online activities were found to be less popular, including product/service purchase at 59%, instant messaging at 45% and online newspapers at 42%. A May 2005 industry report entitled Email Clients Market Analysis, 2005-2009 by The Radicati Group, Inc., which we refer to as the Radicati Report, estimates that the number of worldwide business and consumer email users will increase from approximately 680 million in 2005 to 920 million in 2009 and that the number of email mailboxes will increase from approximately 1.2 billion in 2005 to 1.8 billion in 2009. We believe that the increase in the number of email mailboxes per user indicates that our market is not limited by the number of active users in the market.
+
+Our products target the consumer or home user email client market. An email client is a software program that provides the user with an interface to his or her email account on an email server, allowing him or her to download mail from the email server, send email through the email server, edit emails, organize them in folders and otherwise manipulate them. In addition to having more than one email mailbox, email users may have more than one email client. The Radicati Report estimates that total consumer email clients will grow from approximately 760 million in 2005 to 1.3 billion in 2009 with an approximately 65%-35% split between desktop and web-based remaining constant for the period. This growth in email clients represents additional target users of our products and services.
+
+The IncrediMail Solution
+
+We employ innovative approaches to enhancing our users email experience. Our products and services provide the following benefits:
+
+ 
+
+Variety and Amount of Content. Our products offer users access to an extensive and continually growing pool of content that we believe is one of the largest collections of creative and diverse graphics, sound and multimedia content available online for email communications. We began assembling our content in 1999.
+
+2
+
+ 
+
+Creative Technology. Our proprietary technology, which we believe is based on advanced software development standards, is designed to produce robust quality products that provide the functionality expected in an email client packaged in a friendly, less technologically-oriented and entertaining environment.
+
+ 
+
+Customization. The diversity of our graphics, sound and multimedia content enables our users to customize and personalize their email messages and letters easily and quickly.
+
+ 
+
+Flexibility and Ease of Use for Both Sender and Recipient. We strive to offer a simple and intuitive user interface that enables our users to create different experiences depending on the nature or recipient of the email or letter. Users can easily change one or more features for a specific email. Further, recipients of IncrediMail emails can easily open them using most available email clients and can see all the features without the need for special software.
+
+Our Strategy
+
+Our objective is to become the market leader in entertaining and creative email systems for the consumer and home user market. Based on our survey of downloads of our products and those of competitors from third party websites, we believe that IncrediMail Xe is one of the most downloaded free products providing an entertaining and creative email system, and our strategy will include building on its popularity and seeking to convert free users to paying customers. The key elements of our strategy are to:
+
+ 
+
+Expand product offerings and increase user sales. We plan to stimulate growth of our sales and enhance our cross-sale capabilities by expanding our existing product and service offering and developing new ones. We will continue to seek to convert free users into paying customers by marketing the paid products and services to our large user base and to cross-sell additional products and services to paying users.
+
+ 
+
+Avoid offensive marketing tools. We design our products and services to address users aversion to spam, spyware and other perceived offensive Internet marketing tools, which we believe encourages more use of them and increases user loyalty.
+
+ 
+
+Acquire complementary products, technologies or companies. We seek to enhance our technology, grow our user base, and diversify our product lines and services by exploiting strategic acquisition opportunities. We intend to supplement our research and development efforts by acquiring complementary technologies and other assets that enhance the features, functionality and performance of our products and services. We may also seek to increase our user base or enhance our sales and marketing capabilities by acquiring companies in our or similar markets.
+
+ 
+
+Maintain and grow our user community. Our effective viral marketing has resulted in millions of registered users who spread the word about our products and services at relatively low marketing costs to us. For that reason, we expect a significant part of our products and services offering will remain free. In order to strengthen awareness of our Incredi brand and increase the size of our user base, we intend to use a portion of the proceeds of this offering to expand our marketing methods beyond viral marketing to include advertisements, media buying, public relations activities and additional co-branding arrangements.
+
+ 
+
+Strengthen our advertising revenues. We intend to increase our revenues from monetizing visitor traffic to our website by increasing our paid advertising and sponsored links. Additionally, we believe that our large registered and active user base and our growing number of paying users should be attractive to potential advertisers. We intend to continue to develop our advertising infrastructure so that we can offer our advertisers a more effective method to reach their target audiences and thereby increase our advertising rates. We also plan to increase our advertising force by expanding our sales and business development teams, opening a U.S. sales and marketing office, establishing new co-branding relationships, participating in trade shows, and strengthening our brand through other online and offline marketing activities.
+
+3
+
+ 
+
+Enter into OEM, collaboration and other strategic sales and distribution arrangements. We intend to market our products to original equipment manufacturers, or OEMs, with the goal of having our products bundled together with their hardware products in exchange for licensing fees. In addition, we intend to seek out licensing or collaboration arrangements similar to those we currently have with PointMatch USA Inc. for IncrediDate.com. an Internet dating site, and Oberon Media Inc. for IncrediGames.com, an Internet game site.
+
+ 
+
+Continue to focus on the online consumer market. Email continues to grow as a communication medium. The Internet allows us to reach potential users throughout the world quickly and easily as well as reduces the costs associated with sales and distribution of our products and services.
+
+Our Risks
+
+Our business and our ability to implement our operating and growth strategies are subject to numerous risks that you should consider before investing in our ordinary shares. In particular, the risks we face include, but are not limited to:
+
+ 
+
+our ability to establish and increase market acceptance of our products;
+
+ 
+
+our ability to continually enhance our existing products and to develop new products that achieve widespread market acceptance;
+
+ 
+
+our ability to manage our growth;
+
+ 
+
+our ability to establish a strong brand name;
+
+ 
+
+our ability to develop additional ways to distribute and sell our products;
+
+ 
+
+our ability to generate substantial revenues from advertisers;
+
+ 
+
+our ability to compete with larger, better-financed companies;
+
+ 
+
+the development and future nature of the Internet and legal requirements for online operations;
+
+ 
+
+restrictions imposed in connection with our international operations; and
+
+ 
+
+political, economic and military conditions in the Middle East.
+
+Corporate Information
+
+We were incorporated in the State of Israel in November 1999. Our headquarters are located at 2 Kaufman Street, Tel-Aviv 68012, Israel. Our phone number is (972-3) 516-0195. Our website addresses are www.incredimail-corp.com and www.incredimail.com. The information on our websites does not constitute part of this prospectus.
+
+INCREDIMAIL is a registered trademark in the United States. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.
+
+4
+
+The Offering
+
+Ordinary shares offered by us
+
+ 2,500,000 shares
+
+ 
+
+Ordinary shares to be outstanding
+
+after this offering
+
+ 
+
+9,373,668 shares
+
+ 
+
+Use of proceeds
+
+ For the expansion of product research and development, sales and marketing operations, establishment of a U.S. office, business development and general corporate purposes, including potential acquisition of complementary products, technologies or businesses.
+
+ 
+
+Proposed Nasdaq Capital Market symbol
+
+ MAIL
+
+The number of ordinary shares that will be outstanding after this offering is based on 5,108,720 ordinary shares outstanding as of September 30, 2005.
+
+Unless otherwise indicated, the information in this prospectus:
+
+ 
+
+Reflects the increase in our authorized share capital to 15 million ordinary shares and a 38-for-one ordinary share split effected as a dividend on our ordinary shares outstanding effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part;
+
+ 
+
+Reflects the automatic conversion of all of our outstanding redeemable convertible preferred shares, on a 38-for-one basis, into 1,764,948 ordinary shares upon the closing of our initial public offering;
+
+ 
+
+Assumes no exercise of the underwriters over-allotment option to purchase ordinary shares from the selling shareholders or the representative s purchase option to purchase ordinary shares;
+
+ 
+
+Excludes 296,400 shares issuable upon the exercise of options outstanding as of September 30, 2005 at a weighted average exercise price of $1.72 per share; and
+
+ 
+
+Excludes 1,071,600 shares available for future grant as of September 30, 2005 under our 2003 stock option plan. 
+
+5
+
+Summary Financial and Other Data
+
+The following tables present our summary financial and other data and should be read in conjunction with Selected Financial Data and Management s Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and related notes appearing elsewhere in this prospectus. We derived the summary financial data below for the years ended December 31, 2002, 2003 and 2004 and as of December 31, 2003 and 2004 from our audited financial statements included elsewhere in this prospectus. We derived the summary financial data below for the nine months ended September 30, 2004 and 2005 and as of September 30, 2005 from our unaudited financial statements appearing elsewhere in this prospectus. Our financial statements are prepared and presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
+
+The as adjusted balance sheet data as of September 30, 2005 presented below gives effect to the following events as if each had occurred as of September 30, 2005: (i) the issuance of 1,764,948 ordinary shares upon conversion of all our outstanding preferred shares; (ii) the completion of this offering at an assumed initial offering price of $7.00 per share (the midpoint of the proposed range indicated on the front cover of this prospectus) and (iii) the application of the proceeds therefrom. The as adjusted summary financial data is not necessarily indicative of what our financial position would have been had this offering been completed as of the date indicated, nor is such data necessarily indicative of our financial position as of any future date.
+
+ Year ended December 31,
+
+ Nine months ended
+
+September 30,
+
+ 
+
+ 2002
+
+ 2003
+
+ 2004
+
+ 2004
+
+ 2005
+
+ 
+
+ (unaudited)
+
+ 
+
+ (in thousands, except share and per share data)
+
+ 
+
+Statement of Operations Data:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Revenues
+
+ 
+
+$
+
+4,062
+
+ 
+
+$
+
+5,160
+
+ 
+
+$
+
+6,208
+
+ 
+
+$
+
+4,295
+
+ 
+
+$
+
+5,250
+
+ 
+
+Cost of revenues
+
+ 
+
+ 176
+
+ 
+
+ 362
+
+ 
+
+ 473
+
+ 
+
+ 389
+
+ 
+
+ 496
+
+ 
+
+Gross profit
+
+ 
+
+ 3,886
+
+ 
+
+ 4,798
+
+ 
+
+ 5,735
+
+ 
+
+ 3,906
+
+ 
+
+ 4,754
+
+ 
+
+ 
+
+Operating expenses:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Research and development costs
+
+ 
+
+ 1,161
+
+ 
+
+ 1,319
+
+ 
+
+ 1,321
+
+ 
+
+ 966
+
+ 
+
+ 1,413
+
+ 
+
+Selling and marketing expenses
+
+ 
+
+ 776
+
+ 
+
+ 688
+
+ 
+
+ 576
+
+ 
+
+ 396
+
+ 
+
+ 651
+
+ 
+
+General and administrative expenses
+
+ 
+
+ 626
+
+ 
+
+ 601
+
+ 
+
+ 1,271
+
+ 
+
+ 525
+
+ 
+
+ 589
+
+ 
+
+Total operating expenses
+
+ 
+
+ 2,563
+
+ 
+
+ 2,608
+
+ 
+
+ 3,168
+
+ 
+
+ 1,887
+
+ 
+
+ 2,653
+
+ 
+
+ 
+
+Operating income
+
+ 
+
+ 1,323
+
+ 
+
+ 2,190
+
+ 
+
+ 2,567
+
+ 
+
+ 2,019
+
+ 
+
+ 2,101
+
+ 
+
+Financial income (expenses) and other, net
+
+ 
+
+ (12
+
+) 
+
+ 49
+
+ 
+
+ 75
+
+ 
+
+ (1
+
+) 
+
+ (15
+
+)
+
+Income before taxes on income
+
+ 
+
+ 1,311
+
+ 
+
+ 2,239
+
+ 
+
+ 2,642
+
+ 
+
+ 2,018
+
+ 
+
+ 2,086
+
+ 
+
+Taxes on income (tax benefit)
+
+ 
+
+ -
+
+ 
+
+ (114
+
+) 
+
+ (154
+
+) 
+
+ (143
+
+) 
+
+ 607
+
+ 
+
+Tax expense in respect of dividend paid out of 
+
+tax-exempt income
+
+ 
+
+ -
+
+ 
+
+ -
+
+ 
+
+ -
+
+ 
+
+ -
+
+ 
+
+ 937
+
+ 
+
+ 
+
+Net income
+
+ 
+
+$
+
+1,311
+
+ 
+
+$
+
+2,353
+
+ 
+
+$
+
+2,796
+
+ 
+
+$
+
+2,161
+
+ 
+
+$
+
+542
+
+ 
+
+6
+
+ 
+
+ Year Ended December 31,
+
+ Nine Months Ended
+
+September 30,
+
+ 2002
+
+ 2003
+
+ 2004
+
+ 2004
+
+ 2005
+
+ (unaudited)
+
+ (in thousands, except share and per share data)
+
+Net earnings per ordinary share(1): 
+
+ 
+
+Basic
+
+$0.21
+
+ 
+
+$0.37
+
+ 
+
+$0.44
+
+ 
+
+$0.34
+
+ 
+
+$0.08
+
+Diluted
+
+$0.18
+
+ $0.33
+
+ $0.39
+
+ $0.30
+
+ $0.08
+
+Weighted average number of shares used in net earnings per share(1): 
+
+ 
+
+Basic
+
+4,426,058
+
+ 4,500,340
+
+ 4,606,657
+
+ 4,601,525
+
+ 4,789,148
+
+Diluted
+
+5,037,804
+
+ 5,127,244
+
+ 5,197,558
+
+ 5,185,278
+
+ 5,275,318
+
+ 
+
+Pro forma net earnings per ordinary share(1)(2): 
+
+ 
+
+Basic
+
+ $0.40
+
+ $0.08
+
+Diluted
+
+ $0.37
+
+ $0.07
+
+Weighted average number of shares used in pro forma net earnings per share(1)(2): 
+
+ 
+
+Basic
+
+ 6,931,414
+
+ 7,098,926
+
+Diluted
+
+ 7,522,315
+
+ 7,585,096
+
+ 
+
+ As of 
+
+December 31,
+
+ As of
+
+ September 30, 2005
+
+ 2003 
+
+ 2004 
+
+ Actual
+
+ As Adjusted
+
+ (unaudited)
+
+ (in thousands)
+
+Balance Sheet Data:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash and cash equivalents
+
+ 
+
+ 
+
+$
+
+2,232
+
+ 
+
+$
+
+4,342
+
+ 
+
+$
+
+1,828
+
+ 
+
+$
+
+16,372
+
+Working capital
+
+ 
+
+ 3,907
+
+ 
+
+ 6,238
+
+ 
+
+ 2,676
+
+ 
+
+ 17,220
+
+Total assets
+
+ 
+
+ 5,029
+
+ 
+
+ 8,264
+
+ 
+
+ 6,528
+
+ 
+
+ 21,072
+
+Total debt
+
+ 
+
+ 4
+
+ 
+
+ 12
+
+ 
+
+ 6
+
+ 
+
+ 6
+
+Total liabilities
+
+ 
+
+ 851
+
+ 
+
+ 2,349
+
+ 
+
+ 4,242
+
+ 
+
+ 4,242
+
+Redeemable convertible preferred shares
+
+ 
+
+ 3,063
+
+ 
+
+ 3,063
+
+ 
+
+ 3,030
+
+ 
+
+ -
+
+Shareholders equity (deficiency)
+
+ 
+
+ 1,115
+
+ 
+
+ 2,852
+
+ 
+
+ (744
+
+) 
+
+ 16,830
+
+ 
+
+ Year Ended December 31,
+
+ Nine Months Ended
+
+September 30,
+
+ 2002 
+
+ 2003 
+
+ 2004 
+
+ 2004
+
+ 2005
+
+ (in thousands)
+
+Other Data:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Registered users(3) 
+
+ 
+
+ 13,405
+
+ 
+
+ 29,132
+
+ 
+
+ 44,716
+
+ 
+
+ 40,373
+
+ 
+
+ 56,667
+
+Paying users(4)
+
+ 
+
+ 132
+
+ 
+
+ 271
+
+ 
+
+ 459
+
+ 
+
+ 395
+
+ 
+
+ 601
+
+ 
+
+(1)
+
+All references to shares and per share amounts have been retroactively restated to reflect our 38-for-one ordinary share split effected as a share dividend as if such event had occurred as of the beginning of the earliest period presented. See Note 10 to our financial statements.
+
+(2)
+
+Our redeemable convertible preferred shares are entitled to participate on a non-cumulative basis in any dividends declared by our shareholders on the same per share basis as each ordinary share. Pro forma net earnings reflects the conversion of all outstanding shares of redeemable convertible preferred shares as of the dates indicated. Basic and diluted pro forma net earnings per ordinary share also give effect to the increase in the number of shares that, when multiply by the offering price, would be sufficient to replace the capital in excess of earnings being withdrawn. For additional information, see Note 2(o) to our financial statements included elsewhere in this prospectus.
+
+(3)
+
+Represents cumulative registered downloads of our products for which the online registration form was completed. Registrations are not necessarily indicative of the number of individual users as a user may register more than one time.
+
+(4)
+
+Represents cumulative purchases of all products and licenses.
+
+7
+
+RISK FACTORS
+
+Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether or not to invest in our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. If this happens, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment in our ordinary shares.
+
+Risks Related to Our Business
+
+If we are unable to establish and increase market acceptance of our products, we will not grow our business and our revenues could decline.
+
+Our basic software product is currently supplied to our customers free of charge. We will be able to increase revenues only if we can create and maintain a substantial market demand for our enhanced software products and related services, for which we currently charge a one-time license fee. 
+
+Many email users have multiple email clients, many of which are likely provided to them free of charge by large Internet and software companies. Therefore, our ability to execute our business strategy depends on market demand for email software programs that create a customized and entertaining email experience of the kind provided by our products. The rate of adoption and acceptance of our products may be affected adversely by changing consumer preferences, product obsolescence, technological change, market competition, development and acceptance of non-Internet mediums of communication and our products quality and novelty.
+
+If we are unable to continually enhance our existing products and develop new products that achieve widespread market acceptance, our ability to attract and retain customers could be impaired, our competitive position may be harmed and we may be unable to generate additional revenues.
+
+We believe that the number of downloads of our free IncrediMail Xe indicates that many email users are interested in having a customized and entertaining email experience. Our future revenue and profit growth will depend, in part, on increasing the percentage of registered or active users of our free product who become actual purchasers of our products and services, as well as making our products and services attractive to new users. In order to induce those email users to purchase or license our products, we must continually enhance our existing products by offering additional features and content and we must continue to introduce novel products. The enhancement of existing products and the development and commercialization of new products can be very complex. Software product development and commercialization depends upon a number of factors, including:
+
+ 
+
+accurate prediction of market requirements, market preferences and content trends and evolving standards;
+
+ 
+
+development of advanced technologies and capabilities;
+
+ 
+
+timely completion and introduction of new product designs and features that incorporate market requirements and preferences;
+
+ 
+
+our ability to recruit and retain highly qualified personnel;
+
+ 
+
+our ability to market our new products; and
+
+ 
+
+market acceptance of the enhanced and new products.
+
+We may be unable to enhance our existing products or to develop new products. Furthermore, we may not develop or introduce new products or product enhancements in time to take advantage of market opportunities or achieve a significant or substantial level of acceptance in new or existing markets. If we fail to do so, our ability to attract and retain customers could be impaired, our competitive position may be harmed and we may be unable to generate substantial revenues.
+
+8
+
+We may have difficulty managing our growth, which could limit our ability to increase our sales and control our costs.
+
+We have been experiencing significant growth in the scope of our operations and the number of our employees. This growth has placed increased demands on our management and on our financial and operational resources. In order to achieve our business objectives, we will need to continue to grow. Continued growth would increase the challenges involved in:
+
+ 
+
+implementing appropriate operational and financial systems and controls;
+
+ 
+
+expanding our sales and marketing infrastructure and capabilities; and
+
+ 
+
+maintaining the morale of our employees.
+
+If we cannot scale and manage our business appropriately, we will not experience our projected growth and our financial results will suffer.
+
+Due to our limited history of operations, we may not be able to predict our future performance or continue our revenue growth or profitability.
+
+We were incorporated in November 1999 and commercially launched our first product in the third quarter of 2000. Consequently, we have a limited history of operations from which to predict our future performance. The future viability of our business will depend on our ability to increase product sales, introduce new products, increase advertising revenues, exploit our brand name and control costs, which we may be unable to do. As a result, we may not be able to continue our revenue growth or profitability.
+
+If we do not establish a strong brand name, we may be unable to market our products effectively.
+
+We have not yet established a strong brand name. We believe that establishing and strengthening the IncrediMail and Incredi brand among Internet and email users is one of the critical elements of executing our business strategy. Our ability to promote and position our brand depends largely on our ability to provide high quality, highly reliable products with the features desired by our consumers. If we fail to establish and maintain our brand, we may be unable to attract new consumers and compete effectively.
+
+In addition, we seek to exploit our brand name Incredi by applying it to products or services offered through collaboration with third parties. Failure of any of our collaborations that exploit our brand name for services not related to our core business could damage our brand name and reputation as it relates both to our software products and to our other existing collaborations. This kind of damage could curtail our efforts to strengthen our brand name and could adversely affect our results of operations.
+
+If we do not develop additional ways to distribute and sell our products, our sales could decline.
+
+We currently sell our products primarily through our website. Our growth strategy includes entering into agreements with OEMs, to bundle our products and services with their hardware. We do not currently have any agreements with OEMs, and we cannot assure you that we will be able to enter into such agreements on favorable terms or at all. OEM customers can be very demanding with respect to the features they demand in software products they bundle, quality controls and testing requirements and payment terms. Because there are a relatively small number of significant OEM customers, if they demand reduced prices for our products, we may not be in a position to refuse such demands, which could adversely affect growth of our sales. If particular OEMs demand certain product or product features that we are unable to deliver, or if they impose higher quality requirements than we are able to satisfy, our revenues also could be adversely affected. Further, if our competitors offer our OEM customers more favorable terms than we do or if our competitors are able to take advantage of their existing relationships with these OEMs, then these OEMs may not include our software with their computers. These OEM relationships serve an important role in distributing our software to the end-user and positioning the market for upgrades to our more fully featured software products. If we are unable to develop and then maintain relationships with OEMs, our business could suffer.
+
+9
+
+In addition, our growth in part depends upon creating and managing additional distribution channels, such as distributors that would sell our products to end-users and other resellers. These channels involve a number of special risks, including:
+
+ 
+
+resellers and distributors are generally not subject to minimum sales requirements or any obligation to market our products to their customers;
+
+ 
+
+reseller and distributor agreements are generally nonexclusive and may be terminated at any time without cause; and
+
+ 
+
+resellers and distributors may market and distribute competing products, in part due to pricing, terms and promotions offered by our competitors and other factors that we do not control and cannot predict.
+
+If we fail to develop additional distribution channels, our ability to increase our revenues and achieve our anticipated growth would be adversely affected. If we fail to manage our distribution channels, our distribution channels may conflict with one another or otherwise fail to perform as we anticipate, which could reduce our sales and increase our expenses as well as weaken our competitive position. In addition, some distributors may experience financial difficulties, and as a result, we may have reduced sales or increased bad debt expense, which would also adversely affect our operating results.
+
+Our continuing viral growth could be adversely affected if we do not increase the number of our registered users or if users stop using our software.
+
+To date, we have relied mainly on viral growth to grow our user base. If users of our products stop their usage, our viral growth will be diminished because they will no longer be forwarding links to our site via their emails, and our revenues and market share may decrease. Our historical experience with usage of our products indicates that usage of IncrediMail Premium declines to approximately 8% after three years. Therefore, in order to induce our existing users to continue to send IncrediMail emails to potential new users, we must continually enhance our existing products and develop new ones. If we can not offer such products, because of lack of resources, competition or other reasons described elsewhere in these Risk Factors , our revenues and results of operations will be adversely affected.
+
+If we are unable to generate substantial revenues from advertisers, we may not be able to increase our revenues or execute our business strategy.
+
+We currently display third party advertising on our website and in our free software. Our revenues from these advertisers have increased over the past two years but still represented less than 10% of our revenues for the nine months ended September 30, 2005. We intend to dedicate additional marketing resources to the development of this revenue stream. However, our ability to increase our advertising revenues may be limited by, among other reasons, a possible perception that the Internet is an ineffective marketing medium due to the excessive number of banner advertisements, the growing number of installations by Internet users of filter software programs that allow them to block pop-up advertisements or to prevent installation of software components that act as spying agents, and the limitations on the content of advertisements on the Internet compared to other forms of media. In addition, our advertising revenues depend, in part, on the number of our active users and visitors to our website. Because most users stop using the IncrediMail software after three years, if we do not continue to experience large numbers of new registered users, or if our website traffic decreases, our advertising revenues may not increase or could decline. In addition, we may not be able to increase our advertising revenue if advertising rates decrease in response to increased competition. Our inability to increase our revenues from advertisers could reduce our growth and affect our profitability.
+
+The market for email software products and services is highly competitive, and if we cannot compete effectively, our revenues will decline and we will be unable to gain or retain market share.
+
+Our products compete in the specialized market for email software products and services that aim to offer a customized and entertaining email experience for consumers, including features such as email notifiers, software skins, email backgrounds and multimedia content. Our main competitors among specialized providers of email services offer the following products: Arcsoft Multimedia Email 3, Comet Cursor Plus, LetterMark email, FunWeb Products , Hotbar , Metamail 4.0 and WikMail 2005, all of which incorporate special features that 
+
+10
+
+provide a personalized email experience. In addition, our products also face competition from general email software programs offered to the private market by large Internet and software companies, such as AOL9 and NetscapeMail by America Online, Inc., Eudora by QUALCOMM Incorporated (Nasdaq: QCOM), FireFox Mail by Mozilla Foundation and Outlook Express and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also incorporate certain special features that provide a personalized email experience. Many of the large Internet and software companies offer their email software programs free of charge. Competition with these products could result in reduced prices and margins, fewer purchases of our products and services and loss of market share.
+
+Many of our competitors have more established brands, products and customer relationships than we do, which could inhibit our market penetration efforts even if they may not offer a customized and entertaining email experience similar to IncrediMail. For example, consumers may choose to receive an extensive package of Internet and email services from a more dominant and recognized company, such as Microsoft Corporation (Outlook Express or MSN ) or America Online, Inc. (AOL ). If we are unable to achieve continued market penetration, we will be unable to compete effectively.
+
+In addition, many of our other current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to develop new technologies, products or features that could effectively compete with our existing product lines. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors. See Business Competition for additional discussion of our competitive market.
+
+We may use a substantial
+ portion of the proceeds of this offering to 
+acquire an unspecified business.
+ These acquisitions could divert our resources, cause dilution to our shareholders and adversely affect our financial results.
+
+We may use a portion of the proceeds of this offering to acquire complementary products, technologies or businesses. We have not made any acquisitions to date and our management has not had any experience making acquisitions or integrating acquired businesses. Negotiating potential acquisitions or integrating newly-acquired products, technologies or businesses could divert our management s attention from other business concerns and could be expensive and time-consuming. Acquisitions could expose our business to unforeseen liabilities or risks associated with the business or assets acquired or with entering new markets. In addition, we might lose key employees while integrating new organizations. Consequently, we might not effectively integrate any acquired products, technologies or businesses, and might not achieve anticipated revenues or cost benefits. In addition, future acquisitions could result in customer dissatisfaction, performance problems with an acquired product, technology or company, or issuances of equity securities that cause dilution to our existing shareholders. Furthermore, we may incur contingent liability or possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, and we may not have, or may not be able to enforce, adequate remedies in order to protect our company. If any of these or similar risks relating to acquiring products, technologies or businesses should occur, our business could be materially harmed. See Use of Proceeds. 
+
+If we are deemed to be not in compliance with applicable data protection laws, our operating results could be materially affected.
+
+We collect and maintain certain information about our customers in our database. Such collection and maintenance of customer information is subject to data protection laws and regulations in Israel, the United States and other countries. A failure to comply with applicable regulations could result in class actions, governmental investigations and orders, and criminal and civil liabilities, which could materially affect our operating results.
+
+Although we strive to comply with all applicable regulations and use our best efforts to inform our customers of our business practices prior to any installations of our software, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which in turn could have a material effect on our business. See Business Government Regulation for additional discussion of applicable regulations.
+
+11
+
+If there are privacy or security concerns regarding our collection, use and handling of personal information, we could incur substantial expenses.
+
+Although we take all reasonable steps to insure the security of personal information, concerns may be expressed, from time to time, about whether our products compromise the privacy or confidentiality of the information of users and others. Concerns about our collection, use, sharing or handling of personal information or other privacy related matters, even if unfounded, could damage our reputation and operating results. See Business Government Regulation for additional discussion of applicable regulations.
+
+We rely on online payment for our products and any limitations imposed on online payment services could increase our costs associated with the collection of payment and could adversely affect our business.
+
+Payment for our products is processed online. We engage third parties to process online payment for our products. Credit card companies could change their policies with respect to acceptance of online payments, refunds and chargebacks or in response to any change in government regulations. Any of these changes could result in increased costs for providing online payment services. Furthermore, implementation of an alternative method for collection of payment would entail substantial expenses and may not be feasible for our business.
+
+We depend on a third party Internet and telecommunication provider to operate our website and securing alternate sources for these services could significantly increase our expenses.
+
+We depend on Bezeq International Ltd., a third party provider of Internet and related telecommunication services, including hosting and location facilities, to operate our website. This company may not continue to provide services to us without disruptions in services, at the current cost or at all. While we believe that there are many alternative providers of hosting and other communication services available to us, the costs associated with any transition to a new service provider could be substantial and require us to reengineer our computer systems and telecommunications infrastructure to accommodate a new service provider. This process could be both expensive and time consuming and could result in lost business both during the transition period and after.
+
+Our servers and communications systems could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions. Although we maintain back-up systems for our servers, any of these events could cause system interruption, delays, loss of critical data and lost registered users and revenues.
+
+We currently rely solely on the Internet as a means to sell our products. Accordingly, if we or our customers are unable to utilize the Internet due to a failure of technology or infrastructure, terrorist activity or other reasons, we could lose current or potential customers and revenues. While we have backup systems for most aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. Furthermore, interruptions in our website could materially impede our ability to attract new companies to advertise on our website and to maintain relationships with current advertisers. Difficulties of this kind could damage our reputation, be expensive to remedy and curtail our growth.
+
+Termination of our licensing or promotion agreements or our agreement with Commtouch could result in lost revenues and loss of market share.
+
+Our licensing and promotion agreements, including our agreements with Oberon Media Inc. and PointMatch USA Inc., are providing an increasing amount of revenue, growing from $31,000 for all of 2003 to $583,000 for the nine months ended September 30, 2005. The termination of those agreements would result in lost revenues and the loss of market share until we were able, if at all, to enter into new and similar arrangements. Further, the agreement with PointMatch USA prohibits us from integrating or promoting a similar matchmaking site or otherwise competing with it for 12 months after the termination, which would make it more difficult to enter into similar arrangements. In addition, if our agreement to use the anti-spam software development kit developed by Commtouch Ltd. were to terminate, we would be required to redevelop our Junk Filter Plus anti-spam product. We have just launched Junk Filter Plus. If we have to redevelop it ourselves or retain a new provider of a development kit because of a termination of the Commtouch agreement, we would likely suffer lost revenues and the potential loss of market share.
+
+12
+
+Our products operate in a variety of computer configurations and could contain undetected errors or defects that could result in product failures, lost revenues and loss of market share.
+
+Our software may contain undetected errors, failures or defects, especially when the products are first introduced or when new versions are released. Our customers computer environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. Therefore, there could be errors or failures in our products. In addition, despite testing by us and beta testing by some of our registered users, errors, failures or bugs may not be found in new products or releases until after commencement of commercial sales. In the past, we have discovered software errors, failures and defects in certain of our product offerings after their introduction and have likely experienced delayed or lost revenues during the period required to correct these errors.
+
+Errors, failures or defects in products released by us could result in negative publicity, product returns, loss of or delay in market acceptance of our products, loss of competitive position or claims by customers. Alleviating any of these problems could require significant expense and could cause interruptions.
+
+Exchange rate fluctuations may decrease our earnings if we are not able to hedge our currency exchange risks effectively.
+
+A majority of our revenues are denominated in U.S. dollars. However, most of our costs, mainly personnel expenses, are incurred in New Israeli Shekels, or NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations in Israel. A revaluation of one percent of the NIS as compared to the U.S. dollar will cause an effect of less than 1% on our income before taxes. During 2003 and 2004, the exchange rate of the U.S. dollar to the New Israeli Shekel declined significantly although that trend reversed in the first nine months of 2005.
+
+We receive only U.S. dollars from sales; however, our online payment service providers process sales in various currencies. Some of the proceeds from our sales are processed by an online payment service that holds 25% of these proceeds for a period of up to six months. With respect to cash proceeds that are held by this online payment service in currencies other than U.S. dollar, we bear a foreign currency fluctuation risk until such proceeds are actually paid to us. As of September 30, 2005, proceeds in foreign currencies held by this online payment service amounted to approximately $353,000 and resulted in expenses of approximately $69,000 for the nine months ended September 30, 2005. In addition, in territories where our prices are based on local currencies, fluctuations in the dollar exchange rate could affect our gross profit margin. To date, we have not found it necessary to hedge the risks associated with fluctuations in currency exchange rates. In the future, if we do not engage in effective hedging transactions, we may incur losses from unfavorable fluctuations in foreign currency exchange rates. See Management s Discussion of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure of Market Risks for further discussion of the effects of exchange rate fluctuations on earnings.
+
+A loss of the services of our senior management and other key personnel could adversely affect execution of our business strategy.
+
+We depend on the continued services of our senior management, particularly Yaron Adler, our Chief Executive Officer, Ofer Adler, our Chief Product Officer, and Gil Pry-Dvash, our Chief Technology Officer. Our business and operations to date have been mainly implemented under the direction of our current senior management. The loss of their services could create a gap in management and could result in the loss of management and technical expertise necessary for us to execute our business strategy and thereby, adversely affect execution of our business strategy. We have agreed with the representative of the underwriters of this offering to obtain key person life insurance on the life of Yaron Adler in the amount of $1.5 million prior to the consummation of this offering. We do not expect to obtain key person life insurance with respect to our other officers.
+
+Further, our ability to execute our business strategy also depends on our ability to continue to attract, retain and motivate qualified and skilled technical and creative personnel and skilled management, marketing and sales personnel. If we cannot attract and retain additional key employees or lose one or more of our current key employees, our ability to develop or market our products could be adversely affected. See Management. 
+
+13
+
+Under current U.S. and Israeli law, we may not be able to enforce covenants not to compete and, therefore, may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
+
+We have entered into non-competition agreements with all of our professional employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. Under current U.S. and Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
+
+Our international operations involve special risks that could increase our expenses, adversely affect our operating results and require increased time and attention of our management.
+
+We derive and expect to continue to derive a substantial portion of our revenues from customers outside Israel and the United States. Our international sales and related operations are subject to a number of inherent risks, including risks with respect to:
+
+ 
+
+potential loss of proprietary information due to piracy, misappropriation or laws that may be less protective of our intellectual property rights than those of Israel or the United States;
+
+ 
+
+costs and delays associated with translating and supporting our products in multiple languages;
+
+ 
+
+foreign exchange rate fluctuations and economic instability, such as higher interest rates and inflation, which could make our products more expensive in those countries;
+
+ 
+
+costs of compliance with a variety of laws and regulations;
+
+ 
+
+restrictive governmental actions such as trade restrictions;
+
+ 
+
+limitations on the transfer and repatriation of funds and foreign currency exchange restrictions;
+
+ 
+
+compliance with different consumer and data protection laws and restrictions on pricing or discounts;
+
+ 
+
+lower levels of adoption or use of the Internet and other technologies vital to our business and the lack of appropriate infrastructure to support widespread Internet usage;
+
+ 
+
+lower levels of consumer spending on a per capita basis and fewer opportunities for growth in certain foreign market segments compared to the United States;
+
+ 
+
+lower levels of credit card usage and increased payment risk;
+
+ 
+
+changes in domestic and international tax regulations; and
+
+ 
+
+geopolitical events, including war and terrorism.
+
+Risks Related to Our Intellectual Property
+
+If we are unable to protect our intellectual property rights, our competitive position could be harmed.
+
+Our ability to execute our business strategy and compete depends in part upon our ability to protect our intellectual property. In 2000, we submitted patent applications in the United States, the European Community and Israel with respect to certain processes that we employ in our products. No patents have been issued under these applications to date. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any issued patents may be challenged, invalidated or legally circumvented by third parties. We cannot be certain that our patents will be upheld as valid and enforceable or prevent the development of competitive products. Consequently, competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. If our
+
+14
+
+intellectual property does not adequately protect us from our competitors products and methods, our competitive position could be adversely affected and we could be precluded from operating all or a portion of our business.
+
+In addition, we exploit our brand name Incredi by applying it to products offered through collaborations with third parties. We have registered INCREDIMAIL as a trademark only in the United States. Our ownership and use of the Incredi brand name may be challenged, invalidated or legally circumvented by third parties, in which case our ability to generate revenues from its exploitation will suffer.
+
+We have registered, or have rights to, various domain names relating to our brand, including incredimail.com, incredidate.com and incredigames.com. If we fail to maintain, or to enforce our rights to, these registrations, it will be difficult for us to implement our strategy to increase recognition of our brand. Third parties have registered domain names similar to ours and if such parties engage in a business that may be harmful to our reputation or confusing to our customers, our revenue may decline and we may incur additional expenses in maintaining our brand.
+
+We rely on a combination of patent and other intellectual property laws and confidentiality, non-disclosure and assignment of inventions covenants as appropriate, with our employees and consultants, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our property from unauthorized disclosure, third-party infringement or misappropriation. We also rely on trade secret protection for our technology, in part through confidentiality covenants with our employees, consultants and third parties. However, these parties may breach these covenants and we may not have adequate remedies for any breach. Also, others may learn of our trade secrets through a variety of methods. In addition, the laws of certain countries in which we sell our products may not protect our intellectual property rights to the same extent as the laws of the United States or Israel. See Business Intellectual Property. 
+
+Third party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in future costly intellectual property litigation, which could adversely affect our financial position and our ability to execute our business strategy.
+
+The appeal of our products is largely the result of the graphics, sound and multimedia content that we incorporate in our products. We enter into licensing arrangements with third parties for these uses. However, other third parties may from time to time claim that our current or future use of content, sound and graphics infringe their intellectual property rights, and seek to prevent, limit or interfere with our ability to make, use or sell our products. For example, in 2002 and again in 2004, a third party had contacted us to demand that we remove certain Smiley graphics from our website, claiming that he had registered a trademark with respect to these graphics and that our use infringed his rights. We believe this claim to be without any merit and intend to vigorously defend any suit filed against us in this matter.
+
+If it appears necessary or desirable, we may seek to obtain licenses for intellectual property rights that we are allegedly infringing, may infringe or desire to use. Although holders of these types of intellectual property rights often offer these licenses, we cannot assure you that licenses will be offered or that the terms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights from a third party for technology or content, sound or graphic used by us could cause us to incur substantial liabilities and to suspend the development and sale of our products. Alternatively, we could be required to expend significant resources to re-design our products or develop non-infringing technology. If we are unable to re-design our products or develop non-infringing technology, our revenues could decrease and we may not be able to execute our business strategy.
+
+We may become involved in litigation not only as a result of alleged infringement of a third-party s intellectual property rights, but also to protect our own intellectual property rights. If we do not prevail in any third-party action for infringement, we may be required to pay substantial damages and be prohibited from using intellectual property essential to our products.
+
+We may also become involved in litigation in connection with the brand name rights associated with our company name or the names of our products. We do not know whether others will assert that our company name or brand name infringes their trademark rights. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the name of our company or products, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales. Any lawsuit, regardless of its merit, would likely be time-consuming, expensive to resolve and require additional management time and attention.
+
+15
+
+Unlawful copying of our products or other third party violations of existing legal protections or reductions in the legal protection for intellectual property rights of software developers or use of open source software could adversely affect our revenue.
+
+The software products that we sell incorporate a technology that reduces the ability of third parties to copy the software without having paid for it. Unlicensed copying and use of software and intellectual property rights represents a loss of potential revenue to us, which could be more significant in countries where laws are less protective of intellectual property rights. Continued educational and enforcement efforts may not affect revenue positively and further deterioration in compliance with existing legal protections or reductions in the legal protection for intellectual property rights of software developers could adversely affect our revenue.
+
+In addition, certain of our products or services may now or in the future incorporate open source software, which are typically distributed as-is without warranties, such as warranties of performance or ownership or indemnities against intellectual property infringement claims. Moreover, to the extent that we incorporate open source software into our products or services, although we do not currently intend ever to incorporate open source software that would require us to do so, the license for such open source software may obligate us, among other things, to pass on to our licensees without charge the rights to use, copy, modify and redistribute the underlying software source code, both with respect to the original open source code and any modifications to such code created by us.
+
+Risks Related to Our Industry
+
+The Internet as a medium for commerce and communication is not yet fully established and is subject to uncertainty and a decline in the number of Internet users could cause our revenues to decrease and our products to become obsolete.
+
+The Internet as a medium for communication is not yet fully established and is subject to uncertainty. In addition, the electronic communication industry is rapidly evolving, as new means for electronic communication are offered to the public. Our ability to execute our business strategy is dependent upon the continued predominance of email as a means of electronic communication and upon the continued use of the Internet.
+
+Although email software programs and services currently enjoy a large market, the development and consumer acceptance of other means of electronic communication, such as text messaging over phone networks, could result in a substantial decrease in the size of this market, in which case our revenues could decrease and our products could become obsolete.
+
+In addition, our products may only be used on personal computers that can be and are connected to the Internet. While the number of Internet users has been rising, the Internet infrastructure may not expand fast enough to meet the increased levels of demand. In addition, activity that diminishes the experience for Internet users, such as spyware, spoof emails, viruses and spam directed at Internet users, as well as viruses and denial of service attacks directed at Internet companies and service providers, may discourage people from using the Internet, including for communications and commerce. Furthermore, newer users of the Internet could be less active email users compared to our earlier users. If use of the Internet as a medium for communication and commerce grows at a slower rate than we anticipate, our sales would be less than expected. In addition, the development and acceptance of new technologies and platforms could divert our targeted customers from the use of the Internet, in which case our results of operations will be adversely affected.
+
+New laws and regulations applicable to e-commerce, Internet advertising, privacy and data collection, and uncertainties regarding the application or interpretation of existing laws and regulations, could harm our business.
+
+Our business is conducted through the Internet and therefore, among other things, we are also subject to the laws and regulations that apply to e-commerce. These laws and regulations are becoming more prevalent in the United States and elsewhere and may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, data protection, pricing, content, copyrights, electronic contracts and other communications, Internet advertising, consumer protection, the provision of online payment services, broadband residential Internet access, and the characteristics and quality of products and services.
+
+16
+
+Many areas of the law affecting the Internet remain largely unsettled, even in areas where there has been some legislative action. It is difficult to determine whether and how existing laws, such as those governing intellectual property, privacy and data protection, libel, data security and taxation, apply to the Internet and our business. New laws and regulations may seek to impose additional burdens on companies conducting business over the Internet. We are unable to predict the nature of the limitations that may be imposed.
+
+For example, legislation has been enacted to regulate the use of cookie technology. Upon installation of our software, certain cookies generated by us and our advertisers are placed on our customers computers. It has been argued that Internet protocol addresses and cookies are intrinsically personally identifiable information that is subject to privacy standards. We cannot assure you that our current policies and procedures would meet these restrictive standards.
+
+In addition, technology is changing constantly and data security regulations and standards are in a state of flux. Changes in law or regulations may require that we materially change the way we do business. For example, we may be required to implement physical, administrative and technological security measures different from those we have now, such as different data access controls or encryption technology. We may incur substantial expenses in implementing such security measures.
+
+In addition, although current decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet, the U.S. Congress and a number of states have been considering various initiatives that could limit or supersede these decisions. If any of these initiatives result in a reversal of the Court s current position, we could be required to collect sales and use taxes on our U.S. sales. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us and could decrease our future sales.
+
+The cost of compliance with taxation, consumer and privacy related regulations could be material and we may not be able to comply with the applicable regulations in a timely or cost-effective manner. In response to evolving legal requirements, we may be compelled to change our business model and practices, which could reduce our sales, and we may not be able to replace the revenues lost as a consequence of the change. These changes could also require us to incur significant expenses, subject us to liability and require increased time and attention of our management. See Business Government Regulation for additional discussion of applicable regulations affecting our company.
+
+Risks Related to Our Operations in Israel
+
+Political, economic and military instability in the Middle East may impede our ability to operate and harm our financial results.
+
+Our principal executive offices are located in Israel. Accordingly, political, economic and military conditions in the Middle East may affect directly our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Since October 2000, terrorist violence in Israel has increased significantly. Ongoing and revived hostilities and the attempts to resolve the conflict between Israel and its Arab neighbors often results in political instability that affects the Israeli capital markets and can cause volatility in interest rates, exchange rates and stock market quotes. These or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease. In addition, we can not predict the effect on Israel or the Middle East generally of the recent elections in the Palestinian Authority or of the formation of Kadima, a new Israeli political party, and the elections to be held in March 2006 for the Knesset, the Israeli parliament. Furthermore, several countries, principally those in the Middle East, still restrict business with Israel and Israeli companies although the impact of these restrictions is not as important for a company such as ours that sells its products through the Internet. See Conditions in Israel Political Conditions for additional information.
+
+Our operations may be disrupted by the obligations of our personnel to perform military service.
+
+Many of our male employees in Israel, including members of senior management, are obligated to perform up to 36 days of military reserve duty annually until they reach age 48 and, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of military service of one or more of our key employees. See Conditions in Israel Military Service for additional information.
+
+17
+
+Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this prospectus or asserting U.S. securities laws claims in Israel.
+
+We are incorporated in Israel and all of our executive officers, most of our directors and the Israeli experts named in this prospectus reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, all of our assets and most of the assets of our executive officers and directors and some of the experts named in this prospectus are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel. For more information regarding the enforceability of civil liabilities against us, our directors and executive officers and certain of the experts named in this prospectus, including the terms under which certain judgments may be enforced by an Israeli court, please see Enforceability of Civil Liabilities. 
+
+The tax benefits available to us require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and taxes.
+
+We have generated income and therefore, are able to take advantage of tax exemptions and reductions resulting from the Approved Enterprise status of our facilities in Israel. To remain eligible for these tax benefits, we must continue to meet certain conditions, including making specified investments in property and equipment, financing a percentage of investments with share capital and obtaining pre-approval for the sale of shares by a limited number of our shareholders. If we or such shareholders fail to meet these conditions in the future, the tax benefits would be canceled and we could be required to refund any tax benefits we have received. These tax benefits may not be continued in the future at their current levels or at any level.
+
+Effective April 1, 2005, the Law for the Encouragement of Capital Investments was amended. As a result, the criteria for investments qualified to receive tax benefits as an Approved Enterprise were revised. No assurance can be given that we will, in the future, be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits would increase our tax liability in the future, which would reduce our profits or increase our losses. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities might not be eligible for inclusion in Israeli tax benefit programs. See Israeli Taxation Law for the Encouragement of Capital Investments, 1959 for more information about these programs.
+
+Risks Related to This Offering
+
+Our ordinary shares have not been publicly-traded, and we expect that the price of our ordinary shares will fluctuate substantially.
+
+Before this offering, there has been no public market for our ordinary shares. An active public trading market may not develop after completion of this offering or, if developed, may not be sustained. In addition, our ordinary shares will be included for quotation in the Nasdaq Capital Market, which provides limited liquidity compared to the Nasdaq National Market or the national exchanges. The lack of a trading market may result in the loss of research coverage by any securities analyst that may cover our company in the future. Moreover, we cannot assure you that any securities analyst will initiate or maintain research coverage of our company and our ordinary shares. The price of the ordinary shares sold in this offering will not necessarily reflect the market price of our ordinary shares after this offering. The market price for our ordinary shares after this offering will be affected by a number of factors, including:
+
+ 
+
+any increase or decrease in the sales of our products;
+
+ 
+
+the recruitment or departure of key personnel;
+
+ 
+
+the announcement of new products or service enhancements by us or our competitors;
+
+ 
+
+quarterly variations in our or our competitors results of operations;
+
+18
+
+ 
+
+seasonal trends in purchases of our products;
+
+ 
+
+announcements related to litigation;
+
+ 
+
+changes in earnings estimates, investors perceptions or recommendations by securities analysts or our failure to achieve analysts earning estimates;
+
+ 
+
+fluctuations in foreign currency exchange rates affecting our results of operations;
+
+ 
+
+developments in our industry; and
+
+ 
+
+general market conditions and political and other factors unrelated to our operating performance or the operating performance of our competitors.
+
+In addition, the stock prices of many companies in the software and Internet industries have experienced wide fluctuations that often have been unrelated to the operating performance of those companies. These factors and price fluctuations may materially and adversely affect the market price of our ordinary shares.
+
+Purchasers in this offering will experience immediate and substantial dilution in net tangible book value.
+
+The initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding ordinary shares. As a result, investors purchasing ordinary shares in this offering will incur immediate dilution of $5.20, or 74.3% per share, based on an assumed initial public offering price of $7.00 per share. As a result of this dilution, investors purchasing ordinary shares from us will have contributed 84.0% of the total amount invested in us but will own only 26.7% of our outstanding ordinary shares. In addition, the exercise of outstanding options and future equity issuances may result in further dilution to investors and current shareholders. See Dilution for a further discussion of the dilution to occur as a result of this offering.
+
+If we cannot continue to satisfy the Nasdaq Capital Market s listing maintenance requirements and other Nasdaq rules, our ordinary shares could be delisted, which could negatively affect the price of our ordinary shares and your ability to sell them.
+
+Following this offering, in order to maintain listing on the Nasdaq Capital Market, we will be required to comply with Nasdaq rules applicable to foreign private issuers, which include rules regarding minimum shareholders equity, minimum share price, and certain corporate governance requirements. We may not be able to continue to satisfy the listing maintenance requirements of the Nasdaq Capital Market and other applicable Nasdaq rules. If we are unable to satisfy the Nasdaq criteria for maintaining listing, our ordinary shares could be subject to delisting. If our shares are delisted, trading, if any, of our ordinary shares would thereafter be conducted in the over-the-counter market, in the so-called pink sheets or on the National Association of Securities Dealers, Inc. s electronic bulletin board. As a consequence of any such delisting, our share price could be negatively affected and our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of, our ordinary shares.
+
+We will incur a significant increase in costs as a result of being a public company.
+
+As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements as well as costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, the rules of the Nasdaq Market and the provisions of the Israeli Companies Law that apply to public companies. For example, as a public company, we will create additional board committees, and we are obligated to nominate two external directors as provided by the Israeli Companies Law. We also have hired a full-time chief financial officer and intend to increase our accounting and financial staff. In addition, we expect to incur significant costs in connection with disclosure controls and procedures and the assessment of our internal controls over financial reporting, as required under the Sarbanes-Oxley Act of 2002. Furthermore, due to the enhanced liability imposed on directors and officers of a public company, we expect our director and officer liability insurance to be more difficult and more expensive for us to obtain. See Management s Discussion and Analysis of Financial Conditions and Results of Operations Overview General and Administrative Expenses for a discussion of our increased expenses as a result of being a public company.
+
+19
+
+If we do not establish a fully-staffed accounting and financial department, our business and our share price could be adversely affected.
+
+In order to support our intended growth, as well as to help ensure compliance with our obligations as a public company, we will need to increase our accounting staff and retain an internal auditor, as required of public companies under applicable Israeli law. If we can not retain such personnel, our ability to meet our reporting obligations could suffer and we may not be able to manage our intended growth effectively, which could also cause the price of our ordinary shares to decline. Further, beginning with our annual report for the year ending December 31, 2007, we and our auditor will be required to report on the effectiveness of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. The existence of one or more material weaknesses, whether because of inadequate staffing or otherwise, would require us and our auditor to conclude that our internal control over financial reporting is not effective. If there are identified deficiencies in our internal control over financial reporting, we could be subject to investigations and sanctions by regulatory authorities. As a result, the price of our ordinary shares could decline and we may be required to incur additional costs in improving our accounting and financial staffing as well as our internal control system. The potential damage to our reputation from a public announcement of an internal control weakness could also adversely affect the price of our ordinary shares.
+
+We are controlled by a small number of existing shareholders, who may make decisions with which you may disagree.
+
+Our directors and officers currently beneficially own (including shares issuable upon exercise of options exercisable within 60 days of January 25, 2006) approximately 54.16% of our outstanding ordinary shares in the aggregate and will continue to beneficially own or control approximately 39.77% of our outstanding ordinary shares following the completion of this offering, or 35.79% if the underwriters exercise their over-allotment option in full. The interests of these shareholders may differ from your interests. These shareholders, acting together, could exercise significant influence over our operations and business strategy and will have sufficient voting power to influence all matters requiring approval by our shareholders, including the ability to elect or remove directors, to approve or reject mergers or other business combination transactions, the raising of future capital and the amendment of our articles of association, which govern the rights attached to our ordinary shares. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive you of a possible premium for your ordinary shares as part of a sale of our company.
+
+Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
+
+We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. See Description of Share Capital Approval of Related Party Transactions for additional information concerning this duty. Investors in this offering and our shareholders generally may find it difficult to comply with the provisions of Israeli law.
+
+Moreover, unlike U.S. domestic corporations, foreign private issuers such as IncrediMail are not required to comply with the Nasdaq Market rules regarding independent director review of related party transactions and shareholder approval of certain corporate actions (including issuances of in excess of 20% of our outstanding securities). We are obligated to comply with Israeli laws with respect to these matters, as more fully described under Description of Share Capital Approval of Related Party Transactions and Voting, Shareholder Meetings and Resolutions. 
+
+Provisions of our articles of association and Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and, therefore, depress the price of our shares.
+
+Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain provisions that may make it more difficult to acquire our company, such as provisions establishing a 
+
+20
+
+classified board. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Description of Share Capital Approval of Related Party Transactions and Israeli Taxation for additional discussion about some anti-takeover effects of Israeli law.
+
+These provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our shares.
+
+We will have broad discretion in how we use the proceeds of this offering and we may not apply the proceeds to uses that will benefit shareholders.
+
+Our management will have broad discretion over the use and investment of the net proceeds of this offering, and accordingly, investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds, with only limited information concerning management s specific intentions. See Use of Proceeds. 
+
+Future sales of our ordinary shares could reduce our stock price.
+
+We have granted to a number of our shareholders, who together own approximately 26% of our shares prior to this offering, registration rights with respect to their ordinary shares or ordinary shares underlying other securities, as the case may be. In addition, we have granted the underwriters of this offering a purchase option to purchase 
+175,000
+ of our ordinary shares and the right to demand registration of such underlying shares under the Securities Act of 1933, as amended. Sales by shareholders and the underwriters of substantial amounts of our ordinary shares, or the perception that these sales may occur in the future, could materially and adversely affect the market price of our ordinary shares. The ordinary shares we are offering for sale in this offering will be freely tradeable immediately following this offering. In addition, a substantial number of shares held by our current shareholders or issuable upon exercise of options will be eligible for sale in the public market after this offering, and could be sold in a registration under the Securities Act or an exemption from registration. Our executive officers, directors and certain large shareholders have agreed not to sell their shares for a period of 12 months after the date of this prospectus. As these restrictions on resale end, the market price of our ordinary shares could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
+
+Although we have paid dividends in the past we do not expect to pay dividends in the future and any return on investment may be limited to the value of our stock.
+
+Although we have paid dividends in the past, we do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. The payment of dividends on our ordinary shares will depend on our earnings, financial condition and other business and economic factors affecting us at the time as our board of directors may consider relevant. We may pay dividends in any fiscal year only out of profits, as defined by the Israeli Companies Law, and provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates. Following this offering, we intend to reinvest the amount of tax exempt income derived from our Approved Enterprise status and not to distribute that income as dividends. See Dividend Policy for additional information regarding the payment of dividends.
+
+U.S. investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
+
+If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our shareholders. If we were classified as a passive foreign investment company, a U.S. holder of our ordinary shares could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as excess distributions. Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. holder s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with 
+
+21
+
+respect to the amount allocated to years prior to the year of the disposition, or excess distribution, cannot be offset by any net operating losses. In addition, holders of shares in a passive foreign investment company may not receive a step-up in basis on shares acquired from a decedent. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares, as well as the specific application of the excess distribution and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see United States Federal Income Tax Considerations Passive Foreign Investment Company Considerations. 
+
+22
+
+CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
+
+Some of the statements under Summary, Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations, Business and elsewhere in this prospectus constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, will, should, could, would, expects, plans, intends, anticipates, believes, estimates, predicts, projects, potential or continue or the negative of such terms and other comparable terminology.
+
+Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. All forward-looking statements included in this prospectus are based on information available to us on the date of this prospectus. Except as require by applicable law, we undertake no obligation to update or revise any of the forward-looking statements after the date of this prospectus to conform those statements to reflect the occurrence of unanticipated events, new information or otherwise.
+
+You should read this prospectus and the documents that we reference in this prospectus and the exhibits to the registration statement on
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/PNBK_patriot_legal_matters.txt b/parsed_sections/legal_matters/2006/PNBK_patriot_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3f36a7cde3eb52d74e9925b1ec5b226a15e2c32b
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/PNBK_patriot_legal_matters.txt
@@ -0,0 +1,10943 @@
+Legal Matters 
+ 
+
+ The validity of the shares of common stock offered hereby will be passed upon for us by Tyler Cooper & Alcorn, LLP, Hartford, Connecticut. Certain legal
+matters regarding the offering will be passed upon for Sandler O'Neill & Partners, L.P. by Patton Boggs LLP, Washington, D.C. 
+
+72
+
+ 
+
+ 
+ 
+
+Experts 
+ 
+
+ The consolidated financial statements appearing in this prospectus and the registration statement on Form S-1 have been audited by
+McGladrey & Pullen, LLP, an independent registered public accounting firm, to the extent and for the periods indicated in their report appearing elsewhere herein and are included in reliance on
+such report upon the authority of such firm as experts in accounting and auditing. 
+
+ 
+ 
+
+Where You Can Find More Information 
+ 
+
+ We are subject to the informational requirements of the 1934 Act, and, in accordance therewith, file periodic reports, proxy statements and other information with
+the SEC. We have filed with the SEC a registration statement under the Securities Act of 1933, as amended, to register the common stock to be sold in the offering. The registration statement,
+including the exhibits, contains additional relevant information about us and our common stock. The rules and regulations of the SEC allow us to omit certain information included in the registration
+statement from this prospectus. You may read and copy the registration statement at the SEC's public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at
+1-800-SEC-0330 for further information on the SEC's public reference rooms. The registration statement also is available to the public from commercial document
+retrieval services and at the Internet World Wide Website maintained by the SEC at "http://www.sec.gov." 
+
+ "Patriot"
+and the corresponding logo are our trademarks. 
+
+73
+
+ 
+
+ 
+ 
+
+Index to Consolidated Financial Statements 
+ 
+
+Audited Financial Statements
+ 
+ 
+
+Report of McGladrey & Pullen, LLP, Independent Registered Public Accounting Firm
+ 
+F-2
+
+Consolidated Balance Sheets as of December 31, 2005 and 2004
+ 
+F-3
+
+Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003
+ 
+F-4
+
+Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003
+ 
+F-5
+
+Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
+ 
+F-6
+
+Notes to Consolidated Financial Statements
+ 
+F-7
+
+Unaudited Financial Statements
+
+ 
+
+ 
+
+Consolidated Balance Sheet as of June 30, 2006 (unaudited)
+
+ 
+
+F-38
+
+Consolidated Statements of Income for the six months ended June 30, 2006 and 2005 (unaudited)
+ 
+F-39
+
+Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2006 and 2005 (unaudited)
+ 
+F-40
+
+Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)
+ 
+F-41
+
+Notes to Consolidated Financial Statements (unaudited)
+ 
+F-42
+
+F-1
+
+ 
+
+ 
+
+ 
+ 
+
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+ 
+
+To
+the Shareholders and Board of Directors
+
+Patriot National Bancorp, Inc. and Subsidiary
+
+Stamford, Connecticut 
+
+ We
+have audited the accompanying consolidated balance sheets of Patriot National Bancorp, Inc. and Subsidiary (the "Company") as of December 31, 2005 and 2004, and the
+related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2005. These consolidated financial statements are the
+responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 
+
+ We
+conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
+obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
+the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
+presentation. We believe that our audits provide a reasonable basis for our opinion. 
+
+ In
+our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Patriot National Bancorp, Inc. and
+Subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the
+period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. 
+
+/s/
+McGladrey & Pullen, LLP 
+
+New
+Haven, Connecticut
+
+March 8, 2006 
+
+McGladrey & Pullen, LLP is a member firm of RSM International,
+
+an affiliation of separate and independent legal entities. 
+
+F-2
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY 
+ 
+ CONSOLIDATED BALANCE SHEETS 
+ 
+ December 31, 2005 and 2004 
+ 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+
+ASSETS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash and due from banks (Note 2):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Noninterest bearing deposits and cash
+ 
+$
+7,180,391
+ 
+$
+6,641,533
+ 
+
+ 
+Interest bearing deposits
+ 
+ 
+40,186
+ 
+ 
+28,876
+ 
+
+Federal funds sold
+ 
+ 
+6,500,000
+ 
+ 
+37,500,000
+ 
+
+Short-term investments
+ 
+ 
+2,247,028
+ 
+ 
+11,460,057
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Cash and cash equivalents
+ 
+ 
+15,967,605
+ 
+ 
+55,630,466
+ 
+
+Available for sale securities (at fair value) (Note 3)
+
+ 
+
+ 
+
+78,672,068
+
+ 
+
+ 
+
+76,269,475
+
+ 
+
+Federal Reserve Bank stock
+ 
+ 
+1,022,300
+ 
+ 
+692,600
+ 
+
+Federal Home Loan Bank stock (Note 7)
+ 
+ 
+1,296,700
+ 
+ 
+1,296,700
+ 
+
+Loans receivable (net of allowance for loan losses: 2005 $4,588,335; 2004 $3,481,525) (Note 4)
+ 
+ 
+364,243,777
+ 
+ 
+263,874,820
+ 
+
+Accrued interest and dividends receivable
+ 
+ 
+2,445,417
+ 
+ 
+1,758,339
+ 
+
+Premises and equipment, net (Notes 5 and 8)
+ 
+ 
+2,474,153
+ 
+ 
+2,132,633
+ 
+
+Deferred tax asset (Note 9)
+ 
+ 
+2,675,595
+ 
+ 
+1,677,042
+ 
+
+Goodwill (Note 10)
+ 
+ 
+930,091
+ 
+ 
+930,091
+ 
+
+Other assets (Note 7)
+ 
+ 
+913,456
+ 
+ 
+784,789
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total assets
+ 
+$
+470,641,162
+ 
+$
+405,046,955
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+LIABILITIES AND SHAREHOLDERS' EQUITY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Liabilities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Deposits (Note 6):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Noninterest bearing deposits
+ 
+$
+48,797,389
+ 
+$
+42,584,120
+ 
+
+ 
+ 
+Interest bearing deposits
+ 
+ 
+370,277,899
+ 
+ 
+324,421,205
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total deposits
+ 
+ 
+419,075,288
+ 
+ 
+367,005,325
+ 
+
+ 
+
+ Federal Home Loan Bank borrowings (Note 7)
+
+ 
+
+ 
+
+9,000,000
+
+ 
+
+ 
+
+8,000,000
+
+ 
+
+ 
+Junior subordinated debt owed to unconsolidated trust (Note 7)
+ 
+ 
+8,248,000
+ 
+ 
+8,248,000
+ 
+
+ 
+Accrued expenses and other liabilities
+ 
+ 
+2,943,259
+ 
+ 
+2,037,196
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total liabilities
+ 
+ 
+439,266,547
+ 
+ 
+385,290,521
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Commitments and Contingencies (Notes 7, 8, 11 and 13)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Shareholders' equity (Notes 11 and 14)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Preferred stock, no par value; 1,000,000 shares authorized, no shares issued
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Common stock, $2 par value: 30,000,000 shares authorized; shares issued and outstanding: 2005 3,230,649; 2004 2,486,391
+ 
+ 
+6,461,298
+ 
+ 
+4,972,782
+ 
+
+ 
+Additional paid-in capital
+ 
+ 
+21,709,224
+ 
+ 
+11,830,173
+ 
+
+ 
+Retained earnings
+ 
+ 
+4,308,242
+ 
+ 
+3,346,718
+ 
+
+ 
+Accumulated other comprehensive loss net unrealized loss on available for sale securities, net of taxes
+ 
+ 
+(1,104,149
+)
+ 
+(393,239
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total shareholders' equity
+ 
+ 
+31,374,615
+ 
+ 
+19,756,434
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total liabilities and shareholders' equity
+ 
+$
+470,641,162
+ 
+$
+405,046,955
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+See Notes to Consolidated Financial Statements. 
+
+F-3
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY 
+ 
+ CONSOLIDATED STATEMENTS OF INCOME 
+ 
+ Years Ended December 31, 2005, 2004 and 2003 
+ 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+2003
+
+Interest and Dividend Income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest and fees on loans
+ 
+$
+21,561,121
+ 
+$
+15,631,838
+ 
+$
+12,782,457
+
+ 
+Interest on investment securities
+ 
+ 
+2,750,205
+ 
+ 
+2,496,065
+ 
+ 
+2,022,490
+
+ 
+Dividends on investment securities
+ 
+ 
+510,657
+ 
+ 
+358,012
+ 
+ 
+311,567
+
+ 
+Interest on Federal funds sold
+ 
+ 
+315,942
+ 
+ 
+189,485
+ 
+ 
+96,693
+
+ 
+Other interest income
+ 
+ 
+10,776
+ 
+ 
+2,851
+ 
+ 
+1,495
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total interest and dividend income
+ 
+ 
+25,148,701
+ 
+ 
+18,678,251
+ 
+ 
+15,214,702
+
+ 
+ 
+
+ 
+
+ 
+
+Interest Expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest on deposits (Note 6)
+ 
+ 
+9,366,563
+ 
+ 
+6,213,732
+ 
+ 
+4,861,152
+
+ 
+Interest on Federal Home Loan Bank borrowings
+ 
+ 
+374,315
+ 
+ 
+371,699
+ 
+ 
+327,020
+
+ 
+Interest on subordinated debt
+ 
+ 
+527,435
+ 
+ 
+380,194
+ 
+ 
+270,610
+
+ 
+Interest on other borrowings
+ 
+ 
+1,312
+ 
+ 
+42,883
+ 
+ 
+129,473
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total interest expense
+ 
+ 
+10,269,625
+ 
+ 
+7,008,508
+ 
+ 
+5,588,255
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net interest income
+ 
+ 
+14,879,076
+ 
+ 
+11,669,743
+ 
+ 
+9,626,447
+
+Provision for Loan Losses (Note 4)
+
+ 
+
+ 
+
+1,110,000
+
+ 
+
+ 
+
+556,000
+
+ 
+
+ 
+
+563,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net interest income after provision for loan losses
+ 
+ 
+13,769,076
+ 
+ 
+11,113,743
+ 
+ 
+9,063,447
+
+ 
+ 
+
+ 
+
+ 
+
+Noninterest Income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Mortgage brokerage referral fees
+ 
+ 
+2,104,065
+ 
+ 
+1,717,756
+ 
+ 
+3,356,470
+
+ 
+Loan origination and processing fees
+ 
+ 
+402,723
+ 
+ 
+408,152
+ 
+ 
+668,410
+
+ 
+Fees and service charges
+ 
+ 
+561,651
+ 
+ 
+465,018
+ 
+ 
+378,415
+
+ 
+Gain on sale of investment securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+307,739
+
+ 
+Other income
+ 
+ 
+160,598
+ 
+ 
+111,278
+ 
+ 
+102,706
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total noninterest income
+ 
+ 
+3,229,037
+ 
+ 
+2,702,204
+ 
+ 
+4,813,740
+
+ 
+ 
+
+ 
+
+ 
+
+Noninterest Expenses
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Salaries and benefits (Notes 8 and 12)
+ 
+ 
+8,997,255
+ 
+ 
+7,544,055
+ 
+ 
+7,574,532
+
+ 
+Occupancy and equipment expense, net
+ 
+ 
+2,082,593
+ 
+ 
+1,707,769
+ 
+ 
+1,311,038
+
+ 
+Data processing and other outside services
+ 
+ 
+1,147,378
+ 
+ 
+802,536
+ 
+ 
+690,168
+
+ 
+Advertising and promotional expenses
+ 
+ 
+420,222
+ 
+ 
+369,638
+ 
+ 
+332,852
+
+ 
+Professional services
+ 
+ 
+419,921
+ 
+ 
+386,110
+ 
+ 
+301,016
+
+ 
+Loan administration and processing expenses
+ 
+ 
+190,139
+ 
+ 
+209,283
+ 
+ 
+404,231
+
+ 
+Other operating expenses
+ 
+ 
+1,376,979
+ 
+ 
+1,237,159
+ 
+ 
+1,045,630
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total noninterest expenses
+ 
+ 
+14,634,487
+ 
+ 
+12,256,550
+ 
+ 
+11,659,467
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Income before income taxes
+ 
+ 
+2,363,626
+ 
+ 
+1,559,397
+ 
+ 
+2,217,720
+
+Provision for Income Taxes (Note 9)
+ 
+ 
+957,000
+ 
+ 
+633,000
+ 
+ 
+877,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net income
+ 
+$
+1,406,626
+ 
+$
+926,397
+ 
+$
+1,340,720
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Basic income per share (Note 11)
+ 
+$
+0.52
+ 
+$
+0.38
+ 
+$
+0.56
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Diluted income per share (Note 11)
+ 
+$
+0.51
+ 
+$
+0.37
+ 
+$
+0.55
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Dividends per share
+ 
+$
+0.155
+ 
+$
+0.135
+ 
+$
+0.115
+
+ 
+ 
+
+ 
+
+ 
+
+See Notes to Consolidated Financial Statements. 
+
+F-4
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY 
+ 
+ CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
+ 
+ Years Ended December 31, 2005, 2004 and 2003 
+ 
+
+ 
+
+ 
+Number of
+
+Shares
+ 
+Common
+
+Stock
+ 
+Additional
+
+Paid-in
+
+Capital
+ 
+Retained
+
+Earnings
+ 
+Accumulated
+
+Other
+
+Comprehensive
+
+Loss
+ 
+Total
+ 
+
+Balance at December 31, 2002
+ 
+2,400,525
+ 
+$
+4,801,050
+ 
+$
+11,484,649
+ 
+$
+1,688,158
+ 
+$
+571,098
+ 
+$
+18,544,955
+ 
+
+Comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,340,720
+ 
+ 
+ 
+ 
+ 
+1,340,720
+ 
+
+Unrealized holding loss on available for sale securities, net of taxes (Note 16)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(879,977
+)
+ 
+(879,977
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+460,743
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(276,337
+)
+ 
+ 
+ 
+ 
+(276,337
+)
+
+Issuance of capital stock
+ 
+8,082
+ 
+ 
+16,164
+ 
+ 
+34,388
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+50,552
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2003
+ 
+2,408,607
+ 
+ 
+4,817,214
+ 
+ 
+11,519,037
+ 
+ 
+2,752,541
+ 
+ 
+(308,879
+)
+ 
+18,779,913
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+926,397
+ 
+ 
+ 
+ 
+ 
+926,397
+ 
+
+ 
+Unrealized holding loss on available for sale securities, net of taxes (Note 16)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(84,360
+)
+ 
+(84,360
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+842,037
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(332,220
+)
+ 
+ 
+ 
+ 
+(332,220
+)
+
+Issuance of capital stock
+ 
+77,784
+ 
+ 
+155,568
+ 
+ 
+311,136
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+466,704
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2004
+ 
+2,486,391
+ 
+ 
+4,972,782
+ 
+ 
+11,830,173
+ 
+ 
+3,346,718
+ 
+ 
+(393,239
+)
+ 
+19,756,434
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,406,626
+ 
+ 
+ 
+ 
+ 
+1,406,626
+ 
+
+ 
+Unrealized holding loss on available for sale securities, net of taxes (Note 16)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(710,910
+)
+ 
+(710,910
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+695,716
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(445,102
+)
+ 
+ 
+ 
+ 
+(445,102
+)
+
+Issuance of capital stock (Note 11)
+ 
+744,258
+ 
+ 
+1,488,516
+ 
+ 
+9,879,051
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+11,367,567
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, December 31, 2005
+ 
+3,230,649
+ 
+$
+6,461,298
+ 
+$
+21,709,224
+ 
+$
+4,308,242
+ 
+$
+(1,104,149
+)
+$
+31,374,615
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+See Notes to Consolidated Financial Statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY 
+ 
+ CONSOLIDATED STATEMENTS OF CASH FLOWS 
+ 
+ Years Ended December 31, 2005, 2004 and 2003 
+ 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+2003
+ 
+
+Cash Flows from Operating Activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+$
+1,406,626
+ 
+$
+926,397
+ 
+$
+1,340,720
+ 
+
+ 
+Adjustments to reconcile net income to net cash provided by operating activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Amortization and accretion of investment premiums and discounts, net
+ 
+ 
+394,827
+ 
+ 
+500,847
+ 
+ 
+593,490
+ 
+
+ 
+ 
+Provision for loan losses
+ 
+ 
+1,110,000
+ 
+ 
+556,000
+ 
+ 
+563,000
+ 
+
+ 
+ 
+Gain on sales of investment securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(307,739
+)
+
+ 
+ 
+Depreciation and amortization of premises and equipment
+ 
+ 
+604,399
+ 
+ 
+536,029
+ 
+ 
+417,377
+ 
+
+ 
+ 
+Loss on disposal of bank premises and equipment
+ 
+ 
+ 
+ 
+ 
+3,804
+ 
+ 
+2,037
+ 
+
+ 
+ 
+Deferred income taxes
+ 
+ 
+(562,833
+)
+ 
+(101,212
+)
+ 
+(230,089
+)
+
+ 
+ 
+Change in assets and liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+Increase in deferred loan fees
+ 
+ 
+17,048
+ 
+ 
+235,734
+ 
+ 
+270,013
+ 
+
+ 
+ 
+ 
+Increase in accrued interest and dividends receivable
+ 
+ 
+(687,078
+)
+ 
+(287,717
+)
+ 
+(159,169
+)
+
+ 
+ 
+ 
+(Increase) decrease in other assets
+ 
+ 
+(128,667
+)
+ 
+132,592
+ 
+ 
+31,555
+ 
+
+ 
+ 
+ 
+Increase (decrease) in accrued expenses and other liabilities
+ 
+ 
+863,861
+ 
+ 
+(373,139
+)
+ 
+635,461
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+Net cash provided by operating activities
+ 
+ 
+3,018,183
+ 
+ 
+2,129,335
+ 
+ 
+3,156,656
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash Flows from Investing Activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Purchases of available for sale securities
+ 
+ 
+(28,208,359
+)
+ 
+(16,020,313
+)
+ 
+(71,907,123
+)
+
+ 
+Proceeds from sales of available for sale securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+7,094,321
+ 
+
+ 
+Proceeds from maturities of available for sale securities
+ 
+ 
+3,000,000
+ 
+ 
+6,000,000
+ 
+ 
+8,200,000
+ 
+
+ 
+Principal repayments on available for sale securities
+ 
+ 
+21,264,308
+ 
+ 
+23,676,009
+ 
+ 
+24,964,017
+ 
+
+ 
+Purchase of Federal Reserve Bank stock
+ 
+ 
+(329,700
+)
+ 
+(1,450
+)
+ 
+(210,100
+)
+
+ 
+Purchase of Federal Home Loan Bank stock
+ 
+ 
+ 
+ 
+ 
+(219,400
+)
+ 
+(456,000
+)
+
+ 
+Net increase in loans
+ 
+ 
+(101,496,005
+)
+ 
+(50,246,026
+)
+ 
+(44,458,602
+)
+
+ 
+Purchases of premises and equipment
+ 
+ 
+(945,919
+)
+ 
+(1,251,368
+)
+ 
+(1,058,215
+)
+
+ 
+Proceeds from sale of bank premises and equipment
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,900
+ 
+
+ 
+Investment in trust (Note 7)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(248,000
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash used in investing activities
+ 
+ 
+(106,715,675
+)
+ 
+(38,062,548
+)
+ 
+(78,072,802
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Cash Flows from Financing Activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net (decrease) increase in demand, savings and money market deposits
+ 
+ 
+(11,884,273
+)
+ 
+17,330,022
+ 
+ 
+14,596,528
+ 
+
+ 
+Net increase in time certificates of deposit
+ 
+ 
+63,954,236
+ 
+ 
+59,683,121
+ 
+ 
+57,484,394
+ 
+
+ 
+Decrease in securities sold under repurchase agreements
+ 
+ 
+ 
+ 
+ 
+(5,700,000
+)
+ 
+ 
+ 
+
+ 
+Proceeds from FHLB borrowings
+ 
+ 
+46,001,000
+ 
+ 
+17,000,000
+ 
+ 
+16,000,000
+ 
+
+ 
+Principal repayments of FHLB borrowings
+ 
+ 
+(45,001,000
+)
+ 
+(26,000,000
+)
+ 
+(3,000,000
+)
+
+ 
+Proceeds from issuance of subordinated debt
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,248,000
+ 
+
+ 
+Debt issuance costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(240,000
+)
+
+ 
+Decrease in other borrowings
+ 
+ 
+ 
+ 
+ 
+(353,385
+)
+ 
+(239,290
+)
+
+ 
+Proceeds from issuance of common stock
+ 
+ 
+11,367,567
+ 
+ 
+466,704
+ 
+ 
+50,552
+ 
+
+ 
+Dividends paid on common stock
+ 
+ 
+(402,899
+)
+ 
+(317,454
+)
+ 
+(264,092
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by financing activities
+ 
+ 
+64,034,631
+ 
+ 
+62,109,008
+ 
+ 
+92,636,092
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net (decrease) increase in cash and cash equivalents
+ 
+ 
+(39,662,861
+)
+ 
+26,175,795
+ 
+ 
+17,719,946
+ 
+
+Cash and cash equivalents
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Beginning
+ 
+ 
+55,630,466
+ 
+ 
+29,454,671
+ 
+ 
+11,734,725
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Ending
+ 
+$
+15,967,605
+ 
+$
+55,630,466
+ 
+$
+29,454,671
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Supplemental Disclosures of Cash Flow Information
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash paid for:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Interest
+ 
+$
+10,265,152
+ 
+$
+7,020,278
+ 
+$
+5,569,011
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Income taxes
+ 
+$
+1,234,761
+ 
+$
+850,970
+ 
+$
+1,102,971
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Supplemental Disclosure of Noncash Investing and Financing Activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Unrealized holding losses on available for sale securities arising during the period
+ 
+$
+(1,146,631
+)
+$
+(136,065
+)
+$
+(1,419,317
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Accrued dividends declared on common stock
+ 
+$
+129,226
+ 
+$
+87,024
+ 
+$
+72,258
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+See Notes to Consolidated Financial Statements. 
+
+F-6
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. AND SUBSIDIARY 
+ 
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+ 
+ December 31, 2005 and 2004 
+ 
+
+Note 1. Nature of Operations and Summary of Significant Accounting Policies 
+
+ Patriot National Bancorp, Inc. (the "Company"), a Connecticut corporation, is a bank holding company that was organized in 1999. On December 1,
+1999, all the issued and outstanding shares of Patriot National Bank (the "Bank") were converted into Company common stock and the Bank became a wholly owned subsidiary of the Company. The Bank is a
+nationally chartered commercial bank whose deposits are insured under the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Bank provides a full range of
+banking services to commercial and consumer customers through its main office in Stamford, Connecticut, and nine branch offices in Fairfield County, Connecticut. The Bank's customers are concentrated
+in Fairfield County, Connecticut and Westchester County, New York. The Bank also conducts mortgage brokerage operations through offices in Connecticut and New York through its Residential Lending
+Group. 
+
+ On
+March 11, 2003, the Company formed Patriot National Statutory Trust I (the "Trust") for the purpose of issuing trust preferred securities and investing the proceeds in
+subordinated debentures issued by the Company, and on March 26, 2003, the first series of trust preferred securities were issued. In accordance with FASB Interpretation No. 46R,
+"Consolidation of Variable Interest Entities," ("FIN 46R") the Trust is not included in the Company's consolidated financial statement. 
+
+ The
+following is a summary of the Company's significant accounting policies: 
+
+Significant group concentrations of credit risk 
+
+ Most of the Company's activities are with customers located within Fairfield County, Connecticut and Westchester County, New York. Note 3 discusses the
+types of securities in which the Company invests. Note 4 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one
+industry or customer. 
+
+Principles of consolidation and basis of financial statement presentation 
+
+ The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and the Bank's wholly owned subsidiary,
+PinPat Acquisition Corporation (currently inactive); and have been prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the
+banking industry. All significant intercompany balances and transactions have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and
+assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the balance sheet date and reported amounts of revenues and expenses
+for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of
+the allowance for loan losses and the evaluation of goodwill for impairment. 
+
+Cash and cash equivalents 
+
+ Cash and due from banks, Federal funds sold and short-term investments are recognized as cash equivalents in the consolidated financial statements. Federal funds
+sold generally mature in one day. For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash
+equivalents. Cash flows from loans and 
+
+F-7
+
+ 
+
+deposits
+are reported net. The Company maintains amounts due from banks and Federal funds sold which, at times, may exceed Federally insured limits. The Company has not experienced any losses from
+such concentrations. The short-term investment represents an investment in a money market mutual fund of a single issuer. 
+
+Investments in debt and marketable equity securities 
+
+ Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such
+classification is reassessed at each balance sheet date. 
+
+ Debt
+securities, if any, that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and are recorded at amortized cost. "Trading"
+securities, if any, are carried at fair value with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, including equity securities with
+readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income,
+net of taxes. 
+
+ Purchase
+premiums and discounts are recognized in interest income using the interest method over the lives of the securities. Declines in the fair value of available for sale and held to
+maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers
+(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and
+ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are
+recorded on the trade date and are determined using the specific identification method. 
+
+ The
+sale of a held to maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is
+considered a maturity for purposes of classification and disclosure. 
+
+Loans held for sale 
+
+ Loans held for sale are those loans the Company has the intent to sell in the foreseeable future, and are carried at the lower of aggregate cost or market value.
+Gains and losses on sales of loans are recognized at the trade dates, and are determined by the difference between the sales proceeds and the carrying value of the loans. Loans are sold with servicing
+released. 
+
+Loans receivable 
+
+ Loans receivable are stated at their current unpaid principal balances and are net of the allowance for loan losses, net deferred loan origination fees and
+purchased loan premiums and discounts. The Company has the ability and intent to hold its loans for the foreseeable future or until maturity or payoff. 
+
+F-8
+
+ 
+
+ Management
+considers all nonaccrual loans and restructured loans to be impaired. In most cases, loan payments that are past due less than 90 days, based on contractual terms, are
+considered minor collection delays, and the related loans are not considered to be impaired. The Company considers consumer installment loans to be pools of smaller balance homogeneous loans, which
+are collectively evaluated for impairment. 
+
+ A
+loan is classified as a restructured loan when certain concessions have been made to the original contractual terms, such as reductions in interest rates or deferral of interest or
+principal payments, due to the borrower's financial condition. 
+
+ Impaired
+loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's
+observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are recorded as adjustments to the
+allowance for loan losses. A loan is impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan
+agreement. 
+
+Allowance for loan losses 
+
+ The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are
+charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. 
+
+ The
+allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical
+experience, the
+nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This
+evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 
+
+ The
+allowance consists of specific, general and unallocated components. The specific component relates to loans that are considered impaired. For impaired loans, an allowance is
+established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. A risk rating system is utilized to
+measure the general component of the allowance for loan losses. Under this system, each loan is assigned a risk rating between one and nine, which has a corresponding loan loss factor assigned, with a
+rating of "one" being the least risk and a rating of "nine" reflecting the most risk or a complete loss. Risk ratings are assigned based upon the recommendations of the credit analyst and the
+originating loan officer and confirmed by the loan committee at the initiation of the transactions and are reviewed and changed, when necessary, during the life of the loan. Loan loss reserve factors
+are multiplied against the balances in each risk rating category to arrive at the appropriate level for the allowance for loan losses. Loans assigned a risk rating of "six" or above are monitored more
+closely by the credit administration officers and loan committee. 
+
+ The
+unallocated portion of the allowance reflects management's estimate of probable but undetected losses inherent in the portfolio; such estimates are influenced by uncertainties in
+economic conditions, delays in obtaining information, including unfavorable information about a borrower's 
+
+F-9
+
+ 
+
+financial
+condition, difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. 
+
+ The
+Company's real estate loans are collateralized by real estate located principally in Fairfield County, Connecticut and Westchester County, New York, and accordingly, the ultimate
+collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in regional real estate market conditions. 
+
+Interest and fees on loans 
+
+ Interest on loans is accrued and included in operating income based on contractual rates applied to principal amounts outstanding. The accrual of interest income
+is discontinued whenever reasonable doubt exists as to its collectibility and generally is discontinued when loans are past due 90 days, based on contractual terms, as to either principal or
+interest. When the accrual of interest income is discontinued, all previously accrued and uncollected interest is reversed against interest income. The accrual of interest on loans past due
+90 days or more, including impaired loans, may be continued if the loan is well secured, and it is believed all principal and accrued interest income due on the loan will be
+realized, and the loan is in the process of collection. A nonaccrual loan is restored to an accrual status when it is no longer delinquent and collectibility of interest and principal is no longer in
+doubt. Interest collected on nonaccrual loans and impaired loans is recognized only to the extent cash payments are received, and may be recorded as a reduction to principal if the collectibility of
+all loan principal is unlikely. 
+
+ Loan
+origination fees and direct loan origination costs are deferred and amortized as an adjustment to the loan's yield, generally over the contractual life of the loan, utilizing the
+interest method. 
+
+Loan brokerage activities 
+
+ The Company receives loan brokerage fees for soliciting and processing conventional loan applications on behalf of permanent investors. Brokerage fee income is
+recognized upon closing of loans for permanent investors. 
+
+Transfers of financial assets 
+
+ Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be
+surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets and no condition both constrains
+the transferee from taking advantage of that right and provides more than a trivial benefit for the transferor, and (3) the transferor does not maintain effective control over the transferred
+assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the
+holder to return specific assets, other than through a cleanup call. 
+
+F-10
+
+ 
+
+Other real estate owned 
+
+ Other real estate owned, if any, consists of properties acquired through, or in lieu of, loan foreclosure or other proceedings and is initially recorded at fair
+value at the date of foreclosure, which establishes a new cost basis. After foreclosure, the properties are held for sale and are carried at the lower of cost or fair value less estimated costs of
+disposal. Any write-down to fair value at the time of acquisition is
+charged to the allowance for loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and valuation allowances are recorded as necessary to
+reduce the carrying amount to fair value less estimated cost of disposal. Revenue and expense from the operation of other real estate owned and valuation allowances are included in operations. Costs
+relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. Gains or losses are included in operations upon disposal. 
+
+Premises and equipment 
+
+ Premises and equipment are stated at cost for purchased assets, and at the lower of fair value or the net present value of the minimum lease payments required
+over the term of the lease for assets under capital leases, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the
+related leases or the estimated economic lives of the improvements. Depreciation is charged to operations using the straight-line method over the estimated useful lives of the related assets which
+range from three to ten years. Amortization of premises under capital leases is charged to operations using the straight-line method over the life of the lease. Gains and losses on dispositions are
+recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized. 
+
+Impairment of assets 
+
+ Long-lived assets, which are held and used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
+amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expense. 
+
+Goodwill 
+
+ Goodwill represents the cost in excess of net assets of businesses acquired and is tested for impairment annually, or more frequently under prescribed conditions. 
+
+Income taxes 
+
+ The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax
+consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and loss carryforwards. Deferred tax assets
+and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
+deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets 
+
+F-11
+
+ 
+
+are
+reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. 
+
+Related party transactions 
+
+ Directors and officers of the Company and the Bank and their affiliates have been customers of and have had transactions with the Bank, and it is expected that
+such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the
+ordinary course of business, and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not
+directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectibility or favored treatment or terms, or present other
+unfavorable features. Note 15 contains details regarding related party transactions. 
+
+Earnings per share 
+
+ Basic earnings per share represents income available to common stockholders and is computed by dividing net income by the weighted-average number of common shares
+outstanding. Diluted earnings per share reflects additional common shares that would have been outstanding if potential dilutive common shares had been issued, as well as any adjustment to income that
+would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and are determined using the treasury stock method. 
+
+Stock compensation plans 
+
+ Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," encourages all entities to adopt a fair value based
+method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is
+usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting
+Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other
+measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plan, and stock warrants issued, have no intrinsic value at the grant
+date, and under Opinion No. 25 no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result,
+provides pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. There is no proforma disclosure required
+for 2005 and 2004, because no compensation cost related to stock options and warrants was attributed to those periods. See "Recent Accounting Pronouncements" below for developments regarding
+accounting for stock compensation plans. 
+
+F-12
+
+ 
+
+Comprehensive income 
+
+ Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and
+liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the shareholders' equity section of the consolidated balance sheets, such
+items, along with net income, are components of comprehensive income. 
+
+Fair values of financial instruments 
+
+ The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: 
+
+ Cash and due from banks, federal funds sold, short-term investments and accrued interest and dividends receivable 
+
+ The carrying amount is a reasonable estimate of fair value. 
+
+ Securities 
+
+Fair
+values, excluding restricted Federal Reserve Bank stock and Federal Home Loan Bank stock, are based on quoted market prices or dealer quotes, if available. If a quoted market price is not
+available, fair value is estimated using quoted market prices for similar securities. The carrying values of the Federal Reserve Bank stock and Federal Home Loan Bank stock approximate fair value
+based on the redemption provisions of the related stock. 
+
+ Loans receivable 
+
+For
+variable rate loans which reprice frequently, and have no significant changes in credit risk, fair value is based on the loans' carrying value. The fair value of fixed rate loans is estimated by
+discounting the future cash flows using the year end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 
+
+ Deposits 
+
+The
+fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time
+deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected
+maturities on such deposits. 
+
+F-13
+
+ 
+
+ Borrowings 
+
+For
+variable rate borrowings which reprice frequently, and short-term borrowings, fair value is based on carrying value. The fair value of fixed rate borrowings is estimated by discounting the future
+cash flows using current interest rates for similar available borrowings with the same remaining maturities. 
+
+ Off-balance-sheet instruments 
+
+Fair
+values for the Company's off-balance-sheet instruments (lending commitments and standby letters of credit) are based on fees currently charged to enter into similar agreements, taking into
+account the remaining terms of the agreements and the counterparties' credit standing. 
+
+Recent accounting pronouncements 
+
+ In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 ("SOP 03-3"), "Accounting for
+Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased
+loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the
+present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective
+yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be
+established for any additional cash flows that are not expected to be received. However, if subsequently more cash flows are expected to be received than originally estimated, the effective yield
+would be adjusted on a prospective basis. SOP 03-3 was effective for loans and debt securities acquired after December 31, 2004. This Statement had no impact on the Company's financial
+statements. 
+
+ On
+September 30, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") Issue No. 03-1-1 delaying
+the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments," which provides guidance for determining the meaning of
+"other-than-temporarily impaired" and its application to certain debt and equity securities within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
+and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be
+recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to
+or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 was superseded by the issuance on November 3, 2005 of FSP 115-1, "The Meaning of
+Other-Than-Temporarily Impaired and Its Application to Certain Investments." This FSP nullified paragraphs 10-18 of EITF 03-1, carried forward certain requirements of EITF 03-1 relating to cost method
+investments, carried forward certain 
+
+F-14
+
+ 
+
+disclosure
+requirements of EITF 03-1 and references existing other-than-temporary impairment guidance. The requirements of this FSP had no effect on the Company's financial statements. 
+
+ In
+December 2004, the FASB published FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires that the compensation
+cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity
+or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share
+appreciation rights, and employee share purchase plans. SFAS 123(R) is a replacement of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
+and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretive guidance (APB 25). 
+
+ The
+effect of SFAS 123(R) will be to require entities to measure the cost of employee services received in exchange for shared-based payments using the grant-date fair value of
+the award, and to recognize the cost over the period the employee is required to provide services for the award. SFAS 123(R) permits entities to use any option-pricing model that meets the fair
+value objective in the Statement. 
+
+ The
+Company will be required to apply SFAS 123(R) as of the beginning of its first interim period that begins after December 15, 2005, which will be the quarter ending
+March 31, 2006. 
+
+ SFAS 123(R)
+allows two methods for determining the effects of the transition: the modified prospective transition method and the modified retrospective method of transition. Under
+the modified prospective transition method, an entity would use the fair value based accounting method for all employee awards granted, modified, or settled after the effective date. As of the
+effective date, compensation cost related to the non-vested portion of awards outstanding as of that date would be based on the grant-date fair value of those awards as calculated under the original
+provisions of Statement No. 123; that is, an entity would not remeasure the grant-date fair value estimate of the unvested portion of awards granted prior to the effective date. An entity will
+have the further option to either apply SFAS 123(R) to all quarters in the fiscal year of adoption. Under the modified retrospective method of transition, an entity would revise its previously
+issued financial statements to recognize employee compensation cost for prior periods presented in accordance with the original provisions of Statement No. 123. The Company will adopt the
+modified transition method effective January 1, 2006. The adoption of this Statement will have no effect on the Company's financial statements as there are no unvested share-based awards at
+January 1, 2006. 
+
+ In
+May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 ("SFAS 154"), "Accounting Changes and Error Corrections," replacing APB Opinion
+No. 20 and FASB Statement No. 3, which changes the treatment and reporting requirements for both accounting errors and changes of accounting principles, and provides guidance on
+determining the treatment of the retrospective application of a change. This Statement applies to all voluntary changes in accounting principles. At this time, management believes this Statement will
+have no impact on the Company's financial statements. 
+
+F-15
+
+ 
+
+Note 2. Restrictions on Cash and Due From Banks 
+
+ The Company is required to maintain reserves against its respective transaction accounts and non-personal time deposits. At December 31, 2005 and 2004, the
+Bank was required to have cash and liquid assets of approximately $3,566,000 and $2,820,000, respectively, to meet these requirements. In addition, at December 31, 2005 and 2004, the Company
+was required to maintain $25,000 in the Federal Reserve Bank for clearing purposes. 
+
+Note 3. Available for Sale Securities 
+
+ The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair values of available for sale securities at December 31, 2005 and
+2004 are as follows: 
+
+2005
+ 
+ 
+Amortized
+
+Cost
+ 
+Gross
+
+Unrealized
+
+Gains
+ 
+Gross
+
+Unrealized
+
+Losses
+ 
+Fair
+
+Value
+
+U.S. Government agency and sponsored agency obligations
+ 
+$
+16,999,341
+ 
+$
+ 
+ 
+$
+(522,657
+)
+$
+16,476,684
+
+Mortgage-backed securities
+ 
+ 
+57,453,614
+ 
+ 
+2,330
+ 
+ 
+(1,260,560
+)
+ 
+56,195,384
+
+Money market preferred equity securities
+ 
+ 
+6,000,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,000,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+80,452,955
+ 
+$
+2,330
+ 
+$
+(1,783,217
+)
+$
+78,672,068
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+2004
+ 
+ 
+Amortized
+
+Cost
+ 
+Gross
+
+Unrealized
+
+Gains
+ 
+Gross
+
+Unrealized
+
+Losses
+ 
+Fair
+
+Value
+
+U.S. Government agency and sponsored agency obligations
+ 
+$
+15,000,000
+ 
+$
+937
+ 
+$
+(177,642
+)
+$
+14,823,295
+
+Mortgage-backed securities
+ 
+ 
+52,903,731
+ 
+ 
+69,719
+ 
+ 
+(527,270
+)
+ 
+52,446,180
+
+Money market preferred equity securities
+ 
+ 
+9,000,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+9,000,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+76,903,731
+ 
+$
+70,656
+ 
+$
+(704,912
+)
+$
+76,269,475
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+F-16
+
+ 
+
+ The
+following table presents the Company's available for sale securities' gross unrealized losses and fair value, aggregated by the length of time the individual securities have been in
+a continuous loss position, at December 31, 2005 and 2004: 
+
+ 
+
+ 
+Less Than 12 Months
+ 
+12 Months or More
+ 
+Total
+ 
+
+2005
+ 
+ 
+Fair
+
+Value
+ 
+Unrealized
+
+Loss
+ 
+Fair
+
+Value
+ 
+Unrealized
+
+Loss
+ 
+Fair
+
+Value
+ 
+Unrealized
+
+Loss
+ 
+
+U.S. Government agency and sponsored agency obligations
+ 
+$
+1,985,625
+ 
+$
+(13,716
+)
+$
+14,491,059
+ 
+$
+(508,941
+)
+$
+16,476,684
+ 
+$
+(522,657
+)
+
+Mortgage-backed securities
+ 
+ 
+27,846,559
+ 
+ 
+(459,646
+)
+ 
+25,315,920
+ 
+ 
+(800,914
+)
+ 
+53,162,479
+ 
+ 
+(1,260,560
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Totals
+ 
+$
+29,832,184
+ 
+$
+(473,362
+)
+$
+39,806,979
+ 
+$
+(1,309,855
+)
+$
+69,639,163
+ 
+$
+(1,783,217
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Less Than 12 Months
+ 
+12 Months or More
+ 
+Total
+ 
+
+2004
+ 
+ 
+Fair
+
+Value
+ 
+Unrealized
+
+Loss
+ 
+Fair
+
+Value
+ 
+Unrealized
+
+Loss
+ 
+Fair
+
+Value
+ 
+Unrealized
+
+Loss
+ 
+
+U.S. Government agency and sponsored agency obligations
+ 
+$
+7,921,108
+ 
+$
+(78,892
+)
+$
+3,901,250
+ 
+$
+(98,750
+)
+$
+11,822,358
+ 
+$
+(177,642
+)
+
+Mortgage-backed securities
+ 
+ 
+17,632,613
+ 
+ 
+(134,422
+)
+ 
+20,361,275
+ 
+ 
+(392,848
+)
+ 
+37,993,888
+ 
+ 
+(527,270
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Totals
+ 
+$
+25,553,721
+ 
+$
+(213,314
+)
+$
+24,262,525
+ 
+$
+(491,598
+)
+$
+49,816,246
+ 
+$
+(704,912
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ At
+December 31, 2005, forty-three securities have unrealized losses with aggregate depreciation of 2.5% from the Company's amortized cost. There were no securities with unrealized
+losses greater than 5% of amortized cost. 
+
+ Management
+believes that none of the unrealized losses on available for sale securities are other than temporary due to the fact that they relate to debt and mortgage-backed securities
+issued by U.S. Government agencies and Government sponsored agencies, which the Company has both the intent and ability to hold until maturity or until the fair value fully recovers. Additionally,
+management considers the issuers of the securities to be financially sound, and expects to receive all contractual principal and interest related to these investments. 
+
+ At
+December 31, 2005 and 2004, available for sale securities with a carrying value of $1,486,000 and $1,280,000, respectively, were pledged to secure obligations under municipal
+deposits. 
+
+ The
+amortized cost and fair value of available for sale debt securities at December 31, 2005 by contractual maturity are presented below. Actual maturities of mortgage-backed
+securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid 
+
+F-17
+
+ 
+
+without
+any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary. 
+
+ 
+
+ 
+Amortized
+
+Cost
+ 
+Fair
+
+Value
+
+Maturity:
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+1-5 years
+ 
+$
+16,999,341
+ 
+$
+16,476,684
+
+ 
+Mortgage-backed securities
+ 
+ 
+57,453,614
+ 
+ 
+56,195,384
+
+ 
+ 
+
+ 
+
+Total
+ 
+$
+74,452,955
+ 
+$
+72,672,068
+
+ 
+ 
+
+ 
+
+ During
+2005 and 2004, there were no sales of available for sale securities. During 2003, proceeds from sales of available for sale securities were $7,094,321, and there were gross gains
+of $307,739 on such sales. 
+
+Note 4. Loans Receivable and Allowance for Loan Losses 
+
+ A summary of the Company's loan portfolio at December 31, 2005 and 2004 is as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Commercial
+ 
+$
+129,178,889
+ 
+$
+106,771,441
+ 
+
+ 
+Residential
+ 
+ 
+77,391,833
+ 
+ 
+36,965,661
+ 
+
+ 
+Construction
+ 
+ 
+107,232,587
+ 
+ 
+74,598,919
+ 
+
+Commercial
+ 
+ 
+15,591,818
+ 
+ 
+17,562,523
+ 
+
+Consumer installment
+ 
+ 
+1,106,648
+ 
+ 
+1,386,709
+ 
+
+Consumer home equity
+ 
+ 
+39,097,450
+ 
+ 
+30,874,894
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total loans
+ 
+ 
+369,599,225
+ 
+ 
+268,160,147
+ 
+
+Premiums on purchased loans
+ 
+ 
+367,491
+ 
+ 
+313,754
+ 
+
+Net deferred loan fees
+ 
+ 
+(1,134,604
+)
+ 
+(1,117,556
+)
+
+Allowance for loan losses
+ 
+ 
+(4,588,335
+)
+ 
+(3,481,525
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Loans receivable, net
+ 
+$
+364,243,777
+ 
+$
+263,874,820
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ The
+changes in the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003 are as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+2003
+ 
+
+Balance, beginning of year
+ 
+$
+3,481,525
+ 
+$
+2,934,675
+ 
+$
+2,372,454
+ 
+
+ 
+Provision for loan losses
+ 
+ 
+1,110,000
+ 
+ 
+556,000
+ 
+ 
+563,000
+ 
+
+ 
+Recoveries of loans previously charged-off
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Loans charged-off
+ 
+ 
+(3,190
+)
+ 
+(9,150
+)
+ 
+(779
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, end of year
+ 
+$
+4,588,335
+ 
+$
+3,481,525
+ 
+$
+2,934,675
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+F-18
+
+ 
+
+ At
+December 31, 2005 and 2004, the unpaid principal balances of loans delinquent 90 days or more were $274,622 and $522,751, respectively, and the unpaid principal balances
+of loans placed on nonaccrual status were $1,934,614 and $3,669,148, respectively. If nonaccrual loans had been performing in accordance with their original terms, the Company would have recorded
+approximately $6,000, $18,000 and $18,000, respectively, of additional income during the years ended December 31, 2005, 2004 and 2003. 
+
+ The
+following information relates to impaired loans as of and for the years ended December 31, 2005 and 2004: 
+
+ 
+
+ 
+2005
+ 
+2004
+
+Loans receivable for which there is a related allowance for credit losses
+ 
+$
+ 
+ 
+$
+150,000
+
+ 
+ 
+
+ 
+
+Loans receivable for which there is no related allowance for credit losses
+ 
+$
+1,934,614
+ 
+$
+3,519,148
+
+ 
+ 
+
+ 
+
+Allowance for credit losses related to impaired loans
+ 
+$
+ 
+ 
+$
+22,500
+
+ 
+ 
+
+ 
+
+Average recorded investment in impaired loans
+ 
+$
+2,668,531
+ 
+$
+2,990,191
+
+ 
+ 
+
+ 
+
+ During
+2005 and 2004, interest income collected and recognized on impaired loans was $223,261 and $184,565, respectively. There was no interest income on impaired loans collected or
+recognized in 2003. The Company has no commitments to lend additional funds to borrowers whose loans are impaired. 
+
+ The
+Company's lending activities are conducted principally in Fairfield County, Connecticut and Westchester County, New York. The Company grants commercial real estate loans, commercial
+business loans and a variety of consumer loans. In addition, the Company grants loans for the construction of residential homes, residential developments and for land development projects. All
+residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent in
+large part upon the status of the regional economy and regional real estate market. Accordingly, the ultimate collectibility of a substantial portion of the loan portfolio and the recovery of a
+substantial portion of any resulting real estate acquired is susceptible to changes in market conditions. 
+
+ The
+Company has established credit policies applicable to each type of lending activity in which it engages, evaluates the creditworthiness of each customer and, in most cases, extends
+credit of up to 75% of the market value of the collateral at the date of the credit extension depending on the Company's evaluation of the borrowers' creditworthiness and type of collateral. The
+market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are
+accounts receivable, inventory, other business assets, marketable securities and time deposits. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires
+the primary source of repayment to be based on the borrower's ability to generate continuing cash flows. 
+
+F-19
+
+ 
+
+Note 5. Premises and Equipment 
+
+ At December 31, 2005 and 2004, premises and equipment consisted of the following: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+
+Leasehold improvements
+ 
+$
+2,217,690
+ 
+$
+1,811,187
+ 
+
+Furniture, equipment and software
+ 
+ 
+2,867,738
+ 
+ 
+2,332,962
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+5,085,428
+ 
+ 
+4,144,149
+ 
+
+Less accumulated depreciation and amortization
+ 
+ 
+(2,611,275
+)
+ 
+(2,011,516
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+2,474,153
+ 
+$
+2,132,633
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ For
+the years ended December 31, 2005, 2004 and 2003, depreciation and amortization expense related to premises and equipment totaled $604,399, $536,029 and $417,377,
+respectively. 
+
+Note 6. Deposits 
+
+ At December 31, 2005 and 2004, deposits consisted of the following: 
+
+ 
+
+ 
+2005
+ 
+2004
+
+Noninterest bearing
+ 
+$
+48,797,389
+ 
+$
+42,584,120
+
+ 
+ 
+
+ 
+
+Interest bearing:
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Time certificates, less than $100,000
+ 
+ 
+168,565,756
+ 
+ 
+131,764,662
+
+ 
+Time certificates, $100,000 or more
+ 
+ 
+98,440,248
+ 
+ 
+71,287,106
+
+ 
+Money market
+ 
+ 
+57,798,772
+ 
+ 
+72,450,663
+
+ 
+Savings
+ 
+ 
+20,089,889
+ 
+ 
+22,104,121
+
+ 
+NOW
+ 
+ 
+25,383,234
+ 
+ 
+26,814,653
+
+ 
+ 
+
+ 
+
+ 
+ 
+Total interest bearing
+ 
+ 
+370,277,899
+ 
+ 
+324,421,205
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total deposits
+ 
+$
+419,075,288
+ 
+$
+367,005,325
+
+ 
+ 
+
+ 
+
+ Interest
+expense on certificates of deposit in denominations of $100,000 or more was $3,023,519, $1,883,047 and $1,297,461 for the years ended December 31, 2005, 2004 and 2003,
+respectively. 
+
+ Contractual
+maturities of time certificates of deposit as of December 31, 2005 are summarized below: 
+
+Due within:
+ 
+ 
+ 
+
+ 
+1 year
+ 
+$
+165,447,760
+
+ 
+1-2 years
+ 
+ 
+34,648,040
+
+ 
+2-3 years
+ 
+ 
+28,391,073
+
+ 
+3-4 years
+ 
+ 
+18,546,108
+
+ 
+4-5 years
+ 
+ 
+19,973,023
+
+ 
+ 
+
+ 
+ 
+$
+267,006,004
+
+ 
+ 
+
+F-20
+
+ 
+
+Note 7. Borrowings 
+
+Federal Home Loan Bank borrowings 
+
+ The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB"). At December 31, 2005, the Bank has the ability to borrow from the FHLB based on a
+certain percentage of the value of the Bank's qualified collateral, as defined in the FHLB Statement of Products Policy, comprised mainly of mortgage-backed securities delivered under collateral
+safekeeping to the FHLB, and a blanket lien on qualifying mortgage loans, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear
+of liens, pledges and encumbrances. In addition, the Company has a $2,000,000 available line of credit with the FHLB. At December 31, 2005 and 2004, there were no advances outstanding under
+this line of credit. At December 31, 2005, other outstanding advances from the FHLB aggregated $9,000,000 at interest rates ranging from 2.49% to 5.11% and at December 31, 2004, other
+outstanding advances aggregated $8,000,000 at interest rates ranging from 1.93% to 5.11%. 
+
+ The
+Bank is required to maintain an investment in capital stock of the FHLB in an amount equal to a percentage of its outstanding mortgage loans and contracts secured by residential
+properties, including mortgage-backed securities. No ready market exists for FHLB stock and it has no quoted market value. For disclosure purposes, such stock is assumed to have a market value which
+is equal to cost since the Bank can redeem the stock with the FHLB at cost. 
+
+Repurchase agreements 
+
+ At December 31, 2005 and 2004, the Company has available borrowings under repurchase agreements of $10,000,000, and no amounts outstanding at
+December 31, 2005 or 2004. 
+
+Junior subordinated debt owed to unconsolidated trust 
+
+ During 2003, the Company formed the Trust of which 100% of the Trust's common securities are owned by the Company. The Trust has no independent assets, and exists
+for the sole purpose of issuing trust securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by the Company. 
+
+ The
+Trust issued $8,000,000 of trust preferred securities in 2003. Pursuant to FIN46R, issued in December 2003, the Company deconsolidated the Trust at December 31, 2003.
+The Company's investment in the Trust of $248,000 is included in other assets. The overall effect on the financial position and operating results of the Company as a result of the deconsolidation was
+not material. 
+
+ Trust
+preferred securities currently qualify for up to 25% of the Company's Tier I Capital, with the excess qualifying as Tier 2 Capital. On March 1, 2005, the Federal Reserve
+Board of Governors, which is the banking regulator for the Holding Company, approved final rules that allow for the continued inclusion of outstanding and prospective issuances of trust preferred
+securities in regulatory capital, subject to new, more strict limitations. The Company has until March 31, 2009 to meet the new limitations. Management does not believe these final rules will
+have a significant impact on the Company. 
+
+ The
+subordinated debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The
+Company 
+
+F-21
+
+ 
+
+has
+entered into a guarantee, which together with its obligations under the subordinated debentures and the declaration of trust governing the Trust, including its obligations to pay costs, expenses,
+debts and liabilities, other than trust securities, provides a full and unconditional guarantee of amounts on the capital securities. The subordinated debentures, which bear interest at three month
+LIBOR plus 3.15% (7.669% at December 31, 2005), mature on March 26, 2033 and can be redeemed at the Company's option in 2008. 
+
+ The
+duration of the Trust is 30 years with early redemption at par at the Company's option in 2008, or earlier in the event of certain regulatory or tax changes. The trust
+securities also bear interest at three month LIBOR plus 3.15%. 
+
+Other borrowings 
+
+ At December 31, 2005, the Bank also has the ability to borrow up to $3,000,000 in federal funds or letters of credit from its correspondent bank. 
+
+Maturity of borrowings 
+
+ The contractual maturities of the Company's borrowings at December 31, 2005, by year, are as follows: 
+
+ 
+
+ 
+Fixed
+
+Rate
+ 
+Floating
+
+Rate
+ 
+Total
+
+2006
+ 
+$
+6,000,000
+ 
+$
+ 
+ 
+$
+6,000,000
+
+2007
+ 
+ 
+3,000,000
+ 
+ 
+ 
+ 
+ 
+3,000,000
+
+2008
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2009
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2010
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Thereafter
+ 
+ 
+ 
+ 
+ 
+8,248,000
+ 
+ 
+8,248,000
+
+ 
+ 
+
+ 
+
+ 
+
+Total borrowings
+ 
+$
+9,000,000
+ 
+$
+8,248,000
+ 
+$
+17,248,000
+
+ 
+ 
+
+ 
+
+ 
+
+Note 8. Commitments and Contingencies 
+
+Operating leases 
+
+ The Company has non-cancelable operating leases for its main office, branch and mortgage brokerage offices. Under these lease agreements, the Company is required
+to pay certain executory costs such as insurance and property taxes. The Company also leases parking space under a noncancelable operating lease agreement and certain equipment under cancelable and
+noncancelable arrangements. 
+
+F-22
+
+ 
+
+ Future
+minimum rental commitments under the terms of these leases, by year and in the aggregate, are as follows: 
+
+Years Ending
+
+December 31,
+ 
+ 
+Amount
+
+2006
+ 
+$
+1,436,286
+
+2007
+ 
+ 
+1,391,699
+
+2008
+ 
+ 
+1,208,492
+
+2009
+ 
+ 
+1,162,632
+
+2010
+ 
+ 
+1,151,592
+
+Thereafter
+ 
+ 
+5,478,775
+
+ 
+ 
+
+ 
+ 
+$
+11,829,476
+
+ 
+ 
+
+ Total
+rental expense charged to operations for cancelable and noncancelable operating leases was $1,194,499, $876,132 and $630,002 for the years ended December 31, 2005, 2004 and
+2003, respectively. 
+
+Employment Agreements 
+
+President's Agreement 
+
+ In October 2003, the Company and the Bank entered into an employment agreement (the "Agreement") with the Bank's President and Chief Executive Officer that
+expires on December 31, 2006. The Agreement provides for, among other things, a stipulated base salary for the first year of the Agreement, annual increases at each anniversary and a
+discretionary annual bonus to be determined by the Board of Directors. 
+
+ In
+the event of the early termination of the Agreement for any reason other than cause, the Company would be obligated to compensate the President in one lump sum payment, an amount
+equal to the higher of the aggregate salary payments that would be made to the President under the remaining term of the Agreement, or eighteen months of the President's stipulated base salary at the
+time of termination. 
+
+ The
+Agreement also includes change of control provisions that entitles the President to a lump sum payment of two times the greater of the President's stipulated base salary at the time
+of the change in control; total cash compensation, as defined, for the year preceding the change in control; or the average total cash compensation, as defined, for the two years preceding the change
+in control. 
+
+ The
+provisions of the early termination clause apply only to termination of the Agreement prior to a change of control. Termination of the Agreement following a change of control shall
+be governed by the change of control provisions. 
+
+ Under
+the terms of a prior employment agreement (the "Prior Agreement"), the Prior Agreement provided that the Company granted shares of the Company's common stock to the President on
+December 31, 2000, and annually thereafter through December 31, 2003. The number of shares granted was based on 30% of the President's stipulated base salary for the preceding annual
+employment period, as defined, and such shares granted would vest and be distributed to the President in four annual installments (with any balance distributed upon termination other than for cause). 
+
+F-23
+
+ 
+
+Compensation
+cost for grants through 2002 was being recognized over four years under the terms of the Prior Agreement and compensation cost for the 2003 grant is being recognized over the term of the
+existing contract. Under certain circumstances defined in the Prior Agreement, this stock grant may be settled in cash. The Prior Agreement also provided for the grant of options to purchase a minimum
+of 10,000 shares of the Company's common stock on December 31, 2000, and annually thereafter through December 2002, and on December 31, 2003, if the President remained employed by
+the Bank. In the event that the Company did not have stock options available to grant at any of the stipulated dates, which was the case at December 31, 2000, 2001, 2002 and 2003, the President
+may then elect, on a future determination date, as defined, to be chosen by the President, to receive cash compensation in the future equal to the difference between the value of the Company's stock
+at the time the options would have been granted, and the value of the Company's stock on the determination date. For the years ended December 31, 2005, 2004 and 2003, approximately $161,000,
+$276,000 and $194,000, respectively, was charged to expense related to the stock and option compensation components of the Prior Agreement. 
+
+Other Employment Agreements 
+
+ Effective January 1, 2006, the Company entered into a one-year employment agreement with an officer of the Residential Lending Group division, which
+replaced a contract that expired on December 31, 2005. The agreement provides for, among other things, a minimum base salary and commission arrangement, as well as additional compensation based
+upon the revenue generated by direct reports, and for reimbursement of expenses incurred incidental to duties as an officer. The agreement terminates on December 31, 2006. 
+
+ In
+November 2003, the Company entered into an employment agreement with its Chief Financial Officer that expires on December 31, 2007. The agreement provides for, among
+other things, a stipulated base salary and annual discretionary bonuses as determined by the Board of Directors. In addition, the Chief Financial Officer has a change of control agreement that
+entitles the Chief Financial Officer to receive two years' compensation (as defined in the agreement) if a change of control (as defined in the agreement) occurs while the Chief Financial Officer is a
+full-time officer of the Bank or within six months following termination of employment other than for cause (as defined in the agreement) or by reason of death or disability. 
+
+ In
+addition, certain officers of the Company have change of control agreements that entitle such officers to receive one year's compensation (as defined in the agreements) if a change of
+control (as defined in the agreements) occurs while such officers are full time officers of the Company or within six months following termination of employment other than for cause (as defined in the
+agreements) or by reason of death or disability. 
+
+Stock Appreciation Rights Plan 
+
+ During 2001, the Company adopted the Patriot National Bancorp, Inc. 2001 Stock Appreciation Rights Plan (the "SAR Plan"). Under the terms of the SAR Plan,
+the Company may grant stock appreciation rights to officers of the Company that entitle the officers to receive, in cash or Company common stock, the appreciation in the value of the Company's common
+stock from the date of grant. Each award vests at the rate of 20% per year from the date of grant. Any unexercised rights will expire 
+
+F-24
+
+ 
+
+ten
+years from the date of grant. During 2001, the Company granted a total of 18,000 stock appreciation rights to three Company officers, and $67,932, $99,216 and $36,576, respectively, was charged to
+operations under the SAR Plan for the years ended December 31, 2005, 2004 and 2003. 
+
+Legal Matters 
+
+ The Company is involved in various legal proceedings which have arisen in the normal course of business. Management believes that the resolution of these matters
+will not have a material effect on the Company's financial condition or results of operations. 
+
+Other 
+
+ The Company has received regulatory approval to open three new branch offices in 2006. The Company entered into a non-cancelable lease for one of these locations.
+Subsequent to December 31, 2005, the Company entered into two non-cancelable leases at the other two locations. 
+
+Note 9. Income Taxes 
+
+ The components of the income tax provision for the years ended December 31, 2005, 2004 and 2003 are as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+2003
+ 
+
+Current
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Federal
+ 
+$
+1,211,403
+ 
+$
+554,723
+ 
+$
+842,241
+ 
+
+ 
+State
+ 
+ 
+308,430
+ 
+ 
+179,489
+ 
+ 
+264,848
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total
+ 
+ 
+1,519,833
+ 
+ 
+734,212
+ 
+ 
+1,107,089
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Deferred
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Federal
+ 
+ 
+(454,457
+)
+ 
+(81,723
+)
+ 
+(178,241
+)
+
+ 
+State
+ 
+ 
+(108,376
+)
+ 
+(19,489
+)
+ 
+(51,848
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total
+ 
+ 
+(562,833
+)
+ 
+(101,212
+)
+ 
+(230,089
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Provision for income taxes
+ 
+$
+957,000
+ 
+$
+633,000
+ 
+$
+877,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ A
+reconciliation of the anticipated income tax provision (computed by applying the statutory Federal income tax rate of 34% to the income before income taxes) to the income tax provision
+as 
+
+F-25
+
+ 
+
+reported
+in the statements of income for the years ended December 31, 2005, 2004 and 2003 is as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+2003
+ 
+
+Provision for income taxes at statutory
+
+Federal rate
+ 
+$
+803,600
+ 
+$
+530,200
+ 
+$
+754,000
+ 
+
+State taxes, net of Federal benefit
+ 
+ 
+117,000
+ 
+ 
+96,500
+ 
+ 
+129,000
+ 
+
+Dividends received deduction
+ 
+ 
+(68,500
+)
+ 
+(52,300
+)
+ 
+(45,900
+)
+
+Nondeductible expenses
+ 
+ 
+38,600
+ 
+ 
+16,800
+ 
+ 
+10,900
+ 
+
+Other
+ 
+ 
+66,300
+ 
+ 
+41,800
+ 
+ 
+29,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total provision for income taxes
+ 
+$
+957,000
+ 
+$
+633,000
+ 
+$
+877,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ At
+December 31, 2005 and 2004, the components of gross deferred tax assets and gross deferred tax liabilities are as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+
+Deferred tax assets:
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Allowance for loan losses
+ 
+$
+1,787,157
+ 
+$
+1,356,056
+
+ 
+Investment securities
+ 
+ 
+676,738
+ 
+ 
+241,017
+
+ 
+Premises and equipment
+ 
+ 
+272,370
+ 
+ 
+138,986
+
+ 
+Accrued expenses
+ 
+ 
+17,138
+ 
+ 
+14,022
+
+ 
+Other
+ 
+ 
+6,989
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+Gross deferred tax assets
+ 
+ 
+2,760,392
+ 
+ 
+1,750,081
+
+ 
+ 
+
+ 
+
+Deferred tax liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Tax bad debt reserve
+ 
+ 
+70,827
+ 
+ 
+69,347
+
+ 
+Other
+ 
+ 
+13,970
+ 
+ 
+3,692
+
+ 
+ 
+
+ 
+
+ 
+ 
+Gross deferred tax liabilities
+ 
+ 
+84,797
+ 
+ 
+73,039
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Deferred tax asset, net
+ 
+$
+2,675,595
+ 
+$
+1,677,042
+
+ 
+ 
+
+ 
+
+ The
+allocation of the deferred tax benefit involving items charged to current year income and items charged directly to equity for the years ended December 31, 2005 and 2004 are
+as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+2003
+ 
+
+Deferred tax benefit allocated to equity
+ 
+$
+(435,721
+)
+$
+(51,705
+)
+$
+(539,340
+)
+
+Deferred tax benefit allocated to operations
+ 
+ 
+(562,833
+)
+ 
+(101,212
+)
+ 
+(230,089
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total deferred tax benefit
+ 
+$
+(998,554
+)
+$
+(152,917
+)
+$
+(769,429
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+F-26
+
+ 
+
+Note 10. Goodwill 
+
+ Based on the Company's annual goodwill impairment tests performed in October 2005, 2004 and 2003, goodwill was not impaired for the years ended
+December 31, 2005, 2004 and 2003. In addition, no goodwill was acquired during 2005, 2004 and 2003. 
+
+Note 11. Shareholders' Equity 
+
+Common stock 
+
+ On August 4, 2005, the Company commenced an offering of up to 705,883 shares of its common stock, at $17.00 per share, to existing shareholders, whereby
+each shareholder was granted the right to purchase one share of stock for every six shares owned as of August 1, 2005. In addition, each shareholder was granted an oversubscription privilege to
+purchase up to two additional shares for each share owned from stock not subscribed by existing shareholders under the initial rights described above. The Company also entered into standby purchase
+agreements pursuant to which the standby purchasers agreed to acquire up to 529,412 shares at $17.00 per share. The common stock offering was completed on September 21, 2005 resulting in an
+increase in common stock and additional paid in capital of $10,965,881 after deducting total stock issuance costs of $1,034,130 which were charged to additional paid-in capital. The Company received
+subscriptions for a total of 705,883 shares; existing shareholders purchased $6.3 million or 368,687 shares; standby investors purchased $5.7 million or 337,196 shares. 
+
+ In
+addition, during 2005, 37,000 options were exercised resulting in proceeds to the Company of $375,436 and 1,375 shares were issued to directors in payment of directors' fees of
+$26,250. 
+
+Income Per Share 
+
+ The following is information about the computation of income per share for the years ended December 31, 2005, 2004 and 2003. 
+
+ 
+
+ 
+2005
+ 
+
+ 
+
+ 
+Net
+
+Income
+ 
+Shares
+ 
+Per Share
+
+Amount
+ 
+
+Basic Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders
+ 
+$
+1,406,626
+ 
+2,696,676
+ 
+$
+0.52
+ 
+
+Effect of Dilutive Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Warrants and stock options outstanding
+ 
+ 
+ 
+ 
+42,042
+ 
+ 
+(0.01
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Diluted Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders plus assumed conversions
+ 
+$
+1,406,626
+ 
+2,738,718
+ 
+$
+0.51
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+F-27
+
+ 
+
+ 
+
+ 
+2004
+ 
+
+ 
+
+ 
+Net
+
+Income
+ 
+Shares
+ 
+Per Share
+
+Amount
+ 
+
+Basic Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders
+ 
+$
+926,397
+ 
+2,449,679
+ 
+$
+0.38
+ 
+
+Effect of Dilutive Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Warrants and stock options outstanding
+ 
+ 
+ 
+ 
+53,012
+ 
+ 
+(0.01
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Diluted Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders plus assumed conversions
+ 
+$
+926,397
+ 
+2,502,691
+ 
+$
+0.37
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+2003
+ 
+
+ 
+
+ 
+Net
+
+Income
+ 
+Shares
+ 
+Per Share
+
+Amount
+ 
+
+Basic Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders
+ 
+$
+1,340,720
+ 
+2,400,879
+ 
+$
+0.56
+ 
+
+Effect of Dilutive Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Warrants and stock options outstanding
+ 
+ 
+ 
+ 
+42,357
+ 
+ 
+(0.01
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Diluted Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders plus assumed conversions
+ 
+$
+1,340,720
+ 
+2,443,236
+ 
+$
+0.55
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Stock warrants 
+
+ The Bank issued warrants to certain of the Bank's original organizing group and certain other individuals to purchase up to 95,000 shares of the Bank's common
+stock at the original public offering price of $6 per share. The obligations related to all warrants issued by the Bank were assumed by the Company. During 2004, all unexercised warrants expired. 
+
+ A
+summary of the status of the warrants at December 31, 2004 and 2003, and changes during the year ended on that date, is as follows: 
+
+ 
+
+ 
+2004
+ 
+2003
+
+ 
+
+ 
+Number
+
+of
+
+Shares
+ 
+Weighted-
+
+Average
+
+Exercise
+
+Price
+ 
+Number
+
+of
+
+Shares
+ 
+Weighted-
+
+Average
+
+Exercise
+
+Price
+
+Outstanding at beginning of year
+ 
+83,484
+ 
+$
+6.00
+ 
+91,166
+ 
+$
+6.00
+
+Expired
+ 
+5,700
+ 
+ 
+6.00
+ 
+ 
+ 
+ 
+ 
+
+Exercised
+ 
+77,784
+ 
+ 
+6.00
+ 
+7,682
+ 
+ 
+6.00
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Outstanding at end of year
+ 
+ 
+ 
+ 
+ 
+ 
+83,484
+ 
+ 
+6.00
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Exercisable at end of year
+ 
+ 
+ 
+ 
+ 
+ 
+83,484
+ 
+ 
+6.00
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+F-28
+
+ 
+
+Stock options 
+
+ On August 17, 1999, the Bank adopted a stock option plan (the "Plan") for employees and directors, under which both incentive and non-qualified stock
+options were granted, and subsequently the Company assumed all obligations related to such options. The Plan provided for the grant of 110,000 non-qualified and incentive stock options in 1999 to
+certain directors of the Company, with an exercise price equal to the market value of the Company's stock on the date of grant. Such options were immediately exercisable and expire if unexercised ten
+years after the date of grant. The Company has reserved 110,000 shares of common stock for issuance under the Plan. No additional options may be granted under the Plan. 
+
+ A
+summary of the status of the stock options at December 31, 2005, 2004 and 2003 is as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+2003
+
+ 
+
+ 
+Number
+
+of Shares
+ 
+Weighted-Average
+
+Exercise Price
+ 
+Number
+
+of Shares
+ 
+Weighted-Average
+
+Exercise Price
+ 
+Number
+
+of Shares
+ 
+Weighted-Average
+
+Exercise Price
+
+Outstanding at beginning of year
+ 
+110,000
+ 
+$
+10.13
+ 
+110,000
+ 
+$
+10.13
+ 
+110,000
+ 
+$
+10.13
+
+Exercised
+ 
+37,000
+ 
+ 
+10.15
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Outstanding at end of year
+ 
+73,000
+ 
+ 
+10.13
+ 
+110,000
+ 
+ 
+10.13
+ 
+110,000
+ 
+ 
+10.13
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Exercisable at end of year
+ 
+73,000
+ 
+ 
+10.13
+ 
+110,000
+ 
+ 
+10.13
+ 
+110,000
+ 
+ 
+10.13
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ The
+weighted-average remaining contractual life for the options outstanding at December 31, 2005 is 3.7 years. 
+
+Rights Agreement 
+
+ On April 15, 2004, the Board of Directors of the Company declared, effective as of April 19, 2004, a dividend distribution of one Right for each
+outstanding share of common stock of the Company. The dividend was payable on April 29, 2004 to the stockholders of record as of the close of business on that date. Each Right entitles the
+registered holder to purchase from the Company 8.152 shares of the Company's common stock, at a price of $60.00, or $7.36 per share subject to adjustment. The description and terms of the Rights are
+set forth in a Rights Agreement, dated as of April 19, 2004 between the Company and Registrar and Transfer Company. 
+
+ The
+Rights are not exercisable until the earliest of (i) the tenth business day after a public announcement that a person or group of affiliated or associated persons acquired, or
+obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of the Company's common stock (an Acquiring Person); (ii) the tenth business day (or such later day
+as may be determined by action of the Board of Directors of the Company prior to such time as any person becomes an Acquiring Person) after the date of the commencement of a tender or exchange offer
+by any person (other than the Company) if, upon consummation such person would be an Acquiring Person; and (iii) the tenth business day (or such later day as may be determined by action of the
+Board of Directors of the Company prior to such time as any person becomes an Acquiring Person) after the filing by any Person (other than the Company) of a registration statement under the Securities
+Act of 1933, as 
+
+F-29
+
+ 
+
+amended,
+with respect to a contemplated exchange offer to acquire (when added to any shares as to which such person is the beneficial owner immediately prior to such filing) beneficial ownership of
+15% or more of the issued and outstanding shares of the Company's common stock. 
+
+ The
+Rights will expire on April 19, 2014, unless earlier redeemed or exchanged by the Company. 
+
+Note 12. 401(k) Savings Plan 
+
+ The Company offers employees participation in the Patriot National Bank 401(k) Savings Plan (the "401(k) Plan") under Section 401(k) of the Internal
+Revenue Code. The 401(k) Plan covers substantially all employees who have completed six months of service, are 21 years of age and who elect to participate. Under the terms of the 401(k) Plan,
+participants can contribute up to the maximum amount allowed, subject to Federal limitations. The Company may make discretionary matching contributions to the 401(k) Plan. Participants are immediately
+vested in their contributions and fully vested in Company contributions after two years. The Company contributed approximately $140,000, $127,000 and $73,000 to the 401(k) Plan in 2005, 2004 and 2003,
+respectively. 
+
+Note 13. Financial Instruments With Off-Balance-Sheet Risk 
+
+ In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These
+financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized
+in the balance sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. 
+
+ The
+contractual amounts of commitments to extend credit and standby letters of credit represent the amounts of potential accounting loss should: the contract be fully drawn upon; the
+customer default; and the value of any existing collateral become worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet
+instruments and evaluates each customer's creditworthiness on a case-by-case basis. Management believes that the Company controls the credit risk of these financial instruments through credit
+approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary. 
+
+ Financial
+instruments whose contract amounts represent credit risk are as follows at December 31, 2005 and 2004: 
+
+ 
+
+ 
+2005
+ 
+2004
+
+Commitments to extend credit:
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Future loan commitments
+ 
+$
+55,364,491
+ 
+$
+23,484,674
+
+ 
+Unused lines of credit
+ 
+ 
+37,819,135
+ 
+ 
+36,018,661
+
+ 
+Undisbursed construction loans
+ 
+ 
+40,398,941
+ 
+ 
+37,224,376
+
+Financial standby letters of credit
+ 
+ 
+216,000
+ 
+ 
+197,000
+
+ 
+ 
+
+ 
+
+ 
+ 
+$
+133,798,567
+ 
+$
+96,924,711
+
+ 
+ 
+
+ 
+
+F-30
+
+ 
+
+ Commitments
+to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally
+have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts
+do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the
+Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include residential and commercial property, deposits and securities. 
+
+ Standby
+letters of credit are written commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit
+is essentially the same as that involved in extending loan facilities to customers. As of January 1, 2003, newly issued or modified guarantees that are not derivative contracts have been
+recorded on the Company's consolidated balance sheet at their fair value at inception. No liability related to guarantees was required to be recorded at December 31, 2005 and 2004. 
+
+Note 14. Regulatory Matters 
+
+ The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital
+requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
+Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve
+quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital
+amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 
+
+ Quantitative
+measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total
+and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of
+December 31, 2005, that the Company and the Bank meet all capital adequacy requirements to which it is subject. 
+
+ The
+most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To
+be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier-I leverage ratios as set forth in the table. There are no conditions or events since
+then that management believes have changed the Bank's category. 
+
+F-31
+
+ 
+
+ The
+Company's and the Bank's actual capital amounts and ratios at December 31, 2005 and 2004 were (dollars in thousands): 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+For Capital
+
+Adequacy Purposes
+ 
+To Be Well
+
+Capitalized Under
+
+Prompt Corrective Action Provisions
+ 
+
+ 
+
+ 
+Actual
+ 
+
+2005
+ 
+ 
+
+ 
+Actual
+ 
+Ratio
+ 
+Amount
+ 
+Ratio
+ 
+Amount
+ 
+Ratio
+ 
+
+The Company:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total Capital (to Risk Weighted Assets)
+
+ 
+
+$
+
+43,870
+
+ 
+
+12.70
+
+%
+
+$
+
+27,635
+
+ 
+
+8.00
+
+%
+
+$
+
+N/A
+
+ 
+
+N/A
+
+ 
+
+ 
+Tier I Capital (to Risk Weighted Assets)
+ 
+ 
+39,549
+ 
+11.45
+%
+ 
+13,816
+ 
+4.00
+%
+ 
+N/A
+ 
+N/A
+ 
+
+ 
+Tier I Capital (Average Assets)
+ 
+ 
+39,549
+ 
+8.56
+%
+ 
+18,481
+ 
+4.00
+%
+ 
+N/A
+ 
+N/A
+ 
+
+The Bank:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total Capital (to Risk Weighted Assets)
+
+ 
+
+$
+
+43,180
+
+ 
+
+12.52
+
+%
+
+$
+
+27,591
+
+ 
+
+8.00
+
+%
+
+$
+
+34,489
+
+ 
+
+10.00
+
+%
+
+ 
+Tier I Capital (to Risk Weighted Assets)
+ 
+ 
+38,865
+ 
+11.27
+%
+ 
+13,794
+ 
+4.00
+%
+ 
+20,691
+ 
+6.00
+%
+
+ 
+Tier I Capital (to Average Assets)
+ 
+ 
+38,865
+ 
+8.42
+%
+ 
+18,463
+ 
+4.00
+%
+ 
+23,079
+ 
+5.00
+%
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+For Capital
+
+Adequacy Purposes
+ 
+To Be Well
+
+Capitalized Under
+
+Prompt Corrective Action Provisions
+ 
+
+ 
+
+ 
+Actual
+ 
+
+2004
+ 
+ 
+
+ 
+Actual
+ 
+Ratio
+ 
+Amount
+ 
+Ratio
+ 
+Amount
+ 
+Ratio
+ 
+
+The Company:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total Capital (to Risk Weighted Assets)
+
+ 
+
+$
+
+30,701
+
+ 
+
+10.70
+
+%
+
+$
+
+22,954
+
+ 
+
+8.00
+
+%
+
+$
+
+N/A
+
+ 
+
+N/A
+
+ 
+
+ 
+Tier I Capital (to Risk Weighted Assets)
+ 
+ 
+25,936
+ 
+9.04
+%
+ 
+11,476
+ 
+4.00
+%
+ 
+N/A
+ 
+N/A
+ 
+
+ 
+Tier I Capital (Average Assets)
+ 
+ 
+25,936
+ 
+6.79
+%
+ 
+15,279
+ 
+4.00
+%
+ 
+N/A
+ 
+N/A
+ 
+
+The Bank:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total Capital (to Risk Weighted Assets)
+
+ 
+
+$
+
+30,124
+
+ 
+
+10.50
+
+%
+
+$
+
+22,952
+
+ 
+
+8.00
+
+%
+
+$
+
+28,690
+
+ 
+
+10.00
+
+%
+
+ 
+Tier I Capital (to Risk Weighted Assets)
+ 
+ 
+26,642
+ 
+9.29
+%
+ 
+11,471
+ 
+4.00
+%
+ 
+17,207
+ 
+6.00
+%
+
+ 
+Tier I Capital (to Average Assets)
+ 
+ 
+26,642
+ 
+6.98
+%
+ 
+15,268
+ 
+4.00
+%
+ 
+19,085
+ 
+5.00
+%
+
+Restrictions on dividends, loans and advances 
+
+ The Company's ability to pay dividends is dependent on the Bank's ability to pay dividends to the Company. However, certain restrictions exist regarding the
+ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of the Comptroller of the
+Currency is required to pay dividends in excess of the Bank's earnings retained in the current year plus retained net earnings for the preceding two years. As of December 31, 2005, the Bank had
+retained earnings of approximately $5,698,000, all of which is available for distribution to the Company as dividends without prior regulatory approval. The Bank is also prohibited from paying
+dividends that would reduce its capital ratios below minimum regulatory requirements, and the Federal Reserve Bank may impose further dividend restrictions on the Company. 
+
+F-32
+
+ 
+
+ Loans
+or advances to the Company by the Bank are limited to 10% of the Bank's capital stock and surplus on a secured basis. 
+
+Note 15. Related Party Transactions 
+
+ In the normal course of business, the Company grants loans to executive officers, directors and members of their immediate families, as defined, and to entities
+in which these individuals have more than a 10% equity ownership. Such loans are transacted at terms, including interest rates, similar to those available to unrelated customers. 
+
+ Changes
+in loans outstanding to such related parties during 2005 and 2004 are as follows: 
+
+ 
+
+ 
+2005
+ 
+2004
+ 
+
+Balance, beginning of year
+ 
+$
+198,586
+ 
+$
+1,410,440
+ 
+
+Additional loans
+ 
+ 
+341,394
+ 
+ 
+183,386
+ 
+
+Repayments
+ 
+ 
+(386,586
+)
+ 
+(22,998
+)
+
+Adjustment for former related parties
+ 
+ 
+ 
+ 
+ 
+(1,372,242
+)
+
+ 
+ 
+
+ 
+
+ 
+
+Balance, end of year
+ 
+$
+153,394
+ 
+$
+198,586
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ Related
+party deposits aggregated approximately $5,700,000 and $3,444,000 as of December 31, 2005 and 2004, respectively. 
+
+ The
+Company leases office space to a director of the Company under two leases. Rental income under these leases was approximately $28,300 for the years ended December 31, 2005 and
+2004 and $25,300 for the year ended December 31, 2003. 
+
+ During
+2005, 2004 and 2003, the Company paid legal fees of approximately $18,600, $20,900 and $30,400, respectively, to an attorney who is a director of the Company. 
+
+F-33
+
+ 
+
+Note 16. Other Comprehensive Income 
+
+ Other comprehensive income, which is comprised solely of the change in unrealized gains and losses on available for sale securities, is as follows: 
+
+ 
+
+ 
+2005
+ 
+
+ 
+
+ 
+Before-Tax
+
+Amount
+ 
+Tax Effect
+ 
+Net-of-Tax
+
+Amount
+ 
+
+Unrealized holding losses arising during period
+ 
+$
+(1,146,631
+)
+$
+435,721
+ 
+$
+(710,910
+)
+
+Less reclassification adjustment for gains recognized in net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Unrealized holding loss on available for sale securities, net of taxes
+ 
+$
+(1,146,631
+)
+$
+435,721
+ 
+$
+(710,910
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+2004
+ 
+
+ 
+
+ 
+Before-Tax
+
+Amount
+ 
+Tax Effect
+ 
+Net-of-Tax
+
+Amount
+ 
+
+Unrealized holding losses arising during period
+ 
+$
+(136,065
+)
+$
+51,705
+ 
+$
+(84,360
+)
+
+Less reclassification adjustment for gains recognized in net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Unrealized holding loss on available for sale securities, net of taxes
+ 
+$
+(136,065
+)
+$
+51,705
+ 
+$
+(84,360
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+2003
+ 
+
+ 
+
+ 
+Before-Tax
+
+Amount
+ 
+Tax Effect
+ 
+Net-of-Tax
+
+Amount
+ 
+
+Unrealized holding losses arising during period
+ 
+$
+(1,111,578
+)
+$
+422,399
+ 
+$
+(689,179
+)
+
+Add reclassification adjustment for gains recognized in net income
+ 
+ 
+(307,739
+)
+ 
+116,941
+ 
+ 
+(190,798
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Unrealized holding loss on available for sale securities, net of taxes
+ 
+$
+(1,419,317
+)
+$
+539,340
+ 
+$
+(879,977
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Note 17. Fair Value of Financial Instruments and Interest Rate Risk 
+
+ SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("Statement No. 107"), requires disclosure of fair value information about
+financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based
+on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In
+that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
+Statement No. 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the
+Company. 
+
+ Management
+uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for
+substantially all financial instruments, the fair value estimates presented herein are not necessarily 
+
+F-34
+
+ 
+
+indicative
+of the amounts the Company could have realized in a sales transaction at December 31, 2005 and 2004. The estimated fair value amounts for 2005 and 2004 have been measured as of their
+respective year-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the fair values of these financial
+instruments subsequent to the respective reporting dates may be different from the amounts reported at each year-end. 
+
+ The
+information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the
+Company's assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company's disclosures and those of
+other bank holding companies may not be meaningful. 
+
+ As
+of December 31, 2005 and 2004, the recorded book balances and estimated fair values of the Company's financial instruments were (in thousands): 
+
+ 
+
+ 
+2005
+ 
+2004
+
+ 
+
+ 
+Recorded
+
+Book
+
+Balance
+ 
+Fair Value
+ 
+Recorded
+
+Book
+
+Balance
+ 
+Fair Value
+
+Financial Assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash and noninterest bearing deposits due from banks
+ 
+$
+7,181
+ 
+$
+7,181
+ 
+$
+6,641
+ 
+$
+6,641
+
+ 
+Interest bearing deposits due from banks
+ 
+ 
+40
+ 
+ 
+40
+ 
+ 
+29
+ 
+ 
+29
+
+ 
+Federal funds sold
+ 
+ 
+6,500
+ 
+ 
+6,500
+ 
+ 
+37,500
+ 
+ 
+37,500
+
+ 
+Short-term investments
+ 
+ 
+2,247
+ 
+ 
+2,247
+ 
+ 
+11,460
+ 
+ 
+11,460
+
+ 
+Available for sale securities
+ 
+ 
+78,672
+ 
+ 
+78,672
+ 
+ 
+76,269
+ 
+ 
+76,269
+
+ 
+Federal Reserve Bank stock
+ 
+ 
+1,022
+ 
+ 
+1,022
+ 
+ 
+693
+ 
+ 
+693
+
+ 
+Federal Home Loan Bank stock
+ 
+ 
+1,297
+ 
+ 
+1,297
+ 
+ 
+1,297
+ 
+ 
+1,297
+
+ 
+Loans receivable, net
+ 
+ 
+364,244
+ 
+ 
+353,231
+ 
+ 
+263,875
+ 
+ 
+265,206
+
+ 
+Accrued interest receivable
+ 
+ 
+2,445
+ 
+ 
+2,445
+ 
+ 
+1,758
+ 
+ 
+1,758
+
+Financial Liabilities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Demand deposits
+ 
+$
+48,797
+ 
+$
+48,797
+ 
+$
+42,584
+ 
+$
+42,584
+
+ 
+Savings deposits
+ 
+ 
+20,090
+ 
+ 
+20,090
+ 
+ 
+22,104
+ 
+ 
+22,104
+
+ 
+Money market deposits
+ 
+ 
+57,799
+ 
+ 
+57,799
+ 
+ 
+72,451
+ 
+ 
+72,451
+
+ 
+NOW accounts
+ 
+ 
+25,383
+ 
+ 
+25,383
+ 
+ 
+26,815
+ 
+ 
+26,815
+
+ 
+Time deposits
+ 
+ 
+267,006
+ 
+ 
+268,643
+ 
+ 
+203,052
+ 
+ 
+206,539
+
+ 
+FHLB borrowings
+ 
+ 
+9,000
+ 
+ 
+8,967
+ 
+ 
+8,000
+ 
+ 
+8,082
+
+ 
+Subordinated debt
+ 
+ 
+8,248
+ 
+ 
+8,248
+ 
+ 
+8,248
+ 
+ 
+8,248
+
+Unrecognized financial instruments 
+
+ Loan commitments on which the committed interest rate is less than the current market rate were insignificant at December 31, 2005 and 2004. The estimated
+fair value of fee income on letters of credit at December 31, 2005 and 2004 was insignificant. 
+
+F-35
+
+ 
+
+ The
+Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company's
+financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and
+liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to
+prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a
+falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by
+adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk. 
+
+Note 18. Segment Reporting 
+
+ The Company has two reportable segments, the commercial bank and the mortgage broker. The commercial bank segment provides its commercial customers with products
+such as commercial mortgage and construction loans, working capital loans, equipment loans and other business financing arrangements, and provides its consumer customers with residential mortgage
+loans, home equity loans and other consumer installment loans. The commercial bank segment also attracts deposits from both consumer and commercial customers and invests such deposits in loans,
+investments and working capital. The commercial bank's revenues are generated primarily from net interest income from its lending, investment and deposit activities. 
+
+ The
+mortgage broker solicits and processes conventional mortgage loan applications from consumers on behalf of permanent investors and originates loans for sale. Revenues are generated
+from loan brokerage and application processing fees received from the permanent investors, and gains and origination fees from loans sold. 
+
+F-36
+
+ 
+
+ Information
+about reportable segments, and a reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, 2005, 2004 and
+2003 is as follows (in thousands): 
+
+2005
+ 
+ 
+Commercial
+
+Bank
+ 
+Mortgage
+
+Broker
+ 
+Consolidated
+
+Totals
+
+Net interest income
+ 
+$
+14,879
+ 
+$
+ 
+ 
+$
+14,879
+
+Noninterest income
+ 
+ 
+457
+ 
+ 
+2,772
+ 
+ 
+3,229
+
+Noninterest expenses
+ 
+ 
+11,671
+ 
+ 
+2,963
+ 
+ 
+14,634
+
+Provision for loan losses
+ 
+ 
+1,110
+ 
+ 
+ 
+ 
+ 
+1,110
+
+Income (loss) before taxes
+ 
+ 
+2,555
+ 
+ 
+(191
+)
+ 
+2,364
+
+Assets
+ 
+ 
+469,572
+ 
+ 
+1,069
+ 
+ 
+470,641
+
+2004
+ 
+ 
+Commercial
+
+Bank
+ 
+Mortgage
+
+Broker
+ 
+Consolidated
+
+Totals
+
+Net interest income
+ 
+$
+11,670
+ 
+$
+ 
+ 
+$
+11,670
+
+Noninterest income
+ 
+ 
+682
+ 
+ 
+2,020
+ 
+ 
+2,702
+
+Noninterest expenses
+ 
+ 
+10,025
+ 
+ 
+2,232
+ 
+ 
+12,257
+
+Provision for loan losses
+ 
+ 
+556
+ 
+ 
+ 
+ 
+ 
+556
+
+Income (loss) before taxes
+ 
+ 
+1,771
+ 
+ 
+(212
+)
+ 
+1,559
+
+Assets
+ 
+ 
+403,959
+ 
+ 
+1,088
+ 
+ 
+405,047
+
+2003
+ 
+ 
+Commercial
+
+Bank
+ 
+Mortgage
+
+Broker
+ 
+Consolidated
+
+Totals
+
+Net interest income
+ 
+$
+9,626
+ 
+$
+ 
+ 
+$
+9,626
+
+Noninterest income
+ 
+ 
+851
+ 
+ 
+3,963
+ 
+ 
+4,814
+
+Noninterest expenses
+ 
+ 
+8,441
+ 
+ 
+3,218
+ 
+ 
+11,659
+
+Provision for loan losses
+ 
+ 
+563
+ 
+ 
+ 
+ 
+ 
+563
+
+Income before taxes
+ 
+ 
+1,473
+ 
+ 
+745
+ 
+ 
+2,218
+
+Assets
+ 
+ 
+341,473
+ 
+ 
+996
+ 
+ 
+342,469
+
+ The
+accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment revenues are negotiated and agreed upon by the
+commercial bank and mortgage broker segments at the time of the transactions. Management allocates certain overhead expenses of the commercial bank to the mortgage broker segment. These allocations
+are based on a pre-determined monthly charge agreed to between the commercial bank and the mortgage broker segment. Management evaluates the performance of each segment based on profit or loss from
+operations before income taxes. 
+
+ The
+Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets
+and, accordingly, requires different technology and marketing strategies. 
+
+ The
+Company does not have operating segments other than those reported, the Company does not have a single external customer from which it derives 10% or more of its revenues and the
+Company operates in one geographical area. 
+
+F-37
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC 
+ 
+ CONSOLIDATED BALANCE SHEETS 
+ 
+ June 30, 2006 (unaudited) 
+ 
+
+ASSETS
+ 
+ 
+ 
+ 
+
+Cash and due from banks
+ 
+$
+8,541,749
+ 
+
+Federal funds sold
+ 
+ 
+13,600,000
+ 
+
+Short term investments
+ 
+ 
+169,065
+ 
+
+ 
+ 
+
+ 
+
+ 
+Cash and cash equivalents
+ 
+ 
+22,310,814
+ 
+
+Available for sale securities (at fair value)
+
+ 
+
+ 
+
+72,145,704
+
+ 
+
+Federal Reserve Bank stock
+ 
+ 
+1,022,950
+ 
+
+Federal Home Loan Bank stock
+ 
+ 
+2,727,200
+ 
+
+Loans receivable (net of allowance for loan losses of $5,510,742)
+ 
+ 
+450,451,755
+ 
+
+Accrued interest receivable
+ 
+ 
+3,134,204
+ 
+
+Premises and equipment
+ 
+ 
+2,479,966
+ 
+
+Deferred tax asset, net
+ 
+ 
+2,842,018
+ 
+
+Goodwill
+ 
+ 
+930,091
+ 
+
+Other assets
+ 
+ 
+961,343
+ 
+
+ 
+ 
+
+ 
+
+ 
+Total assets
+ 
+$
+559,006,045
+ 
+
+ 
+ 
+
+ 
+
+LIABILITIES AND SHAREHOLDERS' EQUITY
+
+ 
+
+ 
+
+ 
+
+ 
+
+Liabilities
+ 
+ 
+ 
+ 
+
+ 
+Deposits:
+ 
+ 
+ 
+ 
+
+ 
+ 
+Noninterest bearing deposits
+ 
+$
+50,892,491
+ 
+
+ 
+ 
+Interest bearing deposits
+ 
+ 
+421,736,219
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total deposits
+ 
+ 
+472,628,710
+ 
+
+ 
+Federal Home Loan Bank borrowings
+ 
+ 
+43,000,000
+ 
+
+ 
+Junior subordinated debt owed to unconsolidated trust
+ 
+ 
+8,248,000
+ 
+
+ 
+Accrued expenses and other liabilities
+ 
+ 
+3,394,124
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total liabilities
+ 
+ 
+527,270,834
+ 
+
+ 
+ 
+
+ 
+
+Shareholders' equity
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Preferred stock: 1,000,000 shares authorized; no shares issued
+ 
+ 
+ 
+ 
+
+ 
+Common stock, $2 par value: 60,000,000 shares authorized; 3,230,649 shares issued and outstanding
+ 
+ 
+6,461,298
+ 
+
+ 
+Additional paid-in capital
+ 
+ 
+21,709,224
+ 
+
+ 
+Retained earnings
+ 
+ 
+4,940,372
+ 
+
+ 
+Accumulated other comprehensive loss net unrealized loss on available for sale securities, net of taxes
+ 
+ 
+(1,375,683
+)
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total shareholders' equity
+ 
+ 
+31,735,211
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Total liabilities and shareholders' equity
+ 
+$
+559,006,045
+ 
+
+ 
+ 
+
+ 
+
+See
+accompanying notes to consolidated financial statements. 
+
+F-38
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. 
+ 
+ CONSOLIDATED STATEMENTS OF INCOME 
+ 
+ (Unaudited) 
+ 
+
+ 
+
+ 
+Six Months Ended
+
+June 30,
+
+ 
+
+ 
+2006
+ 
+2005
+
+Interest and Dividend Income
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest and fees on loans
+ 
+$
+15,510,351
+ 
+$
+9,592,192
+
+ 
+Interest on investment securities
+ 
+ 
+1,347,924
+ 
+ 
+1,398,837
+
+ 
+Dividends on investment securities
+ 
+ 
+195,184
+ 
+ 
+265,799
+
+ 
+Interest on federal funds sold
+ 
+ 
+134,664
+ 
+ 
+142,326
+
+ 
+Other interest income
+ 
+ 
+4,561
+ 
+ 
+4,348
+
+ 
+ 
+
+ 
+
+ 
+ 
+Total interest and dividend income
+ 
+ 
+17,192,684
+ 
+ 
+11,403,502
+
+ 
+ 
+
+ 
+
+Interest Expense
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Interest on deposits
+ 
+ 
+6,681,625
+ 
+ 
+4,028,345
+
+ 
+Interest on Federal Home Loan Bank borrowings
+ 
+ 
+607,805
+ 
+ 
+223,462
+
+ 
+Interest on subordinated debt
+ 
+ 
+320,667
+ 
+ 
+243,343
+
+ 
+Interest on other borrowings
+ 
+ 
+4,150
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+Total interest expense
+ 
+ 
+7,614,247
+ 
+ 
+4,495,150
+
+ 
+ 
+
+ 
+
+ 
+ 
+Net interest income
+ 
+ 
+9,578,437
+ 
+ 
+6,908,352
+
+Provision for Loan Losses
+
+ 
+
+ 
+
+923,500
+
+ 
+
+ 
+
+360,000
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+Net interest income after provision for loan losses
+
+ 
+
+ 
+
+8,654,937
+
+ 
+
+ 
+
+6,548,352
+
+ 
+ 
+
+ 
+
+Noninterest Income
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Mortgage brokerage referral fees
+ 
+ 
+679,638
+ 
+ 
+975,457
+
+ 
+Loan processing fees
+ 
+ 
+153,850
+ 
+ 
+183,343
+
+ 
+Fees and service charges
+ 
+ 
+288,410
+ 
+ 
+284,402
+
+ 
+Other income
+ 
+ 
+89,696
+ 
+ 
+88,693
+
+ 
+ 
+
+ 
+
+ 
+ 
+Total noninterest income
+ 
+ 
+1,211,594
+ 
+ 
+1,531,895
+
+ 
+ 
+
+ 
+
+Noninterest Expenses
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Salaries and benefits
+ 
+ 
+4,913,779
+ 
+ 
+4,258,896
+
+ 
+Occupancy and equipment expenses, net
+ 
+ 
+1,335,574
+ 
+ 
+985,316
+
+ 
+Data processing and other outside services
+ 
+ 
+807,265
+ 
+ 
+484,267
+
+ 
+Professional services
+ 
+ 
+247,958
+ 
+ 
+263,292
+
+ 
+Advertising and promotional expenses
+ 
+ 
+295,866
+ 
+ 
+223,748
+
+ 
+Loan administration and processing expenses
+ 
+ 
+80,473
+ 
+ 
+105,673
+
+ 
+Other noninterest expenses
+ 
+ 
+752,881
+ 
+ 
+686,779
+
+ 
+ 
+
+ 
+
+ 
+ 
+Total noninterest expenses
+ 
+ 
+8,433,796
+ 
+ 
+7,007,971
+
+ 
+ 
+
+ 
+
+ 
+ 
+Income before income taxes
+ 
+ 
+1,432,735
+ 
+ 
+1,072,276
+
+ 
+ 
+
+ 
+
+Provision for Income Taxes
+ 
+ 
+526,000
+ 
+ 
+434,000
+
+ 
+ 
+
+ 
+
+ 
+ 
+Net income
+ 
+$
+906,735
+ 
+$
+638,276
+
+ 
+ 
+
+ 
+
+ 
+ 
+Basic income per share
+ 
+$
+0.28
+ 
+$
+0.26
+
+ 
+ 
+
+ 
+
+ 
+ 
+Diluted income per share
+ 
+$
+0.28
+ 
+$
+0.25
+
+ 
+ 
+
+ 
+
+ 
+ 
+Dividends per share
+ 
+$
+0.085
+ 
+$
+0.075
+
+ 
+ 
+
+ 
+
+See accompanying notes to consolidated financial statements. 
+
+F-39
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. 
+ 
+ CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
+ 
+ (Unaudited) 
+ 
+
+ 
+
+ 
+Number
+
+of
+
+Shares
+ 
+Common
+
+Stock
+ 
+Additional
+
+Paid-In
+
+Capital
+ 
+Retained
+
+Earnings
+ 
+Accumulated
+
+Other
+
+Comprehensive
+
+Loss
+ 
+Total
+ 
+
+Balance at December 31, 2004
+ 
+2,486,391
+ 
+$
+4,972,782
+ 
+$
+11,830,173
+ 
+$
+3,346,718
+ 
+$
+(393,239
+)
+$
+19,756,434
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+638,276
+ 
+ 
+ 
+ 
+ 
+638,276
+ 
+ 
+ 
+ 
+
+ 
+Unrealized holding loss on available for sale securities, net of taxes
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(176,789
+)
+ 
+(176,789
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+461,487
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(186,705
+)
+ 
+ 
+ 
+ 
+(186,705
+)
+
+Issuance of capital stock
+ 
+3,000
+ 
+ 
+6,000
+ 
+ 
+24,330
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+30,330
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at June 30, 2005
+ 
+2,489,391
+ 
+$
+4,978,782
+ 
+$
+11,854,503
+ 
+$
+3,798,289
+ 
+$
+(570,028
+)
+$
+20,061,546
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2005
+
+ 
+
+3,230,649
+
+ 
+
+$
+
+6,461,298
+
+ 
+
+$
+
+21,709,224
+
+ 
+
+$
+
+4,308,242
+
+ 
+
+$
+
+(1,104,149
+
+)
+
+$
+
+31,374,615
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+906,735
+ 
+ 
+ 
+ 
+ 
+906,735
+ 
+
+ 
+Unrealized holding loss on available for sale securities, net of taxes
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(271,534
+)
+ 
+(271,534
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+Total comprehensive income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+635,201
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Dividends
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(274,605
+)
+ 
+ 
+ 
+ 
+(274,605
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at June 30, 2006
+ 
+3,230,649
+ 
+$
+6,461,298
+ 
+$
+21,709,224
+ 
+$
+4,940,372
+ 
+$
+(1,375,683
+)
+$
+31,735,211
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+See
+accompanying notes to consolidated financial statements. 
+
+F-40
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. 
+ 
+ CONSOLIDATED STATEMENTS OF CASH FLOWS 
+ 
+ (Unaudited) 
+ 
+
+ 
+
+ 
+Six Months Ended
+
+June 30,
+ 
+
+ 
+
+ 
+2006
+ 
+2005
+ 
+
+Cash Flows from Operating Activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income
+ 
+$
+906,735
+ 
+$
+638,276
+ 
+
+ 
+Adjustments to reconcile net income to net cash provided by operating activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Amortization and accretion of investment premiums and discounts, net
+ 
+ 
+103,291
+ 
+ 
+190,193
+ 
+
+ 
+ 
+Provision for loan losses
+ 
+ 
+923,500
+ 
+ 
+360,000
+ 
+
+ 
+ 
+Depreciation and amortization
+ 
+ 
+310,659
+ 
+ 
+283,337
+ 
+
+ 
+ 
+Changes in assets and liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+Increase (decrease) in deferred loan fees
+ 
+ 
+415,593
+ 
+ 
+(72,531
+)
+
+ 
+ 
+ 
+Increase in accrued interest receivable
+ 
+ 
+(688,787
+)
+ 
+(190,286
+)
+
+ 
+ 
+ 
+Increase in other assets
+ 
+ 
+(47,887
+)
+ 
+(185,966
+)
+
+ 
+ 
+ 
+Increase in accrued expenses and other liabilities
+ 
+ 
+434,712
+ 
+ 
+91,215
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by operating activities
+ 
+ 
+2,357,816
+ 
+ 
+1,114,238
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Cash Flows from Investing Activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Purchases of available for sale securities
+ 
+ 
+ 
+ 
+ 
+(19,243,381
+)
+
+ 
+Principal repayments on available for sale securities
+ 
+ 
+5,985,116
+ 
+ 
+10,225,465
+ 
+
+ 
+Proceeds from maturities of available for sale securities
+ 
+ 
+ 
+ 
+ 
+1,000,000
+ 
+
+ 
+Purchase of Federal Reserve Bank Stock
+ 
+ 
+(650
+)
+ 
+(600
+)
+
+ 
+Purchase of Federal Home Loan Bank Stock
+ 
+ 
+(1,430,500
+)
+ 
+ 
+ 
+
+ 
+Net increase in loans
+ 
+ 
+(87,547,071
+)
+ 
+(37,072,576
+)
+
+ 
+Purchases of premises and equipment
+ 
+ 
+(316,472
+)
+ 
+(642,593
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash used in investing activities
+ 
+ 
+(83,309,577
+)
+ 
+(45,733,685
+)
+
+ 
+ 
+
+ 
+
+ 
+
+Cash Flows from Financing Activities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net increase (decrease) in demand, savings and money market deposits
+ 
+ 
+3,432,825
+ 
+ 
+(5,278,673
+)
+
+ 
+Net increase in time certificates of deposits
+ 
+ 
+50,120,597
+ 
+ 
+5,555,699
+ 
+
+ 
+Proceeds from FHLB borrowings
+ 
+ 
+54,718,000
+ 
+ 
+31,001,000
+ 
+
+ 
+Principal repayments of FHLB borrowings
+ 
+ 
+(20,718,000
+)
+ 
+(21,001,000
+)
+
+ 
+Dividends paid on common stock
+ 
+ 
+(258,452
+)
+ 
+(174,153
+)
+
+ 
+Proceeds from issuance of common stock
+ 
+ 
+ 
+ 
+ 
+30,330
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by financing activities
+ 
+ 
+87,294,970
+ 
+ 
+10,133,203
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net increase (decrease) in cash and cash equivalents
+ 
+ 
+6,343,209
+ 
+ 
+(34,486,244
+)
+
+Cash and cash equivalents
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Beginning
+ 
+ 
+15,967,605
+ 
+ 
+55,630,466
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Ending
+ 
+$
+22,310,814
+ 
+$
+21,144,222
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Supplemental Disclosures of Cash Flow Information
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash paid for:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Interest
+ 
+$
+7,485,125
+ 
+$
+4,484,662
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Income Taxes
+ 
+$
+934,020
+ 
+$
+487,941
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Supplemental disclosure of noncash investing and financing activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Unrealized holding loss on available for sale securities arising during the period
+ 
+$
+(437,957
+)
+$
+(285,144
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Accrued dividends declared on common stock
+ 
+$
+145,379
+ 
+$
+99,576
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+See accompanying notes to consolidated financial statements. 
+
+F-41
+
+ 
+
+ 
+ 
+
+PATRIOT NATIONAL BANCORP, INC. 
+ 
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 
+ 
+
+Note 1. Basis of Financial Statement Presentation 
+
+ The accompanying unaudited financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange
+Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United
+States of America have been omitted. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited financial statements of Bancorp and notes
+thereto for the year ended December 31, 2005. 
+
+ The
+information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The
+results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results of operations that may be expected for the remainder of 2006. 
+
+ Certain
+2005 amounts have been reclassified to conform to the 2006 presentation. Such reclassifications had no effect on net income. 
+
+Note 2. Investments 
+
+ The following table is a summary of Bancorp's available for sale securities portfolio, at fair value, at the June 30, 2006: 
+
+U.S. Government Agency and sponsored agency obligations
+ 
+$
+16,317,613
+
+Mortgage-backed securities
+ 
+ 
+49,828,091
+
+Money market preferred equity securities
+ 
+ 
+6,000,000
+
+ 
+ 
+
+Total Available For Sale Securities
+ 
+$
+72,145,704
+
+ 
+ 
+
+ The
+amortized cost, gross unrealized gains, gross unrealized losses and fair values of available for sale securities at June 30, 2006 are as follows: 
+
+ 
+
+ 
+Amortized
+
+Cost
+ 
+Gross
+
+Unrealized
+
+Gains
+ 
+Gross
+
+Unrealized
+
+Losses
+ 
+Fair
+
+Value
+
+U.S. Government Agency and sponsored agency obligations
+ 
+$
+16,999,543
+ 
+$
+ 
+ 
+$
+(681,930
+)
+$
+16,317,613
+
+Mortgage-backed securities
+ 
+ 
+51,365,004
+ 
+ 
+403
+ 
+ 
+(1,537,316
+)
+ 
+49,828,091
+
+Money market preferred equity securities
+ 
+ 
+6,000,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,000,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+74,364,547
+ 
+$
+403
+ 
+$
+(2,219,246
+)
+$
+72,145,704
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ At
+June 30, 2006, gross unrealized holding gains and gross unrealized holding losses on available for sale securities totaled $403 and $2.2 million respectively. Of the
+securities with unrealized losses, there are eight U.S. Government agency or sponsored agency obligations and 26 mortgage-backed securities that have unrealized losses for a period in excess of twelve
+months with a combined current unrealized loss of $2.0 million. Management does not believe that any of the unrealized losses are other than temporary since they are the result of changes in
+the interest rate environment and they relate to debt and mortgage-backed securities issued by U.S. Government and U.S. Government sponsored agencies. Bancorp has the ability to hold these securities
+to maturity if necessary and expects to receive all contractual principal and interest related to these investments. As a result, management 
+
+F-42
+
+ 
+
+believes
+that these unrealized losses will not have a negative impact on future earnings or a permanent negative effect on capital. 
+
+Note 3. Loans 
+
+ The following table is a summary of Bancorp's loan portfolio at June 30, 2006: 
+
+Real Estate
+ 
+ 
+ 
+ 
+
+ 
+Commercial
+ 
+$
+154,149,494
+ 
+
+ 
+Residential
+ 
+ 
+94,409,384
+ 
+
+ 
+Construction
+ 
+ 
+165,888,865
+ 
+
+Commercial
+ 
+ 
+15,762,617
+ 
+
+Consumer installment
+ 
+ 
+1,349,051
+ 
+
+Consumer home equity
+ 
+ 
+25,637,414
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+Total Loans
+ 
+ 
+457,196,825
+ 
+
+Premiums on purchased loans
+ 
+ 
+315,869
+ 
+
+Net deferred fees
+ 
+ 
+(1,550,197
+)
+
+Allowance for loan losses
+ 
+ 
+(5,510,742
+)
+
+ 
+ 
+
+ 
+
+ 
+ 
+Total Loans
+ 
+$
+450,451,755
+ 
+
+ 
+ 
+
+ 
+
+Analysis of Allowance for Loan Losses 
+
+ The changes in the allowance for loan losses for the periods shown are as follows: 
+
+ 
+
+ 
+Six Months Ended June 30,
+ 
+
+(Thousands of dollars)
+ 
+ 
+
+ 
+2006
+ 
+2005
+ 
+
+Balance at beginning of period
+ 
+$
+4,588
+ 
+$
+3,481
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Charge-offs
+ 
+ 
+(1
+)
+ 
+ 
+ 
+
+Recoveries
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Net (charge-offs) recoveries
+ 
+ 
+(1
+)
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Provision charged to operations
+ 
+ 
+924
+ 
+ 
+360
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Balance at end of period
+ 
+$
+5,511
+ 
+$
+3,841
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Ratio of net (charge-offs) recoveries during the period to average loans outstanding during the period
+ 
+ 
+(0.00
+)%
+ 
+0.00
+%
+
+ 
+ 
+
+ 
+
+ 
+
+F-43
+
+ 
+
+Note 4. Deposits 
+
+ The following table is a summary of Bancorp's deposits at June 30, 2006: 
+
+Noninterest bearing
+ 
+$
+50,892,491
+
+ 
+ 
+
+Interest bearing
+ 
+ 
+ 
+
+ 
+NOW
+ 
+ 
+33,608,829
+
+ 
+Savings
+ 
+ 
+25,206,094
+
+ 
+Money market
+ 
+ 
+45,794,695
+
+ 
+Time certificates, less than $100,000
+ 
+ 
+196,085,934
+
+ 
+Time certificates, $100,000 or more
+ 
+ 
+121,040,667
+
+ 
+ 
+
+ 
+Total interest bearing
+ 
+ 
+421,736,219
+
+ 
+ 
+
+ 
+ 
+Total Deposits
+ 
+$
+472,628,710
+
+ 
+ 
+
+Note 5. Borrowings 
+
+ In addition to the outstanding borrowings disclosed in the consolidated balance sheet, the Bank has the ability to borrow approximately $73.5 million in
+additional advances from the Federal Home Loan Bank of Boston which includes a $2.0 million overnight line of credit. The Bank also has arranged a $3.0 million overnight line of credit
+from a correspondent bank and $10.0 million under a repurchase agreement; no amounts were outstanding under these two arrangements at June 30, 2006. 
+
+Note 6. Income per share 
+
+ Bancorp is required to present basic income per share and diluted income per share in its income statements. Basic income per share amounts are computed by
+dividing net income by the weighted average number of common shares outstanding. Diluted income per share reflects additional common shares that would have been outstanding if potential dilutive
+common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by Bancorp relate to outstanding stock
+options and are determined using the treasury stock method. Bancorp is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted
+income per share. The following is information about the computation of income per share for the six months ended June 30, 2006 and 2005. 
+
+ Six
+months ended June 30, 2006 
+
+ 
+
+ 
+Net Income
+ 
+Shares
+ 
+Amount
+
+Basic Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders
+ 
+$
+906,735
+ 
+3,230,649
+ 
+$
+0.28
+
+Effect of Dilutive Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Warrants/Stock Options outstanding
+ 
+ 
+ 
+ 
+26,700
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Diluted Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders plus assumed conversions
+ 
+$
+906,735
+ 
+3,257,349
+ 
+$
+0.28
+
+ 
+ 
+
+ 
+
+ 
+
+F-44
+
+ 
+
+ Six
+months ended June 30, 2005 
+
+ 
+
+ 
+Net Income
+ 
+Shares
+ 
+Amount
+ 
+
+Basic Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders
+ 
+$
+638,276
+ 
+2,488,247
+ 
+$
+0.26
+ 
+
+Effect of Dilutive Securities
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Warrants/Stock Options outstanding
+ 
+ 
+ 
+ 
+48,886
+ 
+ 
+(0.01
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Diluted Income Per Share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Income available to common shareholders plus assumed conversions
+ 
+$
+638,276
+ 
+2,537,133
+ 
+$
+0.25
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Note 7. Other Comprehensive Income 
+
+ Other comprehensive income, which is comprised solely of the change in unrealized gains and losses on available for sale securities, is as follows: 
+
+ 
+
+ 
+Six months ended June 30, 2006
+ 
+
+ 
+
+ 
+Before-Tax
+
+Amount
+ 
+Tax
+
+Effect
+ 
+Net-of-Tax
+
+Amount
+ 
+
+Unrealized holding loss arising during the period
+ 
+$
+(437,957
+)
+$
+166,423
+ 
+$
+(271,534
+)
+
+Reclassification adjustment for (gains) losses recognized in income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Unrealized holding loss on available for sale securities, net of taxes
+ 
+$
+(437,957
+)
+$
+166,423
+ 
+$
+(271,534
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Six months ended June 30, 2005
+ 
+
+ 
+
+ 
+Before-Tax
+
+Amount
+ 
+Tax
+
+Effect
+ 
+Net-of-Tax
+
+Amount
+ 
+
+Unrealized holding loss arising during the period
+ 
+$
+(285,144
+)
+$
+108,355
+ 
+$
+(176,789
+)
+
+Reclassification adjustment for (gains) losses recognized in income
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Unrealized holding loss on available for sale securities, net of taxes
+ 
+$
+(285,144
+)
+$
+108,355
+ 
+$
+(176,789
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Note 8. Financial Instruments With Off-Balance Sheet Risk 
+
+ In the normal course of business, Bancorp is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These
+financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized
+in the balance sheets. The contract amounts of these instruments reflect the extent of involvement Bancorp has in particular classes of financial instruments. 
+
+F-45
+
+ 
+
+ The
+contractual amounts of commitments to extend credit and standby letters of credit represent the amounts of potential accounting loss should: the contract be fully drawn upon, the
+customer default and the value of any existing collateral become worthless. Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet
+instruments and evaluates each customer's creditworthiness on a case-by-case basis. Management believes that Bancorp controls the credit risk of these financial instruments through credit approvals,
+credit limits, monitoring procedures and the receipt of collateral as deemed necessary. 
+
+ Financial
+instruments whose contract amounts represent credit risk are as follows at June 30, 2006: 
+
+Commitments to extend credit:
+ 
+ 
+ 
+
+ 
+Future loan commitments
+ 
+$
+46,792,997
+
+ 
+Unused lines of credit
+ 
+ 
+44,465,780
+
+ 
+Undisbursed construction loans
+ 
+ 
+74,627,582
+
+ 
+Financial standby letters of credit
+ 
+ 
+264,483
+
+ 
+ 
+
+ 
+ 
+$
+166,150,842
+
+ 
+ 
+
+ Commitments
+to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally
+have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts
+do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management's credit evaluation of the
+counterparty. Collateral held varies but may include residential and commercial property, deposits and securities. 
+
+ Standby
+letters of credit are written commitments issued by Bancorp to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is
+essentially the same as that involved in extending loan facilities to customers. Newly issued or modified guarantees that are not derivative contracts are recorded on Bancorp's consolidated balance
+sheet at the fair value at inception. No liability related to guarantees was required to be recorded at June 30, 2006. 
+
+Note 9. Stock Based Compensation 
+
+ In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment"
+(SFAS 123R). Under SFAS 123R, companies are no longer permitted to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion
+No. 25 whereby compensation cost charged to expense, if any, was the excess of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee
+would pay to acquire the stock. Instead, under SFAS 123R companies are required to account for such transactions using a fair-value method and recognize the expense in the consolidated
+statements of income. This statement applies to all awards granted, modified, repurchased or cancelled after the required effective date. 
+
+ The
+Company adopted SFAS 123R, effective January 1, 2006, using the modified prospective transition method; this may impact the amount of compensation expense recorded in
+future financial statements if the Company grants share-based compensation to employees or directors in the future. 
+
+F-46
+
+ 
+
+Stock Options 
+
+ On August 17, 1999, the Bank adopted a stock option plan (the "Plan") for employees and directors, under which both incentive and non-qualified stock
+options were granted, and subsequently the Company assumed all obligations related to such options. The Plan provided for the grant of 110,000 non-qualified and incentive stock options in 1999 to
+certain directors of the Company, with an exercise price equal to the market value of the Company's stock on the date of the grant. Such options were immediately exercisable and expire if unexercised
+ten years after the date of the grant. The Company has reserved 73,000 shares of common stock remaining for issuance under the Plan. No additional options may be granted under the Plan. 
+
+ A
+summary of the status of the stock options at June 30, 2006 and 2005 is as follows: 
+
+ 
+
+ 
+Number
+
+of shares
+ 
+Weighted
+
+Average
+
+Exercise
+
+Price
+ 
+Weighted
+
+Average
+
+Remaining
+
+Contractual
+
+Life (in years)
+
+June 30, 2006
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Outstanding, January 1, 2006
+ 
+73,000
+ 
+$
+10.13
+ 
+3.7
+
+Exercised
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Outstanding, June 30, 2006
+ 
+73,000
+ 
+ 
+10.13
+ 
+3.2
+
+Exercisable at June 30, 2006
+ 
+73,000
+ 
+ 
+10.13
+ 
+3.2
+
+June 30, 2005
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Outstanding, January 1, 2005
+ 
+110,000
+ 
+$
+10.13
+ 
+4.7
+
+Exercised
+ 
+3,000
+ 
+ 
+10.11
+ 
+ 
+
+Outstanding, June 30, 2005
+ 
+107,000
+ 
+ 
+10.13
+ 
+4.2
+
+Exercisable at June 30, 2005
+ 
+107,000
+ 
+ 
+10.13
+ 
+4.2
+
+ The
+intrinsic value of options outstanding and exercisable at June 30, 2006 and 2005 was $1,333,491 and $964,819, respectively. There were no options exercised during the six
+months ended June 30, 2006. The intrinsic value of options exercised during the six months ended June 30, 2005 was $24,663. There are no pro forma disclosures required for the six months
+ended June 20, 2006 and 2005, because there was no compensation expense attributed to these periods as no awards were granted or vested under this Plan during these periods. 
+
+ The
+provisions of SFAS 123R have had no impact on existing plans under the employment agreements discussed below: 
+
+President's Agreement 
+
+ Under the terms of a previous employment agreement, which expired on October 23, 2003 (the "Agreement") between the Company and the President, the
+Agreement provided that the Company grants shares of the Company's common stock to the President on December 31, 2000, and annually thereafter through December 31, 2003. The number of
+shares was based on 30% of the President's base salary for the preceding annual employment period. Compensation costs for grants through 2002 were recognized over the period ending with the expiration
+date of the Agreement and compensation cost for the 2003 grant is being recognized over the term of his current employment agreement. This 
+
+F-47
+
+ 
+
+stock
+grant has been settled in cash in each year from 2001 through 2005 and is anticipated to settle in cash until fully settled. The expense charged to operations related to this component of the
+Agreement was $29,376 and $13,626, respectively, for the six months ended June 30, 2006 and 2005, respectively. 
+
+ The
+Agreement also provided for the grant of options to purchase a minimum of 10,000 shares of the Company's common stock on December 31, 2000, and annually thereafter through
+December 31, 2003. In the event that the Company did not have stock options available to grant at any of these dates, which was the case at December 31, 2000, 2001, 2002 and 2003, the
+President was able to elect, on a future determination date, to be chosen by the President, to receive cash compensation in the future equal to the difference between the value of the Company's stock
+at the time the options would have been granted, and the value of the Company's stock on the determination date. The expense charged to operations for the option component of the Agreement was $71,625
+and $37,770, respectively, for the six months ended June 30, 2006 and 2005, respectively. 
+
+Stock Appreciation Rights Plan 
+
+ During 2001, the Company adopted the Patriot National Bancorp, Inc. 2001 Stock Appreciation Rights Plan (the "SAR Plan"), providing for the grant by the
+Company of stock appreciation rights to officers of the Company. Stock appreciation rights entitle the officers to receive, in cash or Company common stock, the appreciation in value of the Company's
+common stock from the date of the grant. Each award vests at the rate of 20% per year from the date of the grant. Any unexercised rights will expire ten years from the date of grant. During 2001, the
+Company granted 18,000 stock appreciation rights to three officers. The expense charged to operations under the SAR Plan was $66,984 and $29,070, respectively, for the six months ended June 30,
+2006 and 2005, respectively. 
+
+Note 10. Segment Reporting 
+
+ Bancorp provides its commercial customers with products such as commercial mortgage and construction loans, working capital loans, equipment loans and other
+business financing arrangements, and provides its consumer customers with residential mortgage loans, home equity loans and other consumer installment loans. Bancorp also attracts deposits from both
+consumer and commercial customers, and invests such deposits in loans, investments and working capital. Revenues are generated primarily from net interest income from lending, investment and deposit
+activities. Additional revenues are derived from loan brokerage and application processing fees through the solicitation and processing of conventional mortgage loans, deposit account transaction
+based fees and service charges and other loan origination and processing fees. 
+
+ Bancorp's
+loan and deposit customers are primarily residents and businesses located in the Connecticut communities in which Bancorp has branches, as well as, in bordering communities.
+Its lending customers extend beyond these areas and also include other nonadjacent towns in Fairfield County, Connecticut and towns in Westchester County, New York. 
+
+ Bancorp's
+customer base is diversified. There is not a concentration of either loans or deposits from a single person or groups of individuals or within a single industry or groups of
+industries. Bancorp is not dependent on one or a few significant customers for either its loan or deposit activities, the loss of any one of which would have a material adverse impact on its business. 
+
+F-48
+
+ 
+
+ Prior
+to April 1, 2006, Bancorp had two reportable segments: commercial banking and mortgage brokerage activities. The operations of the mortgage broker have been fully integrated
+into the operations of the commercial bank. The activities of the former mortgage broker segment have expanded to include the products and services of the former commercial banking segment and
+developed such that they are indistinguishable from the lending activities of the commercial bank. Any such separate financial disclosures would be consistent with those presented in the financial
+statements. 
+
+F-49
+
+ 
+
+1,100,000 Shares 
+
+Common Stock 
+
+ 
+
+PATRIOT NATIONAL BANCORP, INC.
+ 
+
+ PROSPECTUS 
+
+ , 2006 
+
+Sandler O'Neill + Partners, L.P. 
+
+ 
+
+ 
+
+ 
+ 
+
+PART II INFORMATION NOT REQUIRED IN PROSPECTUS 
+ 
+
+Item 13. Other Expenses of Issuance and Distribution. 
+
+ The
+following table shows the costs and expenses, payable in connection with the sale and distribution of the securities being registered. We will pay all of these amounts. All amounts
+except the Securities and Exchange Commission registration fee are estimated. 
+
+SEC registration fee
+ 
+$
+3,858
+
+NASDAQ Global Market listing fee
+ 
+ 
+100,000
+
+NASD filing fee
+ 
+ 
+1,700
+
+Accounting fees and expenses
+ 
+ 
+100,000
+
+Legal fees and expenses
+ 
+ 
+175,000
+
+Printing fees and expenses
+ 
+ 
+75,000
+
+Transfer Agent fees and expenses
+ 
+ 
+30,000
+
+Blue sky fees and expenses (including legal fees)
+ 
+ 
+50,000
+
+Financial advisor fees and expenses
+ 
+ 
+186,000
+
+Miscellaneous
+ 
+ 
+3,442
+
+ 
+ 
+
+Total
+ 
+$
+725,000
+
+ 
+ 
+
+Item 14. Indemnification of Directors and Officers. 
+
+ Section 33-771 of the Connecticut Business Corporation Act as amended permits the indemnification of directors and other individuals as long as
+such individual's behavior conforms to certain standards. Section 33-636 provides that a corporation's certificate of incorporation may limit personal liability and make
+indemnification obligatory under certain circumstances. 
+
+ Section VII
+of our Certificate of Incorporation, as amended, provides that we shall, to the fullest extent permitted under the Connecticut Business Corporation Act, indemnify
+anyone that we have the power to indemnify against any expenses, liabilities or other matters referred to in or covered by the Act. This indemnification is not exclusive of any other rights to which
+those seeking indemnification may be entitled under any by-law, agreement, vote of shareholders or disinterested directors, or otherwise. Both action in an official capacity and action in
+another capacity while holding office may be subject to indemnification. A person's right to indemnification does not cease solely because that person ceases to be a director, officer, employee or
+agent, or because that person dies. 
+
+ Our
+Certificate of Incorporation does not provide for indemnification for expenses, penalties or other payments incurred in an administrative proceeding instituted by a bank regulatory
+agency resulting in civil monetary penalties or requiring payments to us. Director liability for breach of a duty to the company or its shareholders for monetary damages is limited to the amount of
+compensation for serving the corporation during the year of any violation, unless the breach: 
+
+ involved
+a knowing and culpable violation of law;
+
+ enabled
+the director or an associate to receive an improper personal economic gain;
+
+ demonstrated
+a lack of good faith and conscious disregard for the duty;
+
+ constituted
+a sustained and unexcused pattern of inattention amounting to abdication of duty; or
+
+ created
+liability for an unlawful distribution under Section 33-757 of the Connecticut Business Corporation Act. 
+
+II-1
+
+ 
+
+ Section VII
+also stipulates that no amendment to or repeal of Section VII shall apply to the liability or alleged liability of any eligible individual with respect to any
+acts or missions occurring prior to such amendment or repeal. 
+
+ We
+carry Directors' and Officers' insurance that covers our directors and officers against some liabilities they may incur when acting in their official capacities. 
+
+ Insofar
+as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the
+foregoing provisions, the registrant has been informed 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. 
+
+Item 15. Recent Sales of Unregistered Securities. 
+
+ Since July 1, 2003, we have issued and sold the following unregistered securities: 
+
+(a)Issuances
+of stock. 
+
+On
+September 9, 2003, we issued 400 shares of our common stock to a former director pursuant to a consulting agreement. These shares were valued at a price per share of $11.15 for a total of
+$4,460. 
+
+From
+December 31, 2003 through September 30, 2004, we issued an aggregate of 85,266 shares of our common stock upon exercise of warrants issued by the Bank in 1994 to persons who
+assisted the Bank in meeting its pre-opening expenses at an exercise price of $6.00 per share for aggregate consideration of $511,596. 
+
+As
+of August 15, 2006, we had sold an aggregate of 45,000 shares of restricted common stock to our directors under the 1999 Patriot National Bank Stock Option Plan, at a weighted average
+exercise price of $10.13 per share, for aggregate consideration of $456,316. 
+
+On
+October 26, 2005, we issued an aggregate of 1,375 shares of restricted common stock to six directors pursuant to our policy to award shares of common stock to outside directors. These shares
+were valued at approximately $19.118 per share for a total of $26,250. 
+
+On
+July 13, 2006, we issued an aggregate of 845 shares of restricted common stock to five directors pursuant to our policy to award shares of common stock to outside directors. These shares
+were valued at approximately $29.50 per share for a total of $25,000. 
+
+(b)Grants
+and exercises of stock options. 
+
+As
+of August 15, 2006, we had outstanding under the 1999 Patriot National Bank Stock Option Plan options to purchase 65,000 shares of common stock, all of which options were exercisable as of
+that date. We had issued an aggregate of 45,000 shares under the plan. No shares of common stock remain available for future grants under this plan. 
+
+We
+did not engage an underwriter in connection with any of the sales of securities described above. Sales of common stock to employees have been made in reliance upon the exemption for the
+registration requirements afforded by Section 4(2) of the Securities Act and Rule 701 thereunder as sales of an issuer's securities pursuant to a written contract relating to the
+compensation of such individuals. Sales of shares of common stock were made in reliance upon Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder. At the time
+of issuance, all of the foregoing shares of common stock were deemed to be restricted securities for the purposes of the Securities Act, and the certificates representing those securities bore legends
+to that effect. 
+
+II-2
+
+ 
+
+Item 16. Exhibits and Financial Statement Schedules. 
+
+ See the Exhibit Index immediately following the signature page hereof. 
+
+Item 17. Undertakings. 
+
+(a)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.
+
+(b)The
+undersigned registrant hereby undertakes:
+
+(1)For
+purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in
+reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
+part of this registration statement as of the time it was declared effective.
+
+(2)For
+the purpose of determining any liability under the Securities Act 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. 
+
+II-3
+
+ 
+
+ 
+ 
+
+SIGNATURES 
+ 
+
+ In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the
+requirements of filing on Form S-1 and authorized this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, in the City of Stamford,
+State of Connecticut, on September 8, 2006.
+
+ 
+
+ 
+ 
+PATRIOT NATIONAL BANCORP, INC.
+ (Registrant)
+
+ 
+
+ 
+
+By:
+
+/s/ ANGELO DE CARO Angelo De Caro
+ Chairman & Chief Executive Officer
+
+ In
+accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated. 
+
+Signature
+ 
+Title
+ 
+Date
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+/s/ ANGELO DE CARO Angelo De Caro
+ 
+Chairman and Chief Executive Officer (Principal Executive Officer)
+ 
+September 8, 2006
+
+/s/ CHARLES F. HOWELL Charles F. Howell
+
+ 
+
+Vice Chairman and President
+
+ 
+
+September 8, 2006
+
+/s/ ROBERT F. O'CONNELL Robert F. O'Connell
+
+ 
+
+Senior Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer)
+
+ 
+
+September 8, 2006
+
+MICHAEL A. CAPODANNO* Michael A. Capodanno
+
+ 
+
+Senior Vice President and Controller (Principal Accounting Officer)
+
+ 
+
+September 8, 2006
+
+PHILIP W. WOLFORD* Philip W. Wolford
+
+ 
+
+Chief Operating Officer and Director
+
+ 
+
+September 8, 2006
+
+JOHN J. FERGUSON* John J. Ferguson
+
+ 
+
+Director
+
+ 
+
+September 8, 2006
+
+BRIAN A. FITZGERALD* Brian A. Fitzgerald
+
+ 
+
+Director
+
+ 
+
+September 8, 2006
+
+ 
+ 
+ 
+ 
+ 
+
+II-4
+
+ 
+
+JOHN A. GEOGHEGAN* John A. Geoghegan
+
+ 
+
+Director
+
+ 
+
+September 8, 2006
+
+L. MORRIS GLUCKSMAN* L. Morris Glucksman
+
+ 
+
+Director
+
+ 
+
+September 8, 2006
+
+MICHAEL F. INTRIERI* Michael F. Intrieri
+
+ 
+
+Director
+
+ 
+
+September 8, 2006
+
+*By:
+
+ 
+
+/s/ ROBERT F. O'CONNELL Robert F. O'Connell
+ Attorney-in-fact
+
+ 
+
+ 
+
+ 
+
+ 
+
+II-5
+
+ 
+
+ 
+ 
+
+Exhibit Index 
+ 
+
+Exhibit
+
+Number
+ 
+Description of Exhibit
+
+1
+
+*
+
+Form of Underwriting Agreement by and between the Registrant and Sandler O'Neill & Partners, L.P.
+
+2
+
+ 
+
+Agreement and Plan of Reorganization dated as of June 28, 1999 between the Registrant and Patriot National Bank. Filed as Exhibit 2 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on April 25, 2005 and
+incorporated herein by reference.
+
+3.1
+
+ 
+
+Certificate of Incorporation of the Registrant, as amended by the Certificate of Amendment of Certificate of Incorporation of the Registrant, filed on September 27, 2004, as further amended by the Certificate of Amendment of Certificate of
+Incorporation of the Registrant, filed on June 30, 2006.
+
+3.2
+
+ 
+
+By-laws of the Registrant. Filed as Exhibit 3.2 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on April 25, 2005 and incorporated herein by reference.
+
+4.1
+
+ 
+
+Rights Agreement, dated April 19, 2004, by and between Registrar and Transfer Company and the Registrant. Filed as Exhibit 4.1 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on April 25, 2005 and
+incorporated herein by reference.
+
+5
+
+*
+
+Opinion of Tyler Cooper & Alcorn, LLP.
+
+10.1
+
+ 
+
+1999 Stock Option Plan of Patriot National Bank. Filed as Exhibit 10.1 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on April 25, 2005 and incorporated herein by reference.
+
+10.2
+
+ 
+
+2001 Stock Appreciation Rights Plan of Registrant. Filed as Exhibit 10.2 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on April 25, 2005 and incorporated herein by reference.
+
+10.3
+
+ 
+
+Employment Agreement, dated as of October 23, 2000, as amended by a First Amendment, dated as of March 21, 2001, among the Registrant, Patriot National Bank and Charles F. Howell. Filed as Exhibit 10.3 to the Company's Registration
+Statement on Form SB-2 (File No. 333-124312) on April 25, 2005 and incorporated herein by reference.
+
+10.4
+
+ 
+
+Second Amendment to Employment Agreement among the Registrant, Patriot National Bank and Charles F. Howell, dated as of May, 2002. Filed as Exhibit 10.4 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on
+April 25, 2005 and incorporated herein by reference.
+
+10.5
+
+ 
+
+Employment Agreement, dated as of October 23, 2003, among the Registrant, Patriot National Bank and Charles F. Howell. Filed as Exhibit 10.5 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on April 25,
+2005 and incorporated herein by reference.
+
+10.6
+
+ 
+
+Amended and Restated Employment Agreement, dated as of November 3, 2003, among the Registrant, Patriot National Bank and Robert F. O'Connell. Filed as Exhibit 10.6 to the Company's Registration Statement on Form SB-2 (File
+No. 333-124312) on April 25, 2005 and incorporated herein by reference.
+
+ 
+ 
+ 
+
+II-6
+
+ 
+
+10.7
+
+ 
+
+Amended and Restated Senior Management Change of Control Agreement, dated as of November 3, 2003, between Robert F. O'Connell and Patriot National Bank. Filed as Exhibit 10.7 to the Company's Registration Statement on Form SB-2 (File
+No. 333-124312) on April 25, 2005 and incorporated herein by reference.
+
+10.8
+
+ 
+
+Senior Management Change of Control Agreement, dated as of May 1, 2001, between Martin G. Noble and Patriot National Bank. Filed as Exhibit 10.8 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on
+April 25, 2005 and incorporated herein by reference.
+
+10.9
+
+ 
+
+Employment Agreement, dated as of January 1, 2006, between Marcus Zavattaro and Patriot National Bank. Filed as Exhibit 10(a)(8) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005 (File
+No. 0-29599) on March 30, 2006 and incorporated herein by reference.
+
+10.10
+
+ 
+
+License Agreement, dated July 1, 2003, between Patriot National Bank and L. Morris Glucksman. Filed as Exhibit 10.10 to the Company's Registration Statement on Form SB-2 (File No. 333-124312) on April 25, 2005 and incorporated
+herein by reference.
+
+10.11
+
+ 
+
+Amendment No. 1 to the Amended and Restated Change of Control Agreement, dated March 30, 2006, between Robert F. O'Connell and Patriot National Bank. Filed as Exhibit 10(a)(11) to the Company's Annual Report on Form 10-KSB for the
+year ended December 31, 2005 (File No. 0-29599) on March 30, 2006 and incorporated herein by reference.
+
+10.12
+
+ 
+
+2005 Director Stock Award Plan. Filed as Exhibit 10(a)(12) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 0-29599) on August 14, 2006 and incorporated herein by
+reference.
+
+21
+
+ 
+
+Subsidiaries of the Registrant.
+
+23.1
+
+*
+
+Consent of McGladrey & Pullen, LLP, Independent Auditors.
+
+23.2
+
+*
+
+Consent of Tyler Cooper & Alcorn, LLP. Included in Exhibit 5.
+
+24
+
+ 
+
+Power of Attorney.
+
+*Filed
+herewith. All other exhibits previously filed.
+
+ 
+
+II-7
+
+QuickLinks
+
+TABLE OF CONTENTS
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/RELL_richardson_legal_matters.txt b/parsed_sections/legal_matters/2006/RELL_richardson_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e9fc792049dac79c1d59d1842443c7fdeb988601
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/RELL_richardson_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Bryan Cave LLP, our outside counsel, has passed upon the legality of the notes and shares of common stock issuable upon conversion of the notes. Scott Hodes, a partner in Bryan Cave LLP, is also one of our directors and, as of August 21, 2006, beneficially owned 83,424 shares of our common stock and 3,712 shares of our Class B common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/SLV_ishares_legal_matters.txt b/parsed_sections/legal_matters/2006/SLV_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bebe7620980e925c20d01d441152cf3b625d4281
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/SLV_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the iShares has been passed upon for the sponsor by Clifford Chance US LLP, New York, New York, who, as special United States tax counsel to the sponsor, has also given an opinion regarding the material federal income tax consequences relating to the iShares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2006/TLF_tandy_legal_matters.txt b/parsed_sections/legal_matters/2006/TLF_tandy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3cc164b2ea45c3681718ab165d3b3bf89033711c
--- /dev/null
+++ b/parsed_sections/legal_matters/2006/TLF_tandy_legal_matters.txt
@@ -0,0 +1 @@
+legal matters relating to the offering will be passed upon for Tandy Leather Factory by Cantey & Hanger, L.L.P., Fort Worth, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/ACM_aecom_legal_matters.txt b/parsed_sections/legal_matters/2007/ACM_aecom_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..44b174a6feb0a758a35a04e7eb89c943a709420a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/ACM_aecom_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, Los Angeles, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/AER_aercap_legal_matters.txt b/parsed_sections/legal_matters/2007/AER_aercap_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..70454615cbcb129faf1635ba67f46b6096f9d8b5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/AER_aercap_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed upon for us by Milbank, Tweed, Hadley & McCloy LLP, New York, New York, and NautaDutilh N.V. Amsterdam, The Netherlands will pass upon the validity of the ordinary shares. Davis Polk & Wardwell, New York, New York is representing the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/AIFU_aifu-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/AIFU_aifu-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d05bb25d611255dcf0cad95089aa6029bed8c25e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/AIFU_aifu-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to the United States federal and New York law in connection with this offering will be passed upon for us by Latham & Watkins LLP. Certain legal matters as to the United States federal and New York law in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. Legal matters as to PRC law will be passed upon for us by Commerce & Finance Law Offices and for the underwriters by Junhe Law Offices. Latham & Watkins LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law and Commerce & Finance Law Offices with respect to matters governed by PRC law. Simpson Thacher & Bartlett LLP may rely upon Junhe Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/ASYS_amtech_legal_matters.txt b/parsed_sections/legal_matters/2007/ASYS_amtech_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..eff5daff2a0cc4be4da5bb9af51beaa345577bf2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/ASYS_amtech_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by our counsel, Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona. Pillsbury Winthrop Shaw Pittman LLP, Palo Alto, California, is acting as counsel for the underwriters in connection with certain legal matters relating to the shares of common stock offered hereby.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/AVAV_aerovironm_legal_matters.txt b/parsed_sections/legal_matters/2007/AVAV_aerovironm_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..59ffad626731f947ac714510b6fee38660084142
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/AVAV_aerovironm_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered by this prospectus will be passed upon for us by Latham Watkins LLP, San Diego, California. The underwriters have been represented by Cravath, Swaine Moore LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/BATL_battalion_legal_matters.txt b/parsed_sections/legal_matters/2007/BATL_battalion_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..276ac2a8b7a90ff9637f7a2f46ba910e4b4f8582
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/BATL_battalion_legal_matters.txt
@@ -0,0 +1,2177 @@
+LEGAL MATTERS 
+ The validity of the issuance of the shares of common stock offered by this prospectus will be
+passed upon for us by McAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma. C. David Stinson, a stockholder of McAfee & Taft A Professional Corporation, currently beneficially owns 489,626 shares of our common stock. Certain
+legal matters relating to this offering will be passed on by Fulbright & Jaworski L.L.P., as counsel for the underwriters. 
+ 
+
+ 86 
+
+Table of Contents
+
+ 
+EXPERTS 
+ The consolidated financial statements of RAM Energy, Inc. at December 31, 2005 and 2004, and for each
+of the three years in the period ended December 31, 2005, have been audited by UHY Mann Frankfort Stein & Lipp CPAs, LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are
+included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. 
+ The financial statements
+of RAM Energy Resources, Inc. (formerly known as Tremisis Energy Acquisition Corporation) at December 31, 2005 and 2004, the year ended December 31, 2005, the period from February 5, 2004 (inception) to December 31, 2004, and the period from
+February 5, 2004 (inception) to December 31, 2005, included elsewhere herein, have been audited by BDO Seidman, LLP, independent registered public accounting firm as set forth in their report appearing elsewhere herein, and are included in reliance
+upon such report given on the authority of such firm as experts in accounting and auditing. 
+ Certain estimates of oil and natural gas
+reserves incorporated herein were based upon engineering studies prepared by Williamson Petroleum Consultants, Inc., independent petroleum engineers, and Forrest A. Garb & Associates, Inc., independent petroleum engineers. Each such estimate is
+included herein in reliance upon the authority of each of the respective firms as an expert in such matters. 
+ 
+
+ 87 
+
+Table of Contents
+
+ 
+WHERE YOU CAN FIND MORE INFORMATION 
+ We have filed a registration statement on Form S-1 with the Securities
+and Exchange Commission in connection with this offering. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy the registration statement and any
+other documents we have filed at the Securities and Exchange Commission s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the
+Public Reference Room. Our Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission s Internet site at http://www.sec.gov. 
+ This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a
+reference is made in this prospectus to any of our contracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement.
+
+ After the offering, we expect to provide annual reports to our stockholders that include financial information examined and reported on by
+our independent public accountant. 
+ 
+
+ 88 
+
+Table of Contents
+
+ 
+GLOSSARY OF OIL AND NATURAL GAS TERMS 
+ The definitions set forth below apply to the indicated terms as used in
+this prospectus. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple.
+
+ Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons.
+
+ Bcf. One billion cubic feet of natural gas. 
+ Boe. Barrels of oil equivalent in which six Mcf of natural gas equals one Bbl of oil. 
+ Btu.
+British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit. 
+ Completion. The installation of permanent equipment for the production of oil or natural gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency. 
+ Development well. A well drilled within the proved areas of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be
+productive. 
+ Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds
+from the sale of such production exceed production expenses and taxes. 
+ Exploratory well. A well drilled to find and produce oil or
+natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir. 
+ Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural
+feature and/or stratigraphic condition. 
+ Gross acres or gross wells. The total acres or wells, as the case may be, in which a working
+interest is owned. 
+ MBbls. One thousand barrels of crude oil or other liquid hydrocarbons. 
+ MBoe. One thousand Boe. 
+ MMBoe.
+One million Boe. 
+ Mcf. One thousand cubic feet of natural gas. 
+ MMBbls. One million barrels of crude oil or other liquid hydrocarbons. 
+ MMBtu. One million Btus. 
+ MMcf.
+One million cubic feet of natural gas. 
+ Net acres or net wells. The sum of the fractional working interests owned in gross acres or
+gross wells, as the case may be. 
+ Operator. The individual or company responsible for the exploration, exploitation and production of
+an oil or natural gas well or lease. 
+ PV-10 Value. When used with respect to oil and natural gas reserves, the estimated future gross
+revenues to be generated from the production of proved reserves, net of estimated production and future development costs, using the prices provided in this prospectus and costs in effect as of the date indicated, without giving effect to
+non-property related expenses such as general and administrative expenses, debt 
+
+ 
+
+ 89 
+
+Table of Contents
+
+ 
+service and future income tax expenses or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. 
+ Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such
+production exceed production expenses and taxes. 
+ Proved developed producing reserves. Proved developed reserves that are expected to
+be recovered from completion intervals currently open in existing wells and capable of production. 
+ Proved developed reserves. Proved
+reserves that are expected to be recovered from existing wellbores, whether or not currently producing, without drilling additional wells. Production of such reserves may require a recompletion. 
+ Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with
+reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. 
+ Proved
+undeveloped location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves. 
+ Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
+
+ Recompletion. The completion for production of an existing wellbore in another formation from that in which the well has been
+previously completed. 
+ Reserve life. A ratio determined by dividing our estimated existing reserves determined as of the stated
+measurement date by production from such reserves for the prior twelve month period. 
+ Reservoir. A porous and permeable underground
+formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. 
+ 3-D seismic. The method by which a three dimensional image of the earth s subsurface is created through the interpretation of reflection
+seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal, exploitation and production. 
+ Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial
+quantities of oil and natural gas regardless of whether such acreage contains proved reserves. 
+ Working interest. The operating
+interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. 
+ Workover. Operations on a producing well to restore or increase production. 
+ 
+
+ 90 
+
+Table of Contents
+
+ 
+INDEX TO FINANCIAL STATEMENTS
+ 
+ 
+ RAM Energy Resources, Inc. 
+
+ 
+Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005 
+
+ 
+F-2
+
+ 
+Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2006 and 2005 (unaudited)
+
+ 
+F-3
+
+ 
+Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2006 and 2005 (unaudited)
+
+ 
+F-4
+
+ 
+Notes to Condensed Consolidated Financial Statements (unaudited)
+
+ 
+F-6
+
+RAM Energy, Inc.
+ 
+
+ 
+Report of Independent Registered Public Accounting Firm
+
+ 
+F-17
+
+ 
+Consolidated Balance Sheets as of December 31, 2005 and 2004
+
+ 
+F-18
+
+ 
+Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
+
+ 
+F-19
+
+ 
+Consolidated Statements of Stockholders Deficit for the years ended December 31, 2005, 2004 and 2003
+
+ 
+F-20
+
+ 
+Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
+
+ 
+F-21
+
+ 
+Notes to Consolidated Financial Statements
+
+ 
+F-23
+
+ Tremisis Energy Acquisition Corporation 
+
+ 
+Report of Independent Registered Public Accounting Firm
+
+ 
+F-47
+
+ 
+Balance Sheets as of December 31, 2005 and 2004
+
+ 
+F-48
+
+ 
+Statements of Operations Period from February 5, 2004 to December 31, 2004; period from February 5, 2004 to December 31, 2005 and year ended December 31, 2005
+
+ 
+F-49
+
+ 
+Statements of Stockholders Equity for the period February 5, 2004 to December 31, 2004 and for year ended December 31, 2005
+
+ 
+F-50
+
+ 
+Statements of Cash Flows Period from February 5, 2004 to December 31, 2004; period from February 5, 2004 to December 31, 2005 and year ended December 31, 2005
+
+ 
+F-51
+
+ 
+Summary of Significant Accounting Policies
+
+ 
+F-52
+
+ 
+Notes to Financial Statements
+
+ 
+F-53
+
+ 
+
+ F-1 
+
+Table of Contents
+
+ 
+RAM ENERGY RESOURCES, INC. 
+ CONDENSED CONSOLIDATED BALANCE SHEETS 
+ (in thousands, except share and per share amounts) 
+ 
+
+ 
+ 
+ September 30,
+ 2006
+
+ 
+ 
+ December 31,
+ 2005
+
+ 
+
+ 
+ 
+(unaudited)
+ 
+ 
+ 
+ 
+
+ ASSETS
+
+ 
+
+ 
+
+ CURRENT ASSETS:
+
+ 
+
+ 
+
+ Cash and cash equivalents
+
+ 
+$
+7,592
+ 
+ 
+$
+70
+ 
+
+ Accounts receivable:
+
+ 
+
+ 
+
+ Oil and natural gas sales
+
+ 
+ 
+6,501
+ 
+ 
+ 
+7,422
+ 
+
+ Joint interest operations, net of allowance of $185 ($31 at December 31, 2005)
+
+ 
+ 
+234
+ 
+ 
+ 
+566
+ 
+
+ Related party
+
+ 
+ 
+ 
+ 
+ 
+ 
+142
+ 
+
+ Other, net of allowance of $39 ($13 at December 31, 2005)
+
+ 
+ 
+296
+ 
+ 
+ 
+175
+ 
+
+ Derivative assets
+
+ 
+ 
+308
+ 
+ 
+ 
+ 
+ 
+
+ Prepaid expenses
+
+ 
+ 
+391
+ 
+ 
+ 
+756
+ 
+
+ Other current assets
+
+ 
+ 
+36
+ 
+ 
+ 
+484
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current assets
+
+ 
+ 
+15,358
+ 
+ 
+ 
+9,615
+ 
+
+ PROPERTIES AND EQUIPMENT, AT COST:
+
+ 
+
+ 
+
+ Oil and natural gas properties and equipment, using full cost accounting
+
+ 
+ 
+178,668
+ 
+ 
+ 
+160,704
+ 
+
+ Other property and equipment
+
+ 
+ 
+6,110
+ 
+ 
+ 
+7,276
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+184,778
+ 
+ 
+ 
+167,980
+ 
+
+ Less accumulated amortization and depreciation
+
+ 
+ 
+(45,351
+)
+ 
+ 
+(36,848
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total properties and equipment
+
+ 
+ 
+139,427
+ 
+ 
+ 
+131,132
+ 
+
+ OTHER ASSETS:
+
+ 
+
+ 
+
+ Deferred loan costs, net of accumulated amortization of $4,639 ($4,905 at December 31, 2005)
+
+ 
+ 
+2,791
+ 
+ 
+ 
+1,613
+ 
+
+ Other
+
+ 
+ 
+581
+ 
+ 
+ 
+916
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total assets
+
+ 
+$
+158,157
+ 
+ 
+$
+143,276
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+LIABILITIES AND STOCKHOLDERS DEFICIT
+ 
+
+ 
+
+ CURRENT LIABILITIES:
+
+ 
+
+ 
+
+ Accounts payable:
+
+ 
+
+ 
+
+ Trade
+
+ 
+$
+5,386
+ 
+ 
+ 
+4,343
+ 
+
+ Oil and natural gas proceeds due others
+
+ 
+ 
+4,703
+ 
+ 
+ 
+3,201
+ 
+
+ Related party
+
+ 
+ 
+18
+ 
+ 
+ 
+41
+ 
+
+ Other
+
+ 
+ 
+32
+ 
+ 
+ 
+ 
+ 
+
+ Accrued liabilities:
+
+ 
+
+ 
+
+ Compensation
+
+ 
+ 
+830
+ 
+ 
+ 
+749
+ 
+
+ Interest
+
+ 
+ 
+3,064
+ 
+ 
+ 
+1,745
+ 
+
+ Income taxes
+
+ 
+ 
+461
+ 
+ 
+ 
+146
+ 
+
+ Derivative liabilities
+
+ 
+ 
+ 
+ 
+ 
+ 
+3,510
+ 
+
+ Long-term debt due within one year
+
+ 
+ 
+194
+ 
+ 
+ 
+560
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current liabilities
+
+ 
+ 
+14,688
+ 
+ 
+ 
+14,295
+ 
+
+ OIL & NATURAL GAS PROCEEDS DUE OTHERS
+
+ 
+ 
+2,465
+ 
+ 
+ 
+1,972
+ 
+
+ LONG-TERM DEBT
+
+ 
+ 
+131,502
+ 
+ 
+ 
+112,286
+ 
+
+ DEFERRED AND OTHER NON-CURRENT INCOME TAXES
+
+ 
+ 
+27,834
+ 
+ 
+ 
+25,300
+ 
+
+ ASSET RETIREMENT OBLIGATION
+
+ 
+ 
+10,711
+ 
+ 
+ 
+10,192
+ 
+
+ COMMITMENTS AND CONTINGENCIES
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ STOCKHOLDERS DEFICIT:
+
+ 
+
+ 
+
+ Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 33,630,000 and 7,700,000 shares issued at September 30,
+2006 and December 31, 2005, respectively
+
+ 
+ 
+3
+ 
+ 
+ 
+1
+ 
+
+ Additional paid-in capital
+
+ 
+ 
+2,218
+ 
+ 
+ 
+95
+ 
+
+ Treasury stock 837,275 shares at cost
+
+ 
+ 
+(3,768
+)
+ 
+ 
+ 
+ 
+
+ Accumulated deficit
+
+ 
+ 
+(27,496
+)
+ 
+ 
+(20,865
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Stockholders deficit
+
+ 
+ 
+(29,043
+)
+ 
+ 
+(20,769
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total liabilities and stockholders deficit
+
+ 
+$
+158,157
+ 
+ 
+$
+143,276
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these condensed consolidated financial
+statements. 
+ 
+
+ F-2 
+
+Table of Contents
+
+ 
+RAM ENERGY RESOURCES, INC. 
+ CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
+ (in thousands, except share and per share amounts) 
+ (unaudited) 
+ 
+
+ 
+ 
+Three Months Ended
+September 30,
+ 
+ 
+Nine Months Ended
+September 30,
+ 
+
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+
+ OPERATING REVENUES:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Oil and natural gas sales
+
+ 
+$
+18,267
+ 
+ 
+$
+17,974
+ 
+ 
+$
+53,050
+ 
+ 
+$
+48,140
+ 
+
+ Realized and unrealized gains (losses) on derivatives
+
+ 
+ 
+3,878
+ 
+ 
+ 
+(12,397
+)
+ 
+ 
+1,108
+ 
+ 
+ 
+(16,613
+)
+
+ Other
+
+ 
+ 
+42
+ 
+ 
+ 
+398
+ 
+ 
+ 
+466
+ 
+ 
+ 
+983
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total operating revenues
+
+ 
+ 
+22,187
+ 
+ 
+ 
+5,975
+ 
+ 
+ 
+54,624
+ 
+ 
+ 
+32,510
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ OPERATING EXPENSES:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Oil and natural gas production taxes
+
+ 
+ 
+843
+ 
+ 
+ 
+919
+ 
+ 
+ 
+2,527
+ 
+ 
+ 
+2,460
+ 
+
+ Oil and natural gas production expenses
+
+ 
+ 
+4,309
+ 
+ 
+ 
+3,917
+ 
+ 
+ 
+13,222
+ 
+ 
+ 
+11,453
+ 
+
+ Amortization and depreciation
+
+ 
+ 
+3,495
+ 
+ 
+ 
+3,397
+ 
+ 
+ 
+10,019
+ 
+ 
+ 
+9,213
+ 
+
+ Accretion expense
+
+ 
+ 
+133
+ 
+ 
+ 
+71
+ 
+ 
+ 
+398
+ 
+ 
+ 
+217
+ 
+
+ Share-based compensation
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,218
+ 
+ 
+ 
+ 
+ 
+
+ General and administrative, overhead and other expenses
+
+ 
+ 
+2,304
+ 
+ 
+ 
+2,367
+ 
+ 
+ 
+6,351
+ 
+ 
+ 
+6,285
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total operating expenses
+
+ 
+ 
+11,084
+ 
+ 
+ 
+10,671
+ 
+ 
+ 
+34,735
+ 
+ 
+ 
+29,628
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Operating income (loss)
+
+ 
+ 
+11,103
+ 
+ 
+ 
+(4,696
+)
+ 
+ 
+19,889
+ 
+ 
+ 
+2,882
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ OTHER INCOME (EXPENSE):
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Interest expense
+
+ 
+ 
+(3,906
+)
+ 
+ 
+(3,145
+)
+ 
+ 
+(13,213
+)
+ 
+ 
+(8,769
+)
+
+ Interest income
+
+ 
+ 
+129
+ 
+ 
+ 
+19
+ 
+ 
+ 
+238
+ 
+ 
+ 
+41
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ INCOME (LOSS) BEFORE INCOME TAXES
+
+ 
+ 
+7,326
+ 
+ 
+ 
+(7,822
+)
+ 
+ 
+6,914
+ 
+ 
+ 
+(5,846
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ INCOME TAX PROVISION (BENEFIT)
+
+ 
+ 
+3,081
+ 
+ 
+ 
+(2,972
+)
+ 
+ 
+2,924
+ 
+ 
+ 
+(2,222
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ NET INCOME (LOSS)
+
+ 
+$
+4,245
+ 
+ 
+$
+(4,850
+)
+ 
+$
+3,990
+ 
+ 
+$
+(3,624
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ EARNINGS (LOSS) PER SHARE:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic
+
+ 
+$
+0.13
+ 
+ 
+$
+(0.63
+)
+ 
+$
+0.19
+ 
+ 
+$
+(0.47
+)
+
+ Diluted
+
+ 
+$
+0.13
+ 
+ 
+$
+(0.63
+)
+ 
+$
+0.18
+ 
+ 
+$
+(0.47
+)
+
+ WEIGHTED AVERAGE SHARES OUTSTANDING:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic
+
+ 
+ 
+33,459,589
+ 
+ 
+ 
+7,700,000
+ 
+ 
+ 
+21,501,633
+ 
+ 
+ 
+7,700,000
+ 
+
+ Diluted
+
+ 
+ 
+33,692,544
+ 
+ 
+ 
+7,700,000
+ 
+ 
+ 
+22,105,987
+ 
+ 
+ 
+7,700,000
+ 
+
+ The accompanying notes are an integral part of these condensed consolidated financial
+statements. 
+ 
+
+ F-3 
+
+Table of Contents
+
+ 
+RAM ENERGY RESOURCES, INC. 
+ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
+ (in thousands) 
+ (unaudited)
+
+ 
+
+ 
+ 
+Nine Months Ended
+September 30,
+ 
+
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+
+ OPERATING ACTIVITIES:
+
+ 
+
+ 
+
+ Net income (loss)
+
+ 
+$
+3,990
+ 
+ 
+$
+(3,624
+)
+
+ Adjustments to reconcile net income (loss) to net cash provided by operating activities:
+
+ 
+
+ 
+
+ Amortization and depreciation:
+
+ 
+
+ 
+
+ Oil and natural gas properties and equipment
+
+ 
+ 
+9,524
+ 
+ 
+ 
+8,894
+ 
+
+ Amortization of deferred loan costs and senior notes discount
+
+ 
+ 
+776
+ 
+ 
+ 
+629
+ 
+
+ Charge off of unamortized deferred loan costs
+
+ 
+ 
+1,055
+ 
+ 
+ 
+ 
+ 
+
+ Other property and equipment
+
+ 
+ 
+495
+ 
+ 
+ 
+321
+ 
+
+ Accretion expense
+
+ 
+ 
+398
+ 
+ 
+ 
+217
+ 
+
+ Unrealized gain (loss) on derivatives
+
+ 
+ 
+(5,874
+)
+ 
+ 
+14,855
+ 
+
+ Deferred income taxes
+
+ 
+ 
+3,337
+ 
+ 
+ 
+(3,648
+)
+
+ Share-based compensation
+
+ 
+ 
+2,218
+ 
+ 
+ 
+ 
+ 
+
+ Gain on disposal of other property and equipment
+
+ 
+ 
+(99
+)
+ 
+ 
+ 
+ 
+
+ Changes in operating assets and liabilities:
+
+ 
+
+ 
+
+ Accounts receivable
+
+ 
+ 
+1,303
+ 
+ 
+ 
+(1,346
+)
+
+ Prepaid expenses, deposits, and other assets
+
+ 
+ 
+816
+ 
+ 
+ 
+120
+ 
+
+ Accounts payable
+
+ 
+ 
+2,550
+ 
+ 
+ 
+103
+ 
+
+ Accrued liabilities and other
+
+ 
+ 
+4,805
+ 
+ 
+ 
+(5,905
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total adjustments
+
+ 
+ 
+21,304
+ 
+ 
+ 
+14,240
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by operating activities
+
+ 
+ 
+25,294
+ 
+ 
+ 
+10,616
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ INVESTING ACTIVITIES:
+
+ 
+
+ 
+
+ Payments for oil and natural gas properties and equipment
+
+ 
+ 
+(21,529
+)
+ 
+ 
+(11,078
+)
+
+ Proceeds from sales of oil and natural gas properties and equipment
+
+ 
+ 
+3,565
+ 
+ 
+ 
+2,346
+ 
+
+ Payments for other property and equipment
+
+ 
+ 
+(726
+)
+ 
+ 
+(1,145
+)
+
+ Proceeds from sales of other property and equipment
+
+ 
+ 
+366
+ 
+ 
+ 
+ 
+ 
+
+ Payments of merger costs
+
+ 
+ 
+(4,187
+)
+ 
+ 
+ 
+ 
+
+ Cash acquired in merger
+
+ 
+ 
+3,801
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used in investing activities
+
+ 
+ 
+(18,710
+)
+ 
+ 
+(9,877
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these condensed consolidated financial
+statements. 
+ 
+
+ F-4 
+
+Table of Contents
+
+ RAM ENERGY RESOURCES, INC. 
+ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
+ (in thousands)
+
+ (unaudited) 
+ 
+
+ 
+ 
+Nine Months Ended
+September 30,
+ 
+
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+
+ FINANCING ACTIVITIES:
+
+ 
+
+ 
+
+ Payments on long-term debt
+
+ 
+ 
+(87,738
+)
+ 
+ 
+(6,840
+)
+
+ Payments of loan fees
+
+ 
+ 
+(2,978
+)
+ 
+ 
+(424
+)
+
+ Proceeds from borrowings on long-term debt
+
+ 
+ 
+106,557
+ 
+ 
+ 
+8,003
+ 
+
+ Stock redemption
+
+ 
+ 
+(9,792
+)
+ 
+ 
+ 
+ 
+
+ Repurchase of stock
+
+ 
+ 
+(3,768
+)
+ 
+ 
+ 
+ 
+
+ Deferred income taxes on share-based compensation
+
+ 
+ 
+(843
+)
+ 
+ 
+ 
+ 
+
+ Dividends paid
+
+ 
+ 
+(500
+)
+ 
+ 
+(900
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by (used in) financing activities
+
+ 
+ 
+938
+ 
+ 
+ 
+(161
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net increase in cash and cash equivalents
+
+ 
+ 
+7,522
+ 
+ 
+ 
+578
+ 
+
+ Cash and cash equivalents at beginning of period
+
+ 
+ 
+70
+ 
+ 
+ 
+1,175
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash and cash equivalents at end of period
+
+ 
+$
+7,592
+ 
+ 
+$
+1,753
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ SUPPLEMENTAL CASH FLOW INFORMATION:
+
+ 
+
+ 
+
+ Cash paid for interest
+
+ 
+$
+7,214
+ 
+ 
+$
+3,297
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash paid for income taxes
+
+ 
+$
+124
+ 
+ 
+$
+20
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
+
+ 
+
+ 
+
+ Accrued interest added to principal balance of revolving credit facility
+
+ 
+$
+2,848
+ 
+ 
+$
+8,093
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ The accompanying notes
+are an integral part of these condensed consolidated financial statements. 
+ 
+
+ F-5 
+
+Table of Contents
+
+ 
+RAM ENERGY RESOURCES, INC. 
+ NOTES TO UNAUDITED CONDENSED CONSOLIDATED 
+ FINANCIAL STATEMENTS 
+ A SUMMARY OF SIGNIFICANT
+ACCOUNTING POLICIES, ORGANIZATION, AND BASIS OF PRESENTATION 
+ 
+
+1.
+ 
+Basis of Financial Statements 
+ The accompanying
+unaudited condensed consolidated financial statements present the financial position at September 30, 2006 and December 31, 2005 and the consolidated results of operations for the three and nine month periods ended September 30, 2006
+and 2005 and cash flows for the nine month periods ended September 30, 2006 and 2005 of RAM Energy Resources, Inc. and its subsidiaries, including RAM Energy, Inc., (collectively, the Company ). These condensed consolidated financial
+statements include all adjustments, consisting of normal and recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the indicated periods. The
+results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006. Reference is made to the consolidated financial
+statements of RAM Energy, Inc. for the year ended December 31, 2005, for an expanded discussion of the Company s financial disclosures and accounting policies. 
+ 
+
+2.
+ 
+Nature of Operations and Organization 
+ On
+May 8, 2006, Tremisis Energy Acquisition Corporation, or Tremisis, acquired RAM Energy, Inc. through the merger of a subsidiary of Tremisis into RAM Energy, Inc. The merger was accomplished pursuant to the terms of an Agreement and Plan of
+Merger dated October 20, 2005, as amended, among Tremisis, its subsidiary, RAM Energy, Inc. and the stockholders of RAM Energy, Inc. Upon completion of the merger, RAM Energy, Inc. became a wholly-owned subsidiary of Tremisis and Tremisis
+changed its name to RAM Energy Resources, Inc. 
+ Tremisis was formed in February 2004 to effect a merger, capital stock exchange, asset
+acquisition or other similar business combination with an unidentified operating business in either the energy or the environmental industry. Prior to the consummation of the merger, Tremisis did not engage in an active trade or business.
+
+ Prior to the merger, RAM Energy, Inc. was a privately held, independent oil and natural gas company engaged in the acquisition,
+exploration, exploitation and development of oil and natural gas properties and the production of oil and natural gas. 
+ Upon consummation
+of the merger, the stockholders of RAM Energy, Inc. received an aggregate of 25,600,000 shares of Tremisis common stock and $30.0 million of cash. The merger agreement provided, among other things, that, prior to the consummation of the merger, RAM
+Energy, Inc. was entitled to either pay its stockholders a one-time extraordinary dividend or effect one or more redemptions of a portion of its outstanding stock, although the aggregate amount of such cash payments to the RAM Energy, Inc.
+stockholders could not exceed the difference between $40.0 million and the aggregate amount of cash they would receive from Tremisis in the merger. On April 6, 2006, RAM Energy, Inc. redeemed a portion of its outstanding stock for an aggregate
+consideration of $10.0 million. 
+ The merger has been accounted for as a reverse acquisition. Because Tremisis had no active business
+operations prior to consummation of the merger, the merger has been accounted for as a recapitalization of 
+
+ 
+
+ F-6 
+
+Table of Contents
+
+ RAM ENERGY RESOURCES, INC. 
+ NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ 
+
+ 
+RAM Energy, Inc. and RAM Energy, Inc. has been treated as the acquirer and continuing reporting entity for accounting purposes. The assets and liabilities of
+Tremisis were recorded, as of completion of the merger, at fair value, which is considered to approximate historical cost, and added to those of RAM Energy, Inc. 
+ The Company operates exclusively in the upstream segment of the oil and gas industry with activities including the drilling, completion, and operation of oil and gas wells. The Company conducts the majority of its
+operations in the states of Texas, Louisiana, Oklahoma and New Mexico. 
+ 
+
+3.
+ 
+Use of Estimates 
+ The preparation of financial
+statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
+assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions that, in the opinion of
+management of the Company are significant include oil and natural gas reserves, amortization relating to oil and natural gas properties, asset retirement obligations and income taxes. 
+ 
+
+4.
+ 
+Reclassifications 
+ Certain reclassifications of
+previously reported amounts for 2005 have been made to conform with the 2006 presentation format. These reclassifications had no effect on net income or loss. 
+ 
+
+5.
+ 
+Stockholders Equity, Earnings Per Share, and Share-Based Compensation 
+ In connection with the reverse acquisition, the stockholders of RAM Energy, Inc. received an aggregate of 25,600,000 shares of Tremisis stock and $30.0 million. As of September 30, 2006, RAM Energy Resources,
+Inc. (formerly named Tremisis Energy Acquisition Corporation) had 100,000,000 shares of authorized common stock; 33,630,000 shares issued; and 32,792,725 shares outstanding. At December 31, 2005, the Company had 30,000,000 shares of authorized
+common stock, of which 7,700,000 shares were issued and outstanding. 
+ Basic earnings or loss per share is computed by dividing net income
+by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/BOSC_bos_legal_matters.txt b/parsed_sections/legal_matters/2007/BOSC_bos_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5298feb909cf50c5f15b763061863557fafaed23
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/BOSC_bos_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus will be passed upon for us by Amit, Pollak, Matalon & Co., our Israeli counsel. Certain matters set forth herein under Material Tax Considerations United States Tax Considerations will be passed upon for us by Phillips Nizer LLP, our US counsel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/BX_blackstone_legal_matters.txt b/parsed_sections/legal_matters/2007/BX_blackstone_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..306189ae9af15151eacbbfe0f9d926db5ed2c9d9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/BX_blackstone_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common units will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. An investment vehicle composed of certain partners of Simpson Thacher & Bartlett LLP, members of their families, related parties and others owns interests representing less than 1% of the capital commitments of certain investment funds managed by Blackstone. Certain partners of Simpson Thacher & Bartlett LLP may purchase common units in this offering pursuant to the directed sale program in an aggregate amount equal to less than 1% of the common units. See "Underwriters Directed Sale Program". Certain legal matters in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Skadden, Arps, Slate, Meagher & Flom LLP has in the past performed, and may continue to perform, legal services for Blackstone. Skadden, Arps, Slate, Meagher & Flom LLP represents the State Investment Company in connection with its purchase of non-voting common units.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CACI_caci_legal_matters.txt b/parsed_sections/legal_matters/2007/CACI_caci_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..228dbb2004db95b109ec853ef3021bf94b5e3451
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CACI_caci_legal_matters.txt
@@ -0,0 +1,22 @@
+Legal matters 
+ The validity of the notes and common stock offered by this prospectus and the enforceability of
+our obligations under the notes are being passed upon for us by Foley Hoag LLP, Boston, Massachusetts. 
+ 
+
+ 62 
+
+Table of Contents
+
+ 
+Experts 
+ The consolidated financial statements of CACI International Inc included in CACI International
+Inc s Annual Report (Form 10-K) for the year ended June 30, 2007 (including the schedule included therein), and CACI International Inc s management s assessment of the effectiveness of internal control over financial
+reporting as of June 30, 2007 included therein, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein, and incorporated herein by reference. Such
+consolidated financial statements and management s assessment are incorporated herein by reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. 
+ 
+Where you can find more information 
+ We file annual, quarterly and special reports, proxy statements, and
+other information with the SEC. You may read and copy any materials we file with the SEC at the SEC s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on
+its public reference room. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 
+ We have filed with the SEC a registration statement that contains this prospectus on Form S-1 under the Securities Act. The registration statement
+relates to the notes and the common stock issuable on conversion of the notes offered by the
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CBAT_cbak_legal_matters.txt b/parsed_sections/legal_matters/2007/CBAT_cbak_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b3b1473e18d36faa29ed765412460cdf3481a2bd
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CBAT_cbak_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered pursuant to this prospectus will have been passed upon by Schreck Brignone.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CCEC_capital_legal_matters.txt b/parsed_sections/legal_matters/2007/CCEC_capital_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f2849e4e94e06dc1aee478d016ff1a501673f921
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CCEC_capital_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common units and certain other legal matters with respect to the laws of the Republic of the Marshall Islands will be passed upon for us by our counsel as to Marshall Islands law, Watson, Farley & Williams (New York) LLP. Certain other legal matters will be passed upon for us by Cravath, Swaine & Moore LLP, New York, New York. Cravath, Swaine & Moore LLP may rely on the opinion of Watson, Farley & Williams (New York) LLP, for all matters of Marshall Islands law. Certain matters with respect to this offering will be passed upon for the underwriters by Vinson & Elkins L.L.P., New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000003952_allied_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000003952_allied_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0ba329a7082bfcfef0c96254201e716d213bb2cf
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000003952_allied_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Baxter, Baker, Sidle, Conn Jones, P.A., Baltimore, Maryland will pass upon the validity of the common stock offered by this prospectus on behalf of the selling stockholders.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000093631_frederick_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000093631_frederick_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9e230f051d3a4a8a7c10af5fdc11e6602aad9910
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000093631_frederick_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York will pass upon the validity of the common stock offered by this prospectus for us and upon certain tax matters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000098720_toreador_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000098720_toreador_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..980b423ee9dc842d4b464a7c3cf8c7d064390e7c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000098720_toreador_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby has been passed upon for Toreador Resources Corporation by Haynes and Boone, LLP, Dallas, Texas. In addition, Gunel Kaya had delivered a legal opinion to Toreador Resources Corporation as to certain Turkish oil and gas matters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000099047_nyfix-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000099047_nyfix-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a26340f33b76d851dc40b9d3c512a5652b30da70
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000099047_nyfix-inc_legal_matters.txt
@@ -0,0 +1 @@
+legal matters will be passed upon for us by Kelley Drye & Warren LLP, New York, New York, and Stamford, Connecticut.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000314606_geokinetic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000314606_geokinetic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..433066d1be3c0e50eff682948eb2648a75ca41ef
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000314606_geokinetic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas, our counsel. Shearman & Sterling LLP, New York, New York, will pass upon legal matters on behalf of the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000316300_exco_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000316300_exco_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3fe4e78806aa04b98a9d8f19d7144423d9e061ba
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000316300_exco_legal_matters.txt
@@ -0,0 +1,389 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the shares of common stock offered hereby has been passed upon for us by William L. Boeing, our Vice President, General Counsel and Secretary. On
+April 5, 2006, we awarded a ten-year stock option for the purchase of 500,000 shares at $12.36 per share to Mr. Boeing. This option vests in four equal annual installments
+beginning on April 5, 2006. On December 1, 2006, we granted to Mr. Boeing a ten-year stock option for the purchase of 26,200 shares at $14.62 per share. This option vests
+in four equal annual installments beginning on December 1, 2006. 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The financial statements incorporated in this Prospectus by reference to Amendment No. 2 to the Annual Report on Form 10-K of EXCO
+Resources, Inc. for the year ended December 31, 2005 and the audited historical financial statements included on Exhibits 99.2 and 99.3 of EXCO Resources, Inc.'s
+Current Report on Amendment No. 1 to Form 8-K dated May 15, 2006 have been so incorporated in reliance on the reports of PricewaterhouseCoopers LLP, an
+independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. 
+
+ The
+consolidated balance sheets of ONEOK Energy Resources Company and subsidiaries as of December 31, 2004 and 2003, the related consolidated statement of income, shareholder's
+equity and comprehensive income and cash flows for each of the years then ended and for the period from January 1, 2005 through September 26, 2005 and the consolidated financial
+statements of TXOK Acquisition, Inc. and subsidiaries as of December 31, 2005 and for the period from September 16, 2005 (date of inception) through December 31, 2005, have
+been incorporated by reference herein in reliance upon the report of KPMG LLP, independent accountants, and upon the authority of said firm as 
+
+28
+
+ 
+
+experts
+in accounting and auditing. The audit report covering the December 31, 2003 consolidated financial statements of ONEOK Energy Resources Company refers to the adoption of Statement of
+Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. 
+
+ The
+statements of revenues and direct operating expenses of the Winchester Energy Company Properties (Winchester Properties) for the years ended December 31, 2004 and 2005, and
+the nine months ended September 30, 2006, have been incorporated by reference herein in reliance upon the reports of KPMG LLP, independent accountants, incorporated by reference herein, and
+upon the authority of said firm as experts in accounting and auditing. 
+
+ 
+ 
+
+INDEPENDENT PETROLEUM ENGINEERS 
+ 
+
+ Lee Keeling and Associates, Inc., independent petroleum engineers, Tulsa, Oklahoma, prepared the Proved Reserves estimates with respect to all of our
+properties included in our Annual Report on Form 10-K for the year ended December 31, 2005, as subsequently amended, which is incorporated by reference in this prospectus and
+elsewhere in the registration statement in reliance upon the authority of said firm as experts in petroleum engineering. 
+
+29
+
+ 
+
+ 
+
+ 
+ 16,796,244 shares 
+
+ 
+
+ 
+ EXCO Resources, Inc. 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ Common stock 
+
+ 
+
+ 
+
+ 
+
+Prospectus 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+PART II 
+ 
+ INFORMATION NOT REQUIRED IN PROSPECTUS 
+ 
+
+Item 13. Other Expenses of Issuance and Distribution 
+
+ The following table sets forth the costs and expenses expected to be incurred by us in connection with the offering described in this registration statement. All
+amounts are estimates except the registration and filing fees. 
+
+Expenses
+ 
+ 
+Amount
+ 
+
+Securities and Exchange Commission registration fee
+ 
+$
+27,731
+ 
+
+Printing and engraving expenses
+ 
+ 
+7,000
+*
+
+Legal fees and expenses
+ 
+ 
+45,000
+*
+
+Accounting fees and expenses
+ 
+ 
+250,000
+*
+
+Engineering fees and expenses
+ 
+ 
+2,500
+*
+
+Miscellaneous
+ 
+ 
+2,000
+*
+
+ 
+ 
+
+ 
+
+Total
+ 
+$
+334,231
+*
+
+ 
+ 
+
+ 
+
+*Estimate.
+
+ Each
+selling shareholder will be responsible for any underwriting discounts, brokerage fees or commissions and taxes of any kind (including, without limitation, transfer taxes) with
+respect to any disposition, sale or transfer of the shares being registered and for any legal, accounting and other expenses incurred by such selling shareholder. 
+
+Item 14. Indemnification of Directors and Officers 
+
+ Article Fourteen of our Third Amended and Restated Articles of Incorporation provides that to the fullest extent permitted by the TBCA and the Texas Miscellaneous
+Corporation Laws Act, our directors will have no personal liability to us or our shareholders for any acts or omissions in the director's performance of his or her duties as a director.
+Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act permits us to limit the personal liability of directors to us or our shareholders for monetary damages for any act
+or omission in a director's capacity as director, except for liability for any of the following: 
+
+(1)A
+breach of the director's duty of loyalty to the us or our shareholders;
+
+(2)An
+act or omission not in good faith that constitutes a breach of duty of the director to us or an act or omission that involves intentional misconduct or knowing violation of the
+law;
+
+(3)A
+transaction from which the director received an improper benefit, regardless of whether the benefit resulted from an action taken within the scope of the director's office;
+
+(4)An
+act or omission for which the liability of a director is expressly provided by an applicable statute. 
+
+ Article
+Fourteen further provides that if the TBCA or Texas Miscellaneous Corporation Laws Act is amended to authorize further elimination of the personal liability of directors, then
+the liability of a director shall be eliminated to the fullest extent permitted by the TBCA and the Texas Miscellaneous Corporation Laws Act, as so amended. 
+
+ Any
+repeal or modification of Article Fourteen by our shareholders will not adversely affect any right or protection of a director existing at the time of such repeal or modification,
+nor will any repeal or modification of those provisions of the TBCA or Texas Miscellaneous Corporation Laws Act that 
+
+II-1
+
+ 
+
+concerns
+the limitations of director liability be construed to adversely affect any right or protection of a director existing at the time of such repeal or modification unless such adverse
+construction is required by law. 
+
+ Article
+Thirteen of our Third Amended Restated Articles of Incorporation and Article Sixth of our bylaws provide that we must indemnify our directors and officers to the fullest extent
+permitted by the TBCA and the Texas Miscellaneous Corporation Laws Act, except as described below with respect to securities law violations. Our bylaws further provide that we must pay or reimburse
+reasonable expenses incurred by one of our directors or officers who was, is or is threatened to be made a named defendant or respondent in a proceeding to the maximum extent permitted under the TBCA.
+We believe that these provisions are necessary. 
+
+ In
+the event that a claim for indemnification is made for liabilities arising under the Securities Act, the indemnification shall not be made or allowed unless: 
+
+(1)the
+claim for indemnification under the circumstances is predicated upon the prior successful defense by the applicant of any action, suit or proceeding;
+
+(2)our
+Board of Directors receives an opinion of our counsel to the effect that it has been settled by controlling precedent that indemnification under the circumstances is not against
+public policy as expressed in the Securities Act; or
+
+(3)a
+court of appropriate jurisdiction finally adjudicates in an action, suit or proceeding in which we submit the issue to the court prior to allowance of the claim that indemnification
+under the circumstances is not contrary to the public policy expressed in the Securities Act. 
+
+ Under
+Article 2.02-1 of the TBCA, subject to the procedures and limitations stated therein, we may indemnify any person who was, is or is threatened to be made a named
+defendant or respondent in a proceeding because the person is or was a director, officer, employee or agent of ours against judgment, penalties (including excise and similar taxes), fines,
+settlements, and reasonable expenses (including court costs and attorneys' fees) actually incurred by the person in connection with the proceeding if it is determined that the person seeking
+indemnification: 
+
+ acted
+in good faith;
+
+ reasonably
+believed that his or her conduct was in or at least not opposed to our best interests; and
+
+ in
+the case of a criminal proceeding, has no reasonable cause to believe his or her conduct was unlawful. 
+
+ We
+are required by Article 2.02-1 of the TBCA to indemnify a director or officer against reasonable expenses (including court costs and attorneys' fees) incurred by
+the director or officer in connection with a proceeding in which the director or officer is a named defendant or respondent because the director or officer is or was in that position if the director
+or officer has been wholly successful, on the merits or otherwise, in the defense of the proceeding. The TBCA prohibits us from indemnifying a director or officer in respect of a proceeding in which
+the by him or her, other than for reasonable expenses (including court costs and attorneys' fees) actually incurred by him or her in connection with the proceeding; provided, that the TBCA further
+prohibits us from indemnifying a director or officer in respect of any such proceeding in which the person is found liable for willful or intentional misconduct in the performance of his or her
+duties. 
+
+ Under
+Article 2.02-1(J) of the TBCA, a court of competent jurisdiction may order us to indemnify a director or officer if the court determines that the director or
+officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances; however, if the director or officer is found liable to us or is found liable on the basis that a
+personal benefit was improperly received by him or 
+
+II-2
+
+ 
+
+her,
+the indemnification will be limited to reasonable expenses (including court costs and attorneys' fees) actually incurred by him or her in connection with the proceeding. 
+
+ Pursuant
+to a merger agreement dated March 11, 2003 between ER Acquisition, Inc., EXCO Holdings Inc. and us, entered into in connection with a going private
+transaction, we indemnified each person who served as an officer or director of ours prior to the effective time of the merger until the later of six years after the effective time of the merger or
+the expiration of any statute of limitations applicable to the claim under which indemnification is sought, against liabilities for their actions or omissions as directors or officers before the
+effective time of the merger. The merger agreement further provided that for a period of six years after the effective time of the merger, we must maintain directors' and officers' liability insurance
+protection with the same coverage and in the same amount as and on terms no less favorable to the covered officers and directors than that provided by our pre-merger insurance policies.
+The persons benefiting from the insurance provisions of the merger agreement include all persons who served as our directors and executive officers during the period from August 1, 2002 until
+the effective time of the merger. 
+
+ We
+maintain insurance for our officers and directors against certain liabilities, including liabilities under the Securities Act of 1933 and the Securities Exchange Act of 1934, under
+insurance policies, the premiums of which we pay. The effect of these policies is to indemnify any of our officers and directors against expenses, judgments, attorney's fees and other amounts paid in
+settlements incurred by an officer or director upon a determination that such person acted in good faith. 
+
+Item 15. Recent Sales of Unregistered Securities 
+
+ On January 20, 2004, we issued $350.0 million aggregate principal amount of our 71/4% senior notes due 2011 to Credit Suisse
+Securities (USA) LLC, Banc One Capital Markets, Inc., BNP Paribas Securities Corp., Comerica Securities, Inc., Scotia Capital (USA) Inc. and TD Securities (USA) Inc. who
+were the initial purchasers of the senior notes. On April 13, 2004, we issued an additional $100.0 million of our 71/4% senior notes due 2011 to the same initial
+purchasers. We issued the senior notes to the initial purchasers in reliance on Section 4(2) of the Securities Act on the basis that each initial purchaser represented and warranted to us that
+it was (i) a qualified institutional buyer as defined in Rule 144A under the Securities Act and (ii) an "accredited investor" within the meaning of Rule 501(a) under the
+Securities Act. The initial purchasers then offered and resold the notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933 and to non-U.S.
+persons in
+transactions outside the United States in reliance on Regulation S under the Securities Act of 1933. We exchanged all but $300,000 of the senior notes for new registered senior notes with
+substantially identical terms in June 2004. 
+
+ On
+February 14, 2006, EXCO Holdings Inc. merged with and into us, with us as the surviving corporation of the merger. As a result of the merger, 50,000,000 outstanding
+shares of stock of EXCO Holdings Inc. were cancelled and such shares were exchanged for the same number of shares of our common stock. This offering was conducted pursuant to an exemption from
+registration under Sections 3(a)(9) and 4(2) of the Securities Act and Regulation D promulgated thereunder. 
+
+ On
+February 14, 2006, we issued 388,889 shares of common stock to an entity controlled by one of our current directors, Boone Pickens, as the redemption premium under the terms of
+the Amended and Restated Certificate of Incorporation of TXOK Acquisition, Inc. The Redemption Shares were issued at a price of $12.00 per share in accordance with the redemption terms. The
+terms of the TXOK Preferred Stock were negotiated on terms believed to be fair to EXCO Holdings Inc. in order to arrange interim equity financing pending completion of the IPO in connection
+with the acquisition of ONEOK Energy Resources Company. This offering was conducted pursuant to an exemption from registration under Section 4(2) of the Securities Act and Regulation D
+promulgated thereunder. Upon completion of the redemption, TXOK Acquisition, Inc. became our wholly-owned subsidiary. 
+
+II-3
+
+ 
+
+Item 16. Exhibits and Financial Statement Schedules 
+
+ A list of exhibits filed herewith is contained in the Exhibit Index that immediately precedes such exhibits and is incorporated by reference herein. 
+
+Item 17. Undertakings 
+
+ 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;
+
+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.
+
+iii.To
+include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the
+registration statement;
+
+2.That,
+for 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 under the Securities Act of 1933 to any purchaser:
+
+i.If
+the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than
+registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, 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.
+
+5.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 
+
+II-4
+
+ 
+
+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. 
+
+ 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. 
+
+II-5
+
+ 
+
+ 
+ 
+
+SIGNATURES 
+ 
+
+ Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement
+on
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000319126_afp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000319126_afp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..085fd8ee3587f0d4affd9eaf4718279cb60159d4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000319126_afp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock being offered pursuant to this prospectus will be passed upon for us by Snow Becker Krauss P.C. Snow Becker Krauss P.C. owns 25,000 shares of our common stock and a principal thereof, Jack Becker, who also serves as a director of our company, owns 7,022 shares of our common stock and holds options to purchase an additional 135,500 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000716101_hydrogen_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000716101_hydrogen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7cd73eb485bb6eb9d33d84049a3d2e4361191260
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000716101_hydrogen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters in connection with the validity of the shares offered by this prospectus will be passed upon for us by Maslon Edelman Borman & Brand, LLP, Minneapolis, Minnesota.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000718007_delsite_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000718007_delsite_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e730ba6aa620ea098c6c4dcee1670bfbc08849ba
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000718007_delsite_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Thompson Knight LLP, Dallas, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000732834_continenta_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000732834_continenta_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9bb335ef74992c40f7c99373ed19cdda04f850d6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000732834_continenta_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the shares of common stock offered by this prospectus will be passed upon for us by Crowe & Dunlevy, A Professional Corporation, Oklahoma City, Oklahoma. Certain other legal matters will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters with respect to the offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York. Vinson & Elkins L.L.P. and Davis Polk & Wardwell will rely upon Crowe & Dunlevy, A Professional Corporation as to all matters of Oklahoma law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000743884_macrochem_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000743884_macrochem_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..24bbf72da641d48b38b75c5ad3cebcfd96147304
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000743884_macrochem_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the securities offered hereby will be passed upon for us by Ropes & Gray LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000759153_particle_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000759153_particle_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a3ff97cc7bc5ae090fefe1d99bbbc7c5b6da5095
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000759153_particle_legal_matters.txt
@@ -0,0 +1,11735 @@
+LegalMatters_150422">LEGAL
+MATTERS
+
+The validity of the common stock
+offered by this prospectus was passed upon for us by Woodburn and Wedge, Reno,
+Nevada.
+
+EXPERTS
+
+The consolidated financial statements as of September
+30, 2006, and for the year ended September 30, 2006, and for the period from
+June 9, 2003 (date of inception) to September 30, 2006 included in this
+prospectus have been audited by UHY LLP, independent registered public
+accounting firm, as stated in 
+
+ 51
+ 
+
+their reports thereon
+included herein. Such consolidated
+financial statements are included herein in reliance upon such report given on
+the authority of such firm as experts in accounting and auditing.
+
+The consolidated financial statements as of September 30,
+2005, and for the years ended September 30, 2005 and 2004, and for the
+periods from June 9, 2003 (date of inception) to September 30, 2003
+and June 9, 2003 (date of inception) to September 30, 2005 included
+in this prospectus have been audited by UHY Mann Frankfort Stein &
+Lipp CPAs, LLP, independent registered public accounting firm, as stated in
+their report thereon included herein. Such consolidated financial statements
+are included herein in reliance upon such report given on the authority of such
+firm as experts in accounting and auditing.
+
+WHERE YOU CAN FIND MORE INFORMATION
+
+This prospectus is part of a registration statement we
+file with the Securities and Exchange Commission. This prospectus does not
+contain all of the information contained in the registration statement and all
+of the exhibits and schedules thereto. For further information about Particle
+Drilling Technologies, Inc., please see the complete registration
+statement. Please refer to the exhibits to the registration statement for
+complete copies of certain of the agreements or other documents that are
+summarized in this prospectus.
+
+We file annual, quarterly and special reports, proxy
+statements and other information with the Securities and Exchange Commission
+under the Securities Exchange Act of 1934. You may read and copy the
+registration statement, including exhibits and schedules filed with it, at the
+SEC s public reference facilities at 100 F Street, N.E., Room 1580, Washington,
+D.C. 20549. You may obtain information on the operation of the public reference
+room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330.
+
+We file information electronically with the Securities
+and Exchange Commission. Our Securities and Exchange Commission filings also
+are available from the Securities and Exchange Commission s Internet site at
+http://www.sec.gov, which contains reports, proxy and information statements
+and other information regarding issuers that file electronically.
+
+ 52
+
+PARTICLE DRILLING TECHNOLOGIES, INC.
+
+(a development stage enterprise)
+
+Index to Consolidated Financial Statements
+
+ 
+ 
+ Management s Report on
+ Internal Control over Financial Reporting
+
+ 
+ 
+ 
+
+ 
+ 
+ F-2
+
+ 
+ 
+
+ 
+ 
+ Reports of Independent
+ Registered Public Accounting Firms
+
+ 
+ 
+ 
+
+ 
+ 
+ F-3
+
+ 
+ 
+
+ 
+ 
+ Consolidated Balance Sheets as of
+ September 30, 2006 and 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ F-7
+
+ 
+ 
+
+ 
+ 
+ Consolidated Statements of
+ Operations for the years ended September 30, 2006, 2005, and 2004, and
+ for the period from June 9, 2003 (date of inception) to September 30, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ F-8
+
+ 
+ 
+
+ 
+ 
+ Consolidated Statements of
+ Stockholders Equity for the years ended September 30, 2006, 2005, 2004 and
+ for the period from June 9, 2003 (date of inception) to September 30, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ F-9
+
+ 
+ 
+
+ 
+ 
+ Consolidated Statements of
+ Cash Flows for the years ended September 30, 2006, 2005, 2004, and for
+ the period from June 9, 2003 (date of inception) to September 30, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ F-12
+
+ 
+ 
+
+ 
+ 
+ Notes
+ to Consolidated Financial Statements
+
+ 
+ 
+ 
+
+ 
+ 
+ F-13
+
+ 
+ 
+
+ 
+
+ F-1
+
+MANAGEMENT S REPORT ON
+INTERNAL CONTROL OVER FINANCIAL REPORTING
+
+Our company s management is responsible for
+establishing and maintaining adequate internal control over financial
+reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal
+control over financial reporting is a process designed to provide reasonable
+assurance regarding the reliability of financial reporting and the preparation
+of our consolidated financial statements for external purposes in accordance
+with generally accepted accounting principles. Under the supervision and with
+the participation of our company s management, including the Chief Executive
+Officer and the Chief Financial Officer, we conducted an evaluation of the
+effectiveness of our internal control over financial reporting based on the
+framework in Internal Control Integrated
+Framework issued by the Committee of Sponsoring Organizations of the
+Treadway Commission.
+
+Our internal control over financial reporting includes
+those policies and procedures that: (1) pertain to the maintenance of
+records that, in reasonable detail, accurately and fairly reflect the
+transactions and dispositions of our assets; (2) provide reasonable
+assurance that transactions are recorded as necessary to permit preparation of
+our consolidated financial statements in accordance with generally accepted
+accounting principles, and that our receipts and expenditures are being made
+only in accordance with authorizations of our management and directors; and
+(3) provide reasonable assurance regarding prevention or timely detection
+of unauthorized acquisition, use or disposition of our assets that could have a
+material effect on our consolidated financial statements.
+
+Because of its inherent limitations, internal control
+over financial reporting may not prevent or detect misstatements. Also,
+projections of any evaluation of effectiveness to future periods are subject to
+the risk that controls may become inadequate because of changes in conditions,
+or that the degree of compliance with the policies or procedures may
+deteriorate.
+
+Based on our evaluation under the framework in Internal Control Integrated Framework, the
+management of our company concluded that our internal control over financial
+reporting was effective as of September 30, 2006.
+
+The
+assessment by the management of our company of the effectiveness of our
+internal control over financial reporting as of September 30, 2006 has been
+audited by UHY
+LLP, an independent registered public accounting firm, as stated in
+their report that follows.
+
+ 
+ 
+ /s/ J. CHRIS BOSWELL
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Senior
+ Vice President and
+
+ 
+ 
+
+ 
+ 
+ Chief Financial Officer
+
+ 
+ 
+
+ 
+ 
+ /s/ JIM B. TERRY
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ President
+ and
+
+ 
+ 
+
+ 
+ 
+ Chief Executive Officer
+
+ 
+ 
+
+ 
+ 
+ Houston, Texas
+
+ 
+ 
+
+ 
+ 
+ December 14, 2006
+
+ 
+ 
+
+ 
+
+ F-2
+
+Report
+of Independent Registered Public Accounting Firm
+
+To the Board of Directors and Stockholders
+
+Particle Drilling Technologies, Inc.
+
+Houston, Texas
+
+We have audited management s assessment, included in
+the accompanying Management s Report on Internal Control Over Financial
+Reporting appearing on page 24, that Particle Drilling Technologies, Inc. and
+subsidiaries (the Company ) maintained effective internal control over
+financial reporting as of September 30, 2006, based on criteria established in
+Internal Control Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission (COSO). The Company s management is
+responsible for maintaining effective internal control over financial reporting
+and for its assessment of the effectiveness of internal control over financial
+reporting. Our responsibility is to express an opinion on management s
+assessment and an opinion on the effectiveness of the Company s internal
+control over financial reporting based on our audit.
+
+We conducted our audit in accordance with the
+standards of the Public Company Accounting Oversight Board (United States).
+Those standards require that we plan and perform the audit to obtain reasonable
+assurance about whether effective internal control over financial reporting was
+maintained in all material respects. Our audit included obtaining an
+understanding of internal control over financial reporting, evaluating
+management s assessment, testing and evaluating the design and operating
+effectiveness of internal control, and performing such other procedures as we
+considered necessary in the circumstances. We believe that our audit provides a
+reasonable basis for our opinion.
+
+A company s 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 for external
+purposes in accordance with generally accepted accounting principles. A
+company s internal control over financial reporting includes those policies and
+procedures that (1) pertain to the maintenance of records that, in reasonable
+detail, accurately and fairly reflect the transactions and dispositions of the
+assets of the company; (2) provide reasonable assurance that transactions are recorded
+as necessary to permit preparation of financial statements in accordance with
+generally accepted accounting principles, and that receipts and expenditures of
+the company are being made only in accordance with authorizations of management
+and directors of the company; and (3) provide reasonable assurance regarding
+prevention or timely detection of unauthorized acquisition, use, or disposition
+of the company s assets that could have a material effect on the financial
+statements.
+
+Because of its inherent limitations, internal control
+over financial reporting may not prevent or detect misstatements. Also,
+projections of any evaluation of effectiveness to future periods are subject to
+the risk that controls may become inadequate because of changes in conditions,
+or that the degree of compliance with the policies or procedures may
+deteriorate.
+
+ F-3
+ 
+
+In our
+opinion, management s assessment that Particle Drilling Technologies, Inc. and
+subsidiaries maintained effective internal control over financial reporting as
+of September 30, 2006, is fairly stated, in all material respects, based on
+criteria established in Internal Control Integrated Framework issued by COSO.
+Also, in our opinion, Particle Drilling Technologies, Inc. and subsidiaries
+maintained, in all material respects, effective internal control over financial
+reporting as of September 30, 2006, based on criteria established in Internal
+Control Integrated Framework issued by COSO. We have also audited, in
+accordance with the standards of the Public Company Accounting Oversight Board
+(United States), the consolidated balance sheet of Particle Drilling
+Technologies, Inc. and subsidiaries as of September 30, 2006, and the related
+consolidated statements of operations, stockholders equity, and cash flows for
+the year ended September 30, 2006, and for the period from June 9, 2003 (date
+of inception) to September 30, 2006 and our report dated December 14, 2006
+expressed an unqualified opinion on those consolidated financial statements.
+
+ 
+ 
+ /s/ UHY, LLP
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Houston, Texas
+
+ 
+ 
+
+ 
+ 
+ December 14, 2006
+
+ 
+ 
+
+ 
+
+ F-4
+
+REPORT OF
+INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+
+To the Board of Directors and Stockholders
+
+Particle Drilling Technologies, Inc.
+
+Houston, Texas
+
+We have audited the accompanying consolidated balance
+sheet of Particle Drilling Technologies, Inc. (a development stage company) as
+of September 30, 2006, and the related consolidated statements of operations,
+stockholders equity, and cash flows for the year ended September 30, 2006, and
+for the period from June 9, 2003 (date of inception) to September 30, 2006.
+These consolidated financial statements are the responsibility of the Company s
+management. Our responsibility is to express an opinion on these consolidated
+financial statements based on our audit. The cumulative statements of
+operations, stockholders equity, and cash flows for the period June 9, 2003
+(date of inception) to September 30, 2005 include amounts for the period from
+June 9, 2003 (date of inception) to September 30, 2003 and for each of the
+years in the two year period ending September 30, 2005 which were audited by
+other auditors whose report has been furnished to us, and our opinion, insofar
+as it relates to the amounts included for the period June 9, 2003 through
+September 30, 2005 is based solely on the report of other auditors. The report
+of the other auditors includes an explanatory paragraph which states that the
+financial statements as of and for the year ended September 30, 2005 and
+cumulative amounts since inception to September 30, 2005 have been restated.
+
+We conducted our audits in accordance with the
+standards of the Public Company Accounting Oversight Board (United States).
+Those standards require that we plan and perform the audits to obtain
+reasonable assurance about whether the financial statements are free of
+material misstatement. An audit includes examining, on a test basis, evidence
+supporting the amounts and disclosures in the financial statements. An audit
+also includes assessing the accounting principles used and significant
+estimates made by management, as well as evaluating the overall financial
+statement presentation. We believe that our audits provide a reasonable basis
+for our opinion.
+
+In our opinion, the consolidated financial statements
+referred to above present fairly, in all material respects, the consolidated
+financial position of Particle Drilling Technologies, Inc. as of September 30,
+2006, and the consolidated results of their operations and their cash flows for
+the year ended September 30, 2006, and for the periods from June 9, 2003
+(date of inception) to September 30, 2006, in conformity with accounting
+principles generally accepted in the United States of America.
+
+We
+have also audited, in accordance with the standards of the Public Company
+Accounting Oversight Board (United States), the effectiveness of the Company s
+internal control over financial reporting as of September 30, 2006, based on
+the criteria established in Internal Control Integrated Framework issued by the
+Committee of Sponsoring Organizations of the Treadway Commission and our report
+dated December 14, 2006 expressed an unqualified opinion on management s
+assessment of the effectiveness of the Company s internal control over
+financial reporting and an unqualified opinion on the effectiveness of the
+Company s internal control over financial reporting.
+
+ 
+ 
+ /s/ UHY, LLP
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Houston, Texas
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ December 14, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ F-5
+ 
+
+Report of Independent
+Registered Public Accounting Firm
+
+To the Board of Directors and Stockholders
+
+Particle Drilling Technologies, Inc.
+
+Houston, Texas
+
+We have audited the accompanying consolidated balance
+sheet of Particle Drilling Technologies, Inc. (a development stage company) as
+of September 30, 2005, and the related consolidated statements of operations,
+stockholders equity, and cash flows for the years ended September 30, 2005 and
+2004, and for the period June 9, 2003 (date of inception) to September 30,
+2005. These consolidated financial statements are the responsibility of the
+Company s management. Our responsibility is to express an opinion on these
+consolidated financial statements based on our audits.
+
+We conducted our audits in accordance with the
+standards of the Public Company Accounting Oversight Board (United States).
+Those standards require that we plan and perform the audits to obtain
+reasonable assurance about whether the financial statements are free of
+material misstatement. An audit includes examining, on a test basis, evidence
+supporting the amounts and disclosures in the financial statements. An audit
+also includes assessing the accounting principles used and significant
+estimates made by management, as well as evaluating the overall financial
+statement presentation. We believe that our audits provide a reasonable basis
+for our opinion.
+
+In our opinion, the consolidated financial statements
+referred to above present fairly, in all material respects, the consolidated
+financial position of Particle Drilling Technologies, Inc. as of September 30,
+2005, and the consolidated results of their operations and their cash flows for
+the years ended September 30, 2005 and 2004, and for the periods from June
+9, 2003 (date of inception) to September 30, 2005, in conformity with
+accounting principles generally accepted in the United States of America.
+
+As
+discussed in Note 2 to the consolidated financial statements, the accompanying
+consolidated financial statements have been restated.
+
+ 
+ 
+ /s/ UHY MANN FRANKFORT STEIN &
+ LIPP CPAS, LLP
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Houston, Texas
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ December 14,
+ 2005, except for Note 2 as to which the
+
+ date is February 14, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ F-6
+
+PARTICLE DRILLING
+TECHNOLOGIES, INC.
+
+(a development stage enterprise)
+
+CONSOLIDATED BALANCE SHEETS
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ September 30,
+
+ 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ September 30,
+
+ 2005
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Restated)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ ASSETS
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Current assets:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash and cash equivalents
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 2,291,586
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 10,504,646
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Short term investments
+
+ 
+ 
+ 
+
+ 
+ 
+ 385,839
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accounts receivable related party
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 42,330
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Prepaid expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ 234,488
+
+ 
+ 
+ 
+
+ 
+ 
+ 229,963
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Total current assets
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,911,913
+
+ 
+ 
+ 
+
+ 
+ 
+ 10,776,939
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Property, plant & equipment, net
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,326,713
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,277,982
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Intangibles, net
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,230,086
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,102,403
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Other assets
+
+ 
+ 
+ 
+
+ 
+ 
+ 14,650
+
+ 
+ 
+ 
+
+ 
+ 
+ 391,089
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Total assets
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 5,483,362
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 13,548,413
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ LIABILITIES AND STOCKHOLDERS EQUITY
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Current
+ liabilities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accounts payable
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 830,552
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 1,056,733
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Short-term notes payable
+
+ 
+ 
+ 
+
+ 
+ 
+ 179,143
+
+ 
+ 
+ 
+
+ 
+ 
+ 79,880
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Current portion of long-term debt
+
+ 
+ 
+ 
+
+ 
+ 
+ 19,270
+
+ 
+ 
+ 
+
+ 
+ 
+ 11,597
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accrued liabilities
+
+ 
+ 
+ 
+
+ 
+ 
+ 471,463
+
+ 
+ 
+ 
+
+ 
+ 
+ 242,633
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Total current liabilities
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,500,428
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,390,843
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Long-term debt
+
+ 
+ 
+ 
+
+ 
+ 
+ 15,305
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,463
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Commitments and
+ contingencies See Note 13
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Stockholders 
+ equity:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock, $.001 par value, 100,000,000 shares
+ authorized, 28,013,291 shares issued and 25,010,205 shares outstanding at
+ September 30, 2006, and 27,441,472 shares issued and 24,441,472 shares
+ outstanding at September 30, 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 28,014
+
+ 
+ 
+ 
+
+ 
+ 
+ 27,441
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Additional paid-in capital
+
+ 
+ 
+ 
+
+ 
+ 
+ 25,239,221
+
+ 
+ 
+ 
+
+ 
+ 
+ 23,218,868
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Treasury stock at cost, 3,003,086 shares and
+ 3,000,000 shares at September 30, 2006 and September 30, 2005, respectively
+
+ 
+ 
+ 
+
+ 
+ 
+ (1,511,817
+
+ 
+ 
+ )
+
+ 
+ 
+ (1,500,000
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Deficit accumulated during the development stage
+
+ 
+ 
+ 
+
+ 
+ 
+ (19,787,789
+
+ 
+ 
+ )
+
+ 
+ 
+ (9,598,202
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Total stockholders equity
+
+ 
+ 
+ 
+
+ 
+ 
+ 3,967,629
+
+ 
+ 
+ 
+
+ 
+ 
+ 12,148,107
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Total liabilities
+ and stockholders equity
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 5,483,362
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 13,548,413
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ The accompanying notes are an integral part of these statements.
+ F-7
+
+PARTICLE DRILLING
+TECHNOLOGIES, INC.
+
+(a development stage enterprise)
+
+CONSOLIDATED STATEMENTS OF OPERATIONS
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Period from
+
+ June 9, 2003
+
+ (date of
+
+ inception) to
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Year Ended September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+ September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 2006
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Restated)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Revenues
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Operating
+ expenses:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Research and development
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,964,438
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,802,155
+
+ 
+ 
+ 
+
+ 
+ 
+ 621,752
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,427,971
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ General and administrative
+
+ 
+ 
+ 
+
+ 
+ 
+ 4,581,604
+
+ 
+ 
+ 
+
+ 
+ 
+ 3,182,313
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,683,024
+
+ 
+ 
+ 
+
+ 
+ 
+ 10,950,099
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Total operating expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ 10,546,042
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,984,468
+
+ 
+ 
+ 
+
+ 
+ 
+ 3,304,776
+
+ 
+ 
+ 
+
+ 
+ 
+ 20,378,070
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Loss from operations
+
+ 
+ 
+ 
+
+ 
+ 
+ (10,546,042
+
+ 
+ 
+ )
+
+ 
+ 
+ (5,984,468
+
+ 
+ 
+ )
+
+ 
+ 
+ (3,304,776
+
+ 
+ 
+ )
+
+ 
+ 
+ (20,378,070
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Other income
+ (expenses)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Interest income
+
+ 
+ 
+ 
+
+ 
+ 
+ 260,914
+
+ 
+ 
+ 
+
+ 
+ 
+ 209,305
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 470,219
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Rental income related party
+
+ 
+ 
+ 
+
+ 
+ 
+ 46,565
+
+ 
+ 
+ 
+
+ 
+ 
+ 27,162
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 73,727
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Gain on debt extinguishment
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 35,283
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 35,283
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Other
+
+ 
+ 
+ 
+
+ 
+ 
+ 55,614
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 55,614
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Interest expense
+
+ 
+ 
+ 
+
+ 
+ 
+ (6,638
+
+ 
+ 
+ )
+
+ 
+ 
+ (11,700
+
+ 
+ 
+ )
+
+ 
+ 
+ (26,224
+
+ 
+ 
+ )
+
+ 
+ 
+ (44,562
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Total other income (expenses)
+
+ 
+ 
+ 
+
+ 
+ 
+ 356,455
+
+ 
+ 
+ 
+
+ 
+ 
+ 260,050
+
+ 
+ 
+ 
+
+ 
+ 
+ (26,224
+
+ 
+ 
+ )
+
+ 
+ 
+ 590,281
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net loss
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (10,189,587
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (5,724,418
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (3,331,000
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (19,787,789
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Net loss per common share, basic and diluted
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (0.42
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (0.26
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (0.25
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (1.05
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Weighted average
+ number of common shares outstanding basic and diluted
+
+ 
+ 
+ 
+
+ 
+ 
+ 24,520,619
+
+ 
+ 
+ 
+
+ 
+ 
+ 22,150,365
+
+ 
+ 
+ 
+
+ 
+ 
+ 13,364,183
+
+ 
+ 
+ 
+
+ 
+ 
+ 18,841,589
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ The accompanying notes are an integral part of these statements.
+ F-8
+
+ PARTICLE DRILLING TECHNOLOGIES, INC.
+ (a development stage enterprise)
+ CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
+ For the Period from June 9, 2003 (date of inception)
+ to September 30, 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Deficit
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Accumulated
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Additional
+
+ 
+ 
+ 
+
+ 
+ 
+ During
+
+ 
+ 
+ 
+
+ 
+ 
+ Stockholders 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Common Stock
+
+ 
+ 
+ 
+
+ 
+ 
+ Treasury Stock
+
+ 
+ 
+ 
+
+ 
+ 
+ Paid-in
+
+ 
+ 
+ 
+
+ 
+ 
+ Development
+
+ 
+ 
+ 
+
+ 
+ 
+ Equity
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Shares
+
+ 
+ 
+ 
+
+ 
+ 
+ Amount
+
+ 
+ 
+ 
+
+ 
+ 
+ Shares
+
+ 
+ 
+ 
+
+ 
+ 
+ Amount
+
+ 
+ 
+ 
+
+ 
+ 
+ Capital
+
+ 
+ 
+ 
+
+ 
+ 
+ Stage
+
+ 
+ 
+ 
+
+ 
+ 
+ (Deficit)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Retroactive restatement of stockholders equity prior
+ to merger for
+
+ recapitalization
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,550,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 1,550
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (1,550
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued to founders at $0.001 per
+ share in June 2003
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,000,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in private placement for cash at
+ $2.00 per share from June 2003 to September 2003, less offering expense
+ of $436,096
+
+ 
+ 
+ 
+
+ 
+ 
+ 504,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 505
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 572,399
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 572,904
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for services provided at
+ $2.00 per share in July 2003
+
+ 
+ 
+ 
+
+ 
+ 
+ 15,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 15
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 29,985
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 30,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net loss
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (542,784
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (542,784
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Balance, September 30, 2003
+
+ 
+ 
+ 
+
+ 
+ 
+ 11,069,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 11,070
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 600,834
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (542,784
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 69,120
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in private placement for cash at
+ $2.00 per share from October 2003 to February 2004, less offering expense of
+ $166,322
+
+ 
+ 
+ 
+
+ 
+ 
+ 196,800
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 197
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 227,080
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 227,277
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for services provided at $2.00
+ per share in October 2003
+
+ 
+ 
+ 
+
+ 
+ 
+ 27,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 27
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 53,973
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 54,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $2.00 per share from
+ October 2003 to March 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 325,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 325
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 649,675
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 650,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $1.82 per share in
+ October 2003
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,750
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 4,998
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in exchange for note payable at $2.00
+ per share in January
+
+ 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 25,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 25
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 49,975
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 50,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for services provided at $2.00
+ per share in January 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 12,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 12
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 23,988
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 24,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.72 per share in
+ March 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 69,508
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 70
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 49,930
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 50,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.97 per share in
+ March 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 15,480
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 15
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 14,985
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 15,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.75 per share in
+ March 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 35,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 35
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 26,215
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 26,250
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for services provided at $2.00
+ per share in March 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 70,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 70
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 139,930
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 140,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for services provided at $2.00
+ per share in March 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 75,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 75
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 149,925
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 150,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.74 per share in
+ April 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 23,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 23
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 17,477
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 17,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in exchange of accounts payable
+ at $0.12 per share upon exercise of warrants in April 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 50,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 50
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 6,850
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 6,900
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.12 per share upon
+ exercise of warrants from April 2004 to June 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 113,909
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 114
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 15,605
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 15,719
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.12 per share upon
+ exercise of employee stock options in June 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 200,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 200
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 32,062
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 32,262
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in connection with advisory
+ agreement at $0.12 per share in June 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 595,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 600,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ F-9
+ 
+
+ PARTICLE DRILLING TECHNOLOGIES, INC.
+ (a development stage enterprise)
+ CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Continued)
+ For the Period from June 9, 2003 (date of inception)
+ to September 30, 2005
+
+ 
+
+ 
+ 
+ Common stock issued at $1.50 per share upon
+ conversion of note payable in June 2004, less offering expense
+
+ 
+ 
+ 
+
+ 
+ 
+ 410,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 410
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 553,090
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 553,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in private placement for cash at
+ $2.00 per share from July 2004 to September 2004, less offering expense
+
+ 
+ 
+ 
+
+ 
+ 
+ 375,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 375
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 717,125
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 717,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Fair value of common stock warrants issued for
+ services
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,880
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,880
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Stock-based employee compensation
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 42,551
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 42,551
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net loss
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,331,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,331,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Balance, September 30, 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 18,095,447
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 18,095
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 3,974,148
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,873,784
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 118,459
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in private placement for cash at
+ $2.00 per share from October 2004 to February 2005, less offering expense
+
+ 
+ 
+ 
+
+ 
+ 
+ 850,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 850
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,581,585
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,582,435
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for services provided at $1.75
+ per share in October 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 10,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 10
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 17,490
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 17,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued upon cashless exercise of
+ warrants at $0.12 per share in December 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,314
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 10
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (10
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.01 per share upon
+ exercise of warrants in December 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 33,333
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 33
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 302
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 335
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock cancelled at $0.12 per share in January
+ 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ (700,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (700
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (83,300
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (84,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock cancelled at $0.001 per share in
+ January 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ (50,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (50
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 50
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued in private placement for cash at
+ $2.00 per share in February 2005, less offering expense
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,000,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 14,605,332
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 14,614,332
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Repurchase of common stock at $0.50 per share in
+ February 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,000,000
+
+ 
+ 
+ )
+
+ 
+ 
+ (1,500,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (1,500,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restricted stock issued to employees at
+ $4.90 per share in May 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 140,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 140
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (140
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restricted stock issued to employees at
+ $5.45 per share in May 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 5
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (5
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued upon cashless exercise of
+ warrants at $0.12 per share in August 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 48,378
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 48
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (48
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Fair value of common stock warrants issued for
+ services
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,508,564
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,508,564
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Stock-based employee compensation
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 614,900
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 614,900
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net loss
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (5,724,418
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (5,724,418
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Balance, September
+ 30, 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 27,441,472
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 27,441
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,000,000
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (1,500,000
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ 23,218,868
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (9,598,202
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 12,148,107
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ F-10
+
+ PARTICLE DRILLING TECHNOLOGIES, INC.
+ (a development stage enterprise)
+ CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Continued)
+ For the Period from June 9, 2003 (date of inception)
+ to September 30, 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Deficit
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Accumulated
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Additional
+
+ 
+ 
+ 
+
+ 
+ 
+ During
+
+ 
+ 
+ 
+
+ 
+ 
+ Stockholders 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Common Stock
+
+ 
+ 
+ 
+
+ 
+ 
+ Treasury Stock
+
+ 
+ 
+ 
+
+ 
+ 
+ Paid-in
+
+ 
+ 
+ 
+
+ 
+ 
+ Development
+
+ 
+ 
+ 
+
+ 
+ 
+ Equity
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Shares
+
+ 
+ 
+ 
+
+ 
+ 
+ Amount
+
+ 
+ 
+ 
+
+ 
+ 
+ Shares
+
+ 
+ 
+ 
+
+ 
+ 
+ Amount
+
+ 
+ 
+ 
+
+ 
+ 
+ Capital
+
+ 
+ 
+ 
+
+ 
+ 
+ Stage
+
+ 
+ 
+ 
+
+ 
+ 
+ (Deficit)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Comon stock issued
+ for cash at $0.12 per share upon exercise of employee stock options in
+ January 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 53,750
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 54
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 6,396
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 6,450
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock
+ issued upon cashless exercise of warrants at $2.00 per share
+ in February 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 9,721
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 10
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (10
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restricted stock issued to employee at $6.73 per
+ share in January 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 150,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 150
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (150
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued upon cashless exercise of
+ warrants at $2.00 per share in February 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 176,458
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 176
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (176
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restricted stock issued to employee at $5.87 per
+ share in February 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 20,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 20
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (20
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued upon cashless exercise of
+ warrants at $2.00 per share in March 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 66,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 66
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (66
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Repurchase of common stock at $3.85 per share in June
+ 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,086
+
+ 
+ 
+ )
+
+ 
+ 
+ (11,817
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (11,817
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restriced stock issued to employee at $5.73 per
+ share in June 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 12,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 13
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (13
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restriced stock issued to employee at $3.40 per
+ share in June 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 5
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (5
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restriced stock issued to employee at $3.40 per
+ share in June 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 10,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 10
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (10
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restriced stock issued to employee at $3.40 per
+ share in June 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 5
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (5
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restriced stock issued to employee at $3.40 per
+ share in June 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 5
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (5
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restriced stock issued to employee at $3.40 per
+ share in June 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 5
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (5
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued upon cashless exercise of
+ warrants at $2.00 per share in April 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 29,390
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 29
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (29
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued for cash at $0.12 per share
+ upon exercise of employee stock options in July 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 14,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 15
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (15
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Restriced stock issued to employee at $3.51 per
+ share in July 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 7,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 8
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (8
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock issued upon exercise of warrants at
+ $2.00 per share in August
+
+ 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (2
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Stock-based employee compensation
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,014,476
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,014,476
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net loss
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (10,189,587
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (10,189,587
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Balance, September
+ 30, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 28,013,291
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 28,014
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,003,086
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (1,511,817
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ 25,239,221
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (19,787,789
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 3,967,629
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ The accompanying notes are an integral part of these statements.
+ F-11
+
+PARTICLE DRILLING
+TECHNOLOGIES, INC.
+
+(a development stage enterprise)
+
+CONSOLIDATED STATEMENTS OF CASH FLOWS
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Period from
+
+ June 9, 2003
+
+ (date of
+
+ inception) to
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Year Ended September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 2006
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Restated)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash flows from operating activities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net loss
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (10,189,587
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (5,724,418
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (3,331,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (19,787,789
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Adjustments to reconcile
+ net loss to net cash used in operating activities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Gain on debt
+ extinguishment
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (35,283
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (35,283
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Other
+
+ 
+ 
+ 
+
+ 
+ 
+ (54,103
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (54,103
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Depreciation and
+ amortization expense
+
+ 
+ 
+ 
+
+ 
+ 
+ 688,185
+
+ 
+ 
+ 
+
+ 
+ 
+ 391,467
+
+ 
+ 
+ 
+
+ 
+ 
+ 147,409
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,227,062
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Short-term note
+ issued for services
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 44,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 44,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock
+ issued for services
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (66,500
+
+ 
+ 
+ )
+
+ 
+ 
+ 968,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 931,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Warrants issued
+ for services
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 57,999
+
+ 
+ 
+ 
+
+ 
+ 
+ 5,830
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 63,829
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Stock-based
+ employee compensation
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,014,476
+
+ 
+ 
+ 
+
+ 
+ 
+ 614,900
+
+ 
+ 
+ 
+
+ 
+ 
+ 50,814
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,680,190
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Changes in operating
+ assets and liabilities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ (Increase)
+ Decrease in accounts receivable related party
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (42,330
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (42,330
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ (Increase)
+ Decrease in prepaid expenses
+
+ 
+ 
+ 
+
+ 
+ 
+ 249,460
+
+ 
+ 
+ 
+
+ 
+ 
+ (68,428
+
+ 
+ 
+ )
+
+ 
+ 
+ (49,545
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 131,487
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Decrease in other
+ current assets
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 7,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Increase
+ (Decrease) in accounts payable
+
+ 
+ 
+ 
+
+ 
+ 
+ (226,181
+
+ 
+ 
+ )
+
+ 
+ 
+ 221,329
+
+ 
+ 
+ 
+
+ 
+ 
+ 362,527
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 490,614
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Increase in
+ accrued liabilities
+
+ 
+ 
+ 
+
+ 
+ 
+ 325,627
+
+ 
+ 
+ 
+
+ 
+ 
+ 26,080
+
+ 
+ 
+ 
+
+ 
+ 
+ 79,774
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 568,260
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net cash used in
+ operating activities
+
+ 
+ 
+ 
+
+ 
+ 
+ (7,192,123
+
+ 
+ 
+ )
+
+ 
+ 
+ (4,625,184
+
+ 
+ 
+ )
+
+ 
+ 
+ (1,714,691
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (13,782,564
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash flows from investing activities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Payments to
+ purchase property and equipment
+
+ 
+ 
+ 
+
+ 
+ 
+ (636,930
+
+ 
+ 
+ )
+
+ 
+ 
+ (1,167,134
+
+ 
+ 
+ )
+
+ 
+ 
+ (16,555
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (1,820,619
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Proceeds from sale
+ of property and equipment
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 20,957
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 20,957
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Payments to
+ purchase intangibles
+
+ 
+ 
+ 
+
+ 
+ 
+ (178,170
+
+ 
+ 
+ )
+
+ 
+ 
+ (170,281
+
+ 
+ 
+ )
+
+ 
+ 
+ (185,468
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (608,614
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Payments to
+ purchase other assets
+
+ 
+ 
+ 
+
+ 
+ 
+ (28,415
+
+ 
+ 
+ )
+
+ 
+ 
+ (385,839
+
+ 
+ 
+ )
+
+ 
+ 
+ (5,250
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (419,504
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Payments issued
+ for note receivable
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (24,447
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (300,783
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Payments issued
+ for note receivable related party
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (56,783
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (56,783
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net cash used in
+ investing activities
+
+ 
+ 
+ 
+
+ 
+ 
+ (843,515
+
+ 
+ 
+ )
+
+ 
+ 
+ (1,723,254
+
+ 
+ 
+ )
+
+ 
+ 
+ (267,546
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,185,346
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash flows from financing activities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Proceeds from
+ issuance of common stock
+
+ 
+ 
+ 
+
+ 
+ 
+ 6,089
+
+ 
+ 
+ 
+
+ 
+ 
+ 18,647,666
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,746,196
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 20,981,855
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Repurchase of
+ common stock
+
+ 
+ 
+ 
+
+ 
+ 
+ (11,817
+
+ 
+ 
+ )
+
+ 
+ 
+ (1,500,000
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (1,511,817
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Proceeds from
+ issuance of convertible notes
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 553,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 553,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Repayments of
+ notes payable
+
+ 
+ 
+ 
+
+ 
+ 
+ (171,694
+
+ 
+ 
+ )
+
+ 
+ 
+ (314,945
+
+ 
+ 
+ )
+
+ 
+ 
+ (277,403
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (764,042
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Proceeds from
+ borrowings under loan agreements related parties
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 23,195
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Repayment of
+ borrowings under loan agreements related parties
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (23,195
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (23,195
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net cash provided
+ (used in) by financing activities
+
+ 
+ 
+ 
+
+ 
+ 
+ (177,422
+
+ 
+ 
+ )
+
+ 
+ 
+ 16,832,721
+
+ 
+ 
+ 
+
+ 
+ 
+ 1,999,098
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 19,259,496
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net increase
+ (decrease) in cash and cash equivalents
+
+ 
+ 
+ 
+
+ 
+ 
+ (8,213,060
+
+ 
+ 
+ )
+
+ 
+ 
+ 10,484,283
+
+ 
+ 
+ 
+
+ 
+ 
+ 16,861
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 2,291,586
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash and cash
+ equivalents beginning of period
+
+ 
+ 
+ 
+
+ 
+ 
+ 10,504,646
+
+ 
+ 
+ 
+
+ 
+ 
+ 20,363
+
+ 
+ 
+ 
+
+ 
+ 
+ 3,502
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash and cash
+ equivalents end of period
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 2,291,586
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 10,504,646
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 20,363
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 2,291,586
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Supplemental disclosures of cash flow information:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash paid for
+ interest
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 12,339
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 14,004
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 24,697
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 51,040
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Non-cash investing and financing activities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Prepaid insurance
+ acquired with note payable
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 253,985
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 51,000
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 60,990
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 365,975
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock
+ issued as consideration for account payable
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 6,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 6,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Common stock
+ issued as consideration for note payable
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 50,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 50,000
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Related party note
+ receivable exchanged for property and equipment
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 56,783
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 56,783
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Note payable
+ converted into common stock
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 553,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 553,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Property and
+ equipment acquired with assumed liabilities
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 479,610
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 479,610
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Intangibles
+ acquired with assumed liabilities
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 757,792
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 757,792
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Property and
+ equipment acquired with note payable
+
+ 
+ 
+ 
+
+ 
+ 
+ 30,487
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 30,487
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Short-term
+ investment reclassified from other assets
+
+ 
+ 
+ 
+
+ 
+ 
+ 385,839
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 385,839
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Property and
+ equipment reclassified from other assets
+
+ 
+ 
+ 
+
+ 
+ 
+ 19,015
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 19,015
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ The accompanying notes are an integral part of these statements.
+ F-12
+
+PARTICLE DRILLING TECHNOLOGIES, INC.
+
+(a development stage enterprise)
+
+NOTES TO THE CONSOLIDATED FINANCIAL
+STATEMENTS
+
+1. ORGANIZATION
+AND NATURE OF
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000790715_sigma_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000790715_sigma_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0a548964585f6c547c1e37e5aa022ac6dff59826
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000790715_sigma_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Selected legal matters with respect to the validity of the common stock offered by this prospectus will be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP, Palo Alto, California. Selected legal matters relating to the offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000808011_winner_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000808011_winner_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..36ea89fa938c05d13876fe91edf8dff1583a6d93
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000808011_winner_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Jones Vargas, Las Vegas, Nevada counsel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000812701_calgon_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000812701_calgon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..28440331684487e20ef6b9358d61f94f46c5c58b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000812701_calgon_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the issuance of the notes, including the related guarantees and the common stock issuable upon conversion of the notes, will be passed upon for us by Kirkpatrick Lockhart Preston Gates Ellis LLP, Pittsburgh, Pennsylvania.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000817516_simtek_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000817516_simtek_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4bc642636c9d8d88c7ea614d46acdeb27e5ee188
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000817516_simtek_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered hereby will be passed upon by Holme Roberts & Owen LLP, Colorado Springs, Colorado.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000828189_green_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000828189_green_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3342352ac1c35efc8ebd22b246f749be4db70e69
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000828189_green_legal_matters.txt
@@ -0,0 +1,6381 @@
+Legal Matters
+ 
+ 
+ 62
+ 
+
+ 
+ 
+ 
+ Experts
+ 
+ 
+ 62
+ 
+
+ 
+ 
+ 
+ Where You Can Find More Information
+ 
+ 
+ 63
+ 
+
+ 
+
+You should rely only on the information contained in this prospectus. We have not, and the underwriters 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. The information in this prospectus may only be accurate as of the date appearing on the cover page of this prospectus, regardless of the time this prospectus is delivered or our common stock is sold.
+
+We are not, and the underwriters are not, making an offer to sell the common stock in any jurisdiction where the offer or sale is not permitted. No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or the possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside of the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable in that jurisdiction.
+
+All brand names and trademarks appearing in this prospectus are the property of their respective owners.
+
+ 
+
+i
+
+ 
+
+Table of Contents
+
+ 
+
+ CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
+
+This prospectus contains forward-looking statements. All statements regarding our expected financial position and operating results, our business strategy, and our financing plans are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as may, will, anticipate, estimate, expect, project, or intend. These forward-looking statements reflect our plans, expectations and beliefs and, accordingly, are subject to certain risks and uncertainties. We cannot guarantee that any of such forward-looking statements will be realized.
+
+Statements regarding factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, or cautionary statements, include, among others, those under the captions Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations - Overview, and elsewhere in this prospectus, including in conjunction with the forward-looking statements included in this prospectus. All of our subsequent written and oral forward-looking statements (or statements that may be attributed to us) are expressly qualified by the cautionary statements. You should carefully review the risk factors described in our other filings with the Securities and Exchange Commission from time to time, including our reports on Forms 10-Q and 10-K which will be filed in the future, as well as our other reports and
+filings with the Securities and Exchange Commission. Our forward-looking statements are based on information available to us today, and we will not update these statements. Our actual results may differ significantly from the results discussed.
+
+INDUSTRY AND MARKET DATA
+
+Industry and market data throughout this prospectus were obtained through our research, surveys and studies conducted by third parties and from general industry publications. We have not independently verified market and industry data from third-party sources. While we believe our internal surveys are reliable and our market definitions are appropriate, neither these surveys nor these definitions have been verified by any independent sources. While we believe our third party sources are reliable, we have not independently verified industry and market data supplied by third parties. Accordingly, we cannot assure you of the accuracy of our industry and market data. We have not sought the consent of any third party sources to refer to their data in this prospectus.
+
+ 
+
+1
+
+ 
+
+Table of Contents
+
+ 
+
+PROSPECTUS SUMMARY
+
+This is only a summary and does not contain all the information that may be important to you. You should read the more detailed information contained in this prospectus, including but not limited to, the risk factors beginning on page 8. References to we, us, our or the company mean Wilson Holdings, Inc., a Nevada corporation, and, unless the context indicates otherwise, its predecessors and subsidiaries, including its wholly owned subsidiary, Wilson Family Communities, Inc., a Delaware corporation.
+
+Our Company
+
+We make strategic land acquisitions, develop residential communities and provide limited services to local homebuilders. 
+
+To date, our revenues have been from sales of undeveloped parcels of land plus revenue from sales by two-homebuilder customers, whose revenues have been consolidated into our results in accordance with generally accepted accounting standards. We anticipate that an increasing portion of our future revenues will be generated through development of residential communities and sales of land, sections of developed lots and entitled developed lots, primarily to national and regional homebuilders. Additional revenues will be generated through sales of small parcels (5-15 lots per parcel) of developed lots. We plan to enter the homebuilding business and generate revenues by year end. We also provide services to our homebuilder customers. 
+
+Our long-term plan is to further expand our business by entering markets outside the Austin Metropolitan Statistical Area, or MSA, and San Antonio MSA within the next two to three years. We believe that our expertise plus our land acquisition and strategic marketing processes will allow us to develop desirable residential communities and become a preferred supplier of finished lots to national homebuilders, which will accelerate absorption of our communities and contribute to the growth of our company.
+
+We are led by experienced land acquisition and development professionals knowledgeable about both the local and national real estate markets. Currently, our activities are centered on securing and developing approximately $30 million to $50 million in real estate holdings in the central Texas region, which we define as encompassing the Austin MSA, along with the San Antonio MSA. We intend to primarily utilize conventional real estate loans to secure and develop our real estate holdings.
+
+We believe that two trends distinguish the land acquisition, development and homebuilding industries in central Texas today: rapid population growth and the rising influence of national homebuilding companies. The increase in population in the Austin MSA
+from 1990 to 2000 was more than double the growth rate of Texas and almost four times the national average growth rate.
+From 2000 to 2005, population growth has continued at 16.2% per year. Due to this rapid population growth, we expect there will continue to be a high demand for housing in the Austin MSA and nearby metropolitan areas which will fuel the demand for our homebuilding products and sales of our residential lots. 
+
+We believe that growth of national homebuilders and nationwide consolidation within the homebuilder industry has created opportunities for smaller companies with long-term experience and relationships in their local markets. We believe that such companies can benefit from:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ better knowledge of local product demand;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ superior understanding of the entitlement process;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ long term relationships with local regulatory authorities, land owners, designers and contractors; and
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ faster and less cumbersome decision making processes.
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 2
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+It is our plan to utilize these advantages to move more quickly and address the needs of underserved segments in our market.
+
+ 
+Our company, Wilson Holdings, Inc., is a Nevada corporation formerly known as
+Cole Computer Corporation. In connection with our acquisition of Wilson Family
+Communities, Inc., or WFC, in October 2005, Cole Computer Corporation changed its name to Wilson Holdings, Inc. Wilson Holdings, Inc. is the sole stockholder of WFC, which is our sole operating company. Our common stock currently trades on the Over-the-Counter Bulletin Board under the symbol WSHD.OB .
+We have been approved to have our common stock trade on the American Stock
+Exchange (the AMEX ) under the symbol WIH. We will begin trading on the AMEX in
+connection with this offering. Our business was originally conducted, beginning in 2002, by Athena Equity Partners-Hays. L.P., or Athena. In May 2005, Athena merged into WFC. Our principal executive offices are located at 8121 Bee Caves Rd., Austin, Texas 78746 and the telephone number of our offices in (512) 732-0932. Our website address is
+www.wilsonfamilycommunities.com Information contained on our website or any other website does not
+constitute part of this prospectus. 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 3
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+THIS OFFERING
+
+ 
+ 
+ Securities offered:
+ 
+ 
+ 5,000,000 shares of common stock.
+ 
+
+ 
+ 
+ Shares of common stock to be outstanding after this offering:
+ 
+ 
+ 23,055,538
+ 
+
+ 
+ 
+ Use of proceeds:
+ 
+ 
+ We intend to use the net proceeds for the following purposes: land acquisitions, homebuilding and land development and general corporate purposes. See Use of Proceeds. 
+ 
+
+ 
+ 
+ Current OTC Bulletin Board symbol:
+ 
+ 
+ WSHD.OB
+ 
+
+ 
+ 
+ Proposed AMEX symbol:
+ 
+ 
+ "WIH"
+ 
+ 
+
+ 
+ 
+ Risk factors:
+ 
+ 
+ Investing in our common stock involves a high degree of risk. Investors should be able to bear a complete loss of their investment. Investors should carefully consider the information set forth in the Risk Factors section.
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 4
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+There were 18,055,538 shares of our common stock issued and outstanding as of April
+20, 2007. Unless the context indicates otherwise, all share and per-share common stock information in this prospectus:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ includes 5,000,000 shares to be issued in the offering;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ assumes no exercise of the underwriters over-allotment option to purchase up to 750,000 shares; and
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ excludes the issuance of up to:
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 735,000 shares of common stock issuable upon exercise of options granted under our stock option/stock issuance plan as of
+March 31, 2007;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 8,375,000 shares of common stock issuable upon the conversion of convertible promissory notes in the aggregate principal amount of $16,750,000 outstanding as of
+March 31, 2007;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 942,187 shares of common stock issuable upon exercise of warrants issued to the holders of the convertible promissory notes outstanding as of
+March 31, 2007;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 215,000 shares of common stock issuable upon exercise of warrants issued to the placement agent that assisted in the placement of our convertible promissory notes and warrants in December 2005; 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 750,000 shares of common stock issuable upon the exercise of
+ the over-allotment option to purchase
+shares to be issued to the underwriters in this offering (See the section captioned Underwriting ); and
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 500,000 shares of common stock issuable upon the exercise of warrant to be issued to the underwriters in this offering (See the section captioned Underwriting ).
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 5
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+SUMMARY FINANCIAL DATA
+
+The following summary consolidated financial information has been derived from our audited consolidated financial statements for the fiscal years ended December 31, 2006, 2005 and 2004, included elsewhere in this prospectus, and from our unaudited consolidated financial statements for the years ended,
+2003 and 2002. The unaudited summary consolidated financial information and the actual and as adjusted consolidated balance sheet data include all adjustments, consisting principally of normal recurring adjustments, that we consider necessary for a fair presentation. Our historical results are not necessarily indicative of the results to be expected in the future, and the results of interim periods are not necessarily indicative of the results for the entire year.
+
+You should read this information together with Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes, included elsewhere in this prospectus.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Mar. 31,
+ 
+ 
+ 
+ 
+ 
+ Jun. 30,
+ 
+ 
+ 
+ 
+ 
+ Sep. 30,
+ 
+ 
+ 
+ 
+ 
+ Dec. 31,
+ 
+ 
+ 
+ 
+ 
+ Mar. 31,
+ 
+ 
+ 
+ 
+ 
+ Jun. 30,
+ 
+ 
+ 
+ 
+ 
+ Sep. 30,
+ 
+ 
+ 
+ 
+ 
+ Dec. 31,
+ 
+ 
+ 
+ 
+ Mar. 31, 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 2007 
+
+ 
+ 
+ Revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ (In thousands, except per share data)
+ 
+
+ 
+ 
+ Homebuilding and related services
+ 
+ 
+ $
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 417 
+ 
+ 
+ 
+ 
+ 
+ 2,285 
+ 
+ 
+ 
+ 
+ 
+ 1,483 
+ 
+ 
+ 
+ 
+ 
+ 1,033
+ 
+ 
+ 
+ 
+ 798 
+
+ 
+ 
+ Land sales
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 255 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 616 
+ 
+ 
+ 
+ 
+ 
+ 50 
+ 
+ 
+ 
+ 
+ 
+ 414 
+ 
+ 
+ 
+ 
+ 
+ 437
+ 
+ 
+ 
+ 
+ 970 
+
+ 
+ 
+ Total revenues
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 255 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 1,033 
+ 
+ 
+ 
+ 
+ 
+ 2,335 
+ 
+ 
+ 
+ 
+ 
+ 1,897 
+ 
+ 
+ 
+ 
+ 
+ 1,470 
+ 
+ 
+ 
+ 
+ 1,767 
+
+ 
+ 
+ Cost of revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Homebuilding and related services
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 332 
+ 
+ 
+ 
+ 
+ 
+ 1,893 
+ 
+ 
+ 
+ 
+ 
+ 1,256 
+ 
+ 
+ 
+ 
+ 
+ 866
+ 
+ 
+ 
+ 
+ 636 
+
+ 
+ 
+ Land sales
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 115 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 327 
+ 
+ 
+ 
+ 
+ 
+ 24 
+ 
+ 
+ 
+ 
+ 
+ 273 
+ 
+ 
+ 
+ 
+ 
+ 446
+ 
+ 
+ 
+ 
+ 842 
+
+ 
+ 
+ Total cost of revenues
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 115 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 659 
+ 
+ 
+ 
+ 
+ 
+ 1,917 
+ 
+ 
+ 
+ 
+ 
+ 1,529 
+ 
+ 
+ 
+ 
+ 
+ 1,312
+ 
+ 
+ 
+ 
+ 1,478 
+
+ 
+ 
+ Gross profit:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Homebuilding and related services
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 85 
+ 
+ 
+ 
+ 
+ 
+ 392 
+ 
+ 
+ 
+ 
+ 
+ 227 
+ 
+ 
+ 
+ 
+ 
+ 167
+ 
+ 
+ 
+ 
+ 161 
+
+ 
+ 
+ Land sales
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 140 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 289 
+ 
+ 
+ 
+ 
+ 
+ 26 
+ 
+ 
+ 
+ 
+ 
+ 
+ 141 
+ 
+ 
+ 
+ 
+ 
+ (9)
+ 
+ 
+ 
+ 
+ 128 
+
+ 
+ 
+ Total gross profit
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 140 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 374 
+ 
+ 
+ 
+ 
+ 
+ 418 
+ 
+ 
+ 
+ 
+ 
+ 
+ 368 
+ 
+ 
+ 
+ 
+ 
+ 158
+ 
+ 
+ 
+ 
+ 289 
+
+ 
+ 
+ Costs and expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Corporate general and administration
+ 
+ 
+ 
+ 
+ 
+ 1
+ 
+ 
+ 
+ 
+ 
+ 65
+ 
+ 
+ 
+ 
+ 
+ 369
+ 
+ 
+ 
+ 
+ 
+ 765
+ 
+ 
+ 
+ 
+ 
+ 990 
+ 
+ 
+ 
+ 
+ 
+ 1,211 
+ 
+ 
+ 
+ 
+ 
+ 1,168 
+ 
+ 
+ 
+ 
+ 
+ 983
+ 
+ 
+ 
+ 
+ 998 
+
+ 
+ 
+ Sales and marketing
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 7 
+ 
+ 
+ 
+ 
+ 
+ 105 
+ 
+ 
+ 
+ 
+ 
+ 113 
+ 
+ 
+ 
+ 
+ 
+ 129 
+ 
+ 
+ 
+ 
+ 
+ 229 
+ 
+ 
+ 
+ 
+ 
+ 282 
+ 
+ 
+ 
+ 
+ 
+ 177
+ 
+ 
+ 
+ 
+ 74 
+
+ 
+ 
+ Total costs and expenses
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 72 
+ 
+ 
+ 
+ 
+ 
+ 474 
+ 
+ 
+ 
+ 
+ 
+ 878 
+ 
+ 
+ 
+ 
+ 
+ 1,119 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,440 
+ 
+ 
+ 
+ 
+ 
+ 1,450 
+ 
+ 
+ 
+ 
+ 
+ 1,160
+ 
+ 
+ 
+ 
+ 1,072 
+
+ 
+ 
+ Operating loss
+ 
+ 
+ 
+ 
+ 
+ (1)
+ 
+ 
+ 
+ 
+ 
+ (72)
+ 
+ 
+ 
+ 
+ 
+ (334)
+ 
+ 
+ 
+ 
+ 
+ (878)
+ 
+ 
+ 
+ 
+ 
+ (745)
+ 
+ 
+ 
+ 
+ 
+ 
+ (1,023)
+ 
+ 
+ 
+ 
+ 
+ (1,083)
+ 
+ 
+ 
+ 
+ 
+ (1,002)
+ 
+ 
+ 
+ 
+ (783) 
+
+ 
+ 
+ Other income (expense):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Loss on fair value of derivatives
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ (173)
+ 
+ 
+ 
+ 
+ 
+ (345)
+ 
+ 
+ 
+ 
+ 
+ (2,588)
+ 
+ 
+ 
+ 
+ 
+ (460)
+ 
+ 
+ 
+ 
+ 
+ (5,077) 
+ 
+ 
+ 
+ 
+ - 
+
+ 
+ 
+ Interest and other income
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 8 
+ 
+ 
+ 
+ 
+ 
+ 36 
+ 
+ 
+ 
+ 
+ 
+ 56 
+ 
+ 
+ 
+ 
+ 
+ 97 
+ 
+ 
+ 
+ 
+ 
+ 109 
+ 
+ 
+ 
+ 
+ 
+ 54 
+ 
+ 
+ 
+ 
+ 
+ 30
+ 
+ 
+ 
+ 
+ 48 
+
+ 
+ 
+ Interest expense
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ (16)
+ 
+ 
+ 
+ 
+ 
+ (128)
+ 
+ 
+ 
+ 
+ 
+ (213)
+ 
+ 
+ 
+ 
+ 
+ (514)
+ 
+ 
+ 
+ 
+ 
+ (558)
+ 
+ 
+ 
+ 
+ 
+ (570)
+ 
+ 
+ 
+ 
+ 
+ (718)
+ 
+ 
+ 
+ 
+ (619) 
+
+ 
+ 
+ Total other expense
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ (8)
+ 
+ 
+ 
+ 
+ 
+ (92)
+ 
+ 
+ 
+ 
+ 
+ (330)
+ 
+ 
+ 
+ 
+ 
+ 
+ (762)
+ 
+ 
+ 
+ 
+ 
+ (3,037)
+ 
+ 
+ 
+ 
+ 
+ (976)
+ 
+ 
+ 
+ 
+ 
+ (5,765)
+ 
+ 
+ 
+ 
+ (571) 
+
+ 
+ 
+ Net loss
+ 
+ 
+ $
+ 
+ 
+ (1)
+ 
+ 
+ 
+ 
+ 
+ (80)
+ 
+ 
+ 
+ 
+ 
+ (426)
+ 
+ 
+ 
+ 
+ 
+ (1,208)
+ 
+ 
+ 
+ 
+ 
+ (1, 508)
+ 
+ 
+ 
+ 
+ 
+ (4,059)
+ 
+ 
+ 
+ 
+ 
+ (2,059)
+ 
+ 
+ 
+ 
+ 
+ (6,767)
+ 
+ 
+ 
+ 
+ (1,354) 
+
+ 
+ 
+ Basic and diluted loss per share
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ (0.02)
+ 
+ 
+ 
+ 
+ 
+ (0.04)
+ 
+ 
+ 
+ 
+ 
+ (0.16)
+ 
+ 
+ 
+ 
+ 
+ (0.08)
+ 
+ 
+ 
+ 
+ 
+ (0.23)
+ 
+ 
+ 
+ 
+ 
+ (0.12)
+ 
+ 
+ 
+ 
+ 
+ (0.38) 
+ 
+ 
+ 
+ 
+ (0.07) 
+
+ 
+ 
+ Basic and diluted weighted average common shares outstanding
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 3,333,333 
+ 
+ 
+ 
+ 
+ 
+ 10,000,000 
+ 
+ 
+ 
+ 
+ 
+ 17,689,252 
+ 
+ 
+ 
+ 
+ 
+ 17,706,625 
+ 
+ 
+ 
+ 
+ 
+ 17,706,625 
+ 
+ 
+ 
+ 
+ 
+ 17,706,625 
+ 
+ 
+ 
+ 
+ 
+ 17,726,026 
+ 
+ 
+ 
+ 
+ 18,055,538 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 6
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+ 
+ 
+ STATEMENT OF OPERATIONS DATA:
+ 
+ 
+ Years ended December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2002
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (in thousands, except per share data)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Revenues
+ 
+ 
+ $
+ 
+ 
+ 81 
+ 
+ 
+ 
+ 
+ 
+ 16,774 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 255 
+ 
+ 
+ 
+ 
+ 
+ 6,735 
+ 
+
+ 
+ 
+ Gross Profit
+ 
+ 
+ 
+ 
+ 
+ 81 
+ 
+ 
+ 
+ 
+ 
+ 3,059 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 140 
+ 
+ 
+ 
+ 
+ 
+ 1,317 
+ 
+
+ 
+ 
+ Operating
+ gain (loss)
+ 
+ 
+ 
+ 
+ 
+ 71 
+ 
+ 
+ 
+ 
+ 
+ 3,056 
+ 
+ 
+ 
+ 
+ 
+ (48)
+ 
+ 
+ 
+ 
+ 
+ (1,284)
+ 
+ 
+ 
+ 
+ 
+ (3,853)
+ 
+
+ 
+ 
+ Total other expense
+ 
+ 
+ 
+ 
+ 
+ (178)
+ 
+ 
+ 
+ 
+ 
+ (143)
+ 
+ 
+ 
+ 
+ 
+ (11)
+ 
+ 
+ 
+ 
+ 
+ (430)
+ 
+ 
+ 
+ 
+ 
+ (10,540)
+ 
+
+ 
+ 
+ Net loss
+ 
+ 
+ $
+ 
+ 
+ (107)
+ 
+ 
+ 
+ 
+ 
+ 2,913 
+ 
+ 
+ 
+ 
+ 
+ (59)
+ 
+ 
+ 
+ 
+ 
+ (1,714)
+ 
+ 
+ 
+ 
+ 
+ (14,393)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Basic and diluted loss per share
+ 
+ 
+ $
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.22)
+ 
+ 
+ 
+ 
+ 
+ (0.81)
+ 
+
+ 
+ 
+ Basic and diluted weighted average common shares outstanding
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7,755,646 
+ 
+ 
+ 
+ 
+ 
+ 17,711,405 
+ 
+
+ 
+
+ 
+ 
+ STATEMENT OF FINANCIAL CONDITION DATA:
+ 
+ 
+ As of December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2002
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (in thousands, except per share data)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Cash and cash equivalents
+ 
+ 
+ $
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 9 
+ 
+ 
+ 
+ 
+ 
+ 10,020 
+ 
+ 
+ 
+ 
+ 
+ 4,865 
+ 
+
+ 
+ 
+ Total Inventory
+ 
+ 
+ $
+ 
+ 
+ 13,712 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 375 
+ 
+ 
+ 
+ 
+ 
+ 12,955 
+ 
+ 
+ 
+ 
+ 
+ 30,756 
+ 
+
+ 
+ 
+ Total assets
+ 
+ 
+ $
+ 
+ 
+ 13,819 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 384 
+ 
+ 
+ 
+ 
+ 
+ 24,514 
+ 
+ 
+ 
+ 
+ 
+ 37,374 
+ 
+
+ 
+ 
+ Total liabilities
+ 
+ 
+ $
+ 
+ 
+ 10,691 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 311 
+ 
+ 
+ 
+ 
+ 
+ 18,459 
+ 
+ 
+ 
+ 
+ 
+ 36,599 
+ 
+
+ 
+ Total stockholders and partners equity
+ 
+ 
+ 
+ $
+ 
+ 
+ 
+ 3,128 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 73 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 6,055 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 775 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 7
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+RISK FACTORS
+
+An investment in our common stock involves a high degree of risk and many uncertainties. You should carefully consider the specific factors listed below before purchaser our securities. If one or more of the possibilities described as risks below actually occur, our operating results and financial condition would likely suffer and the trading price of our common stock could fall, causing you to lose some or all of your investment in the shares of common stock you purchase. The following is a description of what we consider our key challenges and material risks.
+
+Risks Related to Our Business
+
+Our current operating business has a limited operating history and revenues.
+
+ 
+In October 2005, we acquired Wilson Family Communities, Inc., or WFC, which has
+a limited operating history. Accordingly, our business is subject to substantial
+risks inherent in the commencement of a new business enterprise in an intensely
+competitive industry. The business of WFC was conducted, beginning in 2002, by
+Athena Equity Partners-Hays, L.P., or Athena, to engage in land acquisition and
+development and, beginning in 2005, to provide homebuilder services.
+Prior to its merger with WFC, Athena did not generate significant revenues, and,
+through March 31, 2007, our company has generated revenues of only
+approximately $8.8 million and has incurred cumulative net losses of approximately
+$17.0 million. 
+
+There can be no assurance that we will be able to successfully acquire, develop and/or market land, develop and market our homebuilder services, commence our homebuilding activities, generate revenues, or ever operate on a profitable basis. We currently have only one active homebuilder for our homebuilder services and are evaluating whether to continue providing services to homebuilders. Any investment in our company should be considered a high-risk investment because the investor will be placing funds at risk in a company with unknown costs, expenses, competition, and other problems to which new ventures are often subject. Investors should not invest in our company unless they can afford to lose their entire investment.
+
+We have incurred a significant amount of debt, but will require additional substantial capital to continue to pursue our operating strategy.
+
+ We had approximately $4.4 million in cash and cash equivalents at
+March 31, 2007. We plan to commit several million dollars in cash to exercise option rights to purchase land, develop land and guarantee certain payments regarding the development of optioned land over the next year. We have secured lines of credit totaling approximately $25.5 million. Approximately $1.6 million was drawn against these lines of credit as of
+March 31, 2007, which will be repaid as finished lots and completed homes are sold. Approximately $328,000 of the notes payable relate to variable interest entities, or VIEs, that had drawn on the lines of credit, which we have guaranteed, to build homes that will be repaid as the completed homes are sold. We anticipate investing approximately $23 million for purchase of land, installment payments, options
+fees and development costs over the next twelve months. This amount includes costs for development of land, such as installation of water and wastewater infrastructure, streets and common areas. We intend to purchase or obtain options to purchase additional acreage for development and additional finished lots for sale. 
+
+We have issued and sold an aggregate of $16.75 million in principal amount of convertible promissory notes since December 2005. These notes bear interest at a fixed rate of 5.0% per annum, with the principal amount of such notes convertible into shares of our common stock at the rate of one share per $2.00 of principal, which conversion rate is subject to proportionate adjustment for stock splits, stock dividends and recapitalizations as well as a ratchet adjustment which will apply if we sell shares of our common stock in the future at a price per share of less than $2.00, provided that such conversion rate may not be reduced below a rate of one share of common stock for each $1.00 of note principal.
+
+Our growth plans will require substantial amounts of cash for earnest money deposits, land purchases, development costs and interest payments, and to provide financing or surety services to our homebuilder clients. Until we begin to sell an adequate number of lots and services to cover our monthly operating expenses, 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 8
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+costs associated with our sales, marketing and general and administrative activities will deplete cash. Our articles of incorporation contain no limits on the amount of indebtedness we may incur.
+
+We are seeking additional credit lines to finance land purchases and development costs.
+
+ Through March 31, 2007, we have closed on four major land development projects that used $15.7 million in cash to exercise land purchase options, develop and entitle land and acquire entitled acreage. We anticipate purchasing and committing to various agreements to purchase land that could have performance clauses requiring several million dollars in cash and borrowings. The majority of our expenditures in the past have been for inventory, consisting of land, land development and land options totaling
+over $31 million as of March 31, 2007. To secure additional inventory, we will be required to put up earnest money deposits, make cash down payments, acquire acreage tracts and pay for certain land development activities costing several million dollars. This amount includes the development of land, including costs for the installation of water, sewage, streets and common areas. We intend to
+continue our growth plan and expect to purchase or obtain options to purchase additional acreage for development and additional finished lots to provide ample supplies for our homebuilder customers. We intend to use debt and may utilize joint venture financing as well as cash generated from lot and land sales to finance these activities. 
+
+In the normal course of business, we enter into various land purchase option agreements that require earnest money deposits. In order for us to start or continue the development process, we may incur development costs before we exercise an option agreement. We currently have approximately $451,000 in capitalized development costs, earnest money and deposits outstanding of which the entire amount would be forfeited and expensed if we were to cancel all of these agreements.
+
+Should our financing efforts be insufficient to execute our business plan, we may be required to seek additional sources of capital, which may include partnering with one or more established operating companies that are interested in our emerging business or entering into joint venture arrangements for the development of certain of our properties. However, if we were required to resort to partnering or joint venture relationships as a means to raise needed capital or reduce our cost burden, we likely will be required to cede some control over our activities and negotiate our business plan with our business or joint venture partners.
+
+We are vulnerable to concentration risks because our initial operations have been limited to the central Texas area.
+
+Our real estate activities have to date been conducted almost entirely in the central Texas region, which we define as encompassing the Austin Metropolitan Statistical Area, or Austin MSA, and the San Antonio Metropolitan Statistical Area, or San Antonio MSA. This geographic concentration, combined with a limited number of projects that we plan to pursue, make our operations more vulnerable to local economic downturns and adverse project-specific risks than those of larger, more diversified companies.
+
+The performance of the central Texas economy will affect our sales and, consequently, the underlying values of our properties. For example, the economy in the Austin MSA is heavily influenced by conditions in the technology industries. During periods of weakness or instability in technology industries, we may experience reduced sales, particularly with respect to high-end properties, which can significantly affect our financial condition and results of operations. The San Antonio MSA economy is dependent on the service industry (including tourism), government/military and businesses specializing in international trade. To the extent there is a significant reduction in tourism or in staffing levels of military or other government employers in the San Antonio MSA, we would expect to see reduced sales of lower priced homes due to a likely reduction in lower paying tourism- and
+government-related jobs. 
+
+Fluctuations in market conditions may affect our ability to sell our land at expected prices, if at all, which could adversely affect our revenues, earnings and cash flows.
+
+We are subject to the potential for significant fluctuations in the market value
+of our land inventories. There is a lag between the time we acquire control of
+undeveloped land and the time that we can improve that 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 9
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+land for sale to home builders. This lag time varies from site to site as it is impossible to determine in advance the length of time it will take to obtain government approvals and permits. The risk of owning undeveloped land can be substantial as the market value of undeveloped land can fluctuate significantly as a result of changing economic and market conditions. Inventory carrying costs can be significant and can result in losses in a poorly performing development or market. Material write-downs of the estimated value of our land inventories could occur if market conditions deteriorate or if we purchase land at higher prices during stronger economic periods and the value of those land inventories subsequently declines during weaker economic periods. We could also be forced to sell land or lots for prices that generate lower profit than we anticipate, and may not be able to dispose of an investment in a timely manner
+when we find dispositions advantageous or necessary. Furthermore, a decline in the market vale of our land inventories may give rise to a breach of financial covenants contained in our credit facilities, which could cause a default under one or more of those credit facilities.
+
+Our operations are subject to an intensive regulatory approval process, including governmental and environmental regulation, which may delay, increase the cost of, prohibit or severely restrict our development projects and reduce our revenues and cash flows.
+
+We are subject to extensive and complex laws and regulations that affect the land development process. Before we can develop a property, we must obtain a variety of approvals from local, state and federal governmental agencies with respect to such matters as zoning, density, parking, subdivision, site planning and environmental issues. Certain of these approvals are discretionary by nature. Because certain government agencies and special interest groups have in the past expressed concerns about development plans in or near the central Texas region, our ability to develop these properties and realize future income from them could be delayed, reduced, made more expensive or prevented altogether.
+
+Real estate development is subject to state and federal regulations as well as possible interruption or termination because of environmental considerations, including, without limitation, air and water quality and the protection of endangered species and their habitats. We are making and will continue to make expenditures and other accommodations with respect to our real estate development for the protection of the environment. Emphasis on environmental matters may result in additional costs to us in the future or a reduction in the amount of acreage that we can use for development or sales activities.
+
+We may be subject to risks as a result of our entry into joint ventures.
+
+To the extent that we undertake joint ventures to develop properties or conduct our business, we may be liable for all obligations incurred by the joint venture, even though such obligations may not have been incurred by us, and our share of the potential profits from such joint venture may not be commensurate with our liability. Moreover, we will be exposed to greater risks in joint ventures should our co-venturers financial condition become impaired during the term of the joint venture, as creditors will increasingly look to our company to support the operations and fund the obligations of the joint venture.
+
+Our operations are subject to weather-related risks.
+
+Our land development operations and the demand for our homebuilder services may be adversely affected from time to time by weather conditions that damage property. The central Texas region is prone to tornados, hurricanes entering from the Gulf of Mexico, floods, hail storms, severe heat and droughts. We maintain only limited insurance coverage to protect the value of our assets against natural disasters. Additionally, weather conditions can delay development and construction projects by weeks or months which could delay and decrease our anticipated revenues. To the extent we encounter significant weather-related delays, our business would suffer.
+
+The availability of water could delay or increase the cost of land development and adversely affect our future operating results.
+
+The availability of water is becoming an increasingly difficult issue in the central Texas region and other areas of the Southwestern United States. Many jurisdictions are now requiring that builders provide detailed information regarding the source of water for any new community that they intend to develop. 
+
+ 
+ 
+ 
+ 
+ 
+ 10
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+Similarly, the availability of treatment facilities for sanitary sewage is a growing concern. Many urban areas have insufficient resources to meet the demand for waste-water and sanitary sewage treatment. To the extent we are unable to find satisfactory solutions to these issues with respect to future development projects, our operations could be adversely affected.
+
+We are subject to risks related to environmental damages.
+
+We may be required to undertake expensive and time-consuming clean-up or remediation efforts in the event that we encounter environmental hazards on the lots we own, even if we were not originally responsible for or aware of such hazards. In the event we are required to undertake any such remediation activities, our business could suffer.
+
+We are at risk of loss for loans or advances to our customers.
+
+To the extent we offer surety or financing to our homebuilder customers, we could suffer losses if the funds advanced are not used for their intended purposes and we are forced to exercise legal remedies or incur expenses to recoup our collateral. Although we closely monitor the activities for which the money is intended, it is possible for the funds to be wasted or misappropriated. We do not believe we are required to obtain any license to provide these loans or advances, nor are we limited by our charter on the amount of surety or financing we can offer, but regulatory changes could require that we do so in the future.
+
+Our President and Chief Executive Officer is subject to a non-compete agreement that limits the activities in which we may engage until June 2007.
+
+Clark N. Wilson, our President and Chief Executive Officer, served as the President and Chief Executive Officer of Clark Wilson Homes, Inc., a subsidiary of Capital Pacific Holdings, from 1992 to 2002. Pursuant to an agreement that was executed in connection with the sale of Clark Wilson Homes to J.M. Peters Company in 1994, Mr. Wilson agreed not to engage in the businesses of acquisition, ownership, development, construction or sale of dwelling units in certain portions of the United States in which we plan to do business, including the central Texas region, as well as in any other county in the United States in which J.M. Peters Company conducts business. The stated term of this covenant not-to-compete is five years, expiring in June 2007, for certain enumerated counties in Texas, including the counties in and around, Austin, Dallas, Houston and San Antonio, Texas. The covenant not to
+compete relates to the business of building homes and not the purchase and sale of real estate as contemplated by us. It is our opinion that our current activities do not violate the terms of the covenant because we do not currently and we do not intend to engage in homebuilding activities until after the covenant terminates in June 2007.
+
+We are a small company and have a correspondingly small financial and accounting organization. Being a public company may strain our resources, divert management s attention and affect our ability to attract and retain qualified directors.
+
+We are a small company with a finance and accounting organization that we believe is of appropriate size to support our current operations; however, the rigorous demands of being a public reporting company may lead to a determination that our finance and accounting group is undersized. As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. The requirements of these laws and the rules and regulations promulgated thereunder entail significant accounting, legal and financial compliance costs, and have made, and will continue to make, some activities more difficult, time consuming or costly and may place significant strain on our personnel, systems and resources.
+
+The Securities Exchange Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required. As a result, management s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 11
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+These rules and regulations also have made it more difficult and more expensive for us to maintain director and officer liability insurance, and in the future we may be required to accept reduced coverage or incur substantially higher costs to maintain such coverage. If we are unable to maintain adequate director and officer insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent, will be significantly curtailed.
+
+We depend on our key personnel to manage our business effectively.
+
+We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial and sales and marketing personnel. In particular, due to the relatively early stage of our business, we believe that our future success is highly dependent on Clark N. Wilson, our chief executive officer and the founder of WFC, to provide the necessary leadership to execute our growth plans. Although we intend to acquire a key-man life insurance policy for Mr. Wilson, the loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, and in particular sales personnel, could impede our ability to expand our sales and marketing activities as desired, and negatively impact our profitability.
+
+We have borrowed money at floating interest rates and if interest rates were to significantly increase, our financial results could suffer.
+
+ We have borrowed approximately $4.8 million at interest rates of prime plus 0.50% to 2.00% that adjust in relation to the prime rate. If the prime rate were to significantly increase, we will be required to pay additional amounts in interest under these notes and line of credit and our financial results could suffer. 
+
+We are vulnerable to concentration risks because we intend to focus on the residential rather than commercial market.
+
+We intend to focus on residential rather than commercial properties. Economic shifts affect residential and commercial property markets, and thus our business, in different ways. A developer with diversified projects in both sectors may be better able to survive a downturn in the residential market if the commercial market remains strong. Our focus on the residential sector can make us more vulnerable than a diversified developer.
+
+Our growth strategy to expand into new geographic areas poses risks.
+
+We may expand our business into new geographic areas outside of the central Texas region. We will face additional risks if we expand our operations in geographic areas or climates in which we do not have experience, including:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ adjusting our land development methods to different geographies and climates;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ obtaining necessary entitlements and permits under unfamiliar regulatory regimes;
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ attracting potential customers in a market in which we do not have significant experience; and
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ the cost of hiring new employees and increased infrastructure costs.
+ 
+
+We may not be able to successfully manage the risks of such an expansion, which could have a material adverse effect on our revenues, earnings, cash flows and financial condition.
+
+If we are unable to generate sufficient cash from operations or secure additional borrowings, we may find it necessary to curtail our development activities.
+
+We anticipate that we will need at least $23 million to fund our acquisition and
+development expenditures for the next twelve months. Our performance continues
+to be substantially dependent on future cash flows from real estate financing
+and sales and there can be no assurance that we will generate sufficient cash
+flow or otherwise obtain sufficient funds to meet the expected development plans
+for our current and 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 12
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+future properties. If
+we are unsuccessful in obtaining adequate loans or in generating positive cash flows, we could be forced to: abandon some of our development activities, including the development of sub-divisions and entitling of land for development; forfeit option fees and deposits; default on loans; violate covenants with our current lenders and convertible note holders thereby putting us in default; and possibly be forced to liquidate a substantial portion of our asset holdings at unfavorable prices.
+
+Our results of operations and financial condition are greatly affected by the performance of the real estate industry.
+
+Our real estate activities are subject to numerous factors beyond our control, including local real estate market conditions, substantial existing and potential competition, general national, regional and local economic conditions, fluctuations in interest rates and mortgage availability and changes in demographic and environmental conditions. Real estate markets have historically been subject to strong periodic cycles driven by numerous factors beyond the control of market participants.
+
+Real estate investments often cannot easily be converted into cash and market values may be adversely affected by these economic circumstances, market fundamentals, competition and demographic conditions. Because of the effect these factors have on real estate values, it is difficult to predict with certainty the level of future sales or sales prices that will be realized for individual assets.
+
+Our real estate operations are also dependent upon the availability and cost of mortgage financing for potential customers, to the extent they finance their purchases, and for buyers of the potential customers existing residences.
+
+Risks Related to Investment in Our Securities
+
+There is currently a limited market for our common stock. We have limited trading volume which causes significant stock price fluctuation. Any trading market that develops in our common stock may be highly illiquid and may not reflect the underlying value of our net assets or business prospects.
+
+Although our common stock is currently quoted on the OTC Bulletin Board, we have applied to have our common stock
+quoted on the American Stock Exchange on or promptly after the date of this
+prospectus. However, there is currently only a limited market for our common stock and there can be no assurance that an improved market will ever develop or be sustained. Any trading market that does develop may be volatile, and significant competition to sell our common stock in any such trading market may exist, which could negatively affect the price of our common stock, including shares of our common stock issuable upon conversion of our outstanding convertible promissory notes. Prior to this offering,
+we have a minimal number of shares that are freely tradable and therefore our stock price fluctuates significantly based on trades of very small volume. As a result, the value of our common stock may decrease.
+Additionally, if a trading market does develop, such market may be highly illiquid, and our common stock may trade at a price that does not accurately reflect the underlying value of our net assets or business prospects. Investors are cautioned not to rely on the possibility that an active trading market may develop or on the prices at which our stock may trade in any market that does develop in making an investment decision.
+
+Our company is a holding company, and the obligations of our company are subordinate to those of our operating subsidiary.
+
+Our company is a holding company with no material assets other than our equity interest in our wholly owned subsidiary, Wilson Family Communities, or WFC. WFC conducts substantially all of our operations and directly owns substantially all of our assets. The holding company structure places any obligations of Wilson Holdings subordinate to those of our operating subsidiary, WFC. Therefore, in the event of a liquidation, creditors of WFC would be repaid prior to any distribution to the stockholders of Wilson Holdings. After the repayment of all obligations incurred by WFC and the repayment of all obligations of Wilson Holdings, any remaining assets could then be distributed to Wilson Holdings as the holder of all shares of common stock of WFC and subsequently would be distributed among the holders of our common stock.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 13
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+Our largest stockholder, who is also our President and Chief Executive Officer, will continue to control our company.
+
+Clark N. Wilson, our President and Chief Executive Officer, owns or controls approximately 75% of the issued and outstanding shares of our common stock. Upon completion of this offering, Mr. Wilson will continue to own or control approximately 59% of the issued and outstanding shares of our common stock. This ownership position will provide Mr. Wilson with the voting power to significantly influence the election of all members of our Board of Directors and, thereby, to exert substantial control over all corporate actions and decisions for an indefinite period.
+
+We issued $16.75 million in convertible notes and if these notes are converted into shares of common stock, or if the warrants issued in conjunction with such notes are exercised, our stockholders would suffer substantial dilution.
+
+In December 2005 and September 2006, we issued convertible promissory notes
+which may be converted, at the election of the holders of the notes, into shares
+of our common stock at a conversion price of $2.00 per share. In conjunction
+with these note financings, we also issued warrants to the purchasers which have
+vested and to the placement agent evidencing the right to purchase an aggregate
+of 1,157,187 shares of our common stock at an exercise price of $2.00 per share.
+While the holders of these notes and warrants have not indicated to us that they
+plan to convert their notes into, or exercise their warrants for, shares of our
+common stock, in the event they elect to do so we would be required to issue up
+to 8,375,000 additional shares of our common stock in conversion of the notes
+and 1,157,187 shares of our common stock upon exercise of the warrants, which would be dilutive to our
+existing stockholders. Each convertible note is convertible into shares of our common stock at the option of the holder. The conversion price is subject to adjustment for stock splits, reverse stock splits, recapitalizations and similar corporate actions. A ratchet adjustment in the conversion price, and the corresponding rate at which the convertible notes may be converted into shares of our common stock, also is triggered upon the issuance of certain equity securities or equity-linked securities with a conversion price, exercise price or share price of less than $2.00 per share, provided, that the conversion price cannot be lower than $1.00 per share.
+
+Future sales or the potential for sale of a substantial number of shares of our common stock could cause the trading price of our common stock to decline and could impair our ability to raise capital through subsequent equity offerings.
+
+Sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales may occur, could cause the market price of our stock to decline and could materially impair our ability to raise capital through the sale of additional equity securities. For example, the grant of a large number of stock options or other securities under an equity incentive plan or the sale of our equity securities in private placement transactions at a discount from market value could adversely affect the market price of our common stock.
+
+We have anti-takeover provisions that could discourage, delay or prevent our acquisition.
+
+Provisions of our articles of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition that a stockholder may consider favorable. Our authorized but unissued shares of common stock are available for our board to issue without stockholder approval. We may use these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of our authorized but unissued shares of common stock could render it more difficult or discourage an attempt to obtain control of us by means of a proxy context, tender offer, merger or other transaction. In the future, we may elect to amend our charter to provide for authorized but unissued shares of preferred stock that would be issuable at the discretion of the Board of Directors. We can amend
+and restate our charter by action of the Board of Directors and the written consent of a majority of stockholders. 
+
+We may become subject to Nevada s Control Share Acquisition Act (Nevada Revised Statutes 78.378 -78.3793), which prohibits an acquirer, under certain circumstances, from voting shares of a corporation s stock after crossing specific threshold ownership percentages, unless the acquirer obtains the approval of the issuing corporation s stockholders. The first such threshold is the acquisition of at least one-fifth but less that one-third of the outstanding voting power. Wilson Holdings may become subject to Nevada s Control Share Acquisition 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 14
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+Act
+if it has 200 or more stockholders of record at least 100 of whom are residents of the State of Nevada and does business in the State of Nevada directly or through an affiliated corporation. Currently, we do not conduct business in the State of Nevada directly or through an affiliated corporation.
+
+As a Nevada corporation, we also are subject to Nevada s Combination with Interested Stockholders Statute (Nevada Revised Statutes 78.411 - 78.444) which prohibits an interested stockholder from entering into a combination with the corporation, unless certain conditions are met. An interested stockholder is a person who, together with affiliates and associates, beneficially owns (or within the prior three years, did beneficially own) 10 percent or more of the corporation s voting stock.
+
+Clark N. Wilson, our President and Chief Executive Officer, also owns approximately 75%
+of the issued and outstanding shares of our common stock and will own
+approximately 59% of our common stock after the offering. All of these factors may decrease the likelihood that we would be, or the perception that we can be, acquired, which may depress the market price of our common stock.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 15
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+USE OF PROCEEDS
+
+ Assuming an anticipated offering price of $3.25 per share, we estimate that the net proceeds from the sale of the 5,000,000
+shares that we are selling in this offering will be approximately $14,150,000 or $16,407,500 if the underwriters exercise their over-allotment option in full, after deducting an underwriting discount of $0.24 per
+share, and estimated offering expenses of approximately $900,000 payable by us. 
+
+We intend to use the net proceeds of this offering as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+ 
+Percentage
+ 
+ 
+
+ 
+ 
+ Land Acquisitions 
+ 
+ 
+ $7,300,000
+ 
+ 
+ 
+ 52%
+ 
+
+ 
+ 
+ Land Development 
+ 
+ 
+ $5,000,000
+ 
+ 
+ 
+35%
+ 
+
+ 
+ 
+ Homebuilding 
+ 
+ 
+ $1,100,000
+ 
+ 
+ 
+ 8%
+ 
+
+ 
+ 
+ General
+ Corporate Uses
+ 
+ 
+ $750,000 
+ 
+ 
+ 
+5%
+ 
+
+ 
+ 
+ Total: 
+ 
+ 
+ $14,150,000
+ 
+ 
+ 100%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+The foregoing discussion is an estimate based on our current business plan. We may find it necessary or advisable to use portions of the net proceeds we receive from this offering for other purposes, and we will have broad discretion in applying the net proceeds. Pending these uses, we intend to invest the net proceeds of the offering in short-term, interest-bearing, investment grade securities.
+
+DIVIDEND POLICY
+
+We have not declared or paid any dividends, and do not intend to pay any dividends in the foreseeable future, with respect to our common stock. We intend to retain any future earnings for use in the operation and expansion of our business. Any future decision to pay dividends on our common stock will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements and other factors our Board of Directors may deem relevant.
+
+CAPITALIZATION
+
+ The following table sets forth our actual capitalization as of
+March 31, 2007 and as adjusted to give effect to the sale of 5,000,000
+shares of common stock at an assumed offering price of $3.25 per share, less the underwriting discount and offering expenses. 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+March 31, 2007
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+Actual
+ 
+ 
+ 
+ 
+As adjusted
+ 
+ 
+
+ 
+ 
+ STOCKHOLDERS EQUITY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Common stock, par value $0.001 per share:
+ 
+ 
+
+ 
+ $ 18,056
+ 
+ 
+
+ 
+ $ 23,056
+ 
+
+ 
+ 
+ 
+ 100,000,000 shares authorized; 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Additional paid in capital
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 18,055,538 shares issued and
+ outstanding, actual; 
+ 
+ 
+ 
+ 12,271,497
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 23,055,538 shares issued and outstanding, as adjusted 
+ 
+ 
+ 
+ 
+
+ 
+26,335,247
+ 
+
+ 
+ 
+ Retained deficit 
+ 
+ 
+
+ (8,056,109)
+ 
+ 
+
+ (8,056,109)
+ 
+
+ 
+ 
+ Total capitalization 
+ 
+ 
+
+ 
+$ 4,233,444
+ 
+ 
+
+ 
+$18,302,194
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+You should read this table in conjunction with the sections of this prospectus captioned Use of Proceeds and Management s Discussion and Analysis of Financial Condition and Results of Operations as well as the consolidated financial statements and related notes included elsewhere in this prospectus.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 16
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+DILUTION
+
+If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding at
+March 31, 2007.
+
+Investors participating in this offering will incur immediate, substantial dilution. Our pro forma net tangible book value was $1.00 per share of common stock outstanding at
+March 31, 2007, computed as total stockholders equity less goodwill and other intangible assets. Assuming the sale by us of
+shares of our common stock at a public offering price of $3.25 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at
+March 31, 2007, would have been $0.23 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $0.57 per share of common stock to our existing stockholders and an immediate dilution of $2.45 per share to the new investors purchasing
+shares in this offering. The following table illustrates this per share dilution: 
+
+ 
+ 
+ Assumed offering price per share 
+ 
+ 
+ 
+ 
+ 
+ $ 3.25
+ 
+
+ 
+ 
+ Net tangible book value per share at December 31, 2006 
+ 
+ 
+ 
+ $ 0.23
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Increase per share attributable to new investors 
+ 
+ 
+ $ 0.57
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Pro forma net tangible book value per share after this offering 
+ 
+ 
+ 
+ 
+ 
+ 
+$ 0.80
+ 
+ 
+
+ 
+ 
+ Dilution per share to new investors 
+ 
+ 
+ 
+ 
+ 
+ 
+$ 2.45
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The following table sets forth on a pro forma as adjusted basis, at
+March 31, 2007, the number of shares of common stock purchased or to be purchased from us, the total consideration paid or to be paid and the average price per share paid or to be paid by existing holders of common stock, by holders of options and warrants outstanding at
+March 31, 2007 and by the new investors, before deducting estimated underwriting discounts and estimated offering expenses payable by us. 
+
+ 
+ 
+ 
+ 
+ 
+ 
+Shares Purchased
+ 
+ 
+ 
+ 
+Total Consideration
+ 
+ 
+ 
+ Average
+ Price
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+Number
+ 
+ 
+ 
+ 
+Percent
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+ 
+Percent
+ 
+ 
+ 
+ 
+Per Share
+ 
+ 
+
+ 
+ 
+ Existing stockholders 
+ 
+ 
+ 18,055,538
+ 
+ 
+ 78%
+ 
+ 
+ $ 
+7,136,788
+ 
+ 
+ 
+31%
+ 
+ 
+ $
+0.40
+ 
+
+ 
+ 
+ New investors 
+ 
+ 
+ 
+5,000,000
+ 
+ 
+ 
+ 
+22%
+ 
+ 
+ 
+ 
+$
+16,250,000
+ 
+ 
+ 
+ 
+
+69%
+ 
+ 
+ 
+ 
+$
+3.25
+ 
+ 
+
+ 
+ 
+ Total 
+ 
+ 
+ 
+23,055,538
+ 
+ 
+ 
+ 
+100%
+ 
+ 
+ 
+ 
+$
+23,386,788
+ 
+ 
+ 
+ 
+100%
+ 
+ 
+ 
+ 
+$ 1.01
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The discussion and tables above are based on the number of shares of common stock and preferred stock outstanding at
+March 31, 2007. 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 17
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+PRICE RANGES OF OUR COMMON STOCK
+
+Our common stock is traded on the National Association of Securities Dealers Inc. , or NASD, OTC under the symbol WSHD.OB. We intend to apply to list our shares of common stock on the American Stock Market under the symbol
+"WIH".
+
+The following table represents the range of the high and low bid prices of our common stock as reported by the OTC Bulletin Board Historical Data Service. These quotations represent prices between dealers and may not include retail markups, markdowns, or commissions and may not necessarily represent actual transactions. The market prices reported prior to October 11, 2005 were prices reported for Cole Computer Corporation, our predecessor entity that was a shell corporation with no material assets or liabilities. The share prices reported below have been adjusted to take into account a 350-to-1 reverse stock split with respect to the outstanding shares of our common stock that was effected on September 22, 2005.
+
+ 
+ 
+ 2007
+ 
+ 
+ High
+ 
+ 
+ Low
+ 
+
+ 
+ 
+ First Quarter 
+
+Second Quarter (through May 8, 2007) 
+ 
+ 
+ $6.25
+
+ 
+
+ $5.25
+ 
+ 
+ $4.25
+
+ 
+
+$4.00
+ 
+
+ 
+ 
+ 2006
+ 
+ 
+ High
+ 
+ 
+ Low
+ 
+
+ 
+ 
+ First Quarter 
+ 
+ 
+ $7.50
+ 
+ 
+ $2.90
+ 
+
+ 
+ 
+ Second Quarter 
+ 
+ 
+ $5.25
+ 
+ 
+ $3.00
+ 
+
+ 
+ 
+ Third Quarter 
+ 
+ 
+ $4.95
+ 
+ 
+ $2.00
+ 
+
+ 
+ 
+ Fourth Quarter 
+ 
+ 
+ $6.00
+ 
+ 
+ $2.50
+ 
+
+ 
+ 
+ 2005
+ 
+ 
+ High
+ 
+ 
+ Low
+ 
+
+ 
+ 
+ First Quarter 
+ 
+ 
+ $10.49
+ 
+ 
+ $3.85
+ 
+
+ 
+ 
+ Second Quarter 
+ 
+ 
+ $13.46
+ 
+ 
+ $3.85
+ 
+
+ 
+ 
+ Third Quarter 
+ 
+ 
+ $13.99
+ 
+ 
+ $3.85
+ 
+
+ 
+ 
+ Fourth Quarter 
+ 
+ 
+ $13.00
+ 
+ 
+ $4.00
+ 
+
+ 
+ 
+ 2004
+ 
+ 
+ High
+ 
+ 
+ Low
+ 
+
+ 
+ 
+ First Quarter 
+ 
+ 
+ $7.00
+ 
+ 
+ $3.50
+ 
+
+ 
+ 
+ Second Quarter 
+ 
+ 
+ $7.00
+ 
+ 
+ $7.00
+ 
+
+ 
+ 
+ Third Quarter 
+ 
+ 
+ $17.50
+ 
+ 
+ $14.00
+ 
+
+ 
+ 
+ Fourth Quarter 
+ 
+ 
+ $21.00
+ 
+ 
+ $14.00
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ As of May 8, 2007, the last reported sale price of our common stock on the OTC Bulletin Board
+was on April 25, 2007 at a price of $4.00 per share. According to the records of our transfer agent, there were approximately 345 record holders of our common stock as of May
+8, 2007.
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 18
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+SELECTED FINANCIAL DATA
+
+The following summary consolidated financial information has been derived from our audited consolidated financial statements for the fiscal years ended December 31, 2006, 2005 and 2004, and from our unaudited consolidated financial statements for the years ended December 31, 2002 and 2003. The unaudited summary consolidated financial information and the actual and as adjusted consolidated balance sheet data include all adjustments, consisting principally of normal recurring adjustments that we consider necessary for a fair presentation. Our historical results are not necessarily indicative of the results to be expected in the future.
+
+You should read this information together with Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes, included elsewhere in this prospectus.
+
+ 
+ 
+ STATEMENT OF FINANCIAL CONDITION DATA:
+ 
+ 
+ As of December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2002
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (in thousands, except per share data)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Cash and cash equivalents
+ 
+ 
+ $
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 9 
+ 
+ 
+ 
+ 
+ 
+ 10,020 
+ 
+ 
+ 
+ 
+ 
+ 4,865 
+ 
+
+ 
+ 
+ Total Inventory
+ 
+ 
+ $
+ 
+ 
+ 13,712 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 375 
+ 
+ 
+ 
+ 
+ 
+ 12,955 
+ 
+ 
+ 
+ 
+ 
+ 30,756 
+ 
+
+ 
+ 
+ Total assets
+ 
+ 
+ $
+ 
+ 
+ 13,819 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 384 
+ 
+ 
+ 
+ 
+ 
+ 24,514 
+ 
+ 
+ 
+ 
+ 
+ 37,374 
+ 
+
+ 
+ 
+ Total liabilities
+ 
+ 
+ $
+ 
+ 
+ 10,691 
+ 
+ 
+ 
+ 
+ 
+ 2 
+ 
+ 
+ 
+ 
+ 
+ 311 
+ 
+ 
+ 
+ 
+ 
+ 18,459 
+ 
+ 
+ 
+ 
+ 
+ 36,599 
+ 
+
+ 
+ 
+ Total stockholders and partners equity
+ 
+ 
+ $
+ 
+ 
+ 3,128 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 73 
+ 
+ 
+ 
+ 
+ 
+ 6,055 
+ 
+ 
+ 
+ 
+ 
+ 775 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ STATEMENT OF OPERATIONS DATA:
+ 
+ 
+ 
+ 
+ 
+ Years ended December 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2002
+ 
+ 
+ 
+ 
+ 
+ 2003
+ 
+ 
+ 
+ 
+ 
+ 2004
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (in thousands, except per share data)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ (Unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Revenues
+ 
+ 
+ $
+ 
+ 
+ 81 
+ 
+ 
+ 
+ 
+ 
+ 16,774 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 255 
+ 
+ 
+ 
+ 
+ 
+ 6,735 
+ 
+
+ 
+ 
+ Gross Profit
+ 
+ 
+ 
+ 
+ 
+ 81 
+ 
+ 
+ 
+ 
+ 
+ 3,059 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 140 
+ 
+ 
+ 
+ 
+ 
+ 1,317 
+ 
+
+ 
+ 
+ Operating loss
+ 
+ 
+ 
+ 
+ 
+ 71 
+ 
+ 
+ 
+ 
+ 
+ 3,056 
+ 
+ 
+ 
+ 
+ 
+ (48)
+ 
+ 
+ 
+ 
+ 
+ (1,284)
+ 
+ 
+ 
+ 
+ 
+ (3,853)
+ 
+
+ 
+ 
+ Total other expense
+ 
+ 
+ 
+ 
+ 
+ (178)
+ 
+ 
+ 
+ 
+ 
+ (143)
+ 
+ 
+ 
+ 
+ 
+ (11)
+ 
+ 
+ 
+ 
+ 
+ (430)
+ 
+ 
+ 
+ 
+ 
+ (10,540)
+ 
+
+ 
+ 
+ Net loss
+ 
+ 
+ $
+ 
+ 
+ (107)
+ 
+ 
+ 
+ 
+ 
+ 2,913 
+ 
+ 
+ 
+ 
+ 
+ (59)
+ 
+ 
+ 
+ 
+ 
+ (1,714)
+ 
+ 
+ 
+ 
+ 
+ (14,393)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Basic and diluted loss per share
+ 
+ 
+ $
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.22)
+ 
+ 
+ 
+ 
+ 
+ (0.81)
+ 
+
+ 
+ 
+ Basic and diluted weighted average common shares outstanding
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 7,755,646 
+ 
+ 
+ 
+ 
+ 
+ 17,711,405 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 19
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+Quarterly Results of Operations
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ Mar. 31,
+ 
+ 
+ 
+ 
+ 
+ Jun. 30, 
+ 
+ 
+ 
+ 
+ 
+ Sep. 30,
+ 
+ 
+ 
+ 
+ 
+ Dec. 31,
+ 
+ 
+ 
+ 
+ 
+ Mar. 31,
+ 
+ 
+ 
+ 
+ 
+ Jun. 30, 
+ 
+ 
+ 
+ 
+ 
+ Sep. 30,
+ 
+ 
+ 
+ 
+ 
+ 
+ Dec. 31,
+ 
+ 
+ 
+ 
+ Mar. 31,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+ 2007
+ 
+
+ 
+ 
+ Revenues:
+ 
+ 
+ 
+ 
+ 
+ (In
+ thousands, except per share data)
+ 
+
+ 
+ 
+ Homebuilding and related services
+ 
+ 
+ $
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 417 
+ 
+ 
+ 
+ 
+ 
+ 2,285 
+ 
+ 
+ 
+ 
+ 
+ 1,483 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,033
+ 
+ 
+ 
+ 
+ 798
+ 
+
+ 
+ 
+ Land sales
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 255 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 616 
+ 
+ 
+ 
+ 
+ 
+ 50 
+ 
+ 
+ 
+ 
+ 
+ 414 
+ 
+ 
+ 
+ 
+ 
+ 
+ 437
+ 
+ 
+ 
+ 
+ 970
+ 
+
+ 
+ 
+ Total revenues
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 255 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 1,033 
+ 
+ 
+ 
+ 
+ 
+ 2,335 
+ 
+ 
+ 
+ 
+ 
+ 1,897 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,470 
+ 
+ 
+ 
+ 
+ 1,767
+ 
+
+ 
+ 
+ Cost of revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Homebuilding and related services
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 332 
+ 
+ 
+ 
+ 
+ 
+ 1,893 
+ 
+ 
+ 
+ 
+ 
+ 1,256 
+ 
+ 
+ 
+ 
+ 
+ 
+ 866
+ 
+ 
+ 
+ 
+ 636
+ 
+
+ 
+ 
+ Land sales
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 115 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 327 
+ 
+ 
+ 
+ 
+ 
+ 24 
+ 
+ 
+ 
+ 
+ 
+ 273 
+ 
+ 
+ 
+ 
+ 
+ 
+ 446
+ 
+ 
+ 
+ 
+ 842
+ 
+
+ 
+ 
+ Total cost of revenues
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 115 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 659 
+ 
+ 
+ 
+ 
+ 
+ 1,917 
+ 
+ 
+ 
+ 
+ 
+ 1,529 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,312
+ 
+ 
+ 
+ 
+ 1,478
+ 
+
+ 
+ 
+ Gross profit:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Homebuilding and related services
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 85 
+ 
+ 
+ 
+ 
+ 
+ 392 
+ 
+ 
+ 
+ 
+ 
+ 227 
+ 
+ 
+ 
+ 
+ 
+ 
+ 167
+ 
+ 
+ 
+ 
+ 161
+ 
+
+ 
+ 
+ Land sales
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 140 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 289 
+ 
+ 
+ 
+ 
+ 
+ 26 
+ 
+ 
+ 
+ 
+ 
+ 141 
+ 
+ 
+ 
+ 
+ 
+ 
+ (9)
+ 
+ 
+ 
+ 
+ 128
+ 
+
+ 
+ 
+ Total gross profit
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 140 
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 374 
+ 
+ 
+ 
+ 
+ 
+ 418 
+ 
+ 
+ 
+ 
+ 
+ 368 
+ 
+ 
+ 
+ 
+ 
+ 
+ 158
+ 
+ 
+ 
+ 
+ 289
+ 
+
+ 
+ 
+ Costs and expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Corporate general and administration
+ 
+ 
+ 
+ 
+ 
+ 1
+ 
+ 
+ 
+ 
+ 
+ 65
+ 
+ 
+ 
+ 
+ 
+ 369
+ 
+ 
+ 
+ 
+ 
+ 765
+ 
+ 
+ 
+ 
+ 
+ 990 
+ 
+ 
+ 
+ 
+ 
+ 1,211 
+ 
+ 
+ 
+ 
+ 
+ 1,168 
+ 
+ 
+ 
+ 
+ 
+ 
+ 983
+ 
+ 
+ 
+ 
+ 998
+ 
+
+ 
+ 
+ Sales and marketing
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 7 
+ 
+ 
+ 
+ 
+ 
+ 105 
+ 
+ 
+ 
+ 
+ 
+ 113 
+ 
+ 
+ 
+ 
+ 
+ 129 
+ 
+ 
+ 
+ 
+ 
+ 229 
+ 
+ 
+ 
+ 
+ 
+ 282 
+ 
+ 
+ 
+ 
+ 
+ 
+ 177
+ 
+ 
+ 
+ 
+ 74
+ 
+
+ 
+ 
+ Total costs and expenses
+ 
+ 
+ 
+ 
+ 
+ 1 
+ 
+ 
+ 
+ 
+ 
+ 72 
+ 
+ 
+ 
+ 
+ 
+ 474 
+ 
+ 
+ 
+ 
+ 
+ 878 
+ 
+ 
+ 
+ 
+ 
+ 1,119 
+ 
+ 
+ 
+ 
+ 
+ 1,440 
+ 
+ 
+ 
+ 
+ 
+ 1,450 
+ 
+ 
+ 
+ 
+ 
+ 
+ 1,160
+ 
+ 
+ 
+ 
+ 1,072
+ 
+
+ 
+ 
+ Operating loss
+ 
+ 
+ 
+ 
+ 
+ (1)
+ 
+ 
+ 
+ 
+ 
+ (72)
+ 
+ 
+ 
+ 
+ 
+ (334)
+ 
+ 
+ 
+ 
+ 
+ (878)
+ 
+ 
+ 
+ 
+ 
+ (745)
+ 
+ 
+ 
+ 
+ 
+ (1,023)
+ 
+ 
+ 
+ 
+ 
+ (1,083)
+ 
+ 
+ 
+ 
+ 
+ 
+ (1,002)
+ 
+ 
+ 
+ 
+ (783)
+ 
+
+ 
+ 
+ Other income (expense):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Loss on fair value of derivatives
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ (173)
+ 
+ 
+ 
+ 
+ 
+ (345)
+ 
+ 
+ 
+ 
+ 
+ (2,588)
+ 
+ 
+ 
+ 
+ 
+ (460)
+ 
+ 
+ 
+ 
+ 
+ 
+ (5,077) 
+ 
+ 
+ 
+ 
+ -
+ 
+
+ 
+ 
+ Interest and other income
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ 8 
+ 
+ 
+ 
+ 
+ 
+ 36 
+ 
+ 
+ 
+ 
+ 
+ 56 
+ 
+ 
+ 
+ 
+ 
+ 97 
+ 
+ 
+ 
+ 
+ 
+ 109 
+ 
+ 
+ 
+ 
+ 
+ 54 
+ 
+ 
+ 
+ 
+ 
+ 
+ 30
+ 
+ 
+ 
+ 
+ 48
+ 
+
+ 
+ 
+ Interest expense
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ (16)
+ 
+ 
+ 
+ 
+ 
+ (128)
+ 
+ 
+ 
+ 
+ 
+ (213)
+ 
+ 
+ 
+ 
+ 
+ (514)
+ 
+ 
+ 
+ 
+ 
+ (558)
+ 
+ 
+ 
+ 
+ 
+ (570)
+ 
+ 
+ 
+ 
+ 
+ 
+ (718)
+ 
+ 
+ 
+ 
+ (619)
+ 
+
+ 
+ 
+ Total other expense
+ 
+ 
+ 
+ 
+ 
+ -
+ 
+ 
+ 
+ 
+ 
+ (8)
+ 
+ 
+ 
+ 
+ 
+ (92)
+ 
+ 
+ 
+ 
+ 
+ (330)
+ 
+ 
+ 
+ 
+ 
+ (762)
+ 
+ 
+ 
+ 
+ 
+ (3,037)
+ 
+ 
+ 
+ 
+ 
+ (976)
+ 
+ 
+ 
+ 
+ 
+ 
+ (5,765)
+ 
+ 
+ 
+ 
+ (571)
+ 
+
+ 
+ 
+ Net loss
+ 
+ 
+ $
+ 
+ 
+ (1)
+ 
+ 
+ 
+ 
+ 
+ (80)
+ 
+ 
+ 
+ 
+ 
+ (426)
+ 
+ 
+ 
+ 
+ 
+ (1,208)
+ 
+ 
+ 
+ 
+ 
+ (1, 508)
+ 
+ 
+ 
+ 
+ 
+ (4,059)
+ 
+ 
+ 
+ 
+ 
+ (2,059)
+ 
+ 
+ 
+ 
+ 
+ 
+ (6,767)
+ 
+ 
+ 
+ 
+ (1,354)
+ 
+
+ 
+ 
+ Basic and diluted loss per share
+ 
+ 
+ $
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ (0.02)
+ 
+ 
+ 
+ 
+ 
+ (0.04)
+ 
+ 
+ 
+ 
+ 
+ (0.16)
+ 
+ 
+ 
+ 
+ 
+ (0.08)
+ 
+ 
+ 
+ 
+ 
+ (0.23)
+ 
+ 
+ 
+ 
+ 
+ (0.12)
+ 
+ 
+ 
+ 
+ 
+ 
+ (0.38) 
+ 
+ 
+ 
+ 
+ (0.07)
+ 
+
+ 
+ 
+ Basic and diluted weighted average common shares outstanding
+ 
+ 
+ 
+ 
+ 
+ - 
+ 
+ 
+ 
+ 
+ 
+ 3,333,333 
+ 
+ 
+ 
+ 
+ 
+ 10,000,000 
+ 
+ 
+ 
+ 
+ 
+ 17,689,252 
+ 
+ 
+ 
+ 
+ 
+ 17,706,625 
+ 
+ 
+ 
+ 
+ 
+ 17,706,625 
+ 
+ 
+ 
+ 
+ 
+ 17,706,625 
+ 
+ 
+ 
+ 
+ 
+ 
+ 17,726,026 
+ 
+ 
+ 
+ 
+ 18,055,538
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 20
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+MANAGEMENT S DISCUSSION AND ANALYSIS OF 
+
+FINANCIAL CONDITION AND RESULTS OF OPERATIONS
+
+This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. When used herein, the words believes, plans, expects, anticipates, intends, continue, may, will, could, should, future, potential, estimate, or the negative of such terms and similar expressions as they relate to us or our management are intended to identify forward-looking statements. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed herein. These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ
+materially from those indicated by the forward-looking statements. Historical results and percentage relationships among any amounts in our consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.
+
+The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Consolidated Financial Information and our financial statements and accompanying notes included elsewhere in this document.
+
+Overview
+
+Our business plan focuses on the acquisition of undeveloped land that is strategically located based on our understanding of population growth patterns and infrastructure development. This portion of our business focus has required, and is expected to continue to require, the majority of our financial resources. In tandem with our land acquisition efforts, and based upon our strategic market analysis, we also plan to prepare land for homebuilding and to sell developed land. We believe that as the central Texas economy expands, our strategic land purchases, land development activities and partnering model with local builders will enable us to capitalize on the new growth centers we expect will be created.
+
+To both increase and accelerate lot sales, we also intend to deliver residential lots and financial support to local homebuilders who have strong technical skills but who may lack the personnel and financial resources to compete effectively against national homebuilding companies. Under these arrangements, we derive revenue from the sale of real estate and residential lots, as well as from services provided to clients. The payments that we receive are typically determined by the gross selling price of the builders finished homes as well as the specific services we provide to individual homebuilders. We currently have signed agreements to provide these services to two homebuilder clients, although we have informed one homebuilder client that we would like to phase out the program with them in 2007. We do not expect to generate significant revenues from these services. We exercise
+significant influence over, but hold no controlling interest in, homebuilder clients, but we may retain the majority of the risk of loss. At December 31, 2006, we determined that we were the primary beneficiary in certain homebuilder agreements, as defined under FASB Interpretation No. 46(R), or FIN 46(R), entitled Consolidation of Variable Interest Entities , where we have a significant, but less than controlling, interest in our clients. In accordance with FIN 46(R), the results of these clients have been consolidated into our financial statements.
+
+Currently we are not engaged in homebuilding. We expect to commence homebuilding in June 2007. We will build homes on some of our land which is currently under development. Our home designs will be selected and prepared for each of our markets based on local community tastes and preferences of homebuyers. Substantially all of our construction work will be performed by subcontractors. Subcontractors will be retained for specific subdivisions pursuant to contracts which we plan to enter into during 2007. We plan to enter into homebuilding under the name Green Builders, Inc. We currently have an option to purchase the local homebuilding company Green Builders, Inc. Under the terms of the option, we have an exclusive right to purchase Green Builders at any time prior to June 19, 2009 at a mutually agreeable price on the date of purchase. We paid $15,000 to Green Builders, Inc. to enter into
+
+the
+option. Green Builders is a local homebuilding company which has built four homes in central Texas in 2006. Our strategy on homebuilding is to build homes which are environmental responsive, resource efficient and culturally sensitive.
+
+We merged with Wilson Family Communities, Inc., or WFC, in October 2005. WFC
+was formed early in 2005 with the intention of focusing on acquiring and
+developing residential land in the central Texas region. 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 21
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+In
+May 2005, WFC merged with a limited partnership that had engaged in various land acquisition and development services.
+
+ Comparison of 2006 and 2005 
+
+Results of Operations
+
+Homebuilding and Related Services Revenues
+
+Homebuilding and related services consists of home sales and homebuilder services. All of the home sales are generated by our clients utilizing our homebuilder services. We consolidate these clients into our operating results based on accounting requirements according to FIN 46(R) and refer to these clients as Variable Interest Entities, or VIEs.
+
+During the year ended December 31, 2006, home sales accounted for approximately 77% of revenues at a gross profit margin of approximately 17%. All of the homebuilding revenues were generated by our two VIEs consolidated into our operating results. Revenues from each homebuilder client (i.e.VIE)
+were approximately $1.8 and $3.4 million, respectively. The client that
+generated $1.8 million of revenues has not commenced any new homes or utilized
+our homebuilding services since June 30, 2006. This client has expressed its
+intention to begin building homes and utilizing our services in early 2007. We
+have purchased an exclusive two year option to buy this client. Our other client
+which generated approximately $3.4 million of revenues for the year ended
+December 31, 2006 has seven unsold homes that it expects to complete and sell
+during the first half of 2007. We have notified this client that we would like
+to terminate our relationship once the existing inventory of homes is completed.
+The client has a note payable to us in the principal amount of approximately $203,700. We may not be able to recover the full amount of this note, which may force us to pursue collection activities and a write off for the entire amount. In addition to the note payable, we may need to provide funds to complete the construction and sale of the homes the client currently has under construction and for sale. We have accrued approximately $50,000 for this contingency. The loss of this client will cause revenues from homebuilding to be substantially lower, possibly dropping to zero, for the second and third quarters of 2007.
+
+We plan to commence our own homebuilding activities beginning in June 2007.
+
+We had no homebuilding revenues during the year ended December 31, 2005 and 2004, as no homes were built.
+
+Land Sales
+
+Land sales accounted for approximately 23% of our total revenues, totaling approximately $1.5 million for the year ended December 31, 2006, at a gross profit margin of approximately 29%. For the year ended December 31, 2006, approximately $616,000 of our land sale revenue came from the sale of undeveloped acreage tracts of land, approximately $851,000 of the revenue from the sale of developed finished lots and $50,000 from miscellaneous land revenue.
+
+During the year ended December 31, 2005, we were in the process of acquiring and developing land and generated revenues of approximately $255,000 through the sale of undeveloped acreage lots at a gross profit of approximately $140,000. There were no revenues for the year ended December 31, 2004.
+
+We have been developing and acquiring land for sale to homebuilders and expect to see a material increase in our land sales as we offer more land for sale to national and regional homebuilders as well as to local homebuilders. Developing finished lots from land takes approximately one to three years. We plan to sell the majority of our lots to national, regional and local homebuilders that may purchase anywhere from five to 100 or more lots at a time. We expect lot sales to vary significantly from quarter to quarter causing significant fluctuations in our revenues and gross profit.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 22
+ 
+
+ 
+
+Table of Contents
+
+ 
+
+Costs and Expenses
+
+General and Administrative Expenses
+
+General and administrative expenses are composed primarily of salaries of general and administrative personnel and related employee benefits and taxes, accounting and legal, and general office expenses and insurance. During the year ended December 31, 2006, salaries, benefits, taxes and related employee expenses totaled approximately $1.5 million and represented approximately 35% of total general and administrative costs for the period. Also included is an accrual of approximately $180,000 for severance payments that will be paid to our former Chief Financial Officer over the next ten months. Stock compensation expense totaled approximately $545,000, which is 13% of total general and administrative expenses. Legal, accounting, and audit expense which includes the expense of filing our registration statements and other SEC filings, totaled approximately $776,000. Transaction cost
+amortization and other transaction costs totaled approximately $367,000. Warranty expense, architecture fees, and consulting services were approximately $482,000. Miscellaneous expenses were approximately $643,000 for general overhead, including rent, office expenses and insurance. Depreciation expense included in general and administrative expenses was approximately $56,000 for the year ended December 31, 2006. General and administrative expenses included from the consolidation of our VIEs were less than 5% of the total general and administrative expenses for the year ended December 31, 2006. We expect total general and administrative expenses to increase over the next year as we enter the homebuilding business.
+
+Prior to our merger with Athena in May 2005, we had minimal business activity. From June 2005 until December 2005, we spent money on developing our business strategy, hiring staff, acquiring a 752 acre land tract and merging with a public company, issuing $10 million of convertible debt and preparing all the documents and filings related to the merger activities. At December 31, 2005, we had nine employees as compared to three at June 30, 2005. The majority of expenses were for salaries and related employee expenses of $386,000, legal fees of $203,000, consulting relating to the preparation of home plans and designs of $283,000, accounting and auditing fees of $89,000 and office rent, software, equipment and general expenses of $156,000. Legal and accounting expenses related primarily to the mergers of WFC with Athena, and Wilson Holdings and Cole. 64% of our general and administrative
+expenses were incurred in the fourth quarter of 2005.
+
+Sales and Marketing Expenses
+
+Sales and marketing expenses include salaries and related taxes and benefits, marketing activities including website, brochures, catalogs, signage, and billboards, and market research. Sales and marketing salaries, benefits, taxes and related employee expenses for the year ended December 31, 2006 were approximately $243,000 and represented approximately 30% of our total marketing costs for the period. Expenses for advertising, brochures and catalogs, signage, public relations and other selling expenses for the year ended December 31, 2006 were approximately $378,000 and represented approximately 46% of total sales and marketing costs for the period. The remaining expenses for the year ended December 31, 2006, were for other incidental items and services. Approximately 17% of the sales and marketing expenses in the period resulted from the consolidation of the VIEs.
+
+Sales and marketing expenses for the year ended 2005 were for salaries and related expenses which included $129,000 and $73,000 of website expenses, signage, advertising and marketing. Sales and marketing expenses for the years ended December 31, 2005 and 2004 reflect our limited operations prior to June 2005.
+
+Interest Expense and Income
+
+Interest expense for the year ended December 31, 2006 of approximately $2.4 million is related to debt on properties purchased, convertible debt interest costs and amortization of the convertible debt discounts. The convertible debt discount amortization was approximately $917,000 for the year ended December 31, 2006. Interest on the convertible debt was approximately $586,000 for the year ended December 31, 2006. Our interest expense will increase because of the increase in principal amount of convertible debt outstanding following our September 2006 private placement. We intend to finance a major portion of land purchases and expect interest expense to increase with borrowings in future periods.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 23
+ 
+
+ 
+
+Table of Contents
+
+Interest expense for the year ended December 31, 2005 of approximately $358,000 was for interest costs on land acquired and held for sale or development, a line of credit, bridge loans and convertible debt.
+
+We experienced a loss on the fair value of derivatives during the years ended December 31, 2006 and 2005 of approximately $8.5 million and $173,000, respectively, due to the increases in the fair value of the derivative liabilities related to the convertible notes and contingent warrants. These increases were primarily the result of the increase in value of our common stock and warrants.
+
+Interest income of approximately $290,000 and $100,000 for the years ended December 31, 2006 and 2005 respectively, consisted of interest earned on our cash and cash equivalents and immaterial amounts of other income.
+
+ Comparison of Q1 2007 and Q1 2006 
+
+ Homebuilding
+ and Related Services Revenues
+
+ 
+
+ 
+ Homebuilding
+ and related services consists of home sales and homebuilder services.
+ All of the
+ home sales are generated by our clients utilizing our homebuilder services.
+ We
+ consolidate these clients into our operating results based on accounting
+ requirements according to FIN 46(R) and refer to these clients as Variable
+ Interest Entities, or VIEs.
+
+During
+ the three months ended March 31, 2007, home sales accounted for approximately
+ 45% of our total revenues for the period at a gross profit margin of
+ approximately 20%, as compared to approximately 40% of total revenues
+ and a
+ gross profit margin of approximately 20% in the three months ended March
+ 31,
+ 2006. All of the homebuilding revenues were generated by our two VIEs
+ and
+ consolidated into our operating results. Revenues from one homebuilder
+ client
+ (i.e.,
+ VIE)
+ was approximately $798 thousand in the three months ended March 31, 2007.
+ We
+ have purchased an exclusive two year option to buy the client that generated
+ no
+ revenues in the quarter ended March 31, 2007. Our other client which
+ generated
+ approximately $798 thousand of revenues for the three months ended March
+ 31,
+ 2007 has three unsold homes that it expects to complete and sell during
+ the
+ first half of 2007. We have notified this client that we would like to
+ terminate
+ our relationship once the existing inventory of homes is completed. The
+ client
+ has a note payable to us in the principal amount of approximately $204
+ thousand.
+ We may not be able to recover the full amount of this note, which may
+ force us
+ to pursue collection activities and a write off for the entire amount.
+ In
+ addition to the note payable, we may need to provide funds to complete
+ the
+ construction and sale of the homes the client currently has under construction
+ and for sale. We have accrued approximately $50 thousand for this contingency.
+ The loss of this client will cause revenues from homebuilding to be
+ substantially lower, possibly dropping to zero, for the second and third
+ quarters of 2007.
+
+We
+ plan
+ to commence our own homebuilding activities beginning in June 2007.
+
+ Land
+ Sales
+
+ 
+
+ 
+ Land
+ sales accounted for approximately 55% of our total revenues for the three
+ months
+ ended March 31, 2007, totaling approximately $970 thousand for the period
+ at a
+ gross profit margin of approximately 13%, as compared to 60% of our total
+ revenues for the three months ended March 31, 2006 and a gross profit
+ margin of
+ approximately 36% in that period.
+
+We
+ have
+ been developing and acquiring land for sale to homebuilders and expect
+ to see a
+ material increase in our land sales as we offer more land for sale to
+ national
+ and regional homebuilders as well as to local homebuilders. Developing
+ finished
+ lots from land takes approximately one to three years. We plan to sell
+ the
+ majority of our lots to national, regional and local homebuilders that
+ may
+ purchase anywhere from five to 100 or more lots at a time. We expect
+ lot sales
+ to vary significantly from quarter to quarter causing significant fluctuations
+ in our revenues and gross profit.
+
+ Costs
+ and Expenses
+
+ 
+
+ General
+ and Administrative Expenses
+
+ 
+
+ 
+ General
+ and administrative expenses are composed primarily of salaries of general
+ and
+ administrative personnel and related employee benefits and taxes, accounting
+ and
+ legal, and general office expenses and insurance. During the three months
+ ended
+ March 31, 2007, salaries, benefits, taxes and related employee expenses
+ totaled
+ approximately $365 thousand and represented approximately 37% of total
+ general
+ and administrative expenses for the period, as compared to approximately
+ $435
+ thousand, which represented approximately 44% of total general and
+ administrative expenses for the three months ended March 31, 2006. Legal,
+ accounting, and audit expense, which includes the expense of filing our
+ registration statements and other SEC filings, totaled approximately
+ $159
+ thousand and $182 thousand in the three months ended March 31, 2007 and
+ 2006,
+ respectively. Depreciation expense included in general and administrative
+ expenses was approximately $57 thousand and $46 thousand for the three
+ months
+ ended March 31, 2007 and 2006, respectively. General and administrative
+ expenses
+ included from the consolidation of our VIEs were less than 5% of the
+ total
+ general and administrative expenses for the three months ended March
+ 31, 2007.
+ We expect total general and administrative expenses to increase significantly
+ over the next year as we enter the homebuilding business. 
+
+ 
+ 
+ 
+ 
+ 
+ 24
+ 
+
+ 
+
+Table of Contents
+
+ Sales
+ and Marketing Expenses
+
+ 
+
+ 
+ Sales
+ and
+ marketing expenses include salaries and related taxes and benefits, marketing
+ activities including website, brochures, catalogs, signage, and billboards,
+ and
+ market research. Sales and marketing salaries, benefits, taxes and related
+ employee expenses for the three months ended March 31, 2007 and 2006
+ were
+ approximately $23 thousand and $59 thousand, respectively, and represented
+ approximately 32% and 46% of our total marketing costs for the respective
+ periods. The remaining expenses for the three months ended March 31,
+ 2007 and
+ 2006 were for other incidental items and services. We expect sales and
+ marketing
+ expenses to increase substantially as we enter the homebuilding
+ business.
+
+ Interest
+ Expense and Income
+
+ 
+
+ 
+ Interest
+ expense for the three months ended March 31, 2007 and 2006 were approximately
+ $619 thousand and $514 thousand, respectively, and was related to debt
+ on
+ properties purchased, convertible debt interest costs and amortization
+ of the
+ convertible debt discounts. Included in the interest expense was amortization
+ of
+ subordinated convertible debt of approximately $142 thousand and $179
+ thousand,
+ respectively. To the extent we purchase additional land that we hold
+ for future
+ development, our interest expenses will increase. 
+
+Interest
+ income of approximately $48 thousand and $97 thousand for the three months
+ ended
+ March 31, 2007 and 2006, respectively, consisted of interest earned on
+ our cash
+ and cash equivalents and immaterial amounts of other income.
+
+Financial Condition and Capital Resources
+
+Liquidity
+
+At
+ March
+ 31, 2007 we had approximately $4.4 million in cash and cash equivalents.
+ We plan
+ on investing approximately $23 million for the purchase of land, installment
+ payments, options fees and development costs over the next year. This
+ includes
+ the development of land including the installation of water and wastewater
+ infrastructure, streets and common areas. We intend to and expect to
+ purchase or
+ obtain options to purchase additional acreage for development and additional
+ finished lots for sale. We are actively seeking additional debt financing
+ and
+ expect to finance approximately $16 million of the $23 million. We intend
+ to
+ repay the loans through a combination of cash generated from lot and
+ land sales.
+
+We
+ plan
+ to exercise a land option on the Bohl s tract of approximately $7.2 million by
+ May 2007. Additionally we plan to enter the homebuilding business effective
+ July
+ 19, 2007.
+
+Our
+ growth will require substantial amounts of cash for earnest money deposits,
+ land
+ purchases, development costs, interest payments and to enter the homebuilding
+ business. Until it begins to sell an adequate number of lots and homes
+ to cover
+ monthly operating expenses, sales, marketing, general and administrative
+ costs
+ will deplete cash. 
+
+To
+ maintain our liquidity, we have financed the majority of our land and
+ development activities with debt and equity, and believe we can continue
+ to do
+ so in the future, through a combination of conventional and subordinated
+ convertible debt, joint venture financing, sales of selected lot positions,
+ sales of land and lot options, and by raising additional equity.
+
+Land
+ comprises the majority of the our assets, which could suffer devaluation
+ if the
+ housing and real estate market suffers a significant downturn, due to
+ interest
+ rate increases or other reasons. Our debt might then be called, requiring
+ liquidation of assets to satisfy its debt obligations or the use of its
+ cash. A
+ significant downturn could also make it more difficult for us to liquidate
+ assets, to raise cash and pay off debts, which could have a material
+ adverse
+ effect upon us.
+
+ Capital Resources 
+
+ 
+
+We
+ had
+ raised approximately $16.8 million of subordinated convertible debt.
+ At March
+ 31, 2007, we had a $10 million line of credit for land and homebuilding
+ that is
+ unused. We had outstanding notes payable and lines of credit of approximately
+ $19 million. We have filed a Registration Statement on
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000837038_ahpc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000837038_ahpc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ab82c75d36d0bcad1b23a991084062c447af7e8b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000837038_ahpc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Reinhart Boerner Van Deuren s.c., Milwaukee, Wisconsin.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000855585_fonix-corp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000855585_fonix-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4cdc78f68538e2ddff31ace8397a89b75dac8d24
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000855585_fonix-corp_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the Shares offered hereby will be passed upon for us by Durham Jones & Pinegar, P.C., 111 East Broadway, Suite 900, Salt Lake City, Utah 84111. Fonix has not registered the Shares for sale by Southridge under the securities laws of any state. Brokers or dealers effecting transactions in the Shares should confirm that the Shares have been registered under the securities laws of the state or states in which sales of the Shares occur as of the time of such sales, or that there is an available exemption from the registration requirements of the securities laws of such states. This prospectus is not an offer to sell any securities other than the Shares. This prospectus is not an offer to sell securities in any circumstances in which such an offer is unlawful. Fonix has not authorized anyone, including any salesperson or broker, to give oral or written information about this offering, Fonix or the Shares that is different from the information included or incorporated by reference in this prospectus. You should not assume that the information in this prospectus, or any supplement to this prospectus, is accurate at any date other than the date indicated on the cover page of this prospectus or any supplement to it. Table of contents Summary about Fonix Corporation and this offering 2 Risk factors 5 Information about Fonix Corporation 12 Business 12 Management's discussion and analysis of financial condition and results of operations 18 Information concerning forward-looking statements 32 Market price of and dividends on Fonix Class A common stock 32 Selected financial data 33 Index to financial statements of Fonix Corporation 36 Use of proceeds 44 Selling shareholder 44 Plan of distribution 45 Regulation M 46 Experts 46 Legal matters 46 Additional information 47 Where
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000857073_hq_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000857073_hq_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d07c5ad8c9799456f08f1bcae80544e93e653521
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000857073_hq_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Baker & McKenzie LLP, New York, New York. Certain legal matters will be passed on for the underwriters by Graubard Miller, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000864683_cyberonics_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000864683_cyberonics_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..424efa05a517a49f247d480f93bee2f1112a69a3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000864683_cyberonics_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Vinson Elkins, L.L.P., Houston, Texas, will provide us with an opinion as to legal matters in connection with the notes and the common stock offered by this prospectus supplement.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000869498_ronco-corp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000869498_ronco-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fe65331ed295dc12b43613d6cc3fa4554c3b92fe
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000869498_ronco-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Stubbs Alderton Markiles, LLP, is rendering a legal opinion as to the validity of the shares of our common stock offered by this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000885280_mri_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000885280_mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000885280_mri_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000886328_e-digital_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000886328_e-digital_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f402068e797e424329dd3893a001a8fee2cbd682
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000886328_e-digital_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered will be passed on for the company by McConnell, Dunning & Barwick LLP, Aliso Viejo, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000888504_layne_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000888504_layne_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..541ad270999ba93f554cb5ed6734d98017e0a941
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000888504_layne_legal_matters.txt
@@ -0,0 +1 @@
+We have been and from time to time may be named as a defendant in legal actions claiming damages in connection with drilling or other construction projects and other matters. These are typically actions that arise in the normal course of business, including employment-related claims and contractual disputes or claims for personal injury or property damage that occur in connection with drilling or construction site services. To the extent that defending litigation or successful claims against us are not covered by insurance, our profit could decline, our liquidity could be significantly reduced and our operations could be impaired. If we must write off a significant amount of intangible assets or long-lived assets, our earnings will be reduced. Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial portion of our assets. Goodwill was approximately $78 million as of July 31, 2007. If we make additional acquisitions, it is likely that we will record additional intangible assets on our books. We also have long-lived assets consisting of property and equipment and other identifiable intangible assets of $244 million as of July 31, 2007 that are reviewed for impairment annually or whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If a determination that a significant impairment in value of our unamortized intangible assets or long-lived assets occurs, such determination would require us to write off a substantial portion of our assets, which would reduce our earnings. Difficulties integrating our acquisitions could lower our profit. From time to time, we have made acquisitions to pursue market opportunities, increase our existing capabilities and expand into new areas of operation. We plan to pursue select acquisitions in the future. If we are unable to complete acquisitions we have identified, our growth strategy could be impaired. In addition, we may encounter difficulties integrating our acquisitions and in successfully managing the growth we expect from the acquisitions. Furthermore, expansion into new businesses may expose us to additional business risks that are different from those we have traditionally experienced. Because we may pursue acquisitions around the world and may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays, including difficulties in employing sufficient staff and maintaining operational and management oversight. To the extent we encounter problems in identifying acquisition risks or integrating our acquisitions, our operations could be impaired as a result of business disruptions and lost management time, which could reduce our profit. 25 If we are unable to protect our intellectual property adequately, the value of our patents and trademarks and our ability to operate our business could be harmed. We rely on a combination of patents, trademarks, trade secrets and similar intellectual property rights to protect the proprietary technology and other intellectual property that is instrumental to our water and wastewater infrastructure, mineral exploration and energy operations. We may not be able to protect our intellectual property adequately, and our use of this intellectual property could result in liability for patent or trademark infringement or unfair competition. Further, through acquisitions of third parties, we may acquire intellectual property that is subject to the same risks as the intellectual property we currently own. We may be required to institute litigation to enforce our patents, trademarks or other intellectual property rights, or to protect our trade secrets from time to time. Such litigation could result in substantial costs and diversion of resources and could reduce our profit or disrupt our business, regardless of whether we are able to successfully enforce our rights. RISKS RELATED TO OUR COMMON STOCK The market price of our common stock could be lowered by future sales of our common stock. Sales by us or our stockholders of a substantial number of shares of our common stock in the public market following this offering, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. The shares held by our executive officers and directors following this offering will be subject to lock-up agreements and, subject to certain exceptions set forth in the lock-up agreements, may not be sold to the public during the 90-day period following the date of this prospectus without the consent of the underwriters. UBS Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated may, in their sole discretion and at any time without notice, release all or any portion of the shares subject to these lock-up agreements. For more information about these lock-up agreements, see "Underwriting." Shares held by our executive officers and directors will be considered "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended ("Securities Act") and, after the lock-up period, will be eligible for resale subject to certain limitations of Rule 144. In addition to outstanding shares eligible for future sale, as of July 31, 2007, 917,133 shares of our common stock were issuable under currently outstanding stock options granted to several officers, directors and employees under our stock option and employee incentive plans. Future sales of these shares of our common stock could decrease our stock price. Provisions in our organizational documents and Delaware law could prevent or frustrate attempts by stockholders to replace our current management or effect a change of control of our company. Our certificate of incorporation, bylaws and the Delaware General Corporation Law contain provisions that could make it more difficult for a third party to acquire us without consent of our board of directors. In addition, under our certificate of incorporation, our board of directors may issue shares of preferred stock and determine the terms of those shares of stock without any further action by our stockholders. Our issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby effect a change in the composition of our board of directors. Our certificate of incorporation also provides that our stockholders may not take action by written consent. Our bylaws require advance notice of stockholder proposals and 26 nominations, and permit only our board of directors, or authorized committee designated by our board of directors, to call a special stockholder meeting. These provisions may have the effect of preventing or hindering attempts by our stockholders to replace our current management. In addition, Delaware law prohibits us from engaging in a business combination with any holder of 15% or more of our capital stock until the holder has held the stock for three years unless, among other possibilities, our board of directors approves the transaction. Our board may use this provision to prevent changes in our management. Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future. We have approved a stockholders' rights agreement between us and National City Bank, as rights agent. Pursuant to this agreement, holders of our common stock are entitled to purchase one one-hundredth (1/100) of a share of Series A junior participating preferred stock at a price of $45 per share of preferred stock upon certain events. The purchase price is subject to appropriate adjustment for stock splits and other similar events. Generally, in the event a person or entity acquires, or initiates a tender offer to acquire, at least 25% of our then outstanding common stock, the rights will become exercisable for common stock having a value equal to two times the purchase price of the right. The existence of the Rights Agreement may discourage, delay or prevent a third party from effecting a change of control or takeover of our company that our management and board of directors oppose. In addition, provisions of Delaware law may also discourage, delay or prevent a third party from acquiring or merging with us or obtaining control of our company. Because we are a relatively small company, we are disproportionately negatively impacted by changes in federal securities laws and regulations, which are likely to increase our costs and require additional management resources. The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of the Sarbanes-Oxley Act, the SEC and NASDAQ have promulgated new rules and listing standards covering a variety of subjects. Compliance with these new rules and listing standards has significantly increased our legal and financial and accounting costs, and we expect these increased costs to continue. In addition, the requirements have taxed a significant amount of our time and resources. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly independent directors, or qualified executive officers. Because we are a relatively small company, we may be disproportionately impacted by these changes in federal securities laws and regulations. In addition, any qualifications on the report on our internal controls over financial reporting, could make it more difficult to raise funding for our operations or lower our stock price. As directed by the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies, including us, to include a report of management on the company's internal controls over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, the public accounting firm auditing our financial statements must attest to and report on the effectiveness of our internal controls over financial reporting. These reports currently exclude any assessment of the financial controls at the UIG business, which we acquired on November 20, 2006. We will include UIG in our evaluation of the design and effectiveness of internal control over financial reporting as of January 31, 2008. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of each fiscal year-end, investors could lose confidence in the reliability of our financial statements, which could lower our stock price. 27 We are restricted from paying dividends. We have not paid any cash dividends on our common stock since our initial public offering in 1992, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, our current credit arrangements restrict our ability to pay cash dividends. We may apply the proceeds of this offering to uses that do not improve our results of operations or increase the value of your investment. We anticipate that we will use the net proceeds from this offering to pay down the outstanding balance on our credit facility, for potential future acquisitions and for general corporate purposes, including, working capital and capital expenditures. The proceeds could be applied in ways that do not improve our results of operations or increase the value of your investment. Our share price could be volatile and could decline, resulting in a substantial or complete loss of your investment. Because the trading of our common stock is characterized by low trading volume, it could be difficult for you to sell the shares of our common stock that you may hold. The stock markets, including the NASDAQ Global Select Market, on which we list our common stock, have experienced significant price and volume fluctuations. As a result, the market price of our common stock could be similarly volatile, and you may experience a decrease in the value of the shares of our common stock that you may hold, including decreases unrelated to our operating performance or prospects. In addition, the trading of our common stock has historically been characterized by relatively low trading volume, and the volatility of our stock price could be exacerbated by such low trading volumes. The market price of our common stock could be subject to significant fluctuations in response to various factors or events, including among other things: >our operating performance and the performance of other similar companies; >actual or anticipated differences in our operating results; >changes in our revenue or earnings estimates or recommendations by securities analysts; >publication of research reports about us or our industry by securities analysts; >additions and departures of key personnel; >strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy; >the passage of legislation or other regulatory developments that adversely affect us or our industry; >speculation in the press or investment community; >actions by institutional stockholders; >changes in accounting principles; >terrorist acts; and >general market conditions, including factors unrelated to our performance. These factors may lower the trading price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the offering price to the public. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may lower the market price of our common stock. Issuance of unvested shares 24,576 375 (375 ) Amortization of unearned compensation 94 94 Issuance of stock upon exercise of options 60,247 1 346 347 Income tax benefit on exercise of options 227 227 Payment of notes receivable 28 Cash from continuing operations 19,923 40,841 74,676 Cash from (used in) discontinued operations (2,969 ) F-10 Cash flow from financing activities: Borrowings under revolving credit facilities 46,900 335,155 425,925 Repayments under revolving credit facilities (48,900 ) (266,255 ) (403,225 ) Issuance of long-term debt 20,000 Debt issuance costs (605 ) Payments on promissory note (1,740 ) (1,080 ) Issuance of common stock 347 3,324 3,010 Excess tax benefit on exercise of share-based instruments 1,382 Payments on notes receivable from management stockholders Legal matters The validity of the common stock offered by this prospectus will be passed upon for us by Stinson Morrison Hecker LLP, Kansas City, Missouri. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000890923_zoltek_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000890923_zoltek_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..53e6bc8ddad893ae3d35859acc0c7a07abe0c2ae
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000890923_zoltek_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Thompson Coburn LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000891504_tapestry_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000891504_tapestry_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c454750f8a5fd0073eb1cf5d75266f1d516a446f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000891504_tapestry_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Cooley Godward Kronish LLP, Broomfield, Colorado. Wilmer Cutler Pickering Hale and Dorr LLP is acting as counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000892449_venture_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000892449_venture_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..696a39a43ea41ec6bdad2a0501d62bdaf86c1b39
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000892449_venture_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Foster Pepper LLP, Portland, Oregon, has advised us in connection with this offering and will pass upon the validity of our common stock to be issued in this offering. Graham Dunn P.C., Seattle, Washington, will pass upon certain legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000929186_first_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000929186_first_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c4311c8e2a9276f1d7742036a6cdc716e7a3a80c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000929186_first_legal_matters.txt
@@ -0,0 +1 @@
+legal matters relating to this offering will be passed upon for the underwriters by Mayer, Brown, Rowe Maw LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000934795_everlast_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000934795_everlast_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fe8adc74cf15bb38a76ea46d5e1d00768c316bb4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000934795_everlast_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Olshan Grundman Frome Rosenzweig Wolosky LLP, New York, New York, will pass upon the validity of the shares of common stock offered by this prospectus and other legal matters for us. Faegre Benson LLP, Minneapolis, Minnesota, will pass upon certain legal matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000941553_compbenefi_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000941553_compbenefi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0786a1b0ded330446c7b077c3946cb2c727a4b9e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000941553_compbenefi_legal_matters.txt
@@ -0,0 +1 @@
+outstanding shares of common stock. Certain legal matters relating to this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000944136_tc-global_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000944136_tc-global_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5ae236007758e8609e5d36b577e2a47478dd6606
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000944136_tc-global_legal_matters.txt
@@ -0,0 +1 @@
+CERTAIN LEGAL MATTERS Stoel Rives LLP, Seattle, Washington, has advised us in connection with certain legal matters in connection with this offering, and will pass upon the validity of our common stock offered by this prospectus. Jones Day, Palo Alto, California, will pass upon certain legal matters in connection with this offering for the underwriter.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000947969_mango_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000947969_mango_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6d2f2f5da49a194e3a3305e81a6a1df2c9a4aa3f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000947969_mango_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock and the rights in this offering will be passed upon for MangoSoft, Inc. by Zukerman Gore & Brandeis, LLP of New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0000949373_einstein_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0000949373_einstein_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29076f0ad05062ea798a825ff2c1b5cae0bd7d2b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0000949373_einstein_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon for us by Holme Roberts Owen LLP, Denver, Colorado. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001002902_velocity_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001002902_velocity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9c610c3efb867505a0ca89caa7a31230f234ad08
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001002902_velocity_legal_matters.txt
@@ -0,0 +1,323 @@
+LEGAL MATTERS 
+ The validity of the issuance of the securities offered by this prospectus will be passed upon
+by Mark Carlesimo, our General Counsel and Secretary. 
+ 
+
+ 38 
+
+Table of Contents
+
+ 
+EXPERTS 
+ Velocity Express Corporation 
+ UHY LLP, an independent registered public accounting firm, audited our consolidated financial statements and schedule included in our Annual Report (Form 10-K) for the year ended July 1, 2006. Those financial
+statements and schedule are incorporated by reference in this prospectus in reliance on the report thereon of UHY LLP given on their authority as experts in accounting and auditing. 
+ Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements and schedule at July 2,
+2005 and for each of the two years in the period ended July 2, 2005 included in our Annual Report on Form 10-K for the year ended July 1, 2006, as set forth in their report, which is incorporated by reference into this prospectus and
+elsewhere in the registration statement. Our financial statements and schedule are incorporated by reference in reliance on Ernst & Young LLP s report, given on their authority as experts in accounting and auditing. 
+ CD&L, Inc. 
+ J.H. Cohn LLP, independent registered
+public accounting firm, has audited the consolidated financial statements of CD&L, Inc. as of and for the years ended December 31, 2005 and 2004 included in our Current Report on Form 8-K, filed July 10, 2006, as amended
+September 19, 2006, as set forth in their report, which is also included therein and incorporated by reference into this prospectus. CD&L, Inc. s consolidated financial statements are incorporated by reference in reliance on J.H. Cohn
+LLP s report, given on their authority as experts in accounting and auditing. 
+ The consolidated financial statements of CD&L, Inc.
+and subsidiaries for the year ended December 31, 2003 incorporated in this prospectus by reference from Velocity Express Corporation s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 10, 2006, as
+amended September 19, 2006, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance
+upon the report of such firm given upon their authority as experts in accounting and auditing. 
+ 
+WHERE YOU CAN FIND MORE INFORMATION 
+ We have filed with the SEC a registration statement on Form S-1 under
+the Securities Act that registers the shares of our common stock to be sold in this offering. The registration statement, including the attached exhibits and schedules, contains additional relevant information about us and our capital stock. The
+rules and regulations of the SEC allow us to omit from this prospectus certain information included in the registration statement. For further information about us and our common stock, you should refer to the registration statement and the exhibits
+and schedules filed with the registration statement. With respect to the statements contained in this prospectus regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the
+complete text of the agreement or document, a copy of which has been filed as an exhibit to the registration statement. 
+ We file reports,
+proxy statements and other information with the SEC under the Securities Exchange Act of 1934. You may read and copy this information from the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed
+rates. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us,
+that file electronically with the SEC. The address of that website is www.sec.gov. 
+ The SEC allows us to incorporate by
+reference the information we file with them, which means that we can disclose important information to you by referring you to those documents instead of having to repeat the 
+
+ 
+
+ 39 
+
+Table of Contents
+
+ 
+information in this prospectus. The information incorporated by reference is considered to be part of this prospectus. We incorporate by reference the
+documents listed below, which may also be accessed on our website at www.velocityexpress.com. Except as otherwise specifically incorporated by reference in this prospectus, information contained in, or accessible through, our website is not a part
+of this prospectus. 
+ 
+
+ 
+ 
+ 
+ our Annual Report on Form 10-K for the year ended July 1, 2006, filed with the SEC on October 13, 2006; 
+
+ 
+
+ 
+ 
+ 
+ our Quarterly Reports on Form 10-Q for the quarter ended September 30, 2006, filed with the SEC on November 11, 2006, the quarter ended December 30, 2006, filed
+with the SEC on February 13, 2007 and the quarter ended March 31, 2007, filed with the SEC on May 15, 2007; and 
+
+ 
+
+ 
+ 
+ 
+ our Current Reports on Form 8-K filed on July 6, 2006, July 10, 2006 (as amended September 19, 2006 and October 25,
+2006), July 21, 2006, July 26, 2006, August 8, 2006, August 23, 2006 (as amended September 19, 2006), September 14, 2006, October 24, 2006, November 13, 2006, December 27, 2006
+(as amended January 5, 2007), June 1, 2007, June 29, 2007 and July 25, 2007. 
+
+ Upon written or
+oral request, we will provide without charge to each person, including any beneficial owner, to whom this prospectus is delivered, a copy of any or all of such documents that are incorporated herein by reference (other than exhibits, unless such
+exhibits are specifically incorporated by reference herein). Written or oral requests for copies should be directed to Velocity Express Corporation, attention Mark Carlesimo, General Counsel and Secretary, One Morningside Drive North, Bldg. B, Suite
+300, Westport, Connecticut 06880, telephone number (203) 349-4160. 
+ 
+
+ 40 
+
+Table of Contents
+
+ 6,736,831 Shares 
+ 
+
+ 
+ Common Stock 
+ 
+ PROSPECTUS 
+ 
+ August 3, 2007 
+
+Table of Contents
+
+ PART II 
+ INFORMATION NOT REQUIRED IN PROSPECTUS 
+ 
+
+Item 13.
+Other Expenses of Issuance and Distribution 
+ The
+following table sets forth the various expenses payable by us in connection with the sale and distribution of the shares being registered. All amounts shown are estimates, except the SEC registration fee. 
+ 
+
+ SEC registration fee
+
+ 
+$
+178
+
+ Legal fees and expenses
+
+ 
+ $
+
+ 60,000
+
+ Accounting fees and expenses
+
+ 
+ $
+
+ 35,000
+
+ Miscellaneous (including listing fees)
+
+ 
+ $
+
+ 822
+
+ 
+ 
+ 
+
+ Total
+
+ 
+$
+96,000
+
+ 
+ 
+ 
+
+ Each selling stockholder will be responsible for any underwriting discounts, brokerage fees
+or commissions and taxes of any kind (including, without limitation, transfer taxes) with respect to any disposition, sale or transfer of the shares being registered and for any legal, accounting and other expenses incurred by such selling
+stockholder. 
+ 
+
+Item 14.
+Indemnification of Officers and Directors 
+ Section 145 of the General Corporation Law of the State of Delaware, or DGCL, empowers a Delaware corporation to indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed legal action,
+suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer or director of such corporation, or is or was serving
+at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and
+reasonably incurred by such person in connection with such action, suit or proceeding, provided that such officer or director acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation s best
+interests, and, for criminal proceedings, had no reasonable cause to believe his or her conduct was illegal. A Delaware corporation may indemnify officers and directors against expenses (including attorneys fees) in connection with the defense
+or settlement of an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an
+officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director actually and reasonably incurred. 
+
+Article Five of the by-laws of Velocity Express provides that Velocity Express may indemnify and hold harmless, to the fullest extent authorized by
+the DGCL, any person who is, or is threatened to be made, a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he or she is or was a director or an officer of Velocity Express
+or is or was serving at the request of Velocity Express as a director, officer, employee or agent of any other corporation or entity, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or
+agent or in any other capacity while serving as a director, officer, employee or agent, against all expense, liability and loss reasonably incurred by such indemnitee in connection with those proceedings. This right to indemnification includes the
+right to have Velocity Express advance the funds to cover expenses (including attorneys fees) incurred in defending any of those proceeding in advance of its final disposition; provided, however, that, if required by the DGCL, this expense
+advancement shall be made only upon delivery to Velocity Express of an undertaking by or on behalf of that indemnitee to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further
+right to appeal that such indemnitee is not entitled to be indemnified for such expenses. If a claim for indemnification under Velocity Express by-laws is not paid in full by the Company 
+
+ 
+
+ II-1 
+
+Table of Contents
+
+ 
+within thirty (30) days after a written claim has been received by Velocity Express, except in the case of a claim for an advancement of expenses, in
+which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against Velocity Express to recover the unpaid amount of the claim. In any suit brought by the indemnitee to enforce a right to
+indemnification or to an advancement of expenses hereunder, or brought by Velocity Express to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or
+to such advancement of expenses shall be on Velocity Express. 
+ Article Nine of the certificate of incorporation of Velocity Express limits
+the personal liability of the directors of Velocity Express for violations of their fiduciary duty. This provision eliminates each director s liability to Velocity Express or its shareholders for monetary damages except (i) for any breach
+of the director s duty of loyalty to Velocity Express or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
+providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions, or (iv) for any transaction from which a director derived an improper personal benefit. The effect of this provision is to
+eliminate the personal liability of directors for monetary damages for actions involving a breach of their fiduciary duty of care, including any such actions involving gross negligence. 
+ The Company maintains a directors and officers insurance policy. 
+ 
+
+Item 15.
+Recent Sales of Unregistered Securities 
+ On
+July 26, 2004, we approved the grant of warrants to purchase an aggregate of 41,534 shares of our common stock to certain contractors of our company for their prior and continued service to our company. These five-year warrants are exercisable
+at an exercise price of $0.50 per share. 
+ On February 14, 2005, we issued a warrant to purchase 193,552 shares of common stock, at an
+exercise price of $0.05 per share, to TH Lee Putnam Ventures, L.P. ( THLPV ) and its affiliates in return for its agreement to extend its obligations under the capital contribution agreement, dated July 1, 2004, for a period of two
+years. 
+ On September 7, 2005, we also authorized the granting of compensation warrants to certain members of our management, including
+Messrs. Drew Kronick, EVP Business Development, Wesley Fredenburg, Secretary and General Counsel, and certain other officers and key employees in consideration of their continued service to our company, totaling warrants for the purchase of 58,035
+shares of our common stock. These five-year warrants are exercisable at an exercise price of $2.72 per share. 
+ We created and issued our
+Series I Preferred, Series J Preferred, Series K Preferred and Series L Preferred, at our annual meeting on February 14, 2005. Descriptions of each of these series follow. Upon issuance of these securities, the holders of at least a two-thirds
+majority of the issued and outstanding Series I Preferred, Series J Preferred and Series K Preferred, voting as separate classes, consented to the amendment of the rights and preferences of each of the Series I Preferred, Series J Preferred and
+Series K Preferred, respectively, to (1) make them automatically convert into common stock upon the conversion of our Series B Preferred into common stock, and (2) remove the limitation on conversion into common stock which limited
+conversion to the extent that such conversion would result in the holder of the preferred stock, together with the holder s affiliates, holding 40% or more of all of the outstanding capital stock of our company on an as-converted basis.
+
+ Series J Preferred: From March 2004 through July 2004, we entered into stock purchase agreements with 42 accredited investors to sell
+shares of Series J Preferred for aggregate consideration of approximately $12,000,000. The designation of this series was subsequently amended to provide for a mandatory conversion of such series of preferred stock into common stock upon the
+conversion of our Series B Preferred into common stock. 
+ 
+
+ II-2 
+
+Table of Contents
+
+ Series K Preferred: From August 2004 through December 2004, we entered into stock purchase agreements
+with four accredited investors to sell shares of Series K Preferred for aggregate consideration of approximately $14,777,200. The designation of this series was subsequently amended to provide for a mandatory conversion of such series of preferred
+stock into common stock upon the conversion of our Series B Preferred into common stock. 
+ Series L Preferred: On December 21, 2004, we
+entered into stock purchase agreements with four accredited investors to sell 7,000,000 shares of Series L Preferred for aggregate consideration of approximately $7,000,000. Upon the conversion of 100% of the Series B Preferred into common stock,
+the Series L Preferred automatically be converted into common stock. 
+ On February 15, 2005, all of the outstanding Series B Preferred
+shares were tendered for conversion into common stock. Upon conversion of the Series B Preferred, all outstanding classes of preferred stock of our company automatically converted into common stock at their respective conversion ratios. 
+
+We created our Series M Preferred on February 15, 2005, and issued 6,271,567 Series M Preferred upon tender of the Notes (described below) for
+conversion, including 54,471 PIK shares of Series M Preferred, as contemplated by the related purchase agreement. A description of this series follows. 
+ Series M Preferred: On December 21, 2004, we entered into a purchase agreement with certain institutional and accredited investors, under which we issued 6% Convertible Notes (the Notes ) in the
+aggregate principal amount of $21,000,000. Approximately $18,000,000 of the Notes were placed with three lead institutional investors and the remaining $3,000,000 of Notes were placed with THLPV and its affiliates, Vincent Wasik, our Chief Executive
+Officer and Chairman of the Board, and other accredited investors. The sale of the Notes extended from December 21, 2004 into January 2005. We sold an additional $1,910,000 in principal amount of the Notes on January 31, 2005 in a private
+placement to certain holders of our preferred stock. The Series M Preferred has rights that include cumulative PIK dividends of six percent per annum, preferences in liquidation, the right of conversion into common stock at $3.685 per share, and
+voting rights, including the right to vote with holders of common stock as well as to vote as a separate group to elect one director. In the event of any liquidation or winding up of our company, the holders of the Series M Preferred shall rank
+senior to the holders of the Series N Preferred and the Series O Preferred, and on parity with the holders of the Series P Preferred and will be entitled to a preference on liquidation equal to one times (1x) the original purchase price of the
+Series M Preferred plus accrued and unpaid dividends. 
+ As part of the payment for services rendered by TerraNova in facilitating the sale
+of the Series M Preferred, we sold to TerraNova for $3.685 warrants to purchase 97,693 shares of Series M Preferred. These TerraNova Warrants have a term of five years and may be exercised at any time prior to expiration by its holder for shares of
+Series M Preferred, with an exercise price per share equal to that of the Series M Preferred. 
+ Pursuant to a stock purchase agreement
+entered into on April 28, 2005, we sold 2,544,097 shares of Series N Preferred for $3.685 per share for net proceeds of approximately $9,375,000. Each share of Series N Preferred is convertible into one share of our common stock, and had an
+initial conversion price of $3.685 per share subject to certain adjustments. The proceeds were to be used for general working capital needs. The Series N Preferred is entitled to receive a PIK dividend at the rate of six percent per annum of the
+Series N Preferred stated value of $3.685 per share. Upon any liquidation, dissolution or winding up of the Company the holders of the shares of Series N Preferred shall rank senior to the holders of the Common Stock and holders of the Series O
+Preferred, but junior to the holders of the Series M Convertible Preferred Stock and the Series P Preferred, as to such distributions, and shall be entitled to be paid an amount per share equal to the Series N Preferred stated value plus any accrued
+and unpaid dividends. The approval of shareholders holding at least 62.5% of the outstanding shares of the Series N Preferred is required for certain significant corporate actions, including mergers and sales of substantially all of our assets.
+
+ 
+
+ II-3 
+
+Table of Contents
+
+ On July 20, 2005, we entered into stock purchase agreements for the sale of 1,400,000 shares of
+Series O Preferred in exchange for aggregate gross proceeds of approximately $5,600,000. The Series O Preferred is entitled to receive in preference to holders of all other classes of stock, other than holders of the Series M Preferred and the
+Series N Preferred, a PIK dividend at the rate of six percent per annum of the Series O Preferred stated value. Upon any liquidation, dissolution or winding up of the Company, the holders of the shares of Series O Preferred shall rank senior to the
+holders of the Common Stock, but junior to the holders of the Series M Convertible Preferred Stock, the Series N Convertible Preferred Stock and the Series P Preferred, as to such distributions, and shall be entitled to be paid an amount per share
+equal to the Series O Preferred stated value plus any accrued and unpaid dividends (the Liquidation Preference ). In addition to being junior to the Series M Convertible Preferred Stock and Series N Convertible Preferred Stock from the
+standpoint of liquidation, the Series O Preferred also has reduced voting rights. For example, the approval of at least 62.5% of the outstanding shares of Series O Preferred is not required in order for us to merge, dispose of substantial assets,
+engage in affiliate transactions, pay dividends, authorize new stock options plans, license or sell our intellectual property or change the number members of our board of directors. Each of the shareholders has the right, at its option at any time,
+to convert any such shares of Series O Preferred into such number of fully paid and nonassessable whole shares of common stock as is obtained by multiplying the number of shares of Series O Preferred so to be converted by the liquidation preference
+per share and dividing the result by the conversion price of $4.00 per share, subject to certain adjustments. 
+ On October 14, 2005, we
+entered into stock purchase agreements with one group of institutional investment funds and one accredited investor. The stock purchase agreements provide for the private placement of 3,099,513 shares of Series P Preferred in exchange for aggregate
+gross proceeds of approximately $10,352,370. The Series P Preferred has a term of three years and is entitled to receive a dividend at the rate of eight percent per annum of the Series P Preferred stated value, payable quarterly, in cash or PIK
+shares of Series P Preferred at our option. Effective July 3, 2006, the holders of Series P Preferred consented to reduce the dividend rate to six percent per annum. Under certain events of default, the interest rate will convert to 18%. To the
+extent that the issuance of such PIK shares would result in us issuing in excess of 20% of our outstanding common stock, the issuance will require the prior approval of our shareholders. Upon any liquidation, dissolution or winding up of our
+company, the investors of the shares of Series P Preferred will rank on parity with the holders of our Series M Preferred. Each of the investors has the right, at its option at any time, to convert any shares of Series P Preferred into shares of
+common stock at the conversion price of $3.34 per share subject to certain adjustments. At any time after the effective date of this registration statement and (i) prior to the termination date of the Series P Preferred, or (ii) upon a
+change of control, we shall have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred by tendering to the investors 130% of the stated value of the outstanding Series P Preferred together with all accrued
+dividends. At the termination date of the Series P Preferred, we will have the right, but not the obligation, to redeem all or a portion of the shares of Series P Preferred by tendering to the investors 100% of the conversion price together
+with all accrued but unpaid dividends. In the event that we elect to redeem the Series P Preferred prior to the effectiveness of this registration statement, we may redeem the Series P Preferred by paying to the investors the greater of:
+(1) 130% of the outstanding stated value of the Series P Preferred plus accrued dividends, and (2) 100% of the stated value of the Series P Preferred plus all accrued dividends, plus 50% of the difference between the conversion price then
+in effect and the average closing price of our common stock for the 30 calendar days preceding such redemption. Each investor also received an A Warrant and B Warrant, each a warrant to purchase 20% of the amount of Series P Preferred
+purchased. The exercise of the A Warrant and B Warrant are subject to the prior approval of our stockholders. The exercise price for both warrants is $4.00, subject to adjustment. Additionally, the B Warrant is only exercisable in the event that
+this registration statement is not declared effective within 270 days of closing. Because the registration statement was declared effective within 270 days, the B Warrant is no longer exercisable. We have has the option to redeem the A Warrants in
+the event that our common stock maintains a closing price of at least $7.00 for twenty consecutive trading days. 
+ On December 8, 2005,
+we awarded (1) a warrant to purchase 245,899 shares of common stock to Vincent Wasik, our Chief Executive Officer, (2) a stock option for the purchase of 450,000 shares of common stock to 
+
+ 
+
+ II-4 
+
+Table of Contents
+
+ 
+Jeffrey Hendrickson, our President and Chief Operating Officer, (3) a stock option to purchase 100,000 shares of common stock Daniel DeFazio, our Chief
+Financial Officer, (4) a stock option for the purchase of 50,000 shares of common stock to Drew Kronick, our Executive Vice President, Sales, (5) a stock option for the purchase of 250,000 shares of common stock to Wesley Fredenburg, our
+Secretary and General Counsel, and (6) stock options for the purchase of an aggregate of 280,000 shares of common stock to other key employees. The foregoing warrant and options were issued under our 2004 Stock Incentive Plan. The warrant to
+Mr. Wasik vests to the extent of 100% on December 31, 2006. The options vest to the extent of 50% on December 31, 2006 and 50% on December 31, 2007. The warrant and the options are exercisable at $2.56 per share, which was the
+closing price of our common stock on the Nasdaq Stock Market on December 8, 2005. The warrant expires on December 8, 2010 and the options expire on December 8, 2008. 
+ On December 12, 2005, under a settlement agreement and mutual release entered into as of December 7, 2005 with Banc of America Commercial Finance
+Corporation, Banc of America Leasing & Capital, LLC, John Hancock Life Insurance Company, Hancock Mezzanine Partners, L.P., Charles F. Short, III, Sidewinder Holdings, Ltd. and Sidewinder, N.A., Ltd , we issued 500,000 shares of common
+stock to accredited investors. We registered the resale of the common stock with the SEC. Additionally, if our common stock does not maintain a minimum price of at least $6.00 per share for five consecutive trading days during the 12-month period
+following the effective date of that registration statement, we will be required to deliver additional shares of common stock to achieve the original value of $6.00 per share. This registration statement covers the resale, in part, of those
+securities. 
+ On July 3, 2006, under a stock purchase agreement, the Company issued 4,332,770 shares of Series Q Preferred Stock, which
+are convertible into an aggregate of 39,388,818 shares of the Company s common stock. Of the amount of Series Q Preferred Stock issued, 4,000,000 shares were sold for $10.00 per share, and 332,770 were issued in consideration of services. In
+addition, the Company sold 75,000 units, each of which was comprised of (a) $1,000 aggregate principal amount at maturity of 12% Senior Secured Notes and (b) a warrant to purchase 345 shares of our common stock at an initial exercise price
+of $1.45 per share. In connection with the Company s acquisition of CD&L Series A Preferred Stock, common stock and warrants, the Company issued 3,205 units. The Company also issued warrants to purchase 797,500 shares of common stock to the
+TH Lee Parties in consideration of services provided to the Company. The warrants issued to the TH Lee Parties are exercisable at $0.01 per share. On July 3, 2006, the Company issued 2,465,418 shares of common stock to an investor in CD&L,
+in exchange for the following securities of CD&L: 656,170 shares of CD&L Series A Preferred Stock; 328,084 shares of CD&L common stock; and a Warrant for the purchase of 84,375 shares of common stock of CD&L. The Company engaged
+Broadband Capital Management, LLC ( Broadband ) as lead agent in connection with the sale of the Series Q Preferred Stock and, in addition to cash compensation, issued to Broadband 55,840 shares of Series Q Preferred Stock. The Company
+engaged Jefferies & Company, Inc. ( Jefferies ) as lead agent in connection with sale of the units and, in addition to cash compensation, issued to Jefferies 102,680 shares of Series Q Preferred Stock. 
+ On August 17, 2006, we issued (a) 71,942 shares of common stock and a five-year warrant for the purchase of 133,334 shares of common stock at
+$1.50 per share to Thomas E. Durkin, III, (b) 117,827 shares of common stock and a five-year warrant for the purchase of 133,333 shares of common stock at $1.50 per share to Paul V. Scura, (c) 13,981 shares of common stock and a five-year
+warrant for the purchase of 13,333 shares of common stock at $1.50 per share to P. Carter Rise, (d) 13,981 shares of common stock and a five-year warrant for the purchase of 13,333 shares of common stock at $1.50 per share to Denis Kelly,
+(e) 71,000 shares of common stock and a five-year warrant for the purchase of 93,334 shares of common stock at $1.50 per share to Robert Aiello, and (f) 13,981 shares of common stock and a five-year warrant for the purchase of 13,333
+shares of common stock at $1.50 per share to Mathew Vertin. The issuance to Mr. Durkin was in consideration of advisory services in connection with the CD&L merger. Each of the other issuances was in consideration of the provision by Scura
+Rise Partners of advisory services in connection with the CD&L merger. 
+ On August 22, 2006, the Company sold an additional 500,000
+shares of Series Q Preferred Stock, which are convertible into an aggregate of 4,545,454 shares of the Company s common stock, for $10.00 per share. In connection with such sale, we paid aggregate commissions totaling $372,000. 
+ 
+
+ II-5 
+
+Table of Contents
+
+ On November 7, 2006, Velocity Express Corporation (the Company ) and Meritage Capital
+Advisors LLC ( Meritage ) entered into a letter agreement (the 2006 Letter Agreement ), pursuant to which the Company and Meritage agreed to amend certain terms of their letter agreement dated September 1, 2005 (the
+ 2005 Letter Agreement ). Pursuant to the 2006 Letter Agreement, the Company agreed, as consideration for the financial advisory services Meritage provided to the Company pursuant to the 2005 Letter Agreement, to (i) pay to Meritage
+$150,000 in cash, (ii) issue 45,000 shares of the Company s Series Q Convertible Preferred Stock $0.004 par value per share (the Series Q Preferred ) and (iii) reimburse Meritage for certain out-of-pocket expenses. The
+Series Q Preferred are initially convertible into 9.0909 shares of the Company s common stock, $0.004 par value per share (the Series Q Conversion Shares ) at an initial conversion price of $1.10 per share, subject to adjustment. The
+issuance of the 45,000 shares of Series Q Preferred to Meritage and our agreement to register the resale of the Series Q Conversion Shares was initially disclosed in our Current Report on Form 8-K filed on July 10, 2006 and was previously
+approved by the Company s stockholders in connection with the CD&L, Inc. acquisition and other related transactions. This registration statement covers the resale, in part, of the common stock underlying these shares, which are now owned by
+the applicable
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001003472_paincare_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001003472_paincare_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..916708434067cde99aa59b499c30935ed77b2755
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001003472_paincare_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Arnstein & Lehr LLP, Ft. Lauderdale, Florida, will pass upon the validity of the securities offered in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001007508_affinity_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001007508_affinity_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a6638d3b4cfe1e7938b29108b55e60c308c01756
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001007508_affinity_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares offered hereby will be passed upon for us by Robinson, Bradshaw & Hinson, P.A., 101 North Tryon Street, Suite 1900, Charlotte, North Carolina 28246.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001007800_sipex-corp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001007800_sipex-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d72c896c036529d289a4da61e86c52af2245b970
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001007800_sipex-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered by this prospectus will be passed upon for us by Wilson Sonsini Goodrich Rosati, Professional Corporation, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001012697_insight_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001012697_insight_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001012697_insight_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001023734_bpz_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001023734_bpz_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ee5f76baa6b36def458c431cd33d2b1bb7450a05
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001023734_bpz_legal_matters.txt
@@ -0,0 +1,45 @@
+LEGAL MATTERS
+
+The validity of
+the shares of common stock registered in this offering will be passed upon for
+the selling security holders by the law firm of Adams and Reese LLP.
+
+EXPERTS
+
+Our consolidated
+balance sheets as of December 31, 2006 and 2005 and the consolidated statements
+of operations, stockholders equity (deficit) and cash flows for each of the
+three years in the period ended December 31, 2006, and for the period from
+August 20, 2001 (Inception) through December 31, 2006 in this prospectus have
+been audited by Johnson Miller & Co., CPA s PC, independent registered
+public accountants, to the extent and for the periods set forth in their
+report, and are set forth in this prospectus in reliance upon such report given
+upon the authority of them as experts in auditing and accounting.
+
+SECURITIES AND EXCHANGE COMMISSION
+POSITION ON CERTAIN INDEMNIFICATION
+
+The Colorado
+Business Corporation Act provides for indemnification by a corporation of costs
+incurred by directors, employees, and agents in connection with an action,
+suit, or proceeding brought by reason of their position as a director,
+employee, or agent. The person being indemnified must have acted in good faith
+and in a manner he or she reasonably believed to be in or not opposed to the
+best interests of the corporation.
+
+Our Articles of
+Incorporation obligate us to indemnify our directors and officers to the
+fullest extent permitted under Colorado law. Insofar as indemnification for
+liabilities arising under the Securities Act may be permitted to directors,
+officers or persons controlling us pursuant to the foregoing provisions, we
+have been advised that, in the opinion of the SEC, such indemnification is against
+public policy as expressed in the Securities Act and is therefore
+unenforceable.
+
+ 56
+ 
+
+WHERE YOU CAN FIND MORE INFORMATION
+
+This prospectus is
+part of a Registration Statement on
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001027702_epix_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001027702_epix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ce3d9468a6ec9273c0d65af915446f4694fa3f3e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001027702_epix_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS 30
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001032067_meade_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001032067_meade_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9b6c833e2133dd41bf8fc415a16ba31758dacba3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001032067_meade_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for the Company by Hewitt & O Neil LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001038099_precision_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001038099_precision_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e955a8ba57871bb0f90424d40db68d61180cadbf
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001038099_precision_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, Reston, Virginia. The underwriters are being represented by Latham & Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001041954_itc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001041954_itc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4167672659a4f0e6898d9bfb666cced987c004a2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001041954_itc_legal_matters.txt
@@ -0,0 +1,159 @@
+LEGAL MATTERS 
+ The validity of the subscription rights and the common stock issuable upon exercise of the
+rights will be passed upon for us by Hogan & Hartson L.L.P. 
+ 
+EXPERTS 
+ The consolidated balance sheets of ITC^DeltaCom, Inc. and subsidiaries as of December 31, 2006
+and 2005, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006, and the related financial statement schedules, have been
+incorporated by reference herein in reliance upon the reports of BDO Seidman, LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.
+
+ 
+
+ 56 
+
+Table of Contents
+
+ INFORMATION NOT REQUIRED IN PROSPECTUS 
+ 
+
+Item 13.
+Other Expenses of Issuance and Distribution 
+ The
+following table sets forth an estimate of the costs and expenses payable by ITC^DeltaCom, Inc. (the Registrant ) in connection with the issuance and distribution of the securities being registered: 
+ 
+
+ SEC registration fee
+
+ 
+$
+1,266
+
+ Printing expenses
+
+ 
+ 
+45,000
+
+ Accounting fees and expenses
+
+ 
+ 
+110,000
+
+ Legal fees and expenses
+
+ 
+ 
+150,000
+
+ Subscription and information agent fees and expenses
+
+ 
+ 
+20,000
+
+ Valuation expenses
+
+ 
+ 
+100,000
+
+ Miscellaneous expenses
+
+ 
+ 
+3,734
+
+ 
+ 
+ 
+
+ Total
+
+ 
+$
+430,000
+
+ 
+ 
+ 
+
+ 
+
+Item 14.
+Indemnification of Directors and Officers 
+ Delaware General Corporation Law. The Registrant is a Delaware corporation subject to the applicable indemnification provisions of the General Corporation Law of the State of Delaware (the Delaware General Corporation
+Law ). Section 145(a) of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or
+proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was
+serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid
+in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the
+corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a
+plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation,
+and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person s conduct was unlawful. 
+ Section 145(b) of the Delaware General Corporation Law states that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the
+right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer,
+employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys fees) actually and reasonably incurred by the person in connection with the defense or settlement of such
+action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or
+matter as to which the person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that,
+despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the Delaware Court of Chancery or such other court shall deem proper. 
+
+Section 145(c) of the Delaware General Corporation Law provides that to the extent that a present or former director or officer of a corporation
+has been successful on the merits or otherwise in defense of any action, suit or 
+
+ 
+
+ II-1 
+
+Table of Contents
+
+ 
+proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, such person shall be
+indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith. 
+ Section 145(d) of the Delaware General Corporation Law states that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the
+specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and
+(b) of Section 145. Such determination shall be made with respect to a person who is a director or officer at the time of such determination (1) by a majority vote of the directors who are not parties to such action, suit or
+proceeding, even though less than a quorum, (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, (3) if there are no such directors, or if such directors so direct, by
+independent legal counsel in a written opinion, or (4) by the stockholders. 
+ Section 145(f) of the Delaware General Corporation
+Law states that the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of
+expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office. 
+
+Section 145(g) of the Delaware General Corporation Law provides that a corporation shall have the power to purchase and maintain insurance on
+behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust
+or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such
+person against such liability under the provisions of Section 145. 
+ Section 145(j) of the Delaware General Corporation Law states
+that the indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or
+agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 
+ Certificate of Incorporation. The
+Registrant s restated certificate of incorporation filed as Exhibit 3.1 hereto provides that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as
+a director except for liability (i) for any breach of the director s duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of
+law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived any improper personal benefit. 
+ Bylaws. The Registrant s amended and restated bylaws provide for the indemnification of the officers and directors of the Registrant to the
+fullest extent permitted by the Delaware General Corporation law. The Registrant s amended and restated bylaws provide that the Registrant shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently
+exists or as it may be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he, or
+a person for whom he is the legal representative, is or was a director or officer of the Registrant or, while a director or officer of the Registrant, is or was serving at the request of the Registrant as a director, officer, employee or agent of
+another entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys fees) reasonably incurred by such person. The Registrant s amended and restated bylaws
+provide that the Registrant shall indemnify any such person in connection with a proceeding commenced by such person only if the commencement of such proceeding was authorized by the board of directors of the Registrant, 
+
+ 
+
+ II-2 
+
+Table of Contents
+
+ 
+except for the commencement of an action by such person to recover the unpaid amount of a claim for indemnification or advancement of expenses that is not
+paid in full within thirty (30) days after receipt by the Registrant. 
+ Insurance. The Registrant maintains directors and
+officers liability insurance, which covers directors and officers of the Registrant against certain claims or liabilities arising out of the performance of their duties. 
+ WCAS Stock Purchase Agreement Provisions. In connection with the recapitalization transactions, on July 31, 2007 the Registrant entered into a Stock Purchase Agreement with investment funds
+and other persons affiliated or associated with Welsh, Carson, Anderson & Stowe (the WCAS Securityholders ), pursuant to which the WCAS Securityholders purchased an aggregate of $21 million of the Registrant s common stock
+(the WCAS Purchase Agreement ). The WCAS Purchase Agreement provides that, subject to specified limitations and exceptions, the Registrant will indemnify and hold harmless the WCAS Securityholders and their respective officers, directors,
+employees, agents and controlling persons from any liabilities or damages arising in connection with claims or proceedings instituted by a third party in connection with the WCAS Purchase Agreement or the rights offering. 
+ 
+
+Item 15.
+Recent Sales of Unregistered Securities 
+ The
+following is a
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001043382_solutia_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001043382_solutia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e826ff1a80a7c74a75217851927c4c234f348446
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001043382_solutia_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS 40
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001044435_p10_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001044435_p10_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9b770daa72ea2783d693f44d0ed2fc66ee64ad0b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001044435_p10_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon by Andrews Kurth LLP, Austin, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001054303_direct_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001054303_direct_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0b7ef5107e1304dd78a4ad58cd4a04a9869cfc32
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001054303_direct_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares offered by this prospectus will be passed upon for us by Morse, Zelnick, Rose & Lander, LLP, New York, New York. A member of the firm owns 14,922 shares of common stock and 3,391 Warrants. Skadden, Arps, Slate, Meagher & Flom LLP will pass upon certain matters for the underwriters named in this prospectus in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001062536_zars_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001062536_zars_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f47b467c4d7de0641dfb601853c02295484b08ae
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001062536_zars_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Cooley Godward Kronish LLP, Broomfield, Colorado. Certain legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich Rosati, Professional Corporation, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001062781_ultrapetro_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001062781_ultrapetro_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..687be19f6d1c8e5d72fa96408c1152853970ccc7
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001062781_ultrapetro_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the common stock will be passed upon for us by Higgs & Johnson, Nassau, Bahamas. Certain legal matters are passed upon for us by Seward & Kissel LLP, New York, New York with respect to matters of U.S. and New York law. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001066833_euthymics_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001066833_euthymics_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..27b5d32c7e879d54edfb862be371e3c03e215023
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001066833_euthymics_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Goodwin Procter LLP is acting as our counsel. As of the date of this prospectus, a member of Goodwin Procter LLP owns or beneficially owns an aggregate of 60,000 shares of our common stock, 66,000 warrants to purchase shares of our common stock and holds options to purchase an additional 40,500 shares of our common stock. All of such options are exercisable.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001067550_aki_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001067550_aki_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29cf8ef340709440c078fa214e50a7e124b1b375
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001067550_aki_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and the guarantees have been passed upon by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon: (1) the opinion of Sheri K. Hank, counsel to Jostens, Inc., as to all matters governed by the laws of the State of Minnesota; (2) the opinion of Cozen O'Connor concerning The Lehigh Press, Inc. as to (a) its due incorporation and subsistence, (ii) its due authorization of the Indenture and (b) the non-contravention of certain Pennsylvania statutes, rules, regulations and orders; and (3) the opinion of Calfee, Halter & Griswold LLP, as to all matters governed by the laws of the State of Ohio. An investment vehicle comprised of selected partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others owns an interest representing less than 1% of the capital commitment of funds controlled by KKR.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001068806_viewsonic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001068806_viewsonic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..635155c96244a783796d18bd24150eae30af0faa
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001068806_viewsonic_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, Palo Alto, California. The underwriters are being represented by Davis Polk & Wardwell, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001078203_stamford_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001078203_stamford_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..634a7035387c6673cf9d138400d641e125dcc632
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001078203_stamford_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereunder will be passed upon for us by Kane Kessler, P.C., 1350 Avenue of the Americas, New York, New York 10019.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001080131_internet_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001080131_internet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..090bb928ec48884e5c134dcfb1646e7dca161725
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001080131_internet_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Class A common stock offered hereby will be passed upon for us by Munger, Tolles & Olson LLP, Los Angeles, California. The underwriters have been represented in connection with this offering by Davis Polk & Wardwell, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001081078_api_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001081078_api_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..87d52b1b4ef2822e2bd5eb2813f696b0b311d1dc
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001081078_api_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents Compensation Of Directors There are no standard arrangements for the compensation of our directors. There were no other arrangements pursuant to which any director of the Company was compensated during the Company s fiscal year ended January 31, 2006. Nanotronics Sub has no standard or other arrangements for the compensation of its directors. We pay Donald A. Wright a quarterly fee of $2,500 for his services as a director. Mr. Wright became a director in February 2006. His compensation arrangement became effective in March 2006. In March 2006, Mr. Wright received options to purchase 25,000 shares of our common stock. We expect to compensate our directors in the future. At this time, other than with respect to Donald A. Wright, no decision has been made as to the appropriate compensation for directors. Compensation of Directors of API During the Financial Year Ended May 31, 2006 No directors of API were compensated in cash by API or any of its subsidiaries during the financial years ended May 31, 2006, 2005 or 2004, for their services in their capacity as directors. Two of our directors were issued options to purchase shares of our common stock during the fiscal years ended May 31, 2006, 2005 and 2004, which are described above. Employment Contracts And Termination Of Employment And Change In Control Arrangements 1. We had a compensation agreement with Guy Peckham who was at the time we entered into the agreement, our sole officer. Pursuant to the agreement we paid Mr. Peckham $5,000 per month for his services as our President. Mr. Peckham resigned as an officer and director as of the effective date of the Business Combination. Other than our agreement with Mr. Peckham, prior to the effective date of the Business Combination, there were and of the date of this Prospectus there are no employment contracts or similar agreements between us and any executive officer listed above. 2. There are no compensatory plans or arrangements, including payments to be received from us, with respect to any executive officer named above, which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person s employment with us or its subsidiaries, or any change in control of us, or a change in the person s responsibilities following a change in control of us. Table of Contents Changes In Control We know of no other arrangements, including the pledge by any person of our securities or the Exchangeable Shares of Nanotronics Sub, the operation of which may at a subsequent date result in a change of control of us. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions With Management And Others With Respect To API Since June 1, 2003 to the date of this prospectus, API has been involved in the following material transactions or series of similar transactions and the following proposed transactions or series of similar proposed transactions, in which the amount involved exceeds $120,000, and in which any director or executive officer, or any security holder who was known by API (at the time) to own of record or beneficially more than 5% of any class of API s common stock, or any member of the immediate family of any of the foregoing persons, has an interest. API was a party to an oral agreement with Can- Med Technology, Inc. d/b/a Green Diamond Oil Corp., a shareholder of API that is controlled by Jason DeZwirek, the Vice-Chairman, Secretary and a director of API, and Phillip DeZwirek, the Chairman, Chief Executive Officer, Treasurer and a director of API. For the fiscal year ended May 31, 2005, the agreement provided that Green Diamond would provide executive office space, office equipment and supplies, telecommunications, personnel and management services to API for an annual fee of $180,000 (plus certain expenses). We have assumed API s obligations under the oral agreement with Green Diamond. From June 1, 2006 through July 31, 2006, API has paid Green Diamond $16,350 for such services. During the years ended May 31, 2006 and 2005, API paid Green Diamond Oil Corp. $183,364 per year for such services. During the year ended May 31, 2004, API had entered into a written Management Services Agreement with Green Diamond. The Management Services Agreement provided that Green Diamond would provide executive office space, office equipment and supplies, telecommunications, personnel and management services to the Company for an annual fee of $180,000, plus certain expenses. During the fiscal year ended May 31, 2004, API paid Green Diamond $178,228 for such services. During the years ended May 31, 2006, 2005 and 2004, API paid Jason DeZwirek for consulting services $61,285, $57,154 and $53,623. These consulting services consisted of overseeing the financial and administrative operations of API. During fiscal year 2006, API sold shares of CECO had previously acquired for a net gain of $81,460. These shares had been originally purchased and were later sold in open market transactions. Phillip DeZwirek and Jason DeZwirek serve as directors of CECO. Certain of our bank debt of is guaranteed by Thomas W. Mills. See Note 17 to the Financial Statements of API included in this prospectus. Transactions With Management And Others With Respect To API Nanotronics On January 24, 2007 we borrowed $6,000,000 from Green Diamond in order to fund our proposed purchase of the stock of National Hybrid, Inc., a New York corporation, and Pace Technology, Inc., a Florida corporation, from the Estate of Benedict Pace, and to provide us with additional working capital. This loan is evidenced by a promissory note (the Note ) in favor of the Lender. The Note bears interest at 12% per annum and with interest payable semi-annually. The principal amount of the Note is due five years and one month from the date on which it was made and may be prepaid at any time at our option without penalty. As of February 2, 2007, no prinicipal has been repaid nor any interest paid on the Note. The Note is not presently secured. However, if the Note is not repaid within three months of the date when the Note was made, the Lender may require that the Company and any of its subsidiaries enter into security agreements or other documents to grant the Lender a security interest in the assets of the Company and such subsidiaries. Phillip DeZwirek, a director and the Chairman, Chief Executive Officer and Treasurer of the Company, is the President of the Lender and holds a 50% equity interest in Icarus Investments Corp., which in turn holds a 50.1% equity interest in the Lender. Jason DeZwirek, a director and the Secretary of the Company, owns the other 50% of the equity of Icarus Investments Corp. The Lender owns 2,611,780 Exchangeable Shares. Phillip DeZwirek owns directly 4,499,960 Exchangeable Shares and a warrant to purchase 2,500,000 shares of our common stock. Jason DeZwirek owns directly 3,675,000 Exchangeable Shares and a warrant to purchase 2,500,000 shares of our common stock. Additionally, the shares owned by the Lender may be attributed to both Phillip DeZwirek and Jason DeZwirek. The terms of the loan were approved by a special committee of the board of directors of the Company consisting of the directors not affiliated with the Lender, Thomas Mills and Donald Wright. Table of Contents Except as disclosed above, there were no other material transactions, or series of similar transactions, during our fiscal years ended January 31, 2004, 2005 and 2006, or any present or currently proposed transactions, or series of similar transactions, to which we or Nanotronics Sub were or are to be a party, in which the amount involved exceeds $120,000, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest. Indebtedness Of Management With Respect To API Nanotronics, and API None of the following persons: any director or executive officer of ours or API s, respectively, or any security holder who is known by us or API to own of record or beneficially more than 5% of the common shares of our capital stock or the capital stock of API, respectively, or any member of the immediate family of any of the foregoing persons, or any corporation or organization (other than us or API s or a subsidiary of ours or API s) of which any director or executive officer of ours or API s or nominee for director of ours or API s is an executive officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities, has been indebted to us or any of our subsidiaries or to API or any of API s subsidiaries, with respect to us, since February 1, 2003 and with respect to API since June 1, 2003, in an amount in excess of $120,000. The Company has no set policies or procedures with respect to related party transactions and they are dealt with on a case by case basis. EXPERTS The consolidated financial statements of API Electronics Group Corp. included in this Prospectus and in the Registration Statement have been audited by BDO Dunwoody LLP, an independent registered public accounting firm, to the extent and for the periods set forth in their report appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. The financial statements of Keytronics for the fiscal years ended September 30, 2005 and 2004 have been included in this prospectus and the registration statement in reliance upon the report of Thomas P. Curtain, Certified Public Accountant, independent auditors. The financial statements are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of the National Hybrid Group for the fiscal years ended December 31, 2005 and 2004 have been included in this prospectus and registration statement in reliance upon the report of WithumBrown+Smith, Professional Corporation, independent auditors. The financial statements, are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. Table of Contents LEGAL MATTERS The validity of the common stock offered in this Prospectus is being passed upon for us by Sugar, Friedberg & Felsenthal LLP, Chicago, Illinois 60602.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001084000_biophan_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001084000_biophan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1bcd18d4d7b054237945a9e0ac20adfe8944184c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001084000_biophan_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Sichenzia Ross Friedman Ference LLP has passed upon the validity of the shares of common stock offered hereby.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001087934_incontact_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001087934_incontact_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c06939a8334b6fc80ed49b9e3e8bed3fa32fedd2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001087934_incontact_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters relating to the validity of the securities offered by this prospectus will be passed upon for UCN by Parsons Behle & Latimer, Salt Lake City, Utah.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001092287_transmedic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001092287_transmedic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7c71c6e299a4876f857e18490185650a2322b33d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001092287_transmedic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. The underwriters are represented by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001094739_finisar_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001094739_finisar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..16ec93e40783a7f5d1599607f0cba0b88032dd88
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001094739_finisar_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and the common stock offered hereby will be passed upon for us by DLA Piper US LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001095274_first_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001095274_first_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7e9dd3d428377d359c9159b7664cf72b61c55a47
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001095274_first_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the shares of common stock offered hereby will be passed upon for First National Bancshares, Inc. by Nelson Mullins Riley & Scarborough LLP, Greenville, South Carolina. Certain legal matters in connection with the offering will be passed upon by Alston & Bird LLP, Atlanta, Georgia, counsel to the underwriter.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001097136_senorx-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001097136_senorx-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2b49211564bc5d4afa40e231eba4b144f28c2a60
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001097136_senorx-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain members of, and investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich & Rosati, P.C. own an interest representing less than 1% of the shares our common stock. Cleary Gottlieb Steen & Hamilton LLP is counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001104349_capella_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001104349_capella_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a9353147a439694a0de7d963839cce84ff47374b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001104349_capella_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus and other legal matters will be passed upon for us by Faegre Benson LLP, Minneapolis, Minnesota. The underwriters have been represented by Cravath, Swaine Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001105360_salary_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001105360_salary_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0c42486bbc50cc7da85583c08649e104b029d0d6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001105360_salary_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Goodwin Procter LLP, Boston, Massachusetts, will pass upon the validity of the shares of common stock offered hereby. Legal matters relating to this offering will be passed upon for the underwriters by Choate, Hall & Stewart LLP, Boston, Massachusetts
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001106207_resolve_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001106207_resolve_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..635e7785260ae3dc1502a78e7debe0f35eb2ac02
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001106207_resolve_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Common Stock offered hereby has been passed upon for us by Gregory Bartko, Esq., Law Office of Gregory Bartko, Atlanta, Georgia.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001112683_anda_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001112683_anda_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..53fa4288ce701a8f4e9e804b986fab2a0688f163
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001112683_anda_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered hereby will be passed upon for the company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California and for the underwriters by Weil, Gotshal & Manges LLP, Redwood Shores, California. As of the date of this prospectus, certain partners and employees of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP beneficially owned an aggregate of 2,322 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001113513_mobilesmit_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001113513_mobilesmit_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..288343a5bc5b2df7093a3a5d119701fb3b70bb4f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001113513_mobilesmit_legal_matters.txt
@@ -0,0 +1 @@
+In addition, a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale and who has beneficially owned for at least two years the shares of common stock proposed to be sold is entitled to sell such shares under Rule 144(k) without regard to the volume limitations and other requirements described above. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold at any time. As of July 24, 2007, there are 5,985,058 shares outstanding that can be sold under Rule 144(k). Rule 701. Our employees, directors, officers and consultants who acquired common stock prior to February 15, 2005 (the date we became subject to the reporting requirements of the Exchange Act) under written compensatory benefit plans or written contracts relating to the compensation of those persons may rely on Rule 701 with respect to the resale of that stock. In general, Rule 701 permits resales of shares issued under compensatory benefit plans and contracts in reliance upon Rule 144, but without compliance with certain restrictions, including the holding period requirements described in Rule 144. Accordingly, subject to the Lock-Up Agreements described below, if applicable, under Rule 701 persons who received compensation shares and who are not our affiliates may resell those shares subject only to the manner of sale provisions of Rule 144. Persons who received compensation shares and who are our affiliates may resell those shares subject to Rule 144, but without compliance with Rule 144's minimum holding period requirements. As of July 24, 2007, there are 575,600 shares outstanding that may be sold pursuant to Rule 701. Lock-Up Agreements Many of our security holders have signed agreements restricting the sale of our securities, or Lock-Up Agreements, and/or agreements that limit the number of shares sellable during specific time periods, or Dribble Out Agreements. Certain of these Lock-Up Agreements restrict the sale of 2,441,642 shares of the 17,927,137 shares of common stock issued and outstanding as of July 24, 2007. The Dribble Out Agreements apply to the same outstanding shares subject to the Lock-Up Agreements. The Dribble Out Agreements apply to all the shares sold by us in private placements in 2005 and 2006, which shares we are under an obligation to register for resale and are included in the shares being registered in this offering. Under the Dribble Out Agreements, the stockholders may sell up to 25% of their shares during any rolling 30 day period. Certain of our affiliates have also entered into other Lock-Up Agreements covering a portion of their shares. These agreements restrict the sale of 1,296,623 shares of our common stock. Under the terms of these Lock-Up Agreements, these officers cannot sell, pledge, grant or otherwise transfer the shares subject to the agreement for one year following the effective date of the registration statement of which this prospectus is a part. After one year, 2.5% of these shares per quarter are released from these restrictions on a pro rata basis among these affiliates. All remaining shares will be released from the Lock-Up Agreements on the second anniversary of the effective date of the registration statement of which this prospectus is a part. These Lock-Up Agreements will otherwise terminate at the following times: (A) if the registration statement of which this prospectus is a part is terminated, the earlier of (i) the date of termination if no shares were sold, or (ii) the date any proceeds received from public investors are placed in the mail for return; (B) the date our common stock is listed on a national securities exchange, or (C) thirty (30) days following the date the persons signing these Lock-Up Agreements are no longer affiliates. Outstanding Options and Warrants As of July 24, 2007, options to purchase 2,201,800 shares of common stock were issued and outstanding. Of these, 600 were issued under our 1998 Plan; 575,000 were issued under our 2001 Plan; 1,376,200 were issued under our 2004 Plan; and 250,000 were issued outside of any equity compensation plan. Five million shares have been reserved for issuance under our 2004 Plan (pursuant to which options for 1,376,200 shares of common stock and 156,000 shares of common stock were outstanding as of July 24, 2007) and were registered for resale under a Registration Statement on Form S-8 filed and effective during May 2005. In June 2007, we limited the issuance of shares of our common stock reserved under our 2004 Plan to awards of restricted or unrestricted stock. Shares registered on Form S-8, other than shares held by officers and directors, may be sold in the public markets without any volume limitations. Shares registered on Form S-8 and held by our officers and directors may only be resold in compliance with the volume limitations of Rule 144, discussed above. As of July 24, 2007, officers and directors held options for 605,000 shares of common stock registered under the Form S-8 and options for 771,200 shares of common stock were held by persons other than officers and directors. In June 2007, the non-interested members of our Board of Directors approved an offer for holders of outstanding options with an exercise price of $2.50 per share or greater to exchange the outstanding options for a certain number of shares of restricted stock. In this offer, we intend to divide the outstanding options into classes based on the exercise price and the remaining expected life of the option and to use the Black-Scholes valuation model in our determination of the exchange ratios for the several classes of eligible options. We target using exchange ratios such that the eligible options surrendered for cancellation would exceed the number of shares of restricted stock that would be received in exchange for such options. The exchange offer has not commenced and will not commence until certain actions are taken by us, including the filing of a tender offer statement and offer to exchange on Schedule TO to be filed with the SEC. This prospectus is not an offer or solicitation of an offer to sell or exchange any outstanding options. As of July 24, 2007, there were warrants to purchase 1,655,915 shares of our common stock outstanding, of which 1,655,915 are being registered for resale under the registration statement of which this prospectus is a part. Registration Rights Agreements From March 2004 through August 2004, we sold an aggregate of 1,289,140 shares of our common stock in private placements. Under the terms of registration rights agreements entered into between us and these parties, we were obligated to register these shares with the SEC for resale in the public market and keep registration statement effective until the earlier of 270 days following effectiveness of the registration statement, all shares have been sold by the investor, or when all such shares may be sold without registration or restriction. All but one of these investors may now sell their shares pursuant to Rule 144(k). Because one of these investors is our affiliate and the earlier registration statement on which such investor s shares were registered was not kept effective for 270 days, we are therefore reregistering the 891,428 shares purchased in these placements by such affiliate. The registration rights agreements further provided for a penalty if such registration did not occur by a certain date. Under these agreements, this penalty may be paid in shares of our common stock. If the penalty is paid in this manner, we are obligated to register those shares as well. We are registering 47,485 shares for resale under the registration statement of which this prospectus is a part in satisfaction of our obligation to register such shares under the registration rights agreement with our affiliate. From 2005 through July 24, 2007, we sold an aggregate of 4,744,583 shares of our common stock in private placements. As of July 24, 2007, there were outstanding warrants to purchase an additional 1,655,915 shares of our common stock, which shares of common stock we are also obligated to register. Under the terms of registration rights agreements entered into between us and these parties, we are obligated to register these shares and the shares underlying the warrants with the SEC for resale in the public market. The registration rights agreements also provide for a penalty if registration does not occur by a certain date. Under certain of these agreements, this penalty may be paid in shares of our common stock. If the penalty is paid in this manner, we are obligated to register those shares as well. Several of the stockholders who were owed a late registration penalty entered into amendments to the registration rights agreements fixing their penalty at a certain amount, while others accrued penalties until the date the registration statement of which this prospectus is a part was filed with the SEC. We are registering 82,003 shares for resale under the registration statement of which this prospectus is a part in satisfaction of our obligation to register such shares under the registration rights agreements. All shares subject to these registration rights agreements are being registered by this registration statement. We can offer no assurance that the volume of trading of our shares in the public markets will be sufficient to allow all sellers to sell at the times or prices sellers desire. Future sales of substantial amounts of our shares in the public market could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. The SEC has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which contains: a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements; a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; a toll-free telephone number for inquiries on disciplinary actions; definitions of significant terms in the disclosure document or in the conduct of trading penny stocks; and such other information as the SEC requires by rule or regulation. The broker-dealer also must provide the customer, prior to effecting any transaction in a penny stock, with: bid and ask quotations for the penny stock; the compensation of the broker-dealer and its salesperson in the transaction; the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our common stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling our common stock. LEGAL MATTERS The validity of the shares of common stock offered under this prospectus has been passed upon by James W. Gayton, our Corporate Counsel and Secretary.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001116435_airvana_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001116435_airvana_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4d5b7610874f1a41ed65385e3cf02078cca0729d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001116435_airvana_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. Ropes Gray LLP, Boston, Massachusetts, has acted as counsel for the underwriters in connection with certain legal matters related to this offering. Attorneys at Wilmer Cutler Pickering Hale and Dorr LLP and related investment partnerships own an aggregate of 50,636 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001116927_geopetro_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001116927_geopetro_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aca6623238762e33e19aba23ed438b0569ea658f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001116927_geopetro_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our shares of common stock offered hereby will be passed upon by Greene Radovsky Maloney Share & Hennigh LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001117106_netsuite_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001117106_netsuite_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9fd0e7577041d09abac1a817bca98f73555fe87c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001117106_netsuite_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain members of, investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich & Rosati beneficially hold an aggregate of 4,379 shares of our common stock, which represents less than 0.01% of our outstanding shares of common stock. Certain legal matters in connection with the offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001119745_eurand-n-v_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001119745_eurand-n-v_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c9b2e18d4a55b0a28623a01c42fc288192a74f94
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001119745_eurand-n-v_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Willkie Farr & Gallagher LLP, New York, New York, will pass on certain matters related to the ordinary shares offered by this prospectus for us, with respect to United States laws. NautaDutilh N.V., Amsterdam, The Netherlands will pass on the validity of the ordinary shares offered by this prospectus for us and the selling shareholders, with respect to the laws of The Netherlands. The underwriters have been represented with respect to United States laws by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001120105_intellon_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001120105_intellon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..69e062df8996703a57d2cd70c18eb1124c3b4778
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001120105_intellon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Proskauer Rose LLP, Washington, D.C. The underwriters have been represented in connection with this offering by Ropes & Gray LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001122081_alterrus_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001122081_alterrus_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..60c570ca87871619cc00e2e9ffd0f49f34a4980f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001122081_alterrus_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares being registered by this registration statement and certain legal matters as to Canadian law is being passed upon for us by the firm of Burstall Winger, LLP, Calgary, Alberta.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001123695_imarx_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001123695_imarx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1a1c7fa05e8b74159627e9848bfd3a7df177862d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001123695_imarx_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by our counsel, DLA Piper US LLP, Seattle, Washington. Richardson Patel LLP, New York, New York, is acting as counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001124610_vmware-llc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001124610_vmware-llc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..329cff77afed39dacf43da73c385987f7229c9da
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001124610_vmware-llc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Selected legal matters with respect to the validity of the Class A common stock offered by this prospectus will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts. The underwriters are represented by Cleary Gottlieb Steen & Hamilton LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001132415_ascent_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001132415_ascent_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..88db90728858f89860223fa3bf3d5e792fe64e99
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001132415_ascent_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed on for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters relating to the common stock offered by this prospectus will be passed on by Akin Gump Strauss Hauer & Feld LLP, Houston, Texas, as counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001132484_netezza_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001132484_netezza_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8d320a89bd8f3162c3455fbd11c9280300138d7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001132484_netezza_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. Goodwin Procter LLP has acted as counsel for the underwriters in connection with certain legal matters related to this offering. As of the closing of this offering, funds affiliated with Wilmer Cutler Pickering Hale and Dorr LLP will own 78,955 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001137048_odyssey_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001137048_odyssey_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2889a2d7964c5d7a83868e94154bbd4c2629093f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001137048_odyssey_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Unless otherwise specified in a prospectus supplement, the validity of the securities issued and sold hereunder will be passed upon for us by Donald L. Smith, our Senior Vice President, General Counsel and Corporate Secretary.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001138400_biomimetic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001138400_biomimetic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1de080ccdefc67d67beff08b4ed56759490f8dd0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001138400_biomimetic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the validity of the shares of common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, New York, New York. Willkie Farr & Gallagher LLP, New York, New York, is counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001138639_infinera_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001138639_infinera_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..59d8f07a8778519d8419db12fe298d75d4dbd2b5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001138639_infinera_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered will be passed upon for the company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. The underwriters are being represented by Cooley Godward Kronish LLP, Palo Alto, California. As of the date of this prospectus, an attorney employed by Wilson Sonsini Goodrich & Rosati, Professional Corporation beneficially owns 20,000 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001138830_authentec_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001138830_authentec_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f8f1d1d488efdfe969f5b3faaa21d60f65d095a4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001138830_authentec_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered will be passed upon for us by DLA Piper US LLP, New York, New York. Selected legal matters relating to this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York. Following the completion of the offering, a venture fund affiliated with DLA Piper will hold 13,061 shares of our common stock and warrants to purchase 1,597 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001140390_nimblegen_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001140390_nimblegen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..947958f0e104138f455df9fabfacbe99f989ed57
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001140390_nimblegen_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Certain legal matters with respect to the legality of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Godfrey & Kahn, S.C., Milwaukee, Wisconsin. Various shareholders of Godfrey & Kahn, S.C. currently beneficially own 133,520 shares of our Series E Preferred Stock and 147,238 shares of our Series F Preferred Stock and warrants to purchase 26,666 shares of our common stock as of March 31, 2007. Certain legal matters in connection with the offering will be passed upon for the underwriters by Cahill Gordon & Reindel LLP, New York, New York. Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001142576_optimer_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001142576_optimer_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..37bb611b89e888294e4958ae4c838634fd72c9c1
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001142576_optimer_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters 32
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001143531_devax-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001143531_devax-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f48d237949971717e67247421ce683b9573ada40
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001143531_devax-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. Certain legal matters will be passed upon for the representative of the underwriters by Paul, Hastings, Janofsky & Walker, LLP, in San Francisco, California and Costa Mesa, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001145238_insight_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001145238_insight_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001145238_insight_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001156378_danger-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001156378_danger-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e59b54982a8248a014b7f0a0e14fefcbf9ede518
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001156378_danger-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Selected legal matters with respect to the validity of the common stock offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, Palo Alto, California. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, is acting as counsel for the underwriters. As of the date of this prospectus, GC&H Investments, LLC, an entity comprised of partners and associates of Cooley Godward Kronish LLP, beneficially owns an aggregate of 46,296 shares of our common stock to be issued upon conversion of our preferred stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001157743_equallogic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001157743_equallogic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2a192c8c46bbf443cf287c3040e03d95a4e2be0b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001157743_equallogic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of shares of our common stock being offered will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. The underwriters are represented by Goodwin Procter LLP, Boston, Massachusetts in connection with certain legal matters related to this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001162298_idleaire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001162298_idleaire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4fdb2bb152d3e4407e3906e400e6491094ea6e57
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001162298_idleaire_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of our common stock offered by this prospectus is being passed upon for us by Holland Knight LLP, McLean, Virginia. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001162862_wonder_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001162862_wonder_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ef0d6355c217b0adf5036774b5a4219ceb2c0b5f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001162862_wonder_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters as to United States federal and New York law and the validity of the common stock offered by this prospectus will be passed upon for us by Thelen Reid Brown Raysman & Steiner LLP. Certain legal matters in connection with the offering will be passed upon for the underwriters by O Melveny & Myers LLP. Legal matters as to PRC law will be passed upon for us by Jiayuan Law Firm and for the underwriters by Tianyuan Law Firm. Thelen Reid Brown Raysman & Steiner LLP may rely upon Jiayuan Law firm with respect to matters governed by PRC law. O Melveny & Myers LLP may rely on Tianyuan Law Firm with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001163698_soundbite_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001163698_soundbite_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..36c5809fd6b8d396103748f6bed0bac5881709b6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001163698_soundbite_legal_matters.txt
@@ -0,0 +1 @@
+legal matters relating to this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164048_maxum_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164048_maxum_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164048_maxum_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164049_signal_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164049_signal_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164049_signal_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164051_maxum_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164051_maxum_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164051_maxum_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164052_maxum_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164052_maxum_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164052_maxum_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164053_open-mri_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164053_open-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164053_open-mri_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164057_nddc-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164057_nddc-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164057_nddc-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164059_maxum_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164059_maxum_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164059_maxum_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001164086_insight_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001164086_insight_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001164086_insight_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001166389_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001166389_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1967906fd01d347bee91ef49b352c018bcf69a66
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001166389_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Thelen Reid Brown Raysman & Steiner LLP, Washington, D.C., and Sutor, Lipton & Luttrull, P.C., Dallas, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001169166_wilkes_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001169166_wilkes_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001169166_wilkes_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001171662_triple-s_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001171662_triple-s_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..827633afa5ce3f847a61b8fdd24c69367037deb0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001171662_triple-s_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon for us by Davis Polk & Wardwell, New York, New York. Fiddler, Gonz lez & Rodr guez P.S.C. will pass upon the validity of the shares of common stock sold in this offering and certain other matters under Puerto Rico law. Pietrantoni M ndez & Alvarez LLP will pass upon certain other legal matters for us under Puerto Rico law. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001173752_aruba_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001173752_aruba_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3683b51d786609a083e8de9a7d274f196b1b0885
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001173752_aruba_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich Rosati, Professional Corporation, Palo Alto, California. Simpson Thacher Bartlett LLP, Palo Alto, California is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001175474_von_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001175474_von_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29cf8ef340709440c078fa214e50a7e124b1b375
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001175474_von_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and the guarantees have been passed upon by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon: (1) the opinion of Sheri K. Hank, counsel to Jostens, Inc., as to all matters governed by the laws of the State of Minnesota; (2) the opinion of Cozen O'Connor concerning The Lehigh Press, Inc. as to (a) its due incorporation and subsistence, (ii) its due authorization of the Indenture and (b) the non-contravention of certain Pennsylvania statutes, rules, regulations and orders; and (3) the opinion of Calfee, Halter & Griswold LLP, as to all matters governed by the laws of the State of Ohio. An investment vehicle comprised of selected partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others owns an interest representing less than 1% of the capital commitment of funds controlled by KKR.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001175609_cavium-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001175609_cavium-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0925deea2a608c42120043ed5a34c71290196d48
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001175609_cavium-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, Palo Alto, California. Wilson Sonsini Goodrich Rosati, P.C., Palo Alto, California, will act as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001175685_bladelogic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001175685_bladelogic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2ec36b9a010352ff8a3b47007f8e9b8445069686
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001175685_bladelogic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Goodwin Procter LLP, Boston, Massachusetts. Entities in which attorneys of Goodwin Procter LLP have an interest beneficially own an aggregate of 20,034 shares of our common stock. Legal matters relating to this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001175820_von_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001175820_von_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29cf8ef340709440c078fa214e50a7e124b1b375
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001175820_von_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and the guarantees have been passed upon by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon: (1) the opinion of Sheri K. Hank, counsel to Jostens, Inc., as to all matters governed by the laws of the State of Minnesota; (2) the opinion of Cozen O'Connor concerning The Lehigh Press, Inc. as to (a) its due incorporation and subsistence, (ii) its due authorization of the Indenture and (b) the non-contravention of certain Pennsylvania statutes, rules, regulations and orders; and (3) the opinion of Calfee, Halter & Griswold LLP, as to all matters governed by the laws of the State of Ohio. An investment vehicle comprised of selected partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others owns an interest representing less than 1% of the capital commitment of funds controlled by KKR.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001175827_precision_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001175827_precision_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29cf8ef340709440c078fa214e50a7e124b1b375
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001175827_precision_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and the guarantees have been passed upon by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon: (1) the opinion of Sheri K. Hank, counsel to Jostens, Inc., as to all matters governed by the laws of the State of Minnesota; (2) the opinion of Cozen O'Connor concerning The Lehigh Press, Inc. as to (a) its due incorporation and subsistence, (ii) its due authorization of the Indenture and (b) the non-contravention of certain Pennsylvania statutes, rules, regulations and orders; and (3) the opinion of Calfee, Halter & Griswold LLP, as to all matters governed by the laws of the State of Ohio. An investment vehicle comprised of selected partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others owns an interest representing less than 1% of the capital commitment of funds controlled by KKR.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001176469_early_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001176469_early_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b8efe56ad082f2f975077b200bce91d36fa0c6b4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001176469_early_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Greenberg Traurig, LLP, Costa Mesa, California will pass upon the validity of the securities offered by this prospectus on our behalf. Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., Atlanta, Georgia is counsel to the underwriter in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001193159_maverick_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001193159_maverick_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..26844dd2d248729ca9bdf4092773c7c370b99b69
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001193159_maverick_legal_matters.txt
@@ -0,0 +1,4267 @@
+LEGAL MATTERS
+
+The validity of our common stock offered hereby will be passed upon for us by Buchanan Ingersoll & Rooney PC, Philadelphia, Pennsylvania.
+
+INDEMNIFICATION OF DIRECTORS AND OFFICERS
+
+The Nevada Revised Statutes provide that a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his capacity as a director or officer unless it is proven that his act or failure to act constituted a breach 
+
+61
+
+of his fiduciary duties as a director or officer and his breach of those duties involved intentional misconduct, fraud or a knowing violation of law. The Articles of Incorporation or an amendment thereto may, however, provide for greater individual liability. Furthermore, directors may be jointly and severally liable for the payment of certain distributions in violation of Chapter 78 of the Nevada Revised Statutes.
+
+This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. As a consequence of this provision, shareholders of our company will be unable to recover monetary damages against directors or officers for action taken by them that may constitute negligence or gross negligence in performance of their duties unless such conduct meets the requirements of Nevada law to impose such liability. The provision, however, does not alter the applicable standards governing a director s or officer s fiduciary duty and does not eliminate or limit the right of our company or any shareholder to obtain an injunction or any other type of non-monetary relief in the event of a breach of fiduciary duty.
+
+The Nevada Revised Statutes also provide that under certain circumstances, a corporation may indemnify any person for amounts incurred in connection with a pending, threatened or completed action, suit or proceeding in which he is, or is threatened to be made, a party by reason of his being a director, officer, employee or agent of the corporation or serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, if such person (a) is not liable for a breach of fiduciary duty involving intentional misconduct, fraud or a knowing violation of law or such greater standard imposed by the corporation s articles of incorporation; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation,
+and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Additionally, a corporation may indemnify a director, officer, employee or agent with respect to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor, if such person (a) is not liable for a breach of fiduciary duty involving intentional misconduct, fraud or a knowing violation of law or such greater standard imposed by the corporation s articles of incorporation; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, however, indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court to be liable to the corporation or for amounts paid in settlement to the corporation,
+unless the court determines that the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses, including attorneys fees, actually and reasonably incurred by him in connection with the defense.
+
+The Company s By-laws provide in substance that every director and officer of the Company shall be entitled to indemnification against expense actually and necessarily incurred in any action suit or proceeding, in which he or she may be named as a party by reason of being or having been a director or officer of the Company, except to the extent that such officer is finally adjudicated to be liable for negligence or misconduct
+
+CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
+
+Malone & Bailey, PC completed the audit of our consolidated financial statements for the years ended August 31, 2004, August 31, 2005 and August 31, 2006. We had no disagreements with Malone & Bailey, PC ("Malone") on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Morgan & Company ("Morgan") completed the audit of our consolidated financial statements for the years ended August 31, 2003 and 2002. On December 13, 2004, we dismissed Morgan as our independent accounting firm and we engaged Malone as our 
+
+62
+
+independent accounting firm. The reports of Morgan on our financial statements for the years ended August 31, 2003 and August 31, 2002 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except that each report was modified to indicate that there was substantial doubt about our ability to continue as a going concern. The decision to terminate Morgan and the decision to retain Malone were both unanimously approved by our board of directors.
+
+During the periods covered by the reports of Morgan, and the subsequent interim period through December 13, 2004, the Company had no disagreements with Morgan, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Morgan, would have caused Morgan to make reference to the subject matter of the disagreement in connection with its reports.
+
+Morgan has confirmed that they did not have any disputes or disagreements with our management regarding accounting principles or practices, financial disclosure or auditing scope of procedures.
+
+63
+
+MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
+
+INDEX TO THE FINANCIAL STATEMENTS
+
+Report of Independent Registered Public Accounting Firm
+
+ 
+
+F-2 
+
+Consolidated Balance Sheets
+
+ 
+
+F-3 
+
+Consolidated Statements of Operations
+
+ 
+
+F-4 
+
+Consolidated Statements of Stockholders Equity
+
+ 
+
+F-5 
+
+Consolidated Statements of Cash Flows
+
+ 
+
+F-6 
+
+Notes to Consolidated Financial Statements
+
+ 
+
+F-8 
+
+F-1
+
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+
+To the Board of Directors 
+Maverick Oil and Gas, Inc. and Subsidiaries
+
+Addison, Texas
+
+We have audited the accompanying consolidated balance sheets of Maverick Oil and Gas, Inc. and Subsidiaries as of August 31, 2006 and 2005 and the related consolidated statements of operations, changes in stockholders equity, and cash flows for the three years then ended. These financial statements are the responsibility of Maverick s management. Our responsibility is to express an opinion on these financial statements based on our audits. 
+
+We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+
+In our opinion, consolidated financial statements referred to above present fairly, in all material respects, the financial position of Maverick, as of August 31, 2006 and 2005, and the results of its operations and its cash flows for the periods described in conformity with accounting principles generally accepted in the United States of America. 
+
+The accompanying financial statements have been prepared assuming that Maverick will continue as a going concern. As discussed in Note 3 to the financial statements, Maverick has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management s plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
+
+/s/ Malone & Bailey, PC
+Malone & Bailey, PC
+www.malone-bailey.com
+Houston, Texas
+
+December 1, 2006
+
+F-2
+
+MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
+CONSOLIDATED BALANCE SHEETS
+
+ 
+ 
+
+August 31,
+2006
+
+ 
+
+August 31,
+2005
+
+Current Assets: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash
+
+ 
+
+$
+
+2,212,007
+ 
+
+ 
+
+$
+
+2,907,193 
+ 
+
+Accounts receivable
+
+ 
+ 
+
+2,156,469
+ 
+
+ 
+ 
+
+881,410 
+ 
+
+Prepaid expenses and advances to operators
+
+ 
+ 
+
+71,771
+ 
+
+ 
+ 
+
+161,472 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Current Assets
+
+ 
+ 
+
+4,440,247
+ 
+
+ 
+ 
+
+3,950,075 
+ 
+
+Property, Plant and Equipment: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Oil and natural gas properties, successful efforts method of accounting: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proved properties, net 
+
+ 
+ 
+
+1,969,818
+ 
+
+ 
+ 
+
+1,685,366
+ 
+
+Unproved properties not being amortized, net of impairment
+
+ 
+ 
+
+21,724,881
+ 
+
+ 
+ 
+
+— 
+ 
+
+Buildings, furniture and equipment, net of accumulated depreciation of $94,771 and $18,199
+
+ 
+ 
+
+789,278
+ 
+
+ 
+ 
+
+221,285 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Property, Plant and Equipment, Net 
+
+ 
+ 
+
+24,483,977
+ 
+
+ 
+ 
+
+1,906,651 
+ 
+
+Prepaid loan fees and other assets
+
+ 
+ 
+
+2,969,902
+ 
+
+ 
+ 
+
+432,619 
+ 
+
+Investment in limited partnership
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+962,199 
+ 
+
+Assets held for sale
+
+ 
+ 
+
+9,004,201
+ 
+
+ 
+ 
+
+9,820,019 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Assets
+
+ 
+
+$
+
+40,898,327
+ 
+
+ 
+
+$
+
+17,071,563 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Current Liabilities: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Payables and Accrued Expenses: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Accounts payable and accrued expenses
+
+ 
+
+$
+
+8,069,833
+ 
+
+ 
+
+$
+
+1,100,719 
+ 
+
+Liabilities of held for sale operations
+
+ 
+ 
+
+411,350
+ 
+
+ 
+ 
+
+1,971,748 
+ 
+
+Payables for oil and gas interests
+
+ 
+ 
+
+355,842
+ 
+
+ 
+ 
+
+353,265 
+ 
+
+Notes payable
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+48,451 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Payables and Accrued Expenses
+
+ 
+ 
+
+8,837,025
+ 
+
+ 
+ 
+
+3,474,183 
+ 
+
+Short term Debt and Derivative Liability: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Short term secured convertible debenture, net of unamortized discount
+
+ 
+ 
+
+1,633,580
+ 
+
+ 
+ 
+
+— 
+ 
+
+Debt prepayment penalty
+
+ 
+ 
+
+7,500,000
+ 
+
+ 
+ 
+
+— 
+ 
+
+Current portion of long term debt, net of unamortized discount
+
+ 
+ 
+
+655,787
+ 
+
+ 
+ 
+
+— 
+ 
+
+Derivative liability
+
+ 
+ 
+
+18,087,733
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Short Term Debt and Derivative Liability 
+
+ 
+ 
+
+27,877,100
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Current Liabilities
+
+ 
+ 
+
+36,714,125
+ 
+
+ 
+ 
+
+3,474,183 
+ 
+
+Long Term Liabilities: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Long term debt, net of unamortized discount
+
+ 
+ 
+
+1,311,575
+ 
+
+ 
+ 
+
+— 
+ 
+
+Asset retirement obligation
+
+ 
+ 
+
+33,190
+ 
+
+ 
+ 
+
+6,190 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Long-Term Liabilities
+
+ 
+ 
+
+1,344,765 
+ 
+
+ 
+ 
+
+6,190 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Liabilities 
+
+ 
+ 
+
+38,058,890
+ 
+
+ 
+ 
+
+3,480,373 
+ 
+
+Minority interest — assets held for sale
+
+ 
+ 
+
+71,307
+ 
+
+ 
+ 
+
+889,475 
+ 
+
+Stockholders Equity 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Preferred stock, $.001 par value, authorized 10,000,000 shares; none issued and outstanding 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+Common stock, $.001 par value, authorized 260,000,000 shares at August 31, 2006 and 200,000,000 shares at August 31, 2005; 101,911,116 shares issued and outstanding at August 31, 2006 and 96,472,565 shares issued and outstanding at August 31, 2005
+
+ 
+ 
+
+101,912
+ 
+
+ 
+ 
+
+96,473 
+ 
+
+Additional paid-in capital 
+
+ 
+ 
+
+53,541,999
+ 
+
+ 
+ 
+
+45,687,506 
+ 
+
+Deferred compensation 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+(3,735,956
+
+) 
+
+Accumulated deficit 
+
+ 
+ 
+
+(50,875,781
+
+)
+
+ 
+ 
+
+(29,346,308
+
+) 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Stockholders Equity 
+
+ 
+ 
+
+2,768,130
+ 
+
+ 
+ 
+
+12,701,715 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total Liabilities and Stockholders Equity 
+
+ 
+
+$
+
+40,898,327
+ 
+
+ 
+
+$
+
+17,071,563 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+See accompanying Notes to Consolidated Financial Statements.
+
+F-3
+
+MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF OPERATIONS
+
+ 
+ 
+
+Years Ended
+August 31,
+
+ 
+ 
+
+2006
+
+ 
+
+2005
+
+ 
+
+2004
+
+Revenues
+
+ 
+
+$
+
+2,500,489
+ 
+
+ 
+
+$
+
+283,785
+ 
+
+ 
+
+$
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Expenses: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Lease operating expenses
+
+ 
+ 
+
+881,604
+ 
+
+ 
+ 
+
+154,653
+ 
+
+ 
+ 
+
+— 
+ 
+
+Exploration costs
+
+ 
+ 
+
+1,488,339 
+ 
+
+ 
+ 
+
+4,739,630
+ 
+
+ 
+ 
+
+7,038 
+ 
+
+Impairment of oil & gas properties
+
+ 
+ 
+
+7,015,698
+ 
+
+ 
+ 
+
+5,710,416 
+ 
+
+ 
+ 
+
+— 
+ 
+
+Loss on earnest money deposit
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+4,250,000
+ 
+
+ 
+ 
+
+— 
+ 
+
+General and administrative
+
+ 
+ 
+
+12,692,752
+ 
+
+ 
+ 
+
+13,663,000 
+ 
+
+ 
+ 
+
+153,481 
+ 
+
+Depletion, depreciation and amortization
+
+ 
+ 
+
+1,125,995
+ 
+
+ 
+ 
+
+153,409 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total expenses
+
+ 
+ 
+
+23,204,388 
+ 
+
+ 
+ 
+
+28,671,108
+ 
+
+ 
+ 
+
+160,519 
+ 
+
+Gain on equity method investment
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+12,199 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Loss from operations before other income (expenses)
+
+ 
+ 
+
+(20,703,899
+
+)
+
+ 
+ 
+
+(28,375,124
+
+)
+
+ 
+ 
+
+(160,519
+
+) 
+
+Other income (expenses): 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest income
+
+ 
+ 
+
+100,729
+ 
+
+ 
+ 
+
+37,873
+ 
+
+ 
+ 
+
+— 
+ 
+
+Interest expense & discount amortization
+
+ 
+ 
+
+(6,293,097
+
+)
+
+ 
+ 
+
+(2,158,504
+
+)
+
+ 
+ 
+
+— 
+ 
+
+Debt prepayment penalty accrual 
+
+ 
+ 
+
+(7,500,000
+
+)
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+Net change in fair value of derivatives
+
+ 
+ 
+
+11,479,555
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Total other income (expenses)
+
+ 
+ 
+
+(2,212,813
+
+)
+
+ 
+ 
+
+(2,120,631
+
+)
+
+ 
+ 
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Loss from operations before minority interest
+
+ 
+ 
+
+(22,916,712
+
+)
+
+ 
+ 
+
+(30,495,755
+
+)
+
+ 
+ 
+
+(160,519
+
+) 
+
+Minority interest
+
+ 
+ 
+
+1,387,239
+ 
+
+ 
+ 
+
+1,353,751
+ 
+
+ 
+ 
+
+4,788 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Net loss to common stockholders
+
+ 
+
+$
+
+(21,529,473
+
+)
+
+ 
+
+$
+
+(29,142,004
+
+)
+
+ 
+
+$
+
+(155,731
+
+) 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Basic and diluted loss per common share
+
+ 
+
+$
+
+(0.22
+
+)
+
+ 
+
+$
+
+(0.36
+
+)
+
+ 
+
+$
+
+(0.00
+
+) 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Basic and diluted weighted average common shares outstanding
+
+ 
+ 
+
+98,312,289
+ 
+
+ 
+ 
+
+80,741,335 
+ 
+
+ 
+ 
+
+58,678,904 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+See accompanying Notes to Consolidated Financial Statements.
+
+F-4
+
+MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
+CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
+
+Years ended August 31, 2006, 2005 and 2004
+
+ 
+ 
+
+Common Stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Shares
+
+ 
+
+Amount
+
+ 
+
+Additional
+Paid-In
+Capital
+
+ 
+
+Accumulated
+Deficit
+
+ 
+
+Deferred
+Compensation
+
+ 
+
+Total
+Stockholders 
+Equity
+
+Balance at August 31, 2003
+
+ 
+ 
+
+58,520,000
+ 
+
+ 
+
+$
+
+58,520
+ 
+
+ 
+
+$
+
+19,980
+ 
+
+ 
+
+$
+
+(48,573
+
+)
+
+ 
+ 
+
+—
+ 
+
+ 
+
+$
+
+29,927 
+ 
+
+Issuance of common Stock for Cash at $1.00 per share, net of issuance costs of $155,731 
+
+ 
+ 
+
+2,000,000
+ 
+
+ 
+ 
+
+2,000 
+ 
+
+ 
+ 
+
+1,898,000 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,900,000 
+ 
+
+Net Loss
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+(155,731
+
+)
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+(155,731
+
+) 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Balance at August 31, 2004 
+
+ 
+ 
+
+60,520,000 
+ 
+
+ 
+ 
+
+60,520 
+ 
+
+ 
+ 
+
+1,917,980 
+ 
+
+ 
+ 
+
+(204,304
+
+) 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+1,774,196 
+ 
+
+Discount on convertible debentures, net of minority interest portion of $300,116
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+1,755,576
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,755,576 
+ 
+
+Common Stock issued for cash
+
+ 
+ 
+
+28,535,000 
+ 
+
+ 
+ 
+
+28,535 
+ 
+
+ 
+ 
+
+25,454,756 
+ 
+
+ 
+ 
+
+— 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+25,483,291 
+ 
+
+Common Stock issued for services
+
+ 
+ 
+
+125,000
+ 
+
+ 
+ 
+
+125 
+ 
+
+ 
+ 
+
+198,625 
+ 
+
+ 
+ 
+
+— 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+198,750 
+ 
+
+Purchase of Hurricane Energy, LLC with Common Stock
+
+ 
+ 
+
+4,500,000 
+ 
+
+ 
+ 
+
+4,500 
+ 
+
+ 
+ 
+
+11,785,500 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+(11,790,000
+
+) 
+
+ 
+ 
+
+— 
+ 
+
+Amortization of deferred compensation related to the purchase of Hurricane Energy, LLC
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+8,054,044 
+ 
+
+ 
+ 
+
+8,054,044 
+ 
+
+Warrants issued for the purchase of Hurricane Energy, LLC
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+957,747 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+957,747 
+ 
+
+Options issued for the purchase of Hurricane Energy, LLC
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+76,107 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+76,107 
+ 
+
+Conversion of DDH promissory note to Common Stock
+
+ 
+ 
+
+942,565 
+ 
+
+ 
+ 
+
+943 
+ 
+
+ 
+ 
+
+999,057 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,000,000 
+ 
+
+Conversion of Trident note to Common Stock
+
+ 
+ 
+
+1,850,000 
+ 
+
+ 
+ 
+
+1,850 
+ 
+
+ 
+ 
+
+1,848,150 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,850,000 
+ 
+
+Issuance of options for services
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+418,500 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+418,500 
+ 
+
+Issuance of warrants for services
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+275,508
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+275,508 
+ 
+
+Net loss
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+(29,142,004
+
+) 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+(29,142,004
+
+) 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Balance at August 31, 2005
+
+ 
+ 
+
+96,472,565 
+ 
+
+ 
+
+$
+
+96,473
+ 
+
+ 
+
+$
+
+45,687,506
+ 
+
+ 
+
+$
+
+(29,346,308
+
+)
+
+ 
+
+$
+
+(3,735,956
+
+)
+
+ 
+
+$
+
+12,701,715 
+ 
+
+Common Stock issued for purchase of additional interest in RBE, LLC
+
+ 
+ 
+
+250,000
+ 
+
+ 
+ 
+
+250 
+ 
+
+ 
+ 
+
+287,250 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+287,500 
+ 
+
+Millenium Equity Purchase agreement, Common stock and warrants issued for cash, net of placement fees of $140,000
+
+ 
+ 
+
+2,000,000 
+ 
+
+ 
+ 
+
+2,000 
+ 
+
+ 
+ 
+
+1,858,000 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,860,000 
+ 
+
+Common stock issued for compensation
+
+ 
+ 
+
+1,400,000 
+ 
+
+ 
+ 
+
+1,400 
+ 
+
+ 
+ 
+
+106,600 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+108,000 
+ 
+
+Common stock issued for services
+
+ 
+ 
+
+1,365,000 
+ 
+
+ 
+ 
+
+1,365 
+ 
+
+ 
+ 
+
+1,974,470 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,975,835 
+ 
+
+Common stock issued for interest expense payment
+
+ 
+ 
+
+423,551 
+ 
+
+ 
+ 
+
+424 
+ 
+
+ 
+ 
+
+373,548 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+373,972 
+ 
+
+SFAS 123 (R) Share based compensation amortization
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,188,898 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+3,735,956 
+ 
+
+ 
+ 
+
+4,924,854 
+ 
+
+Issuance of warrants for services
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,449,660 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+1,449,660 
+ 
+
+Discount amortization on repayment of Secured Convertible Debenture from Trident Growth Fund, LP
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+616,067 
+ 
+
+ 
+ 
+
+— 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+616,067 
+ 
+
+Net loss
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+(21,529,473
+
+)
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+(21,529,473
+
+) 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Balance at August 31, 2006
+
+ 
+ 
+
+101,911,116 
+ 
+
+ 
+
+$
+
+101,912 
+ 
+
+ 
+
+$
+
+53,541,999 
+ 
+
+ 
+
+$
+
+(50,875,781
+
+) 
+
+ 
+
+$
+
+— 
+ 
+
+ 
+
+$
+
+2,768,130 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+See accompanying Notes to Consolidated Financial Statements.
+
+F-5
+
+MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF CASH FLOWS
+
+ 
+ 
+
+Years Ended
+August 31,
+
+ 
+ 
+
+2006
+
+ 
+
+2005
+
+ 
+
+2004
+
+Cash Flows from Operating Activities: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net loss
+
+ 
+
+$
+
+(21,529,473
+
+) 
+
+ 
+
+$
+
+(29,142,004
+
+) 
+
+ 
+
+$
+
+(155,731
+
+) 
+
+Adjustments to reconcile net loss to net cash used in operating activities: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Share based compensation
+
+ 
+ 
+
+5,316,690 
+ 
+
+ 
+ 
+
+9,982,798 
+ 
+
+ 
+ 
+
+— 
+ 
+
+Minority interest
+
+ 
+ 
+
+(1,387,239
+
+) 
+
+ 
+ 
+
+(1,353,751
+
+) 
+
+ 
+ 
+
+95,212 
+ 
+
+Gain on equity method investment
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+(12,199
+
+) 
+
+ 
+ 
+
+— 
+ 
+
+Change in fair value of derivatives
+
+ 
+ 
+
+(11,479,555
+
+) 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+Interest expense & discount amortization
+
+ 
+ 
+
+5,894,164 
+ 
+
+ 
+ 
+
+2,158,501
+ 
+
+ 
+ 
+
+— 
+ 
+
+Debt prepayment penalty accrual
+
+ 
+ 
+
+7,500,000
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+Depreciation, depletion and amortization
+
+ 
+ 
+
+1,125,995 
+ 
+
+ 
+ 
+
+153,409
+ 
+
+ 
+ 
+
+7,650 
+ 
+
+Impairment of oil and gas properties
+
+ 
+ 
+
+7,015,698
+ 
+
+ 
+ 
+
+5,710,416
+ 
+
+ 
+ 
+
+— 
+ 
+
+Exploration costs
+
+ 
+ 
+
+1,488,339
+ 
+
+ 
+ 
+
+4,739,630 
+ 
+
+ 
+ 
+
+7,038 
+ 
+
+Loss on earnest money deposit
+
+ 
+ 
+
+— 
+ 
+
+ 
+ 
+
+4,250,000
+ 
+
+ 
+ 
+
+— 
+ 
+
+Changes in working capital: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Increase in accounts receivable
+
+ 
+ 
+
+(1,657,265
+
+)
+
+ 
+ 
+
+(881,410
+
+)
+
+ 
+ 
+
+— 
+ 
+
+Increase in prepaid expenses, advances to operators and others
+
+ 
+ 
+
+(153,269
+
+)
+
+ 
+ 
+
+(825,077
+
+)
+
+ 
+ 
+
+— 
+ 
+
+Increase in accounts payable and accrued expenses
+
+ 
+ 
+
+4,904,992 
+ 
+
+ 
+ 
+
+2,912,935
+ 
+
+ 
+ 
+
+90,796 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Net cash provided (used in) operating activities
+
+ 
+ 
+
+(2,960,923
+
+)
+
+ 
+ 
+
+(2,306,752
+
+)
+
+ 
+ 
+
+44,965 
+ 
+
+Cash Flows from Investing Activities: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Purchase of oil and gas properties
+
+ 
+ 
+
+(27,726,404
+
+)
+
+ 
+ 
+
+(19,209,009
+
+)
+
+ 
+ 
+
+(3,121,344
+
+) 
+
+Purchase of office building and other
+
+ 
+ 
+
+(542,698
+
+)
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+Purchase of furniture and equipment
+
+ 
+ 
+
+(101,867
+
+)
+
+ 
+ 
+
+(167,876
+
+)
+
+ 
+ 
+
+— 
+ 
+
+Loss on earnest money deposit
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+(4,250,000
+
+)
+
+ 
+ 
+
+— 
+ 
+
+Dividends received
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+50,000
+ 
+
+ 
+ 
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Net cash used in investing activities
+
+ 
+ 
+
+(28,370,969
+
+)
+
+ 
+ 
+
+(23,576,885
+
+)
+
+ 
+ 
+
+(3,121,344
+
+) 
+
+Cash Flows from Financing Activities: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds from issuance of common stock, net of issuance costs
+
+ 
+ 
+
+1,860,000 
+ 
+
+ 
+ 
+
+25,364,936
+ 
+
+ 
+ 
+
+1,900,000 
+ 
+
+Proceeds from issuance of Note Payable
+
+ 
+ 
+
+1,884,850
+ 
+
+ 
+ 
+
+1,600,000
+ 
+
+ 
+ 
+
+1,951,500 
+ 
+
+Proceeds from Short-Term Secured Convertible Debenture, net of issuance costs
+
+ 
+ 
+
+9,565,000
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+Proceeds from Long-Term Secured Convertible Debenture, net of issuance costs
+
+ 
+ 
+
+18,270,000 
+ 
+
+ 
+ 
+
+—
+ 
+
+ 
+ 
+
+— 
+ 
+
+Proceeds from minority interest owner
+
+ 
+ 
+
+ 1,105,307
+ 
+
+ 
+ 
+
+1,847,899
+ 
+
+ 
+ 
+
+— 
+ 
+
+Repayment of Note payables
+
+ 
+ 
+
+(2,048,451
+
+)
+
+ 
+ 
+
+(618,753
+
+)
+
+ 
+ 
+
+(210,000
+
+) 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Net cash provided by financing activities
+
+ 
+ 
+
+30,636,706
+ 
+
+ 
+ 
+
+28,194,082
+ 
+
+ 
+ 
+
+3,641,500 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Net Increase (Decrease) in Cash
+
+ 
+ 
+
+(695,186
+
+)
+
+ 
+ 
+
+2,310,445 
+ 
+
+ 
+ 
+
+565,121 
+ 
+
+Cash at the Beginning of Period
+
+ 
+ 
+
+2,907,193 
+ 
+
+ 
+ 
+
+596,748
+ 
+
+ 
+ 
+
+31,627 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Cash at the End of Period
+
+ 
+
+$
+
+2,212,007
+ 
+
+ 
+
+$
+
+2,907,193 
+ 
+
+ 
+
+$
+
+596,748 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Supplemental disclosure of cash flow information
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash paid during the year for: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest
+
+ 
+
+$
+
+398,933
+ 
+
+ 
+
+$
+
+515 
+ 
+
+ 
+
+$
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Taxes
+
+ 
+
+$
+
+— 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+— 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+See accompanying Notes to Consolidated Financial Statements.
+
+F-6
+
+MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
+CONSOLIDATED STATEMENTS OF CASH FLOWS
+
+ 
+ 
+
+Years Ended August 31,
+
+ 
+ 
+
+2006
+
+ 
+
+2005
+
+ 
+
+2004
+
+Supplemental disclosure of non-cash operating, investing and financing activities: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Warrants issued for deferred financing costs
+
+ 
+
+$
+
+1,449,660 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Stock issued for accrued interest
+
+ 
+
+$
+
+373,972 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Stock issued for property
+
+ 
+
+$
+
+1,979,500 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Disposal of equity method partnership
+
+ 
+
+$
+
+962,199 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Additional asset retirement liability
+
+ 
+
+$
+
+55,744 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Discount of note due to derivative liability
+
+ 
+
+$
+
+29,580,388 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Issuance of stock-based instruments in connection with the purchase of Hurricane Energy, LLC: 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stock
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+11,790,000 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Warrants
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+957,747 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Options
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+76,107 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Stock issued for conversion of promissory note
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+1,000,000 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+Stock issued for debt
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+$
+
+1,850,000 
+ 
+
+ 
+
+$
+
+—
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+See accompanying Notes to Consolidated Financial Statements.
+
+F-7
+
+MAVERICK OIL AND GAS, INC. AND SUBSIDIARIES
+
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+
+NOTE 1. NATURE OF OPERATIONS
+
+Maverick Oil and Gas, Inc. ("Maverick") was incorporated in Nevada on June 18, 2002. Maverick and its subsidiaries (collectively, the "Company") is an early stage independent energy company engaged in oil and gas exploration, exploitation, development and production. We currently participate in these activities through the interests we hold in oil and gas exploration and development projects in Texas, Colorado and most recently, Arkansas. 
+
+NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
+
+Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary significantly from those estimates under different assumptions and conditions.
+
+Critical accounting policies are defined as those significant accounting policies that are most critical to an understanding of a company s financial condition and results of operation. We consider an accounting estimate or judgment to be critical if (i) it requires assumptions to be made that were uncertain at the time the estimate was made, and (ii) changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
+
+Principles of Consolidation
+
+The consolidated financial statements include the accounts of Maverick and its subsidiaries. All significant intercompany transactions and balances associated with the consolidated operations have been eliminated. 
+
+Certain reclassifications have been made to the prior year s financial statements to conform with the current presentation.
+
+Successful Efforts Accounting
+
+The Company follows the successful efforts method to account for its crude oil and natural gas operations. Under this method of accounting, all costs associated with oil and gas lease acquisition costs, successful exploratory wells and all development wells are capitalized and amortized on a unit-of-production basis over the remaining life of proved developed reserves and proved reserves on a field basis. Unproved leasehold costs are capitalized pending the results of exploration efforts. Exploration costs, including geological and geophysical expenses, exploratory dry holes and delay rentals, are charged to expense when incurred.
+
+Valuation of Property and Equipment
+
+The Company follows the provisions of Statement of Financial Accounting Standards No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 requires that the Company s long-lived assets, including its oil and gas properties, be assessed for potential impairment in their carrying values whenever events or changes in circumstances indicate such impairment may have occurred. An impairment charge to current operations is recognized when the estimated undiscounted future net cash flows of the asset are less than its carrying value. Any such 
+
+F-8
+
+impairment is recognized based on the differences in the carrying value and estimated fair value of the impaired asset.
+
+SFAS 144 provides for future revenue from the Company s oil and gas production to be estimated based upon prices at which management reasonably estimates such products will be sold. These estimates of future product prices may differ from current market prices of oil and gas. Any downward revisions to management s estimates of future production or product prices could result in an impairment of the Company s oil and gas properties in subsequent periods.
+
+The long-lived assets of the Company, which are subject to evaluation, consist primarily of oil and gas properties. During the fiscal year ended August 31, 2006 the company recorded an impairment loss of $7,015,698 on oil and gas properties and exploration expenses of $1,488,339 related to unproved properties. During the fiscal year ended August 31, 2005, the company recorded an impairment loss of $5,710,416 on proved oil gas reserves and exploration expenses related to unproved properties of $4,739,630. 
+
+Other Property and Equipment 
+
+Other property and equipment of the Company consists primarily of buildings, computer equipment, vehicles and furniture and fixtures, which are depreciated over estimated useful lives, on a straight-line basis. The estimated useful life on buildings is 25 years and ranges from 3 to 7 years for computer equipment, vehicles, furniture and fixtures. Repairs and maintenance are expensed as incurred while costs incurred that extend the useful life are capitalized. 
+
+Asset Retirement Obligations
+
+The company follows the provisions of Financial Accounting Standards Board Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). This accounting standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. 
+
+Revenue Recognition 
+
+The Company recognizes oil and natural gas revenue for its interest in producing wells as oil and natural gas is produced and sold from those wells. Oil and natural gas sold by the Company is not significantly different from the Company s share of production. 
+
+Income Taxes
+
+The Company is subject to income and other related taxes in areas in which it operates. When recording income tax expense, certain estimates are required by management due to timing and the impact of future events on when income tax expenses and benefits are recognized by the Company. The Company evaluates periodically its tax operating loss and other carryforwards to determine whether a gross deferred tax asset, as well as a related valuation allowance, should be recognized in its financial statements.
+
+Cash and Cash Equivalents 
+
+Cash equivalents are considered to be all highly liquid investments having an original maturity of three months or less.
+
+F-9
+
+Equity Method
+
+Under the guidance of Emerging Issues Task Force D-46, Accounting for Limited Partnership Investments Maverick uses the equity method to account for its limited partnership and membership interest that represent an ownership interest that exceeds 5% of the applicable entity, but is less than 50% of the applicable entity. Under the equity method of accounting, Maverick s proportionate share of the investees net income or loss is included in Loss on equity investments in the condensed consolidated statements of operations. During fiscal year 2005, the Company accounted for its investment in PHT Resendez, LP under the equity method of investment. As discussed in note 4, this partnership was dissolved during October 2005. 
+
+Share Based Compensation
+
+In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payments" ("FAS 123R"). The Company adopted the disclosure requirements of FAS 123R as of January 1, 2006 using the modified prospective transition method approach as allowed under FAS 123R. FAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. FAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. FAS 123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to FAS 123R, only certain pro forma disclosures of fair value were required. See additional discussion in Note 4 — SHARE-BASED COMPENSATION. 
+
+Loss per Common Share
+
+Basic and diluted net loss per share calculations are calculated on the basis of the weighted average number of common shares outstanding during the year. The per share amounts include the dilutive effect of common stock equivalents in years with net income. The Company had losses in 2005 and 2004. Basic and diluted loss per share is the same due to the absence of common stock equivalents.
+
+Recently Issued Accounting Pronouncements
+
+In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS Statement No. 154 ("SFAS 154"), Accounting Changes and Error Corrections. SFAS 154 requires that, when a company changes its accounting policies, the change must be applied retrospectively to all prior periods presented instead of a cumulative effect adjustment in the period of the change. SFAS 154 may also apply when the FASB issues new rules requiring changes in accounting. If the new rule allows cumulative effect treatment, it will take precedence over SFAS 154. This statement is effective for fiscal years beginning after December 15, 2005. The adoption of SFAS 154 is not expected to have a significant impact on the Company s financial position or its results of operations.
+
+In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income taxes ("FIN 48"). FIN 48, which is an interpretation of SFAS No. 109, "Accounting for Income Taxes," provides guidance on the manner in which tax positions taken or to be taken on tax returns should be reflected in an entity s financial statements prior to their resolution with taxing authorities. The Company is required to adopt FIN 48 during the first quarter of fiscal 2008. The Company is currently evaluating the requirements of FIN 48 and has not yet determined the impact, if any; this interpretation may have on its consolidated financial statements.
+
+NOTE 3. GOING CONCERN
+
+The Company has incurred significant losses since its inception and as a result, has accumulated a deficit of $50,875,781 at August 31, 2006. During fiscal years 2006 and 2005, we recognized losses of $21,529,473 and $29,142,004, respectively. In addition, our current capital resources, together with our 
+
+F-10
+
+expected cash flow from operations, will not be sufficient to cover the interest and current portion of our Secured Convertible Debentures due within the short-term. We will, therefore, continue to seek additional capital to finance the development of our existing projects and to fund our future growth and exploration activities. This may take the form of debt-based financing, sale of our equity securities, farm-out arrangements or outright sale of portions of our existing properties. However, the terms of our Secured Convertible Debentures place certain limitations on any subsequent rounds of debt or equity financing. These limitations could impair our ability to secure the full amount of capital required, absent the consent of the holders of our Secured Convertible Debentures. There is no assurance that such additional financing will be available to us or,
+if it is, whether we will be able to complete such financing in light of the restrictions of the Secured Convertible Debentures. If we are unable to obtain additional funds when we need them or if we cannot obtain funds on terms favorable to us within the short-term, we may not be able to maintain our operations as a going concern. 
+
+Our ability to continue as a going concern depends upon successfully restructuring the debt and obtaining sufficient financing to maintain operations. The accompanying consolidated financial statements have been prepared on a going concern basis which assumes continuity of operations and realization of assets and liabilities in the ordinary course of
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001207074_virtusa_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001207074_virtusa_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..009be40087350d06df8380c919e8f6dd89f8c0ce
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001207074_virtusa_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Goodwin Procter LLP, Boston, Massachusetts, has passed upon the validity of the shares of common stock offered hereby. Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts, is representing the underwriters in this offering. Partners at Goodwin Procter LLP hold an aggregate of 9,712 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001212235_xtent-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001212235_xtent-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..934c0977daec5e8290c8687b76f79fe2e21b6612
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001212235_xtent-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain members of, and investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich & Rosati, P.C. own or control approximately 1% of the shares of our common stock, assuming that all outstanding convertible preferred stock has been converted into common stock. Latham & Watkins LLP is counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001226847_adnexus_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001226847_adnexus_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1f493066c7c09b8d375c2b8772fe36500ed245af
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001226847_adnexus_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. The underwriters are represented by Goodwin Procter LLP, Boston, Massachusetts.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001227930_entropic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001227930_entropic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8780d5891423cea071a97e29b5cfe4400b53ba3e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001227930_entropic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, San Diego, California. The underwriters are being represented by Davis Polk & Wardwell, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001230355_baxano_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001230355_baxano_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6857bc727003108bd1ac5429ae6bc1cf21962772
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001230355_baxano_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Stradling Yocca Carlson Rauth, a Professional Corporation, Newport Beach, California. As of the date of this prospectus, certain attorneys of Stradling Yocca Carlson Rauth hold an aggregate of 248,113 shares of our common stock, assuming the conversion of preferred stock to common stock immediately upon the closing of this offering. The underwriters are being represented by Latham Watkins LLP, New York, New York and Costa Mesa, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001232468_reliant_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001232468_reliant_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8e4027639ba3cdcab4f645329ec6ab5d8ad09a42
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001232468_reliant_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Cooley Godward Kronish LLP, Palo Alto, California. The underwriters are being represented by Latham & Watkins LLP, Costa Mesa, California, in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001253955_compellent_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001253955_compellent_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..84788e77cad295853d21c022eb5ccae6fa24af69
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001253955_compellent_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, Palo Alto, California. The underwriters are being represented by Gunderson Dettmer Stough Villeneuve Franklin Hachigian, LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001254419_medassets_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001254419_medassets_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6ed8329cf8c424ee613cf74986473efdca828ae8
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001254419_medassets_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Willkie Farr Gallagher LLP, 787 Seventh Avenue, New York, New York 10019. Certain legal matters will be passed upon for the underwriters by Ropes Gray LLP. Willkie Farr Gallagher LLP has represented and continues to represent us in connection with matters unrelated to the offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001260625_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001260625_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..44dea82736181cc95629e1a65b9e35f317ca9400
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001260625_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS 22
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001266677_oncogenex_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001266677_oncogenex_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6a2fadfbcd2691ce269228de18505172010d462b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001266677_oncogenex_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Legal matters relating to Canadian law, the offering and the validity of the common shares offered in this offering are being passed upon for us by DuMoulin Black LLP, Vancouver, British Columbia. Legal matters relating to U.S. law and the offering are being passed upon for us by Dorsey & Whitney LLP, Seattle, Washington and San Francisco, California. Legal matters relating to Canadian law and the offering are being passed upon for the underwriters by Farris, Vaughan, Wills & Murphy LLP, Vancouver, British Columbia. The underwriters have been advised by Shearman & Sterling LLP with respect to certain matters involving U.S. law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001269871_physicians_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001269871_physicians_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e9c70a2e3416e7573ee080aff6ad8c1be9a921d6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001269871_physicians_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Kirkland & Ellis LLP (a partnership that includes professional corporations), Chicago, Illinois. Kirkland & Ellis LLP represents entities affiliated with Summit Partners in connection with various legal matters. Certain partners of Kirkland & Ellis LLP are members of an investment partnership that is an investor in entities affiliated with Summit Partners. The underwriters are represented by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001274563_helicos_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001274563_helicos_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..71dbcfa9d28107480035b7685c3a30e8d30decfd
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001274563_helicos_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Goodwin Procter LLP, Boston, Massachusetts, has passed upon the validity of the shares of common stock offered hereby. Edmund R. Pitcher, Esq., a partner of Goodwin Procter LLP, currently beneficially owns 11,628 shares of our common stock. Dewey Ballantine LLP is representing the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001277021_visant_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001277021_visant_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e19a8db2b22b95edc8b8d431d096cf2b93b48caa
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001277021_visant_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Simpson Thacher & Bartlett LLP, New York, New York has passed upon the validity of the notes on our behalf.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001277092_zhongpin_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001277092_zhongpin_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..dc786ac8f01c49c131940eb60e9a0bd68048a226
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001277092_zhongpin_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legality of the issuance of the shares offered in this prospectus will be passed upon for us by Pryor Cashman LLP, New York, New York. Pryor Cashman LLP holds warrants to purchase 10,000 units, and Eric M. Hellige, a member of Pryor Cashman LLP, owns warrants to purchase 1,650 units, at an initial exercise price of $8.00 per unit, each unit consisting of two shares of our Series A convertible preferred stock and a warrant to purchase one share of our common stock at an initial exercise price of $5.00 per share.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001282393_bioform_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001282393_bioform_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..378ddd5e388c262d618e5cf898ad711899683369
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001282393_bioform_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain legal matters relating to the offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, Palo Alto, California. Certain members of, and persons associated with, Wilson Sonsini Goodrich & Rosati, P.C. own or control less than 0.2% of the shares of our common stock in aggregate, assuming that all outstanding convertible preferred stock has been converted into common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001284218_upek-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001284218_upek-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ac1e6e81b4113957072bd28574d3489e9b8b762f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001284218_upek-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by O Melveny & Myers LLP, Menlo Park, California. O Melveny & Myers LLP holds an indirect interest in less than 0.1 percent of our outstanding shares of common stock. Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California, is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293373_mesa-mri_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293373_mesa-mri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293373_mesa-mri_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293374_mountain_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293374_mountain_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293374_mountain_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293375_los-gatos_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293375_los-gatos_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293375_los-gatos_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293376_woodbridge_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293376_woodbridge_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293376_woodbridge_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293377_jefferson_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293377_jefferson_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293377_jefferson_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293378_jefferson_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293378_jefferson_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293378_jefferson_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293379_orange_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293379_orange_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293379_orange_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293380_san_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293380_san_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293380_san_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293382_valencia_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293382_valencia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293382_valencia_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293389_parkway_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293389_parkway_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293389_parkway_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293393_comprehens_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293393_comprehens_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293393_comprehens_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293395_comprehens_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293395_comprehens_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293395_comprehens_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293402_tme_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293402_tme_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293402_tme_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293409_comprehens_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293409_comprehens_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293409_comprehens_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293412_comprehens_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293412_comprehens_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293412_comprehens_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293414_syncor_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293414_syncor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293414_syncor_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293415_syncor_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293415_syncor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293415_syncor_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001293416_phoenix_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001293416_phoenix_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2bbd34b661fe0d319cd38c6918f7f3be00b24171
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001293416_phoenix_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes registered hereby will be passed upon by our counsel, Kaye Scholer LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001295079_shengtai_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001295079_shengtai_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..971848c4003578031349515cf727b326797c559c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001295079_shengtai_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Our counsel, Guzov Ofsink, LLC, located at 600 Madison Avenue, 14th Floor, New York, New York 10022, is passing upon the validity of the issuance of the common stock offered under this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001295557_bare_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001295557_bare_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0140c32fd84e6872a6741ccc6871d22b677e9c17
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001295557_bare_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins LLP, San Diego, California. Certain legal matters in connection with this offering will be passed upon for the underwriter by Simpson Thacher & Bartlett LLP, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001296755_dli_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001296755_dli_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d3b95ba1c215c2dcc7d97a5fff8a5ffd0b85cdc9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001296755_dli_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the common stock offered in this offering will be passed upon for us by Debevoise & Plimpton LLP, New York, New York and for the underwriters by Latham & Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001297846_fcstone_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001297846_fcstone_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b5e2a6f4a791d42b4e6d0395c5145f2a57856754
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001297846_fcstone_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Stinson Morrison Hecker LLP, Kansas City, Missouri. Certain legal matters in connection with this offering will be passed upon for the underwriters by Mayer, Brown, Rowe & Maw, LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001301081_pharmasset_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001301081_pharmasset_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..957ac4ded3b93080474b3d7e6204a43725d10634
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001301081_pharmasset_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon by Shearman & Sterling LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001302051_akrion-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001302051_akrion-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b335ff5a133ce2aa83b1d09ef0a14a312d4e5c95
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001302051_akrion-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered will be passed upon for us by Cozen O Connor, Philadelphia, Pennsylvania. The underwriters have been represented by Wilmer Cutler Pickering Hale and Dorr LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001303276_marquee_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001303276_marquee_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..766d961997b843b5021bebd7beace5185c2e8310
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001303276_marquee_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by O'Melveny & Myers LLP. Ropes & Gray LLP advised Bain, Carlyle and Spectrum in connection with the sale of the common stock offered hereby. Some partners of Ropes & Gray LLP are members in RGIP, LLC, which is an investor in certain investment funds affiliated with Bain Capital, LLC. Latham & Watkins LLP advised JPMP and Apollo in connection with the sale of the common stock offered hereby. Weil, Gotshal & Manges LLP advised the underwriters in connection with the offering of the common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001303497_cardiovasc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001303497_cardiovasc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e08a810e2c340b9a8a53e4ed85c97234b184ebd1
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001303497_cardiovasc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Flaa Warrants and the shares of the Company s common stock offered by this prospectus will be passed upon by Lord, Bissell & Brook LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001303565_tarpon_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001303565_tarpon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9afdd2190719932ea35989ff45287a913c9f4dc5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001303565_tarpon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares being sold in this offering will be passed upon for us by Ruskin Moscou Faltischek, P.C., Uniondale, New York. Certain legal matters related to the offering will be passed upon for the underwriters by Cozen O'Connor, P.C., of Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001304623_aca_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001304623_aca_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..158c875f3b2bd11a73a16d25d64130aa4319bd80
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001304623_aca_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain matters as to U.S. law in connection with this offering will be passed upon for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York and by Nora J. Dahlman, Senior Managing Director, General Counsel and Secretary of the Company. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001306944_stinger_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001306944_stinger_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f67087e3de1e840c60feb3157fb0947b2972954d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001306944_stinger_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon for us by DLA Piper US LLP, Las Vegas, Nevada. These legal matters include that shares of common stock to be sold by the selling stockholders is validly issued, fully paid and non-assessable.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001307955_anthology_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001307955_anthology_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29cf8ef340709440c078fa214e50a7e124b1b375
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001307955_anthology_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and the guarantees have been passed upon by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon: (1) the opinion of Sheri K. Hank, counsel to Jostens, Inc., as to all matters governed by the laws of the State of Minnesota; (2) the opinion of Cozen O'Connor concerning The Lehigh Press, Inc. as to (a) its due incorporation and subsistence, (ii) its due authorization of the Indenture and (b) the non-contravention of certain Pennsylvania statutes, rules, regulations and orders; and (3) the opinion of Calfee, Halter & Griswold LLP, as to all matters governed by the laws of the State of Ohio. An investment vehicle comprised of selected partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others owns an interest representing less than 1% of the capital commitment of funds controlled by KKR.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001308013_ahc-i_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001308013_ahc-i_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29cf8ef340709440c078fa214e50a7e124b1b375
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001308013_ahc-i_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes and the guarantees have been passed upon by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon: (1) the opinion of Sheri K. Hank, counsel to Jostens, Inc., as to all matters governed by the laws of the State of Minnesota; (2) the opinion of Cozen O'Connor concerning The Lehigh Press, Inc. as to (a) its due incorporation and subsistence, (ii) its due authorization of the Indenture and (b) the non-contravention of certain Pennsylvania statutes, rules, regulations and orders; and (3) the opinion of Calfee, Halter & Griswold LLP, as to all matters governed by the laws of the State of Ohio. An investment vehicle comprised of selected partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others owns an interest representing less than 1% of the capital commitment of funds controlled by KKR.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001311396_ati_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001311396_ati_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1dd5afc28a4ad860e9f6f67107dc6000a93dc413
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001311396_ati_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock that we are offering by means of this prospectus and certain other legal matters in connection with the offering will be passed upon for us by Latham & Watkins LLP, San Francisco, California. Pillsbury Winthrop Shaw Pittman LLP, San Francisco, California, is acting as counsel for the underwriter in connection with certain legal matters relating to the shares of common stock offered hereby.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001313665_accoona_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001313665_accoona_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bdd8000270b246cd35bb30ec94b68ffac01e0fea
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001313665_accoona_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Loeb & Loeb LLP, New York, New York. Mintz Levin Cohn Ferris Glovsky and Popeo P.C., New York, New York, is representing the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001317872_tomotherap_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001317872_tomotherap_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..eb078f1761eb1ca264ffa605778de44fc94f1528
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001317872_tomotherap_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock we are offering and other legal matters concerning this offering will be passed upon for us by Michael Best Friedrich LLP, Milwaukee, Wisconsin. Legal matters in connection with this offering will be passed upon for the underwriters by White Case LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001322494_novacardia_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001322494_novacardia_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..65e7e63d1482858b2bfd4e53fd9e606504dffcb4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001322494_novacardia_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, San Diego, California. The underwriters are being represented by Latham & Watkins LLP, San Diego, California. As of the date of this prospectus, GC&H Investments, LLC, an entity comprised of partners and associates of Cooley Godward Kronish LLP, beneficially owns an aggregate of 54,084 shares of our preferred stock, which will convert into an aggregate of 54,084 shares of our common stock upon the completion of this offering. Latham & Watkins LLP and certain attorneys and investment funds affiliated with the firm collectively own an aggregate of 27,042 shares of our preferred stock, which will convert into an aggregate of 27,042 shares of our common stock upon the completion of this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001323653_coleman_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001323653_coleman_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..940632f76fe0eb965d79f72e01d0a57a954d4682
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001323653_coleman_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Mayer, Brown, Rowe Maw LLP, Chicago, Illinois, will pass upon the validity of the shares of our common stock offered by the selling shareholders under this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001324245_solera_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001324245_solera_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c75129e2eaea8f27f8e237c6c15cdbe5ad0f28ae
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001324245_solera_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Kirkland & Ellis LLP, a limited liability partnership that includes professional corporations, Chicago, Illinois. Certain partners of Kirkland & Ellis LLP, are members of a limited liability company that is an investor in GTCR Fund VIII, L.P. and GTCR Fund VIII/B, L.P. Certain partners of Kirkland & Ellis LLP are members of a partnership that is an investor in GTCR Co-Invest II, L.P. Kirkland & Ellis LLP represents entities affiliated with GTCR Golder Rauner II, L.L.C. and its affiliates in connection with legal matters. Latham & Watkins LLP, Los Angeles, California will act as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001328003_redpoint_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001328003_redpoint_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29e529c45ba423f84d16fea79b1e57a6c3c9538e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001328003_redpoint_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the validity of shares of the common stock being offered hereby will be passed on for us by Morgan, Lewis & Bockius LLP, Princeton, New Jersey.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001328494_interameri_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001328494_interameri_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..60506f854f295ef0d2808b78f99f9405fd2e02f9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001328494_interameri_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the securities offered in this prospectus is being passed upon for us by Kramer Levin Naftalis & Frankel LLP, New York, New York. Loeb & Loeb LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001329361_alpha_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001329361_alpha_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a6b0e6aa50380606e10cd470950c5fc21caefcca
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001329361_alpha_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Eiseman Levine Lehrhaupt Kakoyiannis, P.C., New York, New York. Ellenoff Grossman Schole LLP, New York, New York is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001330017_focus_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001330017_focus_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..41b87fb29c4eb1ac100e8a6e5a4ce3653872b3e2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001330017_focus_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS We are being represented by Simpson Thacher Bartlett LLP with respect to legal matters of United States federal securities and New York State law. Certain legal matters in connection with this offering will be passed upon for the underwriters by Debevoise Plimpton LLP. The validity of the ordinary shares represented by the ADSs offered in this offering and legal matters as to Cayman Islands law will be passed upon for us by Conyers Dill Pearman. Legal matters as to PRC law will be passed upon for us by Global Law Office and for the underwriters by Commerce Finance Law Offices. Conyers Dill Pearman and Simpson Thacher Bartlett LLP may rely upon Global Law Office with respect to matters governed by PRC law. Debevoise Plimpton LLP may rely upon Commerce Finance Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
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@@ -0,0 +1,3681 @@
+LEGAL MATTERS
+
+43
+
+Page 2 of 79
+
+PROSPECTUS SUMMARY
+
+This summary highlights selected information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully. Investors should carefully consider the information set forth under the heading Risk Factors. In this prospectus, unless otherwise indicated, the terms International Power Group, we, us, and our refer to International Power Group, LTD.
+
+Our Company
+
+We are a development stage company that was incorporated in the State of Delaware on November 30, 1998. We plan to build and operate WTE facilities ( WTE ) to process solid and hazardous wastes by incineration on our own and through collaboration with strategic partners and others. We expect this processing will produce marketable electricity, potable water and components in construction materials including cement and road beds. 
+
+Our business plan is to locate, finance, build and operate WTE facilities for governmental entities and others charged with the disposal of municipal, commercial, industrial and certain hazardous wastes. We intend to focus on municipalities that have significant waste-handling and land fill problems and areas that can benefit from potable water and additional electricity production. Our primary marketing strategies include direct contact with government officials and large producers and handlers of waste. We also intend to rely on limited and highly targeted advertising. Integral to these methods is the development of strong brand identification for us coupled with increasing awareness of our target markets in the financial, ecological and tactical advantages of WTE technology.
+
+We have access to components and technologies that incinerate solid waste and hazardous waste at high temperatures. The incinerator produces steam, which drives a turbine which produces electricity and condenses the steam into water. The electricity and steam drive further processes which scrub smoke-stack air emissions, produce potable water, ash and enough excess electricity to sell. We believe we can customize the operation of WTE facilities to suit community needs by maximizing electricity or potable water, with little or no loss of efficiency or environmental friendliness.
+
+We believe our WTE facilities will generate revenues for ourselves, waste generators and collectors, and governments charged with disposal. We expect that our facilities will reduce the potential liabilities of waste generators and collectors for land-fill clean-up and reduce the need for governments to create land-fills. We anticipate three primary income streams: (i) tipping fees, (ii) the sale of electricity and (iii) the sale of potable water. We also expect to augment revenues by selling up to 70% of the ash produced from the processes as construction material, thereby also reducing our disposal costs.
+
+We plan to build plants that are comprised of lines or modules. Initially, each plant will have two to six lines that will cost in the range of $30 million to $50 million per line to construct, depending on the type of waste we are to receive. Each line is estimated to consume approximately 100 tons of waste per day per line. These estimated costs do not include land acquisition costs, legal fees or management time. We therefore need substantial additional capital to undertake plant development and construction and sales efforts. If we cannot obtain such financing, we will not be able to execute our business plan or continue to operate.
+
+We recently purchased proprietary patented technologies, including AddPower, a low temperature turbine (LTT), and ScrubPower, a special emission-to-energy system, from three Swedish entities - Anovo AB Angelholm, AddPower AB Angelholm, and SUPE Ltd - for a total consideration of $2.8 million. We plan to use these technologies to increase the efficiency of our own planned WTE facilities. We also believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of electricity. 
+
+We believe that the acquisition of these technologies,
+
+including AddPower,
+
+ will allow us to convert greater quantities of heat, produced from boilers and turbines, and potentially increase the output of salable electricity by 20% to 30% over technologies that are currently available. We also believe that the LTT technology will provide us with an efficient low-temp turbine which is powered by a proprietary fluid to drive the turbine and produce electricity at approximately 200 F, whereas most conventional boilers and turbines can only produce electricity at temperatures between 600 - 800 F.
+
+ 
+
+Page 3 of 79
+
+During the last fiscal year we developed contacts in several countries that we believe may lead to the construction of WTE facilities. These contacts are located, and WTE facilities are proposed, in the Kingdom of Saudi Arabia, Mexico, Egypt and the United States. The Kingdom of Saudi Arabia s Presidency of Metrology and Environment issued to us in July 2006 an environmental license which we expect will enable us to establish WTE plants in this country. We have identified certain countries and geographic regions where, due to varying combinations of land fill shortages, energy needs and potable water scarcity, we believe WTE technology would be particularly effective. We believe our management s experience in the waste management industry positions us to address the waste management needs of developed and developing nations. In November 2006, we entered into a Joint Venture Agreement with Sistemas Ecologicas Para La Proteccion Ambiental S.A. ( SEPA ) and Mr. Mario Salguero Rossainzz. The agreement provides that the joint venture will build and operate a WTE plant in the City of Mexicali, North Baja California, Mexico. We have not realized any WTE related revenues to date. 
+
+We maintain our principal offices at 950 Celebration Boulevard, Celebration, Florida. Our telephone number at that address is (407) 566-0318. Our web site address is www.international-power.com. Information provided on our web site, however, is not part of this prospectus. 
+
+Page 4 of 79
+
+SELECTED FINANCIAL DATA
+
+The table below summarizes our selected historical financial information for each of the last three years. The Company did not have any financial results for the fiscal years ended December 31, 2002 and 2003. The summary of operations for the years ended December 31, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2005 and 2006, has been derived from our audited Consolidated Financial Statements included in Financial Statements in this prospectus. The balance sheet data as of December 31, 2004, has been derived from our audited Consolidated Financial Statements not included in this report. The summary of operations for the quarters ended March 31, 2006 and 2007, and the balance sheet data as of March 31, 2007, has been derived from our unaudited Consolidated Financial Statements included in Financial Statements in this prospectus. The historical selected financial information may not be indicative of our future performance, and should be read in conjunction with the information contained in Management s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the accompanying Notes to the Consolidate Financial Statements in this prospectus.
+
+ Year ended December 31,
+
+ 
+
+Quarter ended March 31,
+
+ 2004
+
+ 2005
+
+ 2006
+
+ 
+
+2006
+
+ 
+
+2007
+
+Results of Operations
+
+ 
+
+Revenue
+
+$ - 
+
+ $ - 
+
+ $ - 
+
+ 
+
+$ - 
+
+ 
+
+$ - 
+
+Operating expenses
+
+37,637 
+
+ 3,267,710 
+
+ 12,829,775 
+
+ 
+
+2,164,340 
+
+ 
+
+2,227,938 
+
+Net loss
+
+(37,637)
+
+ (3,267,710)
+
+ (12,831,316)
+
+ 
+
+(2,164,340)
+
+ 
+
+(2,227,958)
+
+Net loss per share
+
+(0.00)
+
+ (0.01)
+
+ (0.04)
+
+ 
+
+(0.01)
+
+ 
+
+(0.01)
+
+ 
+
+ 
+
+ As of December 31,
+
+ 
+
+As of March 31,
+
+Balance Sheet Data
+
+2004 
+
+ 2005 
+
+ 2006 
+
+ 
+
+2007 
+
+ 
+
+Working capital
+
+$ 18,863 
+
+ $ 937,722 
+
+ $ (477,832)
+
+ 
+
+$ (796,091)
+
+ 
+
+Total assets
+
+27,147 
+
+ 1,022,621 
+
+ 4,388,709 
+
+ 
+
+3,129,637 
+
+ 
+
+Total stockholders equity
+
+23,363 
+
+ 939,722 
+
+ 2,245,576 
+
+ 
+
+1,829,651
+
+ 
+
+ 
+
+The Offering
+
+Common stock outstanding
+
+350,757,846
+
+ shares as of
+
+June 4
+
+, 2007
+
+Common stock that may be offered by
+
+selling stockholders
+
+Up to
+
+34,807,496
+
+ shares; representing
+
+28,957,496
+
+ shares of our common stock that were previously issued to the selling stockholders and 5,
+
+850
+
+,000 shares issuable upon the exercise of warrants.
+
+Total proceeds raised by offering
+
+We will not receive any proceeds from the resale or other disposition of the shares covered by this prospectus by any selling stockholder. However, we may receive proceeds on exercise of outstanding warrants for shares of common stock covered by this prospectus. Such funds, if any, will be used for working capital and general corporate purposes.
+
+Risk factors
+
+There are significant risks involved in investing in our company. For a discussion of risk factors, you should consider before buying our common stock, see Risk Factors set forth below.
+
+Page 5 of 79
+
+RISK FACTORS
+
+An investment in our securities is highly speculative and involves a high degree of risk. Therefore, in evaluating us and our business you should carefully consider the risks set forth below, which are only a few of the risks associated with investing in our common stock. You should be in a position to risk the loss of your entire investment.
+
+Business and Financial Risks
+
+Our accountants have issued a going concern opinion and we have limited working capital, minimal net worth and substantial current losses that inhibit our ability to implement our business plan.
+
+To date, we have met our working capital requirements through the private placement of our securities and through loans. We believe that we will need an additional $11.7 million to fund the plant design and development and operations that we plan to do over the next 12 months. Since entering the WTE field in November 2004, we have not generated any revenue from WTE facilities operations and have experienced substantial losses. As of 
+
+March
+
+ 31,
+
+2007
+
+, we had a cash balance of $
+
+0.4
+
+ million and negative working capital of $0
+
+.8
+
+ million. 
+
+As of May 15
+
+, 2007, our cash balance has been reduced to approximately $
+
+50,000
+
+.
+
+We have a history of losses and an accumulated deficit; our future profitability is uncertain.
+
+We have experienced significant operating losses since our inception and we expect to incur additional operating losses as we develop WTE facilities. For the year ended December 31, 2006, we reported a loss of approximately $12.
+
+8 million, and as of March 31, 2007, we had an accumulated deficit of approximately $18.4
+
+ million.
+
+There is no assurance that we will successfully develop a commercially viable product.
+
+We plan to be assemblers of WTE technology. As of December 31, 2006, other than the process by which we plan to assemble the described WTE facilities and our AddPower patented technology, we do not have any patented intellectual property of our own and we are dependent on our relationships with third-parties for location of sites to build facilities, permits for operation, construction of the facilities, purchase of the parts to assemble the facilities, operation of the facilities and sales of the by-products. Since our formation in November 30, 1998, we have engaged in various activities and businesses, but we have not produced a profit. We have generated no revenue from WTE facilities operations, do not have any operational WTE facilities, and no revenues are expected to be realized from WTE facilities until 2008, if at all. There can be no assurance that our efforts will lead to the construction of WTE facilities, or revenues or profits from such facilities if built.
+
+We will need substantial additional funds to construct WTE facilities; if financing is not available, we may be required to reduce or cease operations or pursue other financing alternatives. 
+
+Our operations to date have consumed substantial amounts of cash. Negative cash flow from operations is expected to continue in the foreseeable future. Without substantial additional financing, we may be required to reduce some or all of our WTE project development plans or cease operations. We plan to build plants that are comprised of lines or modules. Initially, each plant will have two to six lines that will cost in the range of $30 million to $50 million per line to construct, depending on the type of waste we are to receive. Each line is estimated to consume approximately 100 tons of waste per day per line. These estimated costs do not include land acquisition costs, legal fees or management time. We therefore need substantial additional capital to undertake plant development and construction and sales efforts. If we cannot obtain such financing, we will not be able to execute our business plan or continue to operate. 
+
+Our cash requirements may vary materially from those now planned because of responses to our proposals and permit requests, cost of financing projects, availability and price of materials to construct our proposed WTE plants, changes in tipping fees that we hope to receive, availability and timely delivery of waste to power WTE facilities once built, the amount we can charge for the WTE by-products and the costs of environmental compliance, including disposal of residual waste. We may seek to satisfy future funding requirements through public or private offerings of equity securities, by collaborative or other arrangements with other partners and competitors, issuance of debt or from other sources. Additional financing may not be available when needed or may not be available on acceptable terms. If adequate financing 
+
+Page 6 of 79
+
+is not available, we may not be able to continue as a going concern or may be required to delay, scale back or eliminate certain programs, forego desired opportunities or license third parties rights to develop locations that we would otherwise seek to develop internally. To the extent we raise additional capital by issuing equity securities, ownership dilution to existing stockholders will result.
+
+Our chances for success are reduced because we are an early stage company with regard to our new business operation. 
+
+We have a limited operating history. We are therefore subject to all the risks and challenges associated with the operation of a new enterprise, including inexperience, lack of a track record, difficulty in entering the targeted market place, competition from more established businesses with greater financial resources and experience, an inability to attract and retain qualified personnel (including technical, engineering, sales and marketing personnel) and a need for additional capital to finance our efforts and intended growth. We cannot assure you that we will be successful in overcoming these and other risks and challenges that we face as a new business enterprise.
+
+We need substantial additional financing to execute our business plan which may not be available. If we are unable to raise additional capital, we may not be able to continue operations. 
+
+We need substantial additional capital to undertake plant development and construction and sales efforts. Our current resources are insufficient to fund operations. We believe that we will need an additional $11.7 million to fund the plant design and development and operations that we plan to do over the next 12 months. We have not and cannot assure you that we will be able to secure any such financing. We may not be able to find financing on terms that are acceptable to us. If we cannot obtain such financing, we will not be able to execute our business plan or continue operations.
+
+We do not have employment contracts with any of our employees. 
+
+Development of our business depends to a significant degree on the continuing contributions of our key management and technical personnel on whom we rely to assist in the design, development, construction and operation of our proposed WTE facilities. We cannot assure you that they will remain with us, especially because we do not have any employment contracts with these persons.
+
+We are dependent on third party relationships for critical aspects of our business; problems in these relationships may increase costs and/or diminish our ability to implement our business plan. 
+
+We intend to use the expertise and resources of strategic partners and other third parties in a number of key areas, including (i) engineering, (ii) development, including licensing and permitting, (iii) product development and sales and (iv) construction and operation of WTE facilities. If these third parties do not perform in a timely and satisfactory manner, we may incur costs and delays as we seek alternate sources, if available. Such costs and delays may have a material adverse effect on our business.
+
+We may seek additional third party relationships in certain areas, particularly in marketing and construction, where collaborators may enable us to enter geographic markets that are otherwise beyond our current resources and/or capabilities. There is no assurance that we will be able to obtain any such relationships. Our inability to obtain and maintain relationships with third parties may have a material adverse effect on our business, by slowing our ability to execute our business plan, requiring us to expand our internal capabilities, increasing our overhead expenses, impinging on future growth opportunities or causing us to delay or terminate projects.
+
+We may face delays in the development of our technologies and our technology may not work as expected or be economically viable. 
+
+The technologies we intend to use have not yet been widely applied within the solid waste industry and may not work as well as expected or be economically viable. The successful application of the technologies at the scales we contemplate has yet to occur. The inability to produce large volumes of energy under our current plan may require investment in capital equipment and operating expenses beyond our business and construction plans. Unforeseen difficulties in the development or acceptance of energy produced from waste may lead to delays in the implementation of our WTE process and the subsequent generation of revenue.
+
+Page 7 of 79
+
+We will depend on a significant supply of solid waste and timely payment for that solid waste.
+
+If we do not obtain a supply of solid waste at quantities and qualities that are sufficient to operate our proposed facilities at expected operating levels, our financial condition and operating results could adversely be affected. One or more of the following factors could impact the price and supply of waste:
+
+ 
+
+defaults by waste suppliers under their contracts;
+
+ 
+
+a decline in solid waste supply due to increased recovery by material recovery facilities;
+
+ 
+
+composting of solid waste;
+
+ 
+
+incineration of solid waste;
+
+ 
+
+legal prohibitions against processing of certain types of solid waste in our facilities; or
+
+ 
+
+increased competition from landfills and recycling facilities.
+
+Environmental regulations and litigation could subject us to fines, penalties, judgments and limitations on our ability to expand. 
+
+We are subject to potential liability and restrictions under environmental laws, including those relating to handling, recycling, treatment, storage of wastes, discharges to air and water, and the remediation of contaminated soil, surface water and groundwater. The waste management industry has been and will continue to be subject to regulation, including permitting and related financial assurance requirements, as well as to attempts to further regulate the industry through new legislation. Our business is subject to a wide range of federal, state and, in some cases, local environmental, odor and noise and land use restrictions and regulations. If we are not able to comply with the requirements that apply to a particular facility or if we operate without necessary approvals, we could be subject to civil, and possibly criminal, fines and penalties, and we may be required to spend substantial capital to bring an operation into compliance or to temporarily or permanently discontinue, and/or take corrective actions. We currently do not have insurance coverage for our environmental liabilities, and we may not be able to obtain sufficient coverage in the future. Those costs or actions could be significant to us and significantly impact our results of operations, as well as our available capital.
+
+In addition to the costs of complying with environmental laws and regulations, if governmental agencies or private parties brought environmental litigation against us, we would likely incur substantial costs in defending against such actions. We may in the future be a defendant in lawsuits brought by parties alleging environmental damage, personal injury, and/or property damage. A judgment against us, or a settlement by us, could harm our business, our prospects and our reputation.
+
+We cannot predict with certainty the extent of future costs under environmental, health and safety laws, and cannot guarantee that they will not be material.
+
+We could be liable if our operations cause environmental damage to our properties or to the property of other landowners, particularly as a result of the contamination of potable water sources or soil. Under current law, we could even be held liable for damage caused by conditions that existed before we acquired the assets or operations involved. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows.
+
+We may be exposed to litigation in the ordinary course of our business. 
+
+Since our personnel are expected to routinely handle solid waste materials, we may be subject to liability claims by employees, customers and third parties. 
+
+We may be unable to obtain required financing or permits. 
+
+We plan to construct our initial facilities in Mexico and the Kingdom of Saudi Arabia which will require substantial funding. We cannot assure you that we will obtain the necessary financing or environmental permits to build and operate these facilities, or retain the permits that are required to operate the facilities or obtain financing or permits we require to build and operate our intended additional facilities. Permits to build and operate waste processing facilities have become increasingly difficult and expensive to obtain and retain as a result of many factors including numerous hearings and compliance with zoning, environmental and other regulatory measures. The granting of these permits is also often subject to resistance from citizen.
+
+Page 8 of 79
+
+Waste to energy technology has not yet gained market acceptance, nor do we know whether a market will develop for it in the foreseeable future. 
+
+WTE technology has received only limited market acceptance. This technology is relatively new to the market place and we have not generated any revenues from WTE technology. Although ever growing concerns and regulation regarding the environment and pollution has increased interest in environmentally friendly products generally, the industry remains in an evolving state. WTE technology competes with more established companies in the waste and alternative energy fields. Acceptance of WTE technology to traditional products and/or services depends upon a number of factors including:
+
+ 
+
+favorable pricing vis a vis other alternatives
+
+ 
+
+the ability to establish the feasibility and reliability of WTE technology
+
+ 
+
+public perception of the product
+
+For these reasons, we are uncertain whether WTE technology will gain acceptance. Our future success depends upon such acceptance.
+
+WTE technology may be adversely affected by future technological changes and environmental regulatory requirements as well as reduction of traditional energy costs or the establishment of lower priced energy alternatives. 
+
+Changes in governmental regulation and technological advances by others in the waste or energy industries may render our technology obsolete. Research in this area is currently being sponsored by governmental agencies, major utilities, oil companies and other energy suppliers. If such research is successful, the need for our technology could be reduced or eliminated.
+
+Confidentiality agreements may not adequately protect our business information which could result in unauthorized disclosure or unfair competition. 
+
+We consider our business relationships and process for assembling commercially available equipment to construct WTE facilities proprietary. We require our employees, consultants and third parties with whom we share our business plans and confidential information to execute confidentiality agreements upon the commencement of their relationship with us. The agreements generally provide that trade secrets and all inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship will be our exclusive property and will be kept confidential and not disclosed to third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for our business information in the event of unauthorized use or disclosure of such information. If our unpatented intellectual property is publicly disclosed before we have been granted patent protection, our competitors could be unjustly enriched and we could lose the ability to profitably develop products from such information.
+
+We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes which may result in our technology becoming obsolete. 
+
+The energy production and alternate energy businesses and related businesses are subject to rapid technological change, especially due to environmental protection regulations, and subject to intense competition. We compete with both established companies and a significant number of startup enterprises. Most of our competitors have substantially greater financial, engineering and marketing resources than we do and may independently develop superior technologies which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we cannot keep up with these advances in a timely manner, we will be unable to compete in our chosen markets.
+
+We depend on our executive officers and need additional marketing, engineering, administrative and technical personnel to be successful. We cannot assure you that we will be able to retain or attract such persons; our current officers have other business endeavors in addition to their work for our company.
+
+Page 9 of 79
+
+Since we are a small company, a loss of one or more of our current officers would severely and negatively impact our operations. To implement our business plan, we will need additional marketing, administrative, engineering and technical personnel. The market for such persons remains competitive and our limited financial resources may make it more difficult for us to recruit and retain qualified persons. If any of our officers were to resign or not be able to continue to devote his time to our business, it may have a materially adverse effect upon our business.
+
+Our officers, who are active employees, presently devote in excess of 40 hours per week to our business activities. However, they also have outside business activities which may cause a conflict regarding the time available to devote to our business.
+
+Our current management has a significant voting majority of our company s outstanding common stock and can prevent changes in management, policy or outside takeover of our business. 
+
+Our current officers and directors own over
+
+58
+
+% of our issued and outstanding common stock and can control the appointment and/or election of all directors and officers. 
+
+Risks Related to Construction of WTE Plants
+
+We will depend on third parties to design and build our WTE facilities. However, their failure to perform could force us to abandon business, hinder out ability to operate profitably or decrease the value of your investment. 
+
+We will be highly dependent upon third parties to design and build our WTE facilities. If the third parties do not perform for any reason, there is no assurance that we would be able to obtain a replacement general contractor. Any such event may force us to abandon our business. We do, however, intend to purchase performance bonds to mitigate some of the risk of a contractor terminating its relationship with us after initiation of construction.
+
+We may need to increase cost estimates for construction of our WTE facilities, and such increase could result in devaluation of your investment if plant construction requires additional capital. 
+
+We anticipate that our WTE facilities will be built for a fixed contract price, based on the plans and specifications in anticipated design-build agreements. We will base our cost estimates for construction of any WTE facilities on certain assumptions after discussions and negotiations with parties with design-build experience. There is no assurance that the final cost of the plants will not be higher. There is no assurance that there will not be design changes or cost overruns associated with the construction of the WTE facilities. In addition, steel prices and shortages of steel could affect the final cost and final completion date of any project. Any significant increase in the estimated construction cost of the plants could delay our ability to generate revenues and reduce the value of your investment because our expected revenue streams may not be able to adequately support the increased cost and expense attributable to increased construction costs.
+
+The political climate in some of the countries where we intend to build WTE facilities could cause problems in the completion of our plants, negatively affecting our plans.
+
+We may meet resistance to our efforts to build our WTE facilities in certain countries. The r sistance may be caused by political unrest, labor or union issues, environmental problems, shortage of materials, economic conditions or other issues. There is no assurance that such resistance will not have a material adverse effect on our ability to implement our business plan.
+
+WTE facility construction delays could result in devaluation of your investment if our production and sale of power are similarly delayed. 
+
+Construction projects often involve delays in obtaining permits, construction delays due to weather conditions, or other events that delay the construction schedule. The builder and designer of the plants may be involved in the construction of other projects while constructing our WTE facilities. This could cause delays in our construction schedules. Changes in interest rates or the credit environment or changes in political administrations at the federal, state or local level that result in policy changes towards waste to energy or our proposed projects could also cause construction and operation delays. If it takes longer to construct the WTE facilities than we anticipate, it would delay our ability to generate revenue and make it difficult for us to meet our debt service obligations. This could reduce the value of your investment.
+
+Page 10 of 79
+
+Defects in construction could result in devaluation of your investment if our plants do not produce power as anticipated. 
+
+There is no assurance that defects in materials and/or workmanship in the WTE facilities will not occur. Under the terms of the anticipated design-build agreements, the designer builder would warrant that the material and equipment furnished to build the plant will be new, of good quality, and free from material defects in material or workmanship at the time of delivery. Though we expect the design-build agreements to require the contractors to correct all defects in material or workmanship for a period of one year after substantial completion of the plant, material defects in material or workmanship may still occur. Such defects could delay the commencement of operations of the plants, or, if such defects are discovered after operations have commenced, could cause us to halt or discontinue the plant s operation. Halting or discontinuing plant operations could delay our ability to generate revenues and reduce the value of your investment.
+
+Plant sites may have unknown environmental problems that could be expensive and time consuming to correct, which may delay or halt WTE facilities construction and delay our ability to generate revenue. 
+
+We intend to build our WTE facilities all over the world. Accordingly, in areas with which we are not familiar, we will depend on third parties in locating and evaluating the proposed sites for our plants. As a result, we could encounter unknown environmental problems that will be costly and time consuming to correct, or may not be correctible at all. These risks of environmental problems could have a material adverse effect on our ability to implement our business plan. Upon encountering a hazardous environmental condition, we may suspend work in the affected area. If we receive notice of a hazardous environmental condition, we may be required to correct the condition prior to continuing construction. The presence of a hazardous environmental condition will likely delay construction of the plant and may require significant expenditure of our resources to correct the condition. In addition, the designer builder will likely be entitled to an adjustment in price and time of performance if it has been adversely affected by the hazardous environmental condition. If we encounter any hazardous environmental conditions during construction that require time or money to correct, such event could delay our ability to generate revenues and reduce the value or your investment.
+
+Changes in environmental regulations or violations of the regulations could be expensive and reduce the value of your investment. 
+
+We will be subject to extensive air, water and other environmental regulations and we will need to obtain a number of environmental permits to construct and operate WTE facilities. In addition, it is likely that our obtaining debt financing will be contingent on our ability to obtain the various environmental permits that we will require. If for any reason, any of these permits are not granted, construction costs for WTE facilities may increase, or the WTE facilities may not be constructed at all. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to invest or spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce the value of your investment. 
+
+The operation of WTE facilities could subject us to claims or liability lawsuits. 
+
+The operation of WTE facilities may be considered inherently dangerous and injury to individuals or property may occur, subjecting us to lawsuits. We do not currently have insurance for such possibilities. Although we intend to seek insurance coverage, we may not be to do so at a cost we can afford, or the coverage may prove to be insufficient. The time and cost of defending such suits could have an adverse effect on our ability to implement our business plan. Similarly, a costly judgment against us could cause us to cease operations.
+
+Changes and advances in production technology could require us to incur costs to update our plans or could otherwise hinder our ability to compete in the industry or operate profitably. 
+
+Advances and changes in the technology of WTE facilities are expected to occur. Such advances and changes may make the technology we plan to install in our WTE facilities less desirable or obsolete. These advances could also allow our competitors to operate a lower cost than we expect. If we are unable to adopt or incorporate technological advances, our methods and processes could be less efficient than our competitors, which could cause us to become uncompetitive or our projects obsolete. If our competitors develop, obtain or license technology that is superior to ours or that makes our 
+
+Page 11 of 79
+
+technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that we remain competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. We cannot guarantee or assure you that third-party licenses will be available or, if obtained, will continue to be available on commercially reasonable terms, if at all. These costs could negatively impact our expected financial performance by increasing planned operating costs and reducing expected revenues, which could reduce the value of your investment.
+
+Risks Related To The Power Industry
+
+Competition from the advancement of alternative power may lessen the demand for our technology which could negatively impact our potential for profitability and reduce the value or your investment. 
+
+Alternative power and energy technologies and production methods are continually under development. New developments could reduce the demand for our expected power production and technology, which would negatively impact the value of your investment.
+
+Consumer resistance to the concept of converting waste to energy based on the belief that it is expensive to produce, adds to air pollution, is odorous and takes more energy to produce than it contributes may affect our ability to achieve market acceptance and reduce the value of your investment. 
+
+Based upon public consumer reports, we believe that certain consumers may resist the concept of converting waste to energy due to the fallacy that WTE facilities add to air pollution and are odorous. Still other consumers may believe that the process of producing power from waste takes more energy in the conversion than the power that is actually produced. If we cannot overcome these misconceptions, market acceptance may be difficult and this could negatively affect the value of your investment.
+
+Risks Related To Our Common Stock.
+
+Applicable SEC rules governing the trading of Penny Stocks Limits the trading and liquidity of our common stock. 
+
+The bid and ask quotations of our common stock have been reflected on the Over-the-Counter Bulletin Board under the symbol IPWG since March 9, 2007. Prior thereto, the quotations were reflected on the Unsolicited Pink Sheets. Since our common stock continues to be quoted 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 stock 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 purchaser s written agreement to a transaction prior to sale. 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.
+
+The trading price of our common stock may be volatile.
+
+The trading price of our 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 in this prospectus as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the market place, and other events or factors. In recent years, stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such market fluctuations may adversely affect the future trading price of our common stock.
+
+Page 12 of 79
+
+We have sold stock in private placements; the stock sold in those private placements and any others we may conduct may become freely tradable and have a depressive effect on the market price of our stock. 
+
+Approximately
+
+66,488
+
+,700 of our
+
+350,757,846
+
+ shares outstanding as of
+
+June 4
+
+, 2007 are in the publicly trading float. Public sale of those shares, as well as the registration and subsequent public sale of the remaining shares could have a depressive effect on the public market price of our common stock.
+
+Our outstanding options and warrants may adversely affect our ability to consummate future equity financings due to the dilution potential to future investors. 
+
+We have outstanding options and warrants for the purchase of shares of our common stock which may adversely affect our ability to consummate future equity financings. To the extent any such options and warrants are exercised, the value of our outstanding shares of our common stock will be diluted.
+
+We currently have outstanding vested options to purchase 22,900,000 shares of common stock at a weighted-average exercise price of $0.46 and vested warrants to purchase
+
+9,519,373
+
+ shares of common stock with a weighted-average price of $0.50.
+
+Due to the number of shares of common stock we are obligated to sell pursuant to outstanding options and warrants described above, potential investors may not purchase our future equity offerings at market price because of the potential dilution such investors may suffer as a result of the exercise of the outstanding options and warrants.
+
+The market price of our common stock has experienced significant volatility. 
+
+The securities markets from time to time experience significant price and volume fluctuations unrelated to the operating performance of particular companies. In addition, the market prices of the common stock of many publicly traded solid waste companies have been and can be expected to be especially volatile. Our common stock price in the 52-week period ended
+
+June 4, 2007
+
+, had a low of $
+
+0.19
+
+ and high of $
+
+0.92
+
+. Announcements of technological innovations or new products by us or our competitors, developments or disputes concerning patents or proprietary rights, publicity regarding actual or potential by us or our competitors, regulatory developments in both the United States and foreign countries, delays in our schedules and economic and other external factors, as well as period-to-period fluctuations in our financial results, may have a significant impact on the market price of our common stock. The realization of any of the risks described in these Risk Factors may have a significant adverse impact on such market prices.
+
+We may pay vendors in stock as consideration for their services; this may result in stockholder dilution, additional costs and difficulty retaining certain vendors. 
+
+In order for us to preserve our cash resources, we have previously and may in the future pay certain vendors in stock, warrants or options to purchase shares of our common stock rather than cash. Payments for services in stock may materially and adversely affect our stockholders by diluting the value of outstanding shares of our common stock. In addition, in situations where we have agreed to register the stock issued to a vendor, this will generally cause us to incur additional expenses associated with such registration. Paying vendors in stock, warrants or options to purchase shares of common stock may also limit our ability to contract with the vendor of our choice should that vendor decline payment in stock.
+
+We do not intend to pay dividends on our common stock. Until such time as we pay cash dividends our stockholders must rely on increases in our stock price for appreciation. 
+
+We have never declared or paid dividends on our common stock. We intend to retain future earnings to develop and commercialize our products and therefore we do not intend to pay cash dividends in the foreseeable future. Until such time as we determine to pay cash dividends on our common stock, our stockholders must rely on increases in our common stock s market price for appreciation.
+
+Page 13 of 79
+
+If we do not effectively manage our growth, our resources, systems and controls may be strained and our operating results may suffer. 
+
+We plan to add to our workforce and to continue to increase the size of our workforce and scope of our operations as we continue to develop our business plan and move towards construction of WTE facilities. This growth of our operations will place a significant strain on our management personnel, systems and resources. We may need to implement new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. These endeavors will require substantial management effort and skill, and we may require additional personnel and internal processes to manage these efforts. If we are unable to effectively manage our expanding operations, our revenue and operating results could be materially and adversely affected.
+
+Our obligations as a public company under the laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley Act ) and related regulations, are likely to increase our expenses and administrative burden. These expenses and burdens are particularly acute on companies of our small size. Changes in the laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the Securities and Exchange Commission and the National Association of Securities Dealers, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We have and will continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management s time and attention from commercialization activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies regulatory authorities may initiate legal proceedings against us and our business may be harmed.
+
+There are limitations on the liability of our directors, and we may have to indemnify our officers and directors in certain instances. 
+
+Our certificate of incorporation limits the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors. Our bylaws provide that we will indemnify our officers and directors and may indemnify our employees and other agents. These provisions may be in some respects broader than the specific indemnification provisions under Delaware law. The indemnification provisions may require us, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors and officers insurance. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify a director, officer, employee or agent made or threatened to be made a party to an action by reason of the fact that he or she was a director, officer, employee or agent of the corporation or was serving at the request of the corporation, against expenses actually and reasonably incurred in connection with such action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Delaware law does not permit a corporation to eliminate a director s duty of care and the provisions of our certificate of incorporation have no effect on the availability of equitable remedies, such as injunction or rescission, for a director s breach of the duty of care.
+
+We believe that our limitation of officer and director liability assists us to attract and retain qualified employees and directors. However, in the event an officer, a director or the board of directors commits an act that may legally be indemnified under Delaware law, we will be responsible to pay for such officer(s) or director(s) legal defense and potentially any damages resulting therefrom. Furthermore, the limitation on director liability may reduce the likelihood of derivative litigation against directors, and may discourage or deter stockholders from instituting litigation against directors for breach of their fiduciary duties, even though such an action, if successful, might benefit us and our stockholders. Given the difficult environment and potential for incurring liabilities currently facing directors of publicly-held corporations, we believe that director indemnification is in our and our stockholders best interests because it enhances our ability to attract and retain highly qualified directors and reduce a possible deterrent to entrepreneurial decision-making.
+
+Page 14 of 79
+
+Nevertheless, limitations of director liability may be viewed as limiting the rights of stockholders, and the broad scope of the indemnification provisions contained in our certificate of incorporation and bylaws could result in increased expenses. Our board of directors believes, however, that these provisions will provide a better balancing of the legal obligations of, and protections for, directors and will contribute positively to the quality and stability of our corporate governance. Our board of directors has concluded that the benefit to stockholders of improved corporate governance outweighs any possible adverse effects on stockholders of reducing the exposure of directors to liability and broadened indemnification rights.
+
+DESCRIPTION OF OUR BUSINESS
+
+We were incorporated in the State of Delaware on November 30, 1998. We plan to build and operate WTE facilities ( WTE ) to process solid and hazardous wastes by incineration on our own and through collaboration with strategic partners and others. We expect that this processing will produce marketable electricity, potable water and components in construction materials including cement and road beds. 
+
+Our business plan is to locate, finance, build and operate WTE facilities for governmental entities and others charged with the disposal of municipal, commercial, industrial and certain hazardous wastes. We intend to focus on municipalities that have significant waste-handling and land fill problems and areas that can benefit from potable water and additional electricity production. Our primary marketing strategies include direct contact with government officials and large producers and handlers of waste. We also intend to rely on limited and highly targeted advertising. Integral to these methods is the development of strong brand identification for us coupled with increasing awareness of our target markets in the financial, ecological and tactical advantages of WTE technology.
+
+We have access to components and technologies that incinerate solid waste and hazardous waste at high temperatures. The incinerator produces steam, which drives a turbine which produces electricity and condenses the steam into water. The electricity and steam drive further processes which scrub smoke-stack air emissions, produce potable water, ash and enough excess electricity to sell. We believe we can customize the operation of WTE facilities to suit community needs by maximizing electricity or potable water, with little or no loss of efficiency or environmental friendliness.
+
+We believe we have technology and contractors available to us to build WTE disposal facilities that reduce solid waste output to approximately 16% of input, which we expect will break down as follows: 1.7% fly ash must be treated before it can be placed on a landfill and 14.3% is bottom ash of which 15% is ferrous materials that may be sold as scrap metal, 70% may be sold as construction material for manufacture of concrete, cinder block road beds, and 15% is discarded.
+
+We believe our WTE facilities will generate revenues for ourselves, waste generators and collectors, and governments charged with disposal. We expect that our facilities will reduce the potential liabilities of waste generators and collectors for land-fill clean-up and reduce the need for governments to create land-fills. We anticipate three primary income streams: (i) waste disposal (tipping fees), (ii) the sale of electricity and (iii) the sale of potable water. We also expect to augment revenues by selling up to 70% of the ash produced from the processes as construction material, thereby also reducing our disposal costs.
+
+We plan to build plants that are comprised of lines or modules. Initially, each plant will have two to six lines that will cost in the range of $30 million to $50 million per line to construct, depending on the type of waste we are to receive. Each line is estimated to consume approximately 100 tons of waste per day per line. These estimated costs do not include land acquisition costs, legal fees or management time. We therefore need substantial additional capital to undertake plant development and construction and sales efforts. If we cannot obtain such financing, we will not be able to execute our business plan or continue to operate.
+
+We recently purchased proprietary patented technologies, including AddPower, a low temperature turbine (LTT), and ScrubPower, a special emission-to-energy system, from three Swedish entities - Anovo AB Angelholm, AddPower AB Angelholm, and SUPE Ltd - for a total consideration of $2.8 million. We plan to use these technologies to increase the efficiency of our own planned WTE facilities. We also believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of electricity. 
+
+Page 15 of 79
+
+We believe that the acquisition of these technologies will allow us to convert greater quantities of heat, produced from boilers and turbines, and potentially increase the output of salable electricity by 20% to 30% over technologies that are currently available. We also believe that the LTT technology will provide us with an efficient low-temp turbine which is powered by a proprietary fluid to drive the turbine and produce electricity at approximately 200 F, whereas most conventional boilers and turbines can only produce electricity at temperatures between 600 - 800 F. 
+
+During the last fiscal year we developed contacts in several countries that we believe may lead to the construction of WTE facilities. These contacts are located, and WTE facilities are proposed, in the Kingdom of Saudi Arabia, Mexico, Egypt and the United States. The Kingdom of Saudi Arabia s Presidency of Metrology and Environment issued to us in July 2006 an environmental license which we expect will enable us to establish WTE plants in this country. We have identified certain countries and geographic regions where, due to varying combinations of land fill shortages, energy needs and potable water scarcity, we believe WTE technology would be particularly effective. We believe our management s experience in the waste management industry positions us to address the waste management needs of developed and developing nations. In November 2006, we entered into a Joint Venture Agreement with Sistemas Ecologicas Para La Proteccion Ambiental S.A. ( SEPA ) and Mr. Mario Salguero Rossainzz. The agreement provides that the joint venture will build and operate a WTE plant in the City of Mexicali, North Baja California,
+
+and
+
+ Mexico. We have not realized any WTE related revenues to date.
+
+Competition
+
+Competition for disposal of solid waste is high. This competition comes from public and private commercial trash haulers, commercial and industrial companies that handle their own waste collection and disposal, public and private WTE companies and municipalities and regional government authorities. We have developed a business plan that we believe will maximize our know-how and limited financial assets in a manner that will best enable us to compete in this very competitive environment. 
+
+We believe that the WTE field, due to its relatively young age in the history of solid waste disposal, presents opportunity because of the disparities in technologies and fragmentation in the industry. New technologies emerge frequently. Many have local application only, or insufficient exposure to draw global interest. The components of our planned WTE technologies are commercially available. We do not believe, however, that any entity has assembled or engineered facilities in the same manner as facilities that we plan to construct. That is not to say that there is not substantial competition for the three primary sources of income from which we expect to receive revenue tipping fees sales of electricity and potable water. As to the production of saleable by-products, i.e. electricity, potable water and usable ash, we believe there will be competitors in the production of each of these products in each locale in which we plan to operate. Due to the limited production of those products by our process and because they are only by-products, we plan to partner with potential competing vendors in those locales to gain the efficiencies of the established distribution networks.
+
+Governmental agencies may be able to offer lower direct charges to waste producers for waste removal and potentially WTE incineration by subsidizing costs with tax revenues and tax-exempt financing. Most municipalities presently operate solid waste disposal facilities, most of them as landfills. These facilities generally are subsidized by tax revenues and often produce fiscal losses in addition to environmental damage. We believe we can partner with governmental authorities and provide WTE technologies that can produce profits for IPWG, save our customers substantial amounts and be environmentally responsible.
+
+We expect to compete for business on the basis of geographic location, environmental advantages of WTE over landfills, tipping or waste disposal fees, power generation fees, the sale of potable water, and the quality of operations. Our ability to obtain permits and to locate WTE facilities may be limited in areas where there is adequate space for low cost landfill based disposal of waste, inadequate tipping fees for waste disposal, or abundant and inexpensive sources of electrical power generation and potable water. We expect that operational costs will be offset (with excess revenue for debt service and profits) by a combination of tipping fees and sales of by-products (electricity, water and saleable ash products). If the combination of the revenue streams is estimated to be insufficient to operate a WTE facility, service its debt and produce a profit, we believe that neither local community nor our potential financial sources will approve such a facility. Labor, operating and disposal costs, as well as the value of our by-products, vary widely throughout the areas in which we plan to operate. The tipping fees we expect to charge will be determined locally, and typically vary by the volume and weight, type of waste, treatment requirements, risk of handling or disposal, and labor costs.
+
+Page 16 of 79
+
+Raw materials
+
+We believe there is a readily available supply of machinery, materials, equipment and associated vendors to design, fabricate, construct and if necessary operate the WTE plants that we expect to build. We believe the worldwide need for WTE plants continues to expand as energy costs and the need for potable water increases and open space for land-fills declines. Increasing energy costs coupled with waste generation and fewer landfills provides a growing opportunity for renewable energy solutions. We do not believe we are dependent on any one source for supply of any of the products used in our planned WTE process.
+
+We also do not believe that there will be a shortage of waste on which to run our proposed facilities. However, as mentioned above in Competition, others compete for tipping fees to dispose of solid and hazardous wastes. We anticipate that the government and private agencies for whom we build WTE facilities will be responsible for providing the waste which will be processed through our planned facilities. We plan to enter into long term tipping arrangements with producers of waste and possibly to securitize or insure the revenues of those contracts to finance construction and operation of our facilities.
+
+We believe there are adequate capital markets, assuming the creditworthiness of the contracting party to the tipping fee contracts, the power generation agreements and potable water sales (or availability of insurance to augment the creditworthiness of such contracting parties), to securitize the cash flow from such agreements.
+
+Intellectual Property 
+
+We own certain proprietary patented technologies through AddPower. We otherwise do not own any patents, trademarks or licenses. We expect this AddPower patented technology will benefit our business of developing WTE facilities and expanding into other alternative energy businesses. We continue to negotiate with parties who provide adequate technologies to execute our business plan.
+
+Our business plan relies upon the use of existing technology available and commonly applied in various non-US countries, as well as proprietary technologies that we hope to purchase or license. We intend to employ WTE technology that has been developed in Sweden and other European countries (over 29 WTE power plants exist in Sweden alone). WTE solutions are increasingly common in other countries, as well, including other industrialized nations such as Japan that emphasize WTE because of their limited landfill space. WTE can reduce the volume of waste disposed in landfills by up to 90 percent, which prolongs the life of available landfill space. 
+
+Page 17 of 79
+
+Government Approval and the Effect of Government Regulations
+
+The United States Environmental Protection Agency ( US EPA ) has adopted regulations related to several aspects of solid waste management, including but not limited to regulations related to the products of waste combustion, heavy metal disposal and ground water contamination. We believe that our proposed WTE facilities regulated emissions will be less than permissible limits although no assurance can be given that the proposed WTE facilities will perform as specified or that applicable regulations will not be strengthened. Additionally, we will be required to comply with all regulations, rules and directives imposed by the host governments in connection with the operation of WTE plants outside the United States.
+
+We also anticipate that in each country of operation, we will face various requirements of independent testing and verification of emissions outputs, water sampling, and other environmental monitoring requirements, in addition to oversight and testing by the various government agencies.
+
+The technology that we plan to utilize is based on WTE facilities already in operation. We have emissions reports of some of those operational facilities. We believe that we can rely on the emissions output of similar plants in representing the anticipated emissions levels of the plants we intend to build and operate. It is important to us both as a responsible ecological citizen and to build relationships with the communities that we plan to serve, that our emissions are as clean as possible. We believe that a dirty WTE process would threaten our growth and future.
+
+Number of Employees
+
+We currently have 12 employees (seven officers and five administrative personnel). Our officers devote as much time to our business as they deem necessary, which presently is in excess of 40 hours per week. However, each is also involved in other business ventures. Our administrative employees work fulltime for us.
+
+Executive Offices
+
+Our executive offices are located at 950 Celebration Blvd., Suite A, Celebration, Florida 34747. We lease these premises at approximately $6,000 per month. The lease expires in January 2011. We do not currently own any substantial real or personal property. We also maintain satellite offices as follows: (i) Mexican Office: Culiacan No. 17-105, Colonia Hipodromo Condesa, Delegacion Cuauht moc, Mexico City. Z. C., Mexico, month-to-month rental at $747.50 (USD) per month; (ii) London Office: 1 Threadneedle Street, London EC2R8AW, England, month-to-month arrangement requiring 60 days notice; monthly rent: $1,304.17 (USD); (iii) Northeast England Office: Royal Albert House, Sheet Street, Windsor Royal Berkshire, England, month-to-month arrangement requiring 60 days notice; monthly rent: $1,130.28 (USD); and (iv) Sweden Office: Florettgatan 29B. 25467 Helsingborg, Sweden; one year lease with option to renew monthly rent: $1,455.00 (USD).
+
+Page 18 of 79
+
+SELECTED FINANCIAL DATA
+
+The table below summarizes our selected historical financial information for each of the last three years. The Company did not have any financial results for the fiscal years ended December 31, 2002 and 2003. The summary of operations for the years ended December 31, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2005 and 2006, has been derived from our audited Consolidated Financial Statements included in Financial Statements in this prospectus. The balance sheet data as of December 31, 2004, has been derived from our audited Consolidated Financial Statements not included in this report. The summary of operations for the quarters ended March 31, 2006 and 2007, and the balance sheet data as of March 31, 2007, has been derived from our unaudited Consolidated Financial Statements included in Financial Statements in this prospectus. The historical selected financial information may not be indicative of our future performance, and should be read in conjunction with the information contained in Management s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the accompanying Notes to the Consolidate Financial Statements in this prospectus.
+
+ Year ended December 31,
+
+ 
+
+Quarter ended March 31,
+
+ 2004
+
+ 2005
+
+ 2006
+
+ 
+
+2006
+
+ 
+
+2007
+
+Results of Operations
+
+ 
+
+Revenue
+
+$ - 
+
+ $ - 
+
+ $ - 
+
+ 
+
+$ - 
+
+ 
+
+$ - 
+
+Operating expenses
+
+37,637 
+
+ 3,267,710 
+
+ 12,829,775 
+
+ 
+
+2,164,340 
+
+ 
+
+2,227,938 
+
+Net loss
+
+(37,637)
+
+ (3,267,710)
+
+ (12,831,316)
+
+ 
+
+(2,164,340)
+
+ 
+
+(2,227,958)
+
+Net loss per share
+
+(0.00)
+
+ (0.01)
+
+ (0.04)
+
+ 
+
+(0.01)
+
+ 
+
+(0.01)
+
+ 
+
+ 
+
+ As of December 31,
+
+ 
+
+As of March 31,
+
+Balance Sheet Data
+
+2004
+
+ 2005
+
+ 2006
+
+ 
+
+2007
+
+ 
+
+Working capital
+
+$ 18,863 
+
+ $ 937,722 
+
+ $ (477,832)
+
+ 
+
+$ (796,091)
+
+ 
+
+Total assets
+
+27,147 
+
+ 1,022,621 
+
+ 4,388,709 
+
+ 
+
+3,129,637 
+
+ 
+
+Total stockholders equity
+
+23,363 
+
+ 939,722 
+
+ 2,245,576 
+
+ 
+
+1,829,651 
+
+ 
+
+MANAGEMENT S DISCUSSION AND ANALYSIS
+
+OF FINANCIAL CONDITION
+
+ AND RESULTS OF OPERATIONS
+
+Overview
+
+We commenced our development stage on April 15, 2002. The Company has spent approximately the last two years initiating and developing our WTE technology business plan. Initial steps in that process were negotiation for the opportunity to construct WTE Plants in Mexico and Saudi Arabia. In July 2006, the Kingdom of Saudi Arabia s Presidency of Metrology and Environment issued to us an environmental license which will enable us to establish WTE plants in the country. The second step in developing our business plan was to find sources that could assist us to raise the capital required to build and begin operating WTE facilities. IPWG has not had any revenues and cumulative losses of $
+
+18.4
+
+ million since inception. Accordingly, a comparison of our financial information for accounting periods would likely not be meaningful or helpful in making an investment decision regarding our Company.
+
+Page 19 of 79
+
+We expect to begin realizing operating revenues in the fourth quarter of 2007 from the receipt of tipping fees associated with one or more of our WTE facilities. We are expecting to store waste on our property during the construction of a facility. We are expecting revenue from our first WTE energy plant to commence in 2009 after the completion of the construction of the first plant.
+
+In October 2006, we purchased proprietary patented technologies, AddPower, a low temperature turbine (LTT), and ScrubPower, a special emission-to-energy system from three Swedish entities, Anovo AB Angelholm, AddPower AB Angelholm, and SUPE Ltd for a total consideration of $2.8 million. 
+
+We believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of clean electricity. The Company also plans to use these technologies to increase the efficiency of its own planned WTE facilities. 
+
+We believe that the acquisition of these technologies will allow us to convert greater quantities of heat, produced from boilers and turbines, and potentially increase the output of salable electricity by 20 to 30% or more over technologies that are currently available. We also believe that the LTT technology will provide us with an extremely efficient low-temp turbine which is powered by a proprietary fluid to drive the turbine and produce electricity at approximately 200 F, whereas most conventional boilers and turbines can only produce electricity at temperatures between 600 - 800 F.
+
+We believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of electricity. The Company also plans to use these technologies to increase the efficiency of its own planned WTE facilities. We believe we will begin to receive orders for our AddPower units by the beginning of 2008.
+
+Plan of Operation
+
+Prior to the adoption of our present business plan, we investigated the option of engaging in the management of low level radioactive waste as a result of our acquisition of Terra Mar Environmental Systems, Inc. (TMES) assets. We determined not to pursue that business because of the time and expense of compliance with government regulation in the field.
+
+Our operating plan for the next 12 months and thereafter has three components: (1) to complete pending negotiations to initiate construction of WTE projects in Mexicali, Mexico, Saudi Arabia and Egypt, (2) complete the research and development of our AddPower electrical generating unit to make it a commercially viable product, and (3) to continue our existing program of introducing WTE technology to governments and others charged with responsibility to manage solid waste and/or provide potable water and electricity to various population segments. In furtherance of this general plan we have self-imposed the following goals:
+
+PROJECTED DATE
+
+Goal
+
+ Projected Date
+
+1. Processing of site permits in Mexico
+
+ Present through July 2007
+
+2. Complete R&D of AddPower
+
+ Present through September 2007
+
+3. Introduction of WTE technology in the Kingdom of Saudi Arabia and Egypt beginning of WTE site location negotiations
+
+ Present through October 2007
+
+4. Negotiations for WTE sites in several foreign countries now identified. Form subsidiaries as may be required in other countries
+
+ Foreseeable future
+
+Research and Development.
+
+We do not expect to establish a discrete program of research or development as part of our business plan. We expect to expend our research and development efforts towards on the job training. We intend to cooperate with our development partners to develop efficient WTE technology customized to each customer s needs. We intend to share the learning from each project and application to improve all areas of existing WTE technology from air scrubbing to waste disposal.
+
+Purchase of Plant and Equipment.
+
+Page 20 of 79
+
+The development and construction of each proposed WTE facility will be dependent on: (i) locating appropriate land and obtaining permits for a WTE facility, (ii) obtaining significant external financing (including related financial guaranty and risk insurance) for purchase of materials and equipment and construction of facilities and (iii) securing contracts for delivery of waste and sales of byproducts necessary to produce revenues sufficient to cover debt service and operation costs. In the event we are not able to finance one or more proposed WTE facilities, we would be forced to abandon any such projects.
+
+WTE Facility Finance. 
+
+Our plan to build one or more WTE facilities will require significant capital which we do not currently have. We intend to finance the construction and operation of WTE facilities through a combination of loans and securitization of income from long-term contracts for tipping fees, power and potable water sales. We believe that we will be successful in securing such financing although no assurance can be given.
+
+Changes in the Number of Employees.
+
+We expect a substantial increase in full and part time employees in the foreseeable future to bolster our technical and marketing departments. We expect that plant construction projects will be completed by third parties who will be engaged pursuant to contractual agreements.
+
+Trends.
+
+We believe that the trend that is most likely to affect our business is the burgeoning need of local governments at all levels in most countries to manage sold waste, significant quantities of which are hazardous. We believe this trend will generate demand for the technology we offer although no assurance can be given. 
+
+We also believe the trend of global warming will affect our business. The trend to reduce the output of greenhouse gases has caused a trend to find ways of generating cleaner electricity from cleaner renewable energy sources. We believe the trend will generate a demand for our technology and services we offer although no assurance can be given.
+
+Financial Condition
+
+Ability to Meet Cash Requirements.
+
+We are considered to be in the development stage as defined in the Statement of Financial Accounting Standards ( FASB ) No. 7. To date, we have received no income from our business operations. We have incurred substantial losses since our inception. As of
+
+March
+
+ 31,
+
+2007,
+
+ we had an accumulated loss of $
+
+18.4
+
+ million during the development stage. The expenses that produced this operating loss included stock based compensation expenses in the sum of $
+
+11.4
+
+ million and other expenses, including cash expenses, of approximately $7.0 million. At
+
+March 31
+
+ 2007, our cash balance
+
+was
+
+$0.4
+
+million. During the first quarter of 2007 the Company cash balance decreased by $1.
+
+2 million. 
+
+We used approximately
+
+$1.5 million for our operating activities and made $0.6 million in payments for the acquisition of AddPower. These uses of cash were offset by $0.6 million in stock sales and $0.3 million in cash from the exercise of stock warrants.
+
+ 
+
+Without additional equity or debt financing,
+
+we will not be able to satisfy
+
+ our cash requirements for the next twelve months.
+
+Two Year Cash Forecast.
+
+We have developed a two-year timeline and cash forecast of our cash needs to execute our business plan and we are in the process of raising the funds required to fund our operations for the next 24 months until the time we estimate that our first WTE facility will come online and revenues are expected to commence. There can be no assurance, however, that we will be able to raise the amounts of financing required to operate our business until revenues commence, that we will be able to timely commence revenue generating operations of WTE facility(ies) or that if such facility(ies) commence operation, that we will generate sufficient revenue to be profitable.
+
+Page 21 of 79
+
+We are in the process of attempting to raise capital to address approximately $26.4 million of financing needs for the next twenty-four months, outside of construction/project financing for specific waste to energy projects. Uses of the capital we are attempting to raise include:
+
+1)
+
+Working capital to cover overhead and execution costs during construction of waste to energy plants (approximately $16.0 million), additional details provided in the chart below. 
+
+2)
+
+Working capital to cover the recently completed acquisition of Ad-Power AB and the commercialization of AddPower units (a patented low temperature turbine used for converting waste heat into electricity) of approximately $1.6 million.
+
+3)
+
+Additional development funding to apply AddPower technology to low cost solar power generation, as well as to test the feasibility of integrating the AddPower technology into small scale solar units for office parks, malls, and residential projects ($8.8 million). 
+
+A detailed schedule of our capital needs for the two years ended December 31, 2008 is as follows:
+
+ 2007
+
+ 2008
+
+ Total
+
+ 
+
+Employee Costs
+
+ $2,463,000 
+
+ $3,687,000 
+
+ $6,150,000 
+
+Travel
+
+ 1,040,000 
+
+ 1,040,000 
+
+ 2,080,000 
+
+Construction/Project Management
+
+ 300,000 
+
+ 720,000 
+
+ 1,020,000 
+
+Legal Fees
+
+ 852,000 
+
+ 840,000 
+
+ 1,692,000 
+
+Outsourced Engineering
+
+ 275,000 
+
+ 600,000 
+
+ 875,000 
+
+Contractors/Consultants
+
+ 826,000 
+
+ 818,000 
+
+ 1,644,000 
+
+External & Internal Audit
+
+ 124,000 
+
+ 300,000 
+
+ 424,000 
+
+Corporate Insurance
+
+ 250,000 
+
+ 450,000 
+
+ 700,000 
+
+Accounting Services (Outsourced)
+
+ 75,000 
+
+ 300,000 
+
+ 375,000 
+
+Marketing 
+
+ 155,000 
+
+ 300,000 
+
+ 455,000 
+
+Rental /Office Expenses
+
+ 279,000 
+
+ 300,000 
+
+ 579,000 
+
+Total Operating Costs
+
+ 6,639,000 
+
+ 9,355,000 
+
+ 15,994,000 
+
+ 
+
+Additional Investment/Commercialization of
+
+Other Proprietary Technology 
+
+ 
+
+ 
+
+Cash for AddPower Acquisition
+
+ 1,564,000 
+
+ - 
+
+ 1,564,000 
+
+R&D of AddPower unit for commercialization
+
+ 3,500,000 
+
+ - 
+
+ 3,500,000 
+
+R&D of AddPower unit for potential solar
+
+commercialization
+
+ 
+
+ - 
+
+ 
+
+5,300,000 
+
+ 
+
+5,300,000 
+
+Total Forecasted Cash Usage Excluding
+
+ 
+
+Project Specific Financing
+
+ $11,703,000 
+
+ $14,655,000 
+
+ $26,358,000 
+
+In addition to the above, we plan to develop and execute contracts for our WTE facilities in Saudi Arabia, Egypt, Mexico and elsewhere (these contracts may include long term, ie.7-10 year, commitments for waste disposal, electric and water sales). We expect to use these contracts, and the expected revenue sources they represent, to secure project specific financing. We expect to have multiple financing sources for project/construction financing on a project by project basis outside of this specific equity raise.
+
+Page 22 of 79
+
+Payments Due under Contractual Obligations
+
+We have future commitments
+
+at March 31, 2007
+
+ consisting of office lease obligations as follows: 
+
+Year Ending December 31,
+
+ Office Lease Obligations
+
+2007
+
+ 
+
+$ 66,998 
+
+2008
+
+ 89,959 
+
+2009
+
+ 91,603 
+
+2010
+
+ 91,443 
+
+2011
+
+ 7,639 
+
+Total
+
+ 
+
+$347,642 
+
+In addition, we are obligated to pay during 2007 the remaining $962,057 for the purchase of AddPower. We will not be able to meet this obligation without proceeds of external financing, of which we provide no assurance. 
+
+Results of Operations.
+
+Quarter ended March 31, 2007 compared to the quarter ended March 31, 2006
+
+We only had a 3% increase in net (cash and non-cash) losses from operations for the quarter ended March 31, 2007 as compared to the quarter ended March 31, 2006, or a total increase in net losses of $63,618. The net non-cash losses decreased from $1,260,000 for the quarter ended March 31, 2006 to $1,024,500 for the quarter ended March 31, 2007. This $235,500 decrease is primarily attributable to the difference in the amount of stock options granted in each period ($175,000) and the value associated with the issuance of common stock for services performed ($90,500) and permitting option exercises without charging the strike price in exchange for services ($70,000) in the first quarter of 2006, offset by $100,000 of amortization expense recorded in the first quarter of 2007 that was associated with our intangible asset patents that was acquired in the fourth quarter of 2006. The net cash losses increased from $904,340 for the quarter ended March 31, 2006 to $1,203,438 for the quarter ended March 31, 2007, or a total increase in net cash losses of $299,098. This increase in net cash losses is primarily attributable to employee related costs (i.e., salaries and travel). We hired 9 new employees in 2006.
+
+Year ended December 31, 2006 compared to the year ended December 31, 2005
+
+We had an increase in net (cash and non-cash) losses from operations from $3,267,710 for the year ended December 31, 2005 to $12,831,316 for the year ended December 31, 2006, or a total increase in net losses of $9,563,606. The net non-cash losses increased from $2,354,319 for the year ended December 31, 2005 to $8,288,250 for the year ended December 31, 2006, or a total increase in net non-cash losses of $5,933,931 This increase in net non-cash losses is primarily attributable to the issuance of common stock for services performed ($5,281,250) and permitting option exercises without charging the strike price in exchange for services ($262,500), and the value of options ($2,644,500) granted to officers, directors and consultants and finders. The net cash losses increased from $913,391 for the year ended December 31, 2005 to $4,543,066 for the year ended December 31, 2006, or a total increase in net cash losses of $3,629,675. This increase in net cash losses is primarily attributable to fees paid to professionals service firms and consultants and employee related costs (i.e., salaries and travel). We hired 9 new employees in 2006.
+
+Year ended December 31, 2005 compared to the year ended December 31, 2004
+
+We had an increase in net (cash and non-cash) losses from operations from $37,637 for the year ended December 31, 2004 to $3,267,710 for the year ended December 31, 2005, or a total increase in net losses of $3,239,073. The net non-cash losses increased from $11,500 for the year ended December 31, 2004 to $2,354,319 for the year ended December 31, 2005, or a total increase in net non-cash losses of $2,342,819. This increase in net non-cash losses is primarily attributable to the issuance of common stock for services performed ($20,319) and permitting option exercises without charging the strike price in return for services ($72,500), and the value of 
+
+Page 23 of 79
+
+options ($2,140,000) granted to officers, directors and consultants and finders. The net cash losses increased from $26,137 for the year ended December 31, 2004 to $913,391 for the year ended December 31, 2005, or a total increase in net cash losses of $887,254. This increase in net cash losses is primarily attributable to fees paid to professionals and consultants.
+
+USE OF PROCEEDS
+
+We will not receive any proceeds from sale of the shares of common stock covered by this prospectus by the selling stockholders. However, we may receive proceeds on exercise of outstanding warrants for shares of common stock covered by this prospectus. Any such proceeds received by us will be used for working capital and general corporate purposes.
+
+MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
+
+Market Information
+
+Our shares of common stock have been quoted on the Over-the-Counter Bulletin Board operated by the National Association of Securities Dealers, Inc. under the symbol IPWG beginning on March 9, 2007. Prior thereto, bid and ask quotations for our common stock were reflected on the Unsolicited Pink Sheets under the symbol IPWG. A summary of the quotations by quarter for our
+
+2007,
+
+ 2006 and 2005 fiscal
+
+years
+
+ is as follows: 
+
+ High
+
+Low 
+
+Fiscal Year 2007
+
+ 
+
+Quarter ended March 31, 2007
+
+$0. 48 
+
+$0.24 
+
+Quarter ended June 30, 2007 (through May 31, 2007)
+
+0.35 
+
+0.19
+
+ 
+
+Fiscal Year 2006
+
+ 
+
+Quarter ended March 31, 2006
+
+$1.18 
+
+$1.00 
+
+Quarter ended June 30, 2006
+
+0.88 
+
+0.81 
+
+Quarter ended September 30, 2006
+
+0.92 
+
+0.50 
+
+Quarter ended December 31, 2006
+
+0.70 
+
+0.30 
+
+Fiscal Year 2005
+
+ 
+
+Quarter ended March 31, 2005
+
+$0.45 
+
+$.045 
+
+Quarter ended June 30, 2005
+
+0.40 
+
+0.25 
+
+Quarter ended September 30, 2005
+
+0.72 
+
+0.64 
+
+Quarter ended December 31, 2005
+
+1.86 
+
+1.59 
+
+Source:
+
+Inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual
+
+Transactions
+
+Holders 
+
+As
+
+of June 4,
+
+ 2007, there were approximately 276 holders of record of our common stock, not including holders who hold their shares in street name. 
+
+Page 24 of 79
+
+DESCRIPTION OF OUR AUTHORIZED CAPITAL
+
+Authorized and Outstanding
+
+Our authorized capital consists of 750 million shares of common stock, par value $.00001 per share and no shares of preferred stock. As
+
+of June 4,
+
+ 2007, there were issued and outstanding (i)
+
+350,757,846
+
+ shares of common stock; (ii) options to acquire 22,900,000 shares of common stock, with a weighted average exercise price of $
+
+0
+
+.46 per share; and (iii) warrants to acquire 9
+
+,519,373
+
+ shares of common stock with a weighted average exercise price of $
+
+0
+
+.50 per share
+
+Voting Rights
+
+Holders of our common stock have the right to cast one vote for each share of stock in their name on the books of our company, whether represented in person or by proxy, on all matters submitted to a vote of holders of common stock, including election of directors. There is no right to cumulative voting in election of directors. Except where a greater requirement is provided by statute or by the articles of incorporation, or in the by-laws, the presence, in person or by proxy duly authorized, of one or more holders of a majority of the outstanding shares of our common stock constitutes a quorum for the transaction of business. The vote by the holders of a majority of a class of outstanding shares is required to effect certain fundamental corporate changes such as liquidation, merger, or amendment of our articles of incorporation.
+
+Dividends
+
+There are no restrictions in our articles of incorporation or by-laws that prevent us from declaring dividends. The Delaware General Corporation Law does, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend (1) we would not be able to pay our debts as they become due in the usual course of business or (2) our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution. We have not declared any dividends, and we do not plan to declare any dividends in the foreseeable future.
+
+Preemptive Rights
+
+Holders of our common stock are not entitled to preemptive rights, and no redemption or sinking fund provisions are applicable to our common stock. All outstanding shares of our common stock are fully paid and non-assessable.
+
+Amendment of our Bylaws
+
+Our bylaws may be adopted, amended or repealed by the affirmative vote of a majority of our outstanding shares. Subject to applicable law, our bylaws also may be adopted, amended or repealed by our board of directors.
+
+Our Transfer Agent
+
+We have retained Routh Transfer, Inc. of Plano, Texas as our transfer agent.
+
+Page 25 of 79
+
+DIRECTORS AND EXECUTIVE OFFICERS
+
+Our directors and executive officers, their ages, and the positions they hold are set forth below. Our directors hold office until our next annual meeting of stockholders and until their successors in office are elected and qualified. All officers serve at the discretion of our Board of Directors.
+
+(A)
+
+Directors and Executive Officers
+
+Name
+
+Age
+
+Title
+
+Peter Toscano
+
+58
+
+Chairman of the Board, Chief Executive Officer/President
+
+Jack Wagenti
+
+70
+
+Vice President, Secretary, and Director
+
+Jose Garcia
+
+50 
+
+Vice President and Director
+
+Louis D. Garcia
+
+56
+
+Vice President, Finance
+
+James W. FitzGibbons
+
+38 
+
+Controller and Chief Accounting Officer
+
+Sheik Hani A. Z. Yamani
+
+46
+
+Director
+
+Georgi Grechko
+
+76
+
+Director
+
+Salvatore Arnone
+
+46
+
+Director
+
+Robert Astore
+
+70
+
+Director
+
+Walter J. Salvadore
+
+51
+
+Director
+
+Mr. Peter Toscano. Mr. Toscano has been Director, President and Chief Executive Officer of International Power Group since October of 2004. Mr. Toscano also is President, Chief Executive Officer and Director of U.S. Precious Metals, Inc., positions he has held since May 9, 2002. Mr. Toscano was an officer of Material Waste Recycling, Inc. from February 2001 through May 9, 2002. Material Waste Recycling, Inc. was in the business of recycling wools, cottons and acrylics both in the United States and Mexico. Mr. Toscano over the past five years has been involved in materials reprocessing, export, and importation in Mexico. In addition, Mr. Toscano has had experience in the development of systems for the management of hazardous wastes in Russia and Central Asia. Also, Mr. Toscano has been involved in various low-level radioactive waste management projects within the Pacific Rim. Within those arenas, Mr. Toscano has spearheaded projects that utilized strategic alliances with major companies such as Westinghouse Electric Company and Waste Management, Inc. Among his responsibilities, Mr. Toscano has acted as a liaison bridging the gap between Russian and US corporations. U.S. Precious Metals, Inc. is a venture owned by, among others, Messrs. Toscano, Wagenti and J. Garcia. U.S. Precious Metals, Inc. s principal activity is to acquire, explore and develop mineral properties in Mexico. It is in its exploration stage and is focused on acquiring prospective mineral properties, principally gold and silver. U.S. Precious Metals, Inc. acquired exploration concessions to certain mineral properties known as Solidaridad I, Solidaridad II, Solidaridad III, Solidaridad IV and Solidaridad V located in Michoacan, Mexico. Material Waste Recycling, Inc., which ceased operations in May 2002, was in the business of collecting and recycling fabric remnants. The remnants were collected primarily from domestic U.S clothing manufacturers and sold to overseas processors.
+
+Mr. Jack Wagenti. Mr. Wagenti has been Director and Secretary of International Power Group since October of 2004. He has also served as Chief Financial Officer of the Company from its inception to October 2006. Mr. Wagenti is also a Director and the Secretary and Chief Financial Officer of U.S. Precious Metals Inc., a company which is traded on the Over The Counter Bulletin Board. Mr. Wagenti has held positions with U.S. Precious Metals since May 2002. From 1996 to the present, Mr. Wagenti has served in varying capacities of American International Ventures, Inc., a company which is traded on the Over the Counter Bulletin Board and Pink Sheets Market. Presently, Mr. Wagenti is a Director of American International Ventures, Inc. American International Ventures, Inc. is in the mineral exploration business in the State of Nevada and its assets include the Brunner Property located in Nye County, Nevada.
+
+Mr. Jose Garcia. Mr. Garcia has been a Director and Vice President of International Power Group since October of 2004. Mr. Garcia was employed by La Carvella Restaurant from February 2001 to May 9, 2002. Mr. Garcia has been Vice President of U.S. Precious Metals, Inc. since May 2002, a company trading on the Over The Counter Bulletin Board and President of U.S. Precious Metals de Mexico since March 2003. Mr. Garcia is from Morelia, Mexico and is President of IPW Group de Mexico, which is a wholly owned subsidiary of International Power Group, Ltd. 
+
+Page 26 of 79
+
+Mr. Louis D. Garcia. Mr. Garcia has been the Company s Vice President, Finance since May 15, 2006. From 1997 through March 2006, Mr. Garcia was the Managing Director of Providence Financial Services, LLC. Prior to Providence, Mr. Garcia was a Senior Managing Director with GCR Highland LLC and Senior Managing Director (Real Estate) with Jesup, Josenthal and Co., Inc. Mr. Garcia received a Bachelor of Science in Finance from Saint Johns University in New York. 
+
+James W. FitzGibbons. Mr. FitzGibbons has served as Controller and Chief Accounting Officer of the Company since October 2006. He previously served as Vice President Finance and Chief Accounting Officer of NDC-Health Corporation, a NYSE traded healthcare services company from January 2004 through January 2006. Prior to NDCHealth, beginning in January 1999, Mr. FitzGibbons was Vice President Controller of McKesson Corporation s Information Solutions business unit. Mr. FitzGibbons received his Bachelor of Science degree in accounting from the University of Alabama. He is a certified public accountant in the State of Georgia. 
+
+Sheik Hani A. Z. Yamani. Sheik Yamani has been a Director of International Power Group, Ltd. since March 2006. He is also the Executive Chairman of Hazy Trading Establishment and its affiliated companies, an organization he founded in 1988. Hazy Trading Establishment has completed energy and development projects in Africa and Middle East valued at over 5 billion US. He has been an advisor to a number of multi-national companies including Asea Brown Boveri (ABB) (1991 to 1998), Astaldi spA. (1991 to 1998), Interbeton BV (1992 to 1999) and Avia Mineral (1994 to 1998). He has also been a member of World Travel & Tourism Council and the Young Presidents Organization. He is a member of the Board and the Executive Committee of the International Islamic Relief Organization.
+
+Sheik Yamani attended Oxford University and the Wharton School of Business at the University of Pennsylvania and, from 1983 to 1984, trained at Citibank in New York City and Geneva, and at MKS Finance in Geneva, one of the world s leading integrated precious metals and foreign exchange trading houses. Sheik Yamani is also the author of To Be a Saudi , a book that received positive reviews in the international media during the late 1990s. Sheik Yamani is often an editorial contributor in the Saudi Arabian media on economic, political and social issues.
+
+Dr. Georgi Grechko. Dr. Grechko has been a Director since October 2004. He brings extensive technical expertise in the field of applied sciences. He will also help foster the international cooperation that is required for International Power s operation. He qualifies as an independent director as defined under the Sarbanes Oxley Act of 2002. Dr. Grechko, a Russian cosmonaut, flew on three space flights and at one time held the space endurance record. He graduated from the Leningrad Institute of Mechanics with a doctorate in mathematics. He went on to work at Sergei Korolev s design bureau and from there was selected for cosmonaut training in the Soviet moon program. He went on to work on the Salyut space stations. After leaving the space program in 1992, Dr. Grechko became a lecturer in atmospheric physics at the Soviet Academy of Sciences. Dr. Grechko from November 1997 to September 2004 was the Chief Advisor to the Chairman of the Board of Investsberbank, Pokrovka Street 47A, Moscow, 105062, Russian Federation; from September 2004 to present he is a member of the Board of Directors of Investsberbank.
+
+Mr. Salvatore J. Arnone. Mr. Arnone has been a director of International Power Group, Ltd. since December 2004. He is a Senior Account Executive with KMBS, Inc. (a/k/a Konica-Minolta Business Systems, Inc.), a company that manufactures, sells and services photocopiers and other office equipment. Mr. Arnone has been with KMBS, Inc. since May of 1998. Mr. Arnone has received many exceptional achievement awards in management and sales.
+
+Mr. Robert Astore. Mr. Astore has been a director of International Power Group, Ltd. since January 2005. He was President and owner of Bergen Film Laboratories, Inc., Lodi New Jersey from 1960 to 1981. From 1981 to 1990 Mr. Astore was a self employed builder. Mr. Astore from 1990 to present he has been employed as an independent consultant in seafood sales and brokerage. Mr. Astore received a Bachelor s Degree in Business Administration from the University of Miami.
+
+Mr. Walter Salvadore. Mr. Salvadore has been a director of International Power Group, Ltd. since January 2006. Since 1982, Mr. Salvadore, a ceramic engineer, has been the president of R&S Enterprises, a business consulting firm located in Medford, New Jersey. In addition, since 2000, he has maintained a junior partnership position in 
+
+Page 27 of 79
+
+Draseena Funds Group, an asset management firm located in Stateline, Nevada. From 1982 to 1999, Mr. Salvadore was the President and CEO of Risco, an/engineering and distribution firm specializing in high temperature refractory and industrial insulation materials. From 1977 to 1982, he held various engineering and marketing positions with the Carborundum Company (Niagara Falls, New York). He was a former president of the American Ceramic Society and has a B.S. degree in Ceramic Engineering from Rutgers University.
+
+Mr. Thomas J. Mitchell resigned as a director of the Company on February 3, 2007. He had served as a director of the Company since January 2006. 
+
+Our officers are not full time employees and are involved in other business endeavors. We do not have a formal conflicts of interest policy governing its officers and directors. We do not have written employment agreements with any of our officers. Our officers intend to devote sufficient business time and attention to the our affairs to develop our business in a prudent and business-like manner. 
+
+Other Officers (non-executive) and Significant Personnel.
+
+Dr. Kenny Tang. In March 2006, the Company appointed Dr. Tang, 47, to its newly created Environmental Advisory Board. Currently, he is the first and, to date, the only member of this board. Since June 2000, Dr. Kenny Tang has been the CEO of Oxbridge Capital, an investment and advisory firm which he founded at that time, specializing in environmental clean technologies and renewable energy. Prior to June 2000, he was employed in corporate finance with the Union Bank of Switzerland in London and as a strategy consultant with KPMG Consultants and Stern Stewart, the later two being pioneers in corporate governance and shareholder value creation. Dr. Tang also serves (since 2005) as the European Managing Partner at Enhancement Partners LP which is a global consortium that is developing Gigawatt-size wind farms in China. Prior to 2000, he was the President and CEO of SUSTAIN, an Asian research institute focusing on economic and environmental sustainability from an Asian perspective, which he founded.
+
+Dr. Tang earned his doctorate at Judge Business School, Cambridge University s business school and he is a member of the Board of Governors of Middlesex University, London. He is also a Chartered Financial Analyst (CFA).
+
+Gregory J. Callageri. In April 2006, the Company appointed Gregory J. Callageri, 47, as Chairman of its newly formed Finance Advisory Committee. He is the first and, to date, the only member of this board. Mr. Callageri is the CEO of REGF, LLC, a private investment manager and consulting firm that he founded in April 2005. From 1999 to April 2005, Mr. Callageri owned and operated an asset management and consulting firm named MAP Fund LLC, which he had founded. Mr. Callageri sold MAP Fund LLC in April 2005.
+
+Mr. Callageri has over 23 years experience working with global banks, asset managers and hedge funds. Throughout his career, he has had prominent roles and high level responsibilities in international capital markets and has worked in the major financial centers. His experience in hedge funds and derivatives operations has given him a broad range of exposure and experience in dealing with international banking institutions. He has visited, analyzed and completed due diligence on over 200 hedge funds throughout his career. He received an MBA from Pace University in New York and lives in Chicago, Illinois. 
+
+(C)
+
+Involvement in Certain Legal Proceedings. To the knowledge of the Company, none of its officers or directors has been personally involved in any bankruptcy or insolvency proceedings within the last five years. Similarly, to the knowledge of the Company, none of the directors or officers, within the last five years, have been convicted in any criminal proceedings (excluding traffic violations and other minor offenses) or are the subject of a criminal proceeding which is presently pending, nor have such persons been the subject of any order, judgment, or decree of any court of competent jurisdiction, permanently or temporarily enjoining them from acting as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or insurance company, or from engaging in or continuing in any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security, nor were any of such persons the subject of a federal or state authority barring or suspending, for more than 60 
+
+Page 28 of 79
+
+days, the right of such person to be engaged in any such activity, which order has not been reversed or suspended.
+
+(D)
+
+Audit Committee Financial Expert. The Company does not have an audit committee or an audit committee financial expert; as such term is defined in Item 401(e) of Regulation S-B. The Company is not required at this time to have an audit committee because it is not a listed issuer as described in Rule 10A-3(c)(2) promulgated under the Exchange Act. The Board is considering current and potential independent board members for this committee when the appropriate time arrives.
+
+(E)
+
+Compliance with Section 16(A) of the Exchange Act. Section 16(a) of the Exchange Act requires the Company s directors, executive officers, and persons who own more than 10% of the Company s equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, Directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. During the fiscal year ended December 31, 2006 there were 10 such individuals who were subject to the reporting requirements of the Exchange Act. To the best of the Company s knowledge, all our executive officers, directors and persons who beneficially own more than ten percent of our common stock are current in their Section 16 filings.
+
+(F)
+
+Code of Ethics. The Company s Board of Directors has been considering adoption of a Code of Ethics to be applicable to its Chief Executive Officer and senior financial executives. The Code of Ethics will be designed to deter wrong-doing and promote honest and ethical behavior, full, fair, timely, accurate and understandable disclosure, and compliance with applicable laws. The Board anticipates it will adopt the Code of Ethics during the current fiscal year.
+
+LITIGATION
+
+From time to time, we may be involved in various claims, lawsuits, and disputes with third parties, actions incidental to the normal operations of the business. As of the date of this prospectus, we are not aware of any material claims, lawsuits, disputes with third parties or the like that would have any material affect on our business.
+
+CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
+
+Neither our directors and executive officers, any person who beneficially owns, directly or indirectly, shares
+
+representing
+
+ more than 5% of our common stock
+
+, any other related person as defined in Item 404 of Regulation S-K promulgated under the Securities Act of 1933,
+
+ nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons, has any material interest, direct or indirect, in any transaction that we have entered
+
+into since the beginning of our last fiscal year, during
+
+ the two
+
+fiscal years preceding our last fiscal year, or in
+
+ or any proposed transaction
+
+in which the amount involved exceeds $120,000, except that during the fourth quarter of our fiscal
+
+ year ended December 31
+
+, 2006,
+
+ U.S. Precious Metals, Inc. ( USPM
+
+ ), a company of which
+
+ Peter Toscano, Jack Wagenti and Jose Garcia
+
+are officers and directors
+
+, loaned
+
+to us
+
+ $250,000 at a 6% interest rate and we repaid this loan in the same quarter. 
+
+Page 29 of 79
+
+CORPORATE GOVERNANCE
+
+Director Independence
+
+The board of directors is responsible for directing the management of the business and affairs of the Company. The board holds regular meetings each year and holds additional special meetings as required. Directors are expected to attend board meetings and to spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. Although participation by conference telephone or other communications equipment is allowed, personal attendance is encouraged.
+
+Our board has affirmatively determined, after considering all of the relevant facts and circumstances, that all of the directors other than Peter Toscano, Jack Wagenti, Jose Garcia, and Robert Astore are independent from our management under the standards set forth in the listing standards of the NASDAQ Stock Market. This means that none of the independent directors have any direct or indirect material relationship with the Company that will interfere with their exercise of independent judgment in carrying out their responsibilities as a director.
+
+Board meetings and Committees; Annual Meeting Attendance
+
+The board does not have a separately designated nominating, compensation or audit committee, which functions are handled by the board of directors. The board of directors held 15 meetings during the fiscal year ended December 31, 2006. Each of the directors attended at least 75% of the meetings of the board of directors held during the 2006 fiscal year while he was a member of the board.
+
+EXECUTIVE COMPENSATION
+
+The Company s Executive Compensation Program Philosophy
+
+The Company strives to attract, motivate and retain high-quality executives with the requisite skills and abilities to enable the Company to achieve superior results. Accordingly, the Company s compensation programs are designed to provide compensation commensurate with performance and to reward above average performance and provide incentive opportunity to be competitive for talent in the labor markets in which the Company participates. The board of directors assumes the duties of a compensation committee. The board of directors sets executive compensation and its own compensation using industry standards as a guideline. The Company does not currently have any compensation consultants assisting the Company with executive and/or director compensation matters.
+
+The key elements of the Company s compensation programs are base salaries, performance cash bonuses for contributions to short and long-term goals, and the grant of stock options. Base salaries and cash bonuses are the core elements of the Company s compensation programs. Base salaries are a necessary element to enable the Company to compete and are determined following negotiations with the individual and are based on competitive market conditions. To date, the Company awards cash bonuses based on a subjective evaluation of performance by the board of directors. The board of directors believe that base salaries, along with cash bonuses and stock options enable the Company to meet its objectives of attracting, motivating and retaining the right mix of employees needed to achieve the Company s business objectives. The board of directors also believes that its compensation structure is both fair and competitive and allows the Company to reward extraordinary accomplishments. 
+
+While the Company rewards performance that contributes to business developments that meet the Company s long-term goals, the Company does not have any long-term compensation plans in place, pursuant to which performance will be measured over a period of more than one year and compensation will be paid out after a period of more than a year.
+
+Page 30 of 79
+
+The Company has used utilized market data in making compensation decisions but the Company has not targeted any of its compensation decisions to any specific benchmarks or peer groups. The Company does not have any formal equity ownership requirements.
+
+The Company reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1 million in any taxable year that is paid to certain individuals unless the compensation is performance based. The Company believes that the compensation paid under its compensation programs is generally fully deductible for federal income tax purposes.
+
+Compensation Committee Report
+
+The following report of the board of directors does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this report by reference therein.
+
+The board of directors has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on such review and discussion, the board of directors approved the inclusion of the Compensation Discussion and Analysis in this prospectus.
+
+ 
+
+Peter Toscano
+
+ 
+
+Jack Wagenti
+
+ 
+
+Jose Garcia
+
+ 
+
+Salvatore Arnone
+
+ 
+
+Robert Astore
+
+ 
+
+Walter J. Salvadore
+
+ 
+
+Sheik Hani A.Z. Yamani
+
+ 
+
+Georgi Grechko
+
+Page 31 of 79
+
+The following table sets forth certain information regarding the compensation of our Chief Executive Officer and our
+
+four next most highly compensated
+
+executive officers
+
+ for the fiscal years ended December 31, 2006, 2005
+
+and 2004
+
+. Except as set forth below, no other compensation was paid to these individuals during the years indicated.
+
+Annual Compensation Name and
+
+Principal Position
+
+Year 
+
+Salary 
+
+Bonus 
+
+Stock Awards
+
+Option Awards
+
+Non-Equity Incentive Plans Compensation
+
+Non-Qualified Deferred Compensation
+
+All Other Compensation
+
+Total
+
+Peter Toscano 
+
+2006 
+
+$46,231 
+
+$ - 
+
+- 
+
+$ - 
+
+- 
+
+- 
+
+$39,379(5)
+
+$85,610 
+
+President, Chief Executive 
+
+2005 
+
+19,558 
+
+- 
+
+- 
+
+20,000(1)
+
+- 
+
+- 
+
+2,991 
+
+42,549 
+
+Officer and Director 
+
+2004 
+
+- 
+
+- 
+
+5,000(6)
+
+- 
+
+- 
+
+- 
+
+ 
+
+5,000 
+
+ 
+
+Jack Wagenti 
+
+2006 
+
+46,231 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+18,386(5)
+
+64,617 
+
+Vice President and Director 
+
+2005 
+
+17,058 
+
+- 
+
+- 
+
+20,000(1)
+
+- 
+
+- 
+
+2,949 
+
+40,007 
+
+ 
+
+2004
+
+ 
+
+- 
+
+- 
+
+5,000(6)
+
+- 
+
+- 
+
+- 
+
+- 
+
+5,000 
+
+ 
+
+Jose Garcia
+
+2006 
+
+84,583 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+84,583 
+
+Vice President and Director 
+
+2005 
+
+17,058 
+
+- 
+
+- 
+
+20,000(1)
+
+- 
+
+- 
+
+- 
+
+37,058 
+
+ 
+
+2004 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ - 
+
+ - 
+
+- 
+
+ 
+
+Chris Duncan (2)
+
+2006 
+
+130,769 
+
+- 
+
+- 
+
+307,000(3)
+
+- 
+
+- 
+
+- 
+
+437,769 
+
+Former Chief Operating Officer 
+
+2005 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+2004 
+
+-
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+ 
+
+John Mack (4)
+
+2006 
+
+80,769 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+80,769 
+
+Former Chief Financial Officer 
+
+2005 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+2004
+
+ 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+-
+
+ 
+
+ 
+
+1)
+
+The financial value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for the valuation of these option awards are as follows: Expected dividends 0%; Expected volatility 156.24%; Risk free interest rate 3.75%; expected life of options 75 years. The assumptions are also disclosed in Note 8 in the Notes to the Consolidated Financial Statements included in this prospectus.
+
+2)
+
+Mr. Duncan resigned as the Company s Chief Operating Officer on January 2, 2007.
+
+3)
+
+The financial value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for the valuation of these option awards are as follows: Expected dividends 0%; Expected volatility 100.85%; Risk free interest rate 4.96%; expected life of options 1.39 years. The assumptions are also disclosed in Note 8 in the Notes to the Consolidated Financial Statements included in this prospectus.
+
+4)
+
+Mr. Mack resigned as the Company s Chief Financial Officer on January 5, 2007.
+
+We have no employment contracts with any our officers.
+
+5)
+
+These amounts include car allowance for Messrs Toscano and Wagenti for $12,979 and $18,386, respectively. In addition, Mr. Toscano received a housing allowance in the amount of$26,400.
+
+6)
+
+The $5,000 in compensation received by Messrs Toscano and Wagenti in 2004 was paid in the form of 50,000,000 shares each which was valued as salary compensation at $0.0001 per share.
+
+Page 32 of 79
+
+2006 GRANTS OF PLAN-BASED AWARDS
+
+The table below sets forth information regarding grants of plan-based awards made to each of the named executive officers during 2006:
+
+Name
+
+Grant Date
+
+Estimated Future Payouts Under Non-Equity Incentive Plan Awards
+
+Estimated Future Payouts Under Equity Incentive Plan Awards
+
+All Other Stock Awards: Number of Shares of Stock or Units (#)
+
+All Other Option Awards:
+
+Number of Securities Underlying Options (1) (#)
+
+Exercise or Base Price of Option Awards ($/Sh)
+
+Grant Date Fair Value of Stock and Stock Options ($)(2)
+
+Threshold
+
+Target
+
+Maximum
+
+Threshold
+
+Target
+
+Maximum
+
+Peter Toscano 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+Jack Wagenti 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+Jose Garcia
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+Chris Duncan 
+
+03/14/2006 
+
+ 
+
+1,000,000 
+
+$0.83 
+
+$210,000 
+
+ 
+
+07/18/2006 
+
+ 
+
+200,000 
+
+$0.67 
+
+$240,000 
+
+ 
+
+11/21/2006 
+
+ 
+
+300,000 
+
+$0.67 
+
+$ 57,000 
+
+ 
+
+John Mack 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+ 
+
+(1)
+
+ Reflects options granted during 2006 pursuant to our 2005 Stock Option Plan.
+
+(2)
+
+ The grant date fair value of each stock award and Chris Duncan s option award is determined pursuant to SFAS 123(R).
+
+ 
+
+Page 33 of 79
+
+The following table discloses information regarding outstanding equity awards as of December 31, 2006 for each of our senior executive officers.
+
+OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
+
+Name and Principal Position
+
+ 
+
+Number of Securities
+
+Underlying Unexercised Options/Exercisable (1)
+
+ 
+
+Number of Securities
+
+Underlying Unexercised
+
+Options/Un-exercisable (1)
+
+Option
+
+Exercise Price
+
+ 
+
+Option
+
+Expiration date
+
+Peter Toscano, President, CEO 
+
+ 
+
+ 
+
+and Director
+
+ 1,000,000 
+
+ - 
+
+ $ 
+
+0.10 
+
+ 6/14/2010 
+
+ 
+
+ 
+
+Jack Wagenti
+
+ 
+
+Vice President and Director
+
+ 
+
+ 1,000,000 
+
+ - 
+
+ 0.10 
+
+ 6/14/2010 
+
+ 
+
+ 
+
+Jose Garcia
+
+ 
+
+Vice President and Director
+
+ 
+
+1,000,000 
+
+ 
+
+- 
+
+ 
+
+0.10 
+
+ 
+
+6/14/2010 
+
+ 
+
+ 
+
+Chris Duncan(1)
+
+ 1,000,000 
+
+ - 
+
+ 0.83 
+
+ 6/14/2010 
+
+ 
+
+Former Chief Operating
+
+ 200,000 
+
+ - 
+
+ 0.67 
+
+ 7/17/2010 
+
+ 
+
+Officer
+
+ 300,000 
+
+ - 
+
+ 0.67 
+
+ 6/14/2010 
+
+ 
+
+ 
+
+John Mack(2)
+
+ 
+
+Former Chief Financial Officer
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ 
+
+(1) Mr. Duncan resigned as the Company s Chief Operating Officer on January 2, 2007.
+
+(2) Mr. Mack resigned as the Company s Chief Financial Officer on January 5, 2007. 
+
+Option Exercises and stock vested: No stock options, SARs and similar instruments were exercised and no stock, including restricted stock, restricted stock units or similar instruments vested during our fiscal year ended December 31, 2006.
+
+Directors Compensation.
+
+Directors receive no monetary compensation for their service as directors. Directors are reimbursed for expenses incurred in connection with the Company s business.
+
+Page 34 of 79
+
+The following table documents the compensation of our directors for the fiscal years ended December 31, 2006.
+
+Name
+
+Fees Earned or Paid in Cash
+
+ Stock
+
+Awards
+
+ Option
+
+Awards (1)
+
+ Non-Equity
+
+Incentive Plan
+
+Compensation
+
+ Nonqualified
+
+Deferred Compensation
+
+ All Other
+
+Compensation
+
+ Total
+
+ Salvatore Arnone
+
+$ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ Robert Astore
+
+- 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ Jose Garcia
+
+- 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ Georgi Grecko
+
+- 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ Thomas Mitchell
+
+- 
+
+ - 
+
+ 210,000 
+
+ - 
+
+ - 
+
+ - 
+
+ 210,000 
+
+ Walter Salvatore
+
+- 
+
+ - 
+
+ 210,000 
+
+ - 
+
+ - 
+
+ - 
+
+ 210,000 
+
+ Hani A. Z. Yamani
+
+- 
+
+ - 
+
+ 1,210,000 
+
+ - 
+
+ - 
+
+ - 
+
+ 1,210,000 
+
+ 
+
+(1) The financial value of each option was estimated using the Black-Scholes option-pricing model and the assumptions disclosed in Note 8 in the Notes to the Consolidated Financial Statements included in this Form 10-K
+
+/A2.
+
+ The following is a list of the outstanding option held by each director as of December 31, 2006: 
+
+Salvatore Arnone
+
+(1,000,000)
+
+ 
+
+Robert Astore
+
+(1,000,000)
+
+ 
+
+Jose Garcia
+
+(1,000,000)
+
+ 
+
+Georgi Crechko
+
+(1,000,000)
+
+ 
+
+Thomas Mitchell
+
+(1,000,000)
+
+ 
+
+Walter Salvatore
+
+(1,000,000)
+
+ 
+
+Sheik Hani A. Z. Yamani
+
+(1,000,000)
+
+ 
+
+ 
+
+(2) Mr. Mitchell resigned as a director of the Company on February 3, 2007. 
+
+All Directors have been granted stock options for their board service. All such options were granted at or above fair market value determined on the date of grant.
+
+Stock Incentive Plans. On September 13, 2005, our Board adopted and our shareholders approved the Company s 2005 Stock Option Plan, effective June 15, 2005, a copy of which is attached as Exhibit 4.1 to the Company s Form 10-QSB filed with the SEC on November 21, 2005. This plan authorizes the granting of options representing up to 30,000,000 shares of common stock to Officers, Directors, and consultants. As of December 31, 2006, options to purchase 30,000,000 shares of common stock had been granted pursuant to this plan to individuals at an exercise prices ranging from $0.10 to $0.83 per share. The options vested upon grant, including options to purchase 11,800,000 shares of common stock that were granted to directors 7,100,000 options have been exercised. The options issued pursuant to this plan have been deemed by the Company to have a value ranging from $0.11 to $0.20 per share.
+
+Page 35 of 79
+
+SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+
+The following table indicates the number of shares of our common stock that were beneficially owned as of
+
+June 4,
+
+ 2007, by (1) each person known by us to be the owner of more than 5% of our outstanding shares of common stock, (2) our directors, (3) our executive officers, and (4) our directors and executive officers as a group. In general, beneficial ownership includes those shares a director or executive officer has sole or shared power to vote or transfer (whether or not owned directly) and rights to acquire common stock through the exercise of stock options or warrants that are exercisable currently or become exercisable within 60 days. Except as indicated otherwise, the persons name in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. We based our calculation of the percentage owned on
+
+383,177,219
+
+ beneficially owned shares outstanding on
+
+June 4,
+
+ 2007. The address of each director and executive officer listed below is c/o International Power Group, Ltd., 950 Celebration Boulevard, Celebration, Florida 34747.
+
+Name and Address
+
+Number of Shares Beneficially Owned
+
+ Percent of Class
+
+Peter Toscano
+
+100,954,830 
+
+ 
+
+26.35%
+
+Jack Wagenti
+
+106,194,480 
+
+ 
+
+27.71%
+
+Jose Garcia
+
+2,500,000 
+
+(1)
+
+* 
+
+Louis D. Garcia
+
+2,000,000 
+
+ * 
+
+James W. FitzGibbons
+
+200,000 
+
+(2)
+
+* 
+
+Salvatore Arnone
+
+2,300,000 
+
+(3)
+
+* 
+
+Dr. Georgi Grechko
+
+1,040,000 
+
+(9)
+
+* 
+
+Robert Astore
+
+2,300,000 
+
+(4)
+
+* 
+
+Walter Salvadore
+
+1,660,000 
+
+(5)
+
+* 
+
+Sheik Hani A.Z. Yamani
+
+6,000,000 
+
+(6)
+
+* 
+
+Armada Partners, L.P. (7)
+
+25,000,000 
+
+(8)
+
+6.52%
+
+All officers and directors as a group (10 persons)
+
+225,149,310 
+
+ 
+
+58.76%
+
+* Represents less than 1%
+
+_____________________________ 
+
+(1) Includes 1 million shares issuable upon presently exercisable stock options.
+
+(2) Includes 200,000 shares issuable upon presently exercisable stock options. 
+
+(3) Includes 1 million shares issuable upon presently exercisable stock options. 
+
+(4) Includes 1.3 million shares issuable upon presently exercisable stock options. 
+
+(5) Includes 1.5 million shares issuable upon presently exercisable stock options. 
+
+(6) Includes 6 million shares issuable upon presently exercisable stock options. 
+
+(7) The address for Armada Partners, L.P. is 650 5th Avenue, New York, NY 10199. Voting control and dispositive
+
+power over these shares is held by Mr. Armando Ruiz. 
+
+(8) Includes 5 million shares issuable upon presently exercisable warrants.
+
+(9)
+
+ Includes 1 million shares issuable upon presently exercisable stock options.
+
+ 
+
+Page 36 of 79
+
+SELLING STOCKHOLDERS
+
+The table below sets forth the name of each person who is offering for resale shares of common stock covered by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering, and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
+
+The shares of common stock being offered in this prospectus (including shares issuable upon the exercise of warrants) were issued in private placement transactions by us, each of which was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Securities Act.
+
+Because the selling stockholders may offer all, some, or none of their shares of our common stock, we cannot provide a definitive estimate of the number of shares that the selling stockholders will hold after this offering.
+
+Other than as indicated, none of the selling stockholders has at any time during the past three years acted as one of our employees, officers, or directors or otherwise had a material relationship with us.
+
+In accordance with the terms of registration rights agreements with the selling stockholders, this prospectus covers the resale of all of the shares issued in the private placements and, as to certain shareholders, the shares issuable upon the exercise of warrants sold in the private placements. 
+
+For purposes of the following table, beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a selling stockholder and the percentage ownership of that selling stockholder, shares of common stock issuable through the exercise of warrants that are currently exercisable within 60 days are deemed beneficially owned. Each selling stockholder s percentage of ownership in the following table is based on
+
+383,177,219
+
+ shares of common stock outstanding as of
+
+June 4,
+
+ 2007.
+
+Page 37 of 79
+
+Selling Stockholder
+
+Shares beneficially owned prior to the offering
+
+Number of common shares registered in this prospectus
+
+Shares beneficially owned after the offering
+
+Number
+
+Percent
+
+Number
+
+Percent
+
+Armada Partners, L.P.
+
+25,000,000 (1)
+
+6.52%
+
+25,000,000
+
+0
+
+0%
+
+Alan Nathan
+
+375,000 (2)
+
+*
+
+375,000
+
+0
+
+0%
+
+Trust Philip & Lola Pomeranc TTEES U/A 2/4/94
+
+150,000 (3)
+
+*
+
+150,000
+
+0
+
+0%
+
+Amianna Stovall
+
+300,000 (4)
+
+*
+
+300,000
+
+0
+
+0%
+
+Alejandra Vazquez
+
+225,000 (5)
+
+*
+
+225,000
+
+0
+
+0%
+
+Bradley C. Reifler
+
+1,500,000 (6)
+
+ 1,500,000
+
+0
+
+0%
+
+Jason Guggenheim (7)
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Jill E. Gardner & Phillip Winesberry TEN COM
+
+100,000
+
+*
+
+100,000
+
+0
+
+0%
+
+Daniel Wagener & Wanda F. Wagener JTWROS 
+
+100,000
+
+*
+
+100,000
+
+0
+
+0%
+
+Paul Zeinfeld 
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Dr. Daniel P. Conte 
+
+75,
+
+000
+
+*
+
+75,
+
+000
+
+0
+
+0%
+
+Paul S. Hudson
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Joseph W. Princiotta 
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Samuel T. Cosma & Matthew T. Rega TEN COM 
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Valentine Corporation 
+
+25,000(8)
+
+*
+
+25,000
+
+0
+
+0%
+
+The Valentine Family Trust 
+
+25,000
+
+(9)
+
+*
+
+25,000
+
+0
+
+0%
+
+Anthony R. Lorie 
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Guy Radthe & Susan Radthe JTWROS
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Joseph De Mateo & Carmine De Matteo JTWROS 
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Jerry Pane
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Chester A. Yates
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Vern Hollingsworth
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Salvatore D Angelo
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+John Stellar & John Schmidt
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Seymour Strasser
+
+41,666
+
+*
+
+41,666
+
+0
+
+0%
+
+Elia Vacchione & Floraine Vecchione
+
+16,666
+
+*
+
+16,666
+
+0
+
+0%
+
+Mohammed S. Alyamani
+
+166,667
+
+*
+
+166,667
+
+0
+
+0%
+
+Monica E. Jones
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Timothy P. Jones
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Gregory D. Ackerman
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Gerald W. Soderquist
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Peter D. Ackerman
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Arthur DeWitt Ackerman
+
+16,666
+
+*
+
+16,666
+
+0
+
+0%
+
+Robert Vecchione & Rosalie Vecchione
+
+58,331
+
+*
+
+58,331
+
+0
+
+0%
+
+Page 38 of 79
+
+George Giannandrea
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Frank
+
+Marter
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Jeffrey J. Harrington
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Daniel
+
+Driscoll
+
+1,500,000
+
+*
+
+1,500,000
+
+0
+
+0%
+
+Noel Williams Quinn & Paul Quinn JTWROS
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Lawrence R. Mesarick
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Todd & Maria King JTWROS
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Irene K. Ackley
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Irving & Bette Betrock
+
+450,000
+
+*
+
+450,000
+
+0
+
+0%
+
+Sharon Najger
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+E.P. Desrochers
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+James & Sally Mayer JTWROS
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+John & Martha King JTWROS
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Michael B. Crews Sr.
+
+20,832
+
+*
+
+20,832
+
+0
+
+0%
+
+Rebecca B. Crews
+
+20,834
+
+*
+
+20,834
+
+0
+
+0%
+
+Michael B. Crews Jr. 
+
+41,666
+
+*
+
+41,666
+
+0
+
+0%
+
+Joseph C. Crews
+
+41,668
+
+*
+
+41,668
+
+0
+
+0%
+
+M. Shane Thompson
+
+75,000
+
+*
+
+75,000
+
+0
+
+0%
+
+Timothy R. Thompson
+
+75,000
+
+*
+
+75,000
+
+0
+
+0%
+
+Amy Freese
+
+75,000
+
+*
+
+75,000
+
+0
+
+0%
+
+Ronald W. Thompson
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Marilinette Thompson
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Allen Dukes
+
+275,000
+
+*
+
+275,000
+
+0
+
+0%
+
+Benjamin E. Jefferies
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+James Tully
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Shirley Desrochers
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Martha R. King
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Richard and Eleanor Neubauer
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+James Mayer 
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Daniel Wagener
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+Thomas Rampen
+
+330,000
+
+*
+
+330,000
+
+0
+
+0%
+
+Terry Walcott
+
+62,500(10)
+
+*
+
+62,500
+
+0
+
+0%
+
+Deborah Walcott
+
+125,000(11)
+
+*
+
+125,000
+
+0
+
+0%
+
+Howard Schechter
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Sheldon Baer & Norma Baer JWTROS
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Steven Zeinfeld
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+TOTAL
+
+34,807,496
+
+ 
+
+34,807,496
+
+ 
+
+Page 39 of 79
+
+*
+
+Represents less than 1%.
+
+(1) These shares include 5 million shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010. Of these shares, 10 million were granted in exchange for services provided by Armada Partners, L.P. and/or Mr. Armando Ruiz. Voting control and dispositive power over these shares is held by Mr. Armando Ruiz. Armada Partners, L. P. and/or Mr. Armando Ruiz, the principal of its investment advisor s may continue to introduce the Company to financial institutions which could potentially provide analyst coverage and/or to persons or entities that may be able to assist the Company with project financing for the Company s planned construction of WTE plants and the financing of the Company s planned Addpower business.
+
+(2) These shares include 125,000 shares issuable upon the exercise of a warrant. 
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010
+
+ 
+
+(3) These shares include 50,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010. Voting control and dispositive power over these shares is held by Philip & Lola Pomeranc.
+
+(4) These shares include 100,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010.
+
+ 
+
+(5) These shares include 75,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40per share and expires on December 21, 2010
+
+ 
+
+(6) These shares include 500,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010.
+
+ 
+
+(7) Mr. Guggenheim served as our Vice President of Strategy and Business Development from October 2006 through January 2007. 
+
+These shares were issued to Mr. Guggenheim as severance benefits in January 2007.
+
+(8)
+
+ Voting control and dispositive power over these shares is held by Robert O. Valentine, Sr.
+
+(9)
+
+ Voting control and dispositive power over these shares is held by Robert O. Valentine, Sr. and Madeleine Valentine.
+
+(10)
+
+ These shares include 31,250 shares issuable upon the exercise of a warrant. The warrant is exercisable into common stock at $0.40 per share and expires on April 27, 2008.
+
+ 
+
+(11) These shares include 62,500 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on April 27, 2008.
+
+ 
+
+DILUTION
+
+The common stock to be sold by the selling stockholders is common stock that is currently issued and outstanding or is issuable on exercise of warrants that have already been issued. Accordingly, there will be no dilution to our existing stockholders from the sale of shares registered hereby.
+
+PLAN OF DISTRIBUTION
+
+The selling stockholders may sell all or a portion of the shares beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent's commissions. The shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the 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, 
+
+ 
+
+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;
+
+ 
+
+in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
+
+ 
+
+through the writing of options, whether such 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;
+
+ 
+
+short sales;
+
+Page 40 of 79
+
+ 
+
+sales pursuant to Rule 144;
+
+ 
+
+broker-dealers may agree with the selling security holders 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.
+
+If the selling stockholders effect such transactions by selling shares to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares in the course of hedging in positions they assume. The selling stockholders may also sell shares short and deliver shares covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares to broker-dealers that in turn may sell such shares.
+
+The selling stockholders may pledge or grant a security interest in some or all of the warrants or shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares 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 selling stockholders and any broker-dealer participating in the distribution of the shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.
+
+Under the securities laws of some states, the shares may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
+
+There can be no assurance that any selling stockholder will sell any or all of the shares registered pursuant to the
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001334303_icx_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001334303_icx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..656d68755578b7aaed313bdacbede5abb638146f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001334303_icx_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus and certain other legal matters will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, New York, New York. A member of Wilson Sonsini Goodrich & Rosati and an investment limited liability company comprised of current and former members of, and persons associated with, Wilson Sonsini Goodrich & Rosati beneficially own an aggregate of 10,000 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001336103_industrial_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001336103_industrial_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c4acebd95de6e08903fdc1ac7785fe47c9da63d9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001336103_industrial_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York 10017. Certain legal matters with respect to this offering will be passed upon for the underwriters by Lowenstein Sandler PC.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001336467_american_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001336467_american_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..60107f7c16a7871082323520635c5521a1bf5dc7
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001336467_american_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the shares of our common stock offered by this prospectus has been passed upon by Sonnenschein Nath & Rosenthal LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001337749_media_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001337749_media_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5a0fb58b805b93fe9469d326344dcdf6de0afb55
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001337749_media_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Greenberg Traurig, LLP, New York, New York. Kirkpatrick & Lockhart Preston Gates Ellis LLP, New York, New York, is acting as counsel for the underwriters in this offering. We have paid a retainer of $15,000 to Greenberg Traurig, LLP as of the date of this prospectus and have entered into an arrangement with Greenberg Traurig, LLP which provides that the balance of its fees in connection with this offering will be paid by us only if this offering is completed.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001337927_santa_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001337927_santa_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6f71b77a1647aa055695101814255202be3e4521
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001337927_santa_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Troy Gould Professional Corporation, Los Angeles, California. Bingham McCutchen, LLP, New York, New York, is acting as counsel for the underwriters in this offering. Troy Gould owns 15,024 shares, and David L. Ficksman, a member of Troy Gould, owns 15,024 shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001338520_titanium_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001338520_titanium_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..876bb8f3860ed3a099ef5d9352c7cdafa608ffe6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001338520_titanium_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Harney Westwood & Riegels, Tortola, British Virgin Islands, has given an opinion on the validity of the securities.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001338949_majestic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001338949_majestic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8404272fce2d126ba6a33fa393c8a2cea3d116ef
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001338949_majestic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS We are being represented by Kramer Levin Naftalis Frankel LLP, New York, New York in connection with this offering. The validity of the common shares and other legal matters in connection with this offering with respect to Bermuda law will be passed upon for us by Appleby Hunter Bailhache, Bermuda. Certain legal matters will be passed upon for the Underwriter by Sidley Austin LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001341740_concentric_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001341740_concentric_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d3e248e2f7784d25c5f0dc133a2f20e3bd942127
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001341740_concentric_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby has been passed upon for us by Wilson Sonsini Goodrich Rosati, P.C., Palo Alto, California. The underwriters are being represented by Latham Watkins LLP, Costa Mesa, California. Certain members of Wilson Sonsini Goodrich Rosati, P.C. act as trustees for the estate planning vehicles of certain stockholders holding less than 1% of the shares of our common stock in aggregate, assuming that all outstanding convertible preferred stock has been converted into common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001343719_energy_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001343719_energy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1133781ede2992eb3fee696e75e533e6607e8c0c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001343719_energy_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered hereby will be passed upon for us by Appleby Hunter Bailhache, our Bermuda counsel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001344376_aegean_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001344376_aegean_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8998a5da46e1fc6eb9d121fb14ba6b07898e2d83
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001344376_aegean_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock and certain other matters relating to Marshall Islands law will be passed upon for us by Reeder & Simpson P.C. Certain other matters relating to United States law, including certain tax matters, will be passed upon for us by Seward & Kissel LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Kramer Levin Naftalis & Frankel LLP, as to matters of United States law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001345122_compass_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001345122_compass_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..39bb69040f03ab90dd48ca5b7c6310e0a41104ce
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001345122_compass_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Richards, Layton Finger, P.A., Wilmington, Delaware; Squire, Sanders Dempsey L.L.P., Cincinnati, Ohio will pass upon certain other matters, including with respect to federal income tax matters addressed herein. Attorneys at Squire, Sanders Dempsey L.L.P. beneficially own an aggregate of approximately 44,500 shares of the trust. Certain legal matters will be passed upon on behalf of the underwriters by Alston Bird LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001345715_stoneleigh_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001345715_stoneleigh_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b8f2513e94ecbd6f2f2980c416a17d457e6d513f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001345715_stoneleigh_legal_matters.txt
@@ -0,0 +1,11 @@
+LEGAL MATTERS
+
+The validity of the securities offered in this prospectus are being passed upon for us by Blank Rome LLP, New York, New York. Graubard Miller, New York, New York, is acting as counsel for the underwriters in this offering. Blank Rome LLP, from time to time, acts as counsel to the representative on matters unrelated to this offering.
+
+EXPERTS
+
+The financial statements included in this prospectus and in the registration statement have been audited by BDO Seidman, LLP, independent registered public accounting firm, to the extent and for the periods set forth in their report (which contains an explanatory paragraph regarding its ability to continue as a going concern) appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of BDO Seidman, LLP are included in reliance upon their report given upon the authority of BDO Seidman, LLP as experts in auditing and accounting.
+
+WHERE YOU CAN FIND ADDITIONAL INFORMATION
+
+We have filed with the SEC a registration statement on
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001346685_sterling_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001346685_sterling_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..11c111c5a053511209cbd94e4cf997b90fe8c6ba
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001346685_sterling_legal_matters.txt
@@ -0,0 +1,1975 @@
+LEGAL MATTERS 
+ Certain legal matters relating to the validity of the securities offered by this prospectus
+will be passed upon for Sterling Mining by Hull & Branstetter, Chartered, Wallace, Idaho. 
+ 
+EXPERTS 
+ The financial statements and related financial statement schedule for the years ended
+December 31, 2006, 2005, and 2004, included in this prospectus have been audited by Williams & Webster PS, an independent registered public accounting firm, as stated in their report, which is included herein, and have been so included
+in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 
+ 
+
+ 76 
+
+Table of Contents
+
+ 
+INDEX TO FINANCIAL STATEMENTS
+ 
+ 
+
+ 
+CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 2007
+
+ 
+78
+
+ 
+Balance Sheets - June 30, 2007 (unaudited) and December 31, 2007
+
+ 
+78
+
+ 
+Statements of Operations and Comprehensive Loss - Three and Six Months Ended June 30, 2007 and 2006 (unaudited)
+
+ 
+79
+
+ 
+Statements of Cash Flows - Six Months Ended June 30, 2007 and 2006 (unaudited)
+
+ 
+80
+
+ 
+Condensed Notes to Consolidated Financial Statements
+
+ 
+81
+
+ 
+CONSOLIDATED AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 2006 
+
+ 
+95
+
+ 
+Report of Independent Registered Public Accounting Firm
+
+ 
+95
+
+ 
+Balance Sheets - December 31, 2006 and 2005
+
+ 
+96
+
+ 
+Statements of Operations and Comprehensive Loss - Years Ended December 31, 2006, 2005 and 2004
+
+ 
+97
+
+ 
+Statements of Stockholders Equity - Years Ended December 31, 2006, 2005 and 2004
+
+ 
+98
+
+ 
+Statements of Cash Flows - Years Ended December 31, 2006, 2005 and 2004
+
+ 
+99
+
+ 
+Notes to Consolidated Financial Statements
+
+ 
+100
+
+ 
+
+ 77 
+
+Table of Contents
+
+ 
+STERLING MINING COMPANY AND SUBSIDIARY
+ 
+ CONSOLIDATED BALANCE SHEETS 
+ 
+
+ 
+ 
+ June 30
+ 2007
+ (unaudited)
+
+ 
+ 
+ December 31
+ 2006
+ (audited)
+
+ 
+
+ ASSETS
+
+ 
+
+ 
+
+ CURRENT ASSETS
+
+ 
+
+ 
+
+ Cash
+
+ 
+$
+201,413
+ 
+ 
+$
+3,054,582
+ 
+
+ Marketable securities
+
+ 
+ 
+881,483
+ 
+ 
+ 
+790,514
+ 
+
+ Accounts receivable
+
+ 
+ 
+55,071
+ 
+ 
+ 
+64,043
+ 
+
+ Inventories
+
+ 
+ 
+429,523
+ 
+ 
+ 
+313,467
+ 
+
+ Prepaid expenses and deposits
+
+ 
+ 
+622,557
+ 
+ 
+ 
+225,787
+ 
+
+ Other current assets
+
+ 
+ 
+265,063
+ 
+ 
+ 
+242,211
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current assets
+
+ 
+ 
+2,455,110
+ 
+ 
+ 
+4,690,605
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ INVESTMENTS
+
+ 
+
+ 
+
+ Investment in Chester Mining Company
+
+ 
+ 
+2,860,432
+ 
+ 
+ 
+2,808,238
+ 
+
+ Long-term Investments and Other Investments
+
+ 
+ 
+870,009
+ 
+ 
+ 
+782,253
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total investments
+
+ 
+ 
+3,730,441
+ 
+ 
+ 
+3,590,491
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ PROPERTY AND EQUIPMENT
+
+ 
+
+ 
+
+ Property, plant and equipment
+
+ 
+ 
+17,658,805
+ 
+ 
+ 
+11,720,178
+ 
+
+ Less accumulated depreciation
+
+ 
+ 
+(133,210
+)
+ 
+ 
+(72,603
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total property and equipment
+
+ 
+ 
+17,525,595
+ 
+ 
+ 
+11,647,575
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ OTHER ASSETS
+
+ 
+
+ 
+
+ Prepaid long-term leases
+
+ 
+ 
+947,540
+ 
+ 
+ 
+990,096
+ 
+
+ Other assets
+
+ 
+ 
+12,911
+ 
+ 
+ 
+1,600
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ TOTAL ASSETS
+
+ 
+$
+24,671,597
+ 
+ 
+$
+20,920,367
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
+
+ 
+
+ 
+
+ CURRENT LIABILITIES
+
+ 
+
+ 
+
+ Accounts payable
+
+ 
+$
+2,441,484
+ 
+ 
+$
+1,464,102
+ 
+
+ Accrued expenses
+
+ 
+ 
+409,399
+ 
+ 
+ 
+192,206
+ 
+
+ Notes payable-current portion
+
+ 
+ 
+27,862
+ 
+ 
+ 
+13,931
+ 
+
+ Unearned revenue
+
+ 
+ 
+89,000
+ 
+ 
+ 
+134,172
+ 
+
+ Other current liabilities
+
+ 
+ 
+ 
+ 
+ 
+ 
+4,057,245
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current liabilities
+
+ 
+ 
+2,967,745
+ 
+ 
+ 
+5,861,656
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ LONG-TERM LIABILITIES
+
+ 
+
+ 
+
+ Notes payable
+
+ 
+ 
+505,832
+ 
+ 
+ 
+519,763
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total long-term liabilities
+
+ 
+ 
+505,832
+ 
+ 
+ 
+519,763
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ STOCKHOLDERS EQUITY
+
+ 
+
+ 
+
+ Common stock, $.05 par value; 80,000,000 shares authorized. 30,190,828, and 24,877,568 shares issued and outstanding at June 30, 2007 and
+December 31, 2006, respectively
+
+ 
+ 
+1,509,541
+ 
+ 
+ 
+1,243,878
+ 
+
+ Additional paid in capital
+
+ 
+ 
+45,764,694
+ 
+ 
+ 
+32,674,757
+ 
+
+ Common stock issuable
+
+ 
+ 
+ 
+ 
+ 
+ 
+400,000
+ 
+
+ Accumulated deficit
+
+ 
+ 
+(25,876,562
+)
+ 
+ 
+(19,955,554
+)
+
+ Accumulated comprehensive income
+
+ 
+ 
+(199,653
+)
+ 
+ 
+175,867
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ TOTAL STOCKHOLDERS EQUITY
+
+ 
+ 
+21,198,020
+ 
+ 
+ 
+14,538,948
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
+
+ 
+$
+24,671,597
+ 
+ 
+$
+20,920,367
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying condensed notes are an integral part of these interim financial statements
+
+ 
+
+ 78 
+
+Table of Contents
+
+ 
+STERLING MINING COMPANY AND SUBSIDIARY 
+ CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
+
+ 
+
+ 
+ 
+ 3 Months
+ Ended
+ June 30
+ 2007
+ (unaudited)
+
+ 
+ 
+ 3 Months
+ Ended
+ June 30
+ 2006
+ (unaudited)
+
+ 
+ 
+ Six Months
+ June 30
+ 2007
+ (unaudited)
+
+ 
+ 
+ Six Months
+ June 30
+ 2006
+ (unaudited)
+
+ 
+
+ REVENUES
+
+ 
+$
+854,151
+ 
+ 
+$
+316,509
+ 
+ 
+$
+1,045,488
+ 
+ 
+$
+597,033
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ COSTS AND EXPENSES
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Production costs applicable to sales
+
+ 
+ 
+265,208
+ 
+ 
+ 
+303,985
+ 
+ 
+ 
+513,369
+ 
+ 
+ 
+528,433
+ 
+
+ Exploration
+
+ 
+ 
+642,663
+ 
+ 
+ 
+1,151,966
+ 
+ 
+ 
+940,046
+ 
+ 
+ 
+1,700,370
+ 
+
+ Mine rehabilitation
+
+ 
+ 
+1,751,972
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,996,321
+ 
+ 
+ 
+ 
+ 
+
+ General and administrative
+
+ 
+ 
+1,731,038
+ 
+ 
+ 
+479,316
+ 
+ 
+ 
+2,677,810
+ 
+ 
+ 
+885,977
+ 
+
+ Depreciation and amortization
+
+ 
+ 
+46,358
+ 
+ 
+ 
+26,356
+ 
+ 
+ 
+60,607
+ 
+ 
+ 
+32,250
+ 
+
+ Professional services
+
+ 
+ 
+ 
+ 
+ 
+ 
+219,997
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+312,967
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total expenses
+
+ 
+ 
+4,437,239
+ 
+ 
+ 
+2,181,622
+ 
+ 
+ 
+7,188,153
+ 
+ 
+ 
+3,459,997
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ (LOSS) FROM OPERATIONS
+
+ 
+ 
+(3,583,088
+)
+ 
+ 
+(1,865,112
+)
+ 
+ 
+(6,142,665
+)
+ 
+ 
+(2,862,964
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ OTHER INCOME (EXPENSE)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Gain (loss) on investments
+
+ 
+ 
+39,643
+ 
+ 
+ 
+17,333
+ 
+ 
+ 
+276,988
+ 
+ 
+ 
+57,366
+ 
+
+ Interest and dividends
+
+ 
+ 
+17,553
+ 
+ 
+ 
+17,979
+ 
+ 
+ 
+53,640
+ 
+ 
+ 
+21,702
+ 
+
+ Interest (expense)
+
+ 
+ 
+(18,566
+)
+ 
+ 
+(19,410
+)
+ 
+ 
+(35,151
+)
+ 
+ 
+(27,739
+)
+
+ Gain (loss) on derivative instruments
+
+ 
+ 
+ 
+ 
+ 
+ 
+146,958
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(59,467
+)
+
+ Gain (loss) on exchange
+
+ 
+ 
+6,394
+ 
+ 
+ 
+63,960
+ 
+ 
+ 
+(73,628
+)
+ 
+ 
+6,220
+ 
+
+ Other income
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(746
+)
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total Other Income (Expense)
+
+ 
+ 
+45,024
+ 
+ 
+ 
+226,820
+ 
+ 
+ 
+221,103
+ 
+ 
+ 
+(1,919
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ LOSS BEFORE INCOME TAXES
+
+ 
+ 
+(3,538,064
+)
+ 
+ 
+(1,638,292
+)
+ 
+ 
+(5,921,562
+)
+ 
+ 
+(2,864,883
+)
+
+ INCOME TAXES
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ LOSS FROM CONTINUING OPERATIONS
+
+ 
+ 
+(3,538,064
+)
+ 
+ 
+(1,638,292
+)
+ 
+ 
+(5,921,562
+)
+ 
+ 
+(2,864,883
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ GAIN (LOSS) FROM INVESTMENT IN CHESTER MINING COMPANY
+
+ 
+ 
+(1,062
+)
+ 
+ 
+ 
+ 
+ 
+ 
+554
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ NET LOSS
+
+ 
+ 
+(3,539,126
+)
+ 
+ 
+(1,638,292
+)
+ 
+ 
+(5,921,008
+)
+ 
+ 
+(2,864,883
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ OTHER COMPREHENSIVE INCOME (LOSS)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Unrealized gain (loss) on investments
+
+ 
+ 
+(516,587
+)
+ 
+ 
+(279,641
+)
+ 
+ 
+(375,520
+)
+ 
+ 
+168,059
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ COMPREHENSIVE INCOME (LOSS)
+
+ 
+$
+(4,055,713
+)
+ 
+$
+(1,917,933
+)
+ 
+$
+(6,296,528
+)
+ 
+$
+(2,696,824
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Basic and Fully Diluted Loss per Share
+
+ 
+$
+(0.12
+)
+ 
+$
+(0.08
+)
+ 
+$
+(0.20
+)
+ 
+$
+(0.14
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Basic and fully diluted weighted average shares outstanding
+
+ 
+ 
+29,890,900
+ 
+ 
+ 
+20,105,300
+ 
+ 
+ 
+29,578,000
+ 
+ 
+ 
+19,821,400
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying condensed notes are an integral part of these interim financial statements
+
+ 
+
+ 79 
+
+Table of Contents
+
+ 
+STERLING MINING COMPANY AND SUBSIDIARY 
+ CONSOLIDATED STATEMENTS OF CASH FLOW 
+ 
+
+ 
+ 
+ Six Months
+ ended
+ June 30
+ 2007
+ (unaudited)
+
+ 
+ 
+ Six Months
+ ended
+ June 30
+ 2006
+ (unaudited)
+
+ 
+
+ CASH FLOWS FROM OPERATING ACTIVITIES:
+
+ 
+
+ 
+
+ Net income (loss)
+
+ 
+$
+(5,921,008
+)
+ 
+$
+(2,864,883
+)
+
+ Adjustments to reconcile net loss to net cash used by operating activities:
+
+ 
+
+ 
+
+ Depreciation
+
+ 
+ 
+60,607
+ 
+ 
+ 
+32,250
+ 
+
+ Amortization of discount on debentures
+
+ 
+ 
+ 
+ 
+ 
+ 
+84,755
+ 
+
+ Stock and options issued for services
+
+ 
+ 
+431,130
+ 
+ 
+ 
+ 
+ 
+
+ (Gain) loss on investments
+
+ 
+ 
+(276,988
+)
+ 
+ 
+(57,366
+)
+
+ (Gain) loss on investment in Chester Mining Company
+
+ 
+ 
+(554
+)
+ 
+ 
+ 
+ 
+
+ (Gain) loss on derivatives
+
+ 
+ 
+ 
+ 
+ 
+ 
+59,467
+ 
+
+ Payments for lease expenses with stock
+
+ 
+ 
+25,346
+ 
+ 
+ 
+1,005,000
+ 
+
+ Payment of general & admin. expenses with stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+5,200
+ 
+
+ (Increase) decrease in:
+
+ 
+
+ 
+
+ Accounts receivable
+
+ 
+ 
+8,972
+ 
+ 
+ 
+(53,624
+)
+
+ Inventories
+
+ 
+ 
+(116,056
+)
+ 
+ 
+(23,058
+)
+
+ Prepaid expenses
+
+ 
+ 
+(354,213
+)
+ 
+ 
+(883,368
+)
+
+ Other current assets
+
+ 
+ 
+(69,660
+)
+ 
+ 
+(99,675
+)
+
+ Increase (decrease) in:
+
+ 
+
+ 
+
+ Accounts payable
+
+ 
+ 
+977,382
+ 
+ 
+ 
+158,356
+ 
+
+ Accrued expenses
+
+ 
+ 
+217,193
+ 
+ 
+ 
+(197,622
+)
+
+ Other current liabilities
+
+ 
+ 
+(157,245
+)
+ 
+ 
+(8,490
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used by operating activities
+
+ 
+ 
+(5,175,094
+)
+ 
+ 
+(2,842,879
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ CASH FLOWS FROM INVESTING ACTIVITIES:
+
+ 
+
+ 
+
+ Purchase of investments
+
+ 
+ 
+(644,696
+)
+ 
+ 
+(276,703
+)
+
+ Proceeds from investments
+
+ 
+ 
+484,555
+ 
+ 
+ 
+122,758
+ 
+
+ Investment in property plant and equipment
+
+ 
+ 
+(8,876,127
+)
+ 
+ 
+(1,208,716
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided (used) by investing activities
+
+ 
+ 
+(9,036,268
+)
+ 
+ 
+(1,362,661
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ CASH FLOWS FROM FINANCING ACTIVITIES:
+
+ 
+
+ 
+
+ Proceeds from sales of common stock net of costs
+
+ 
+ 
+11,339,443
+ 
+ 
+ 
+2,460,000
+ 
+
+ Proceeds from exercise of stock options and warrants
+
+ 
+ 
+18,750
+ 
+ 
+ 
+582,331
+ 
+
+ Proceeds from debentures payable
+
+ 
+ 
+ 
+ 
+ 
+ 
+875,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by financing activities:
+
+ 
+ 
+11,358,193
+ 
+ 
+ 
+3,917,331
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net increase (decrease) in cash and cash equivalents
+
+ 
+ 
+(2,853,169
+)
+ 
+ 
+(288,209
+)
+
+ Cash beginning of period
+
+ 
+ 
+3,054,582
+ 
+ 
+ 
+1,270,849
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash at end of period
+
+ 
+$
+201,413
+ 
+ 
+$
+982,640
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ SUPPLEMENTAL CASH FLOW DISCLOSURES:
+
+ 
+
+ 
+
+ Income taxes paid
+
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+
+ Interest paid
+
+ 
+$
+35,151
+ 
+ 
+$
+27,739
+ 
+
+ NON-CASH INVESTING AND FINANCING ACTIVITIES:
+
+ 
+
+ 
+
+ Common stock issued for equipment
+
+ 
+$
+ 
+ 
+ 
+$
+90,000
+ 
+
+ Common stock issued for leases
+
+ 
+$
+156,500
+ 
+ 
+$
+1,005,000
+ 
+
+ Common stock issued for land
+
+ 
+$
+1,362,500
+ 
+ 
+$
+ 
+ 
+
+ Common stock and options issued for services
+
+ 
+$
+431,130
+ 
+ 
+$
+5,200
+ 
+
+ The accompanying condensed notes are an integral part of these interim financial statements
+
+ 
+
+ 80 
+
+Table of Contents
+
+ 
+STERLING MINING COMPANY AND SUBSIDIARY 
+ CONDENSED NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 
+ Sterling Mining Company is engaged in the business of acquiring, exploring, and developing mineral properties, primarily those containing silver and associated base and
+precious metals. It is operating the Barones silver plant and mining surface material at the San Acacio mine in Zacatecas, Mexico and is preparing the
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001347406_radiate_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001347406_radiate_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c21d7a92b0982b173510b727222d3f971ce47e16
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001347406_radiate_legal_matters.txt
@@ -0,0 +1,3899 @@
+Legal
+ matters
+
+ 
+
+ Certain
+ legal matters with respect to the issuance of shares of Common Stock offered
+ hereby will be passed upon by David M. Dobbs, P.C.
+
+ 
+
+ Where
+ You Can Find More Information
+
+ 
+
+ We
+ file
+ reports and other information with the U.S. Securities and Exchange Commission.
+ You may read and copy any document that we file at the SEC s public reference
+ facilities at 100F Street N.E., Washington, D.C. 20549. Please call the SEC
+ at
+ 1-800-732-0330 for more information about its public reference facilities.
+ Our
+ SEC filings are also available to you free of charge at the SEC s web site at
+ www.sec.gov.
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Index
+ to Financial Statements
+
+ 
+
+ 
+ 
+
+ 
+ 
+ Report
+ of Independent Registered Accounting Firm 
+
+ 
+ 
+ F-1
+
+ 
+ 
+
+ 
+ 
+ Balance
+ Sheet as of May 31, 2006
+
+ 
+ 
+ F-2
+
+ 
+ 
+
+ 
+ 
+ Statements
+ of Operations for the year ended May 31, 2006, the period from
+ inception
+ (June 10, 2004) through May 31, 2005 and the period from inception
+ (June 10, 2004) through May 31, 2006
+
+ 
+ 
+ F-3
+
+ 
+ 
+
+ 
+ 
+ Statements
+ of Changes in Shareholders Equity for the year ended May 31, 2006, the
+ period from inception (June 10, 2004) through May 31, 2005 and
+ the period
+ from inception (June 10, 2004) through May 31, 2006
+
+ 
+ 
+ F-4
+
+ 
+ 
+
+ 
+ 
+ Statements
+ of Cash Flows for the year ended May 31, 2006, the period from
+ inception
+ (June 10, 2004) through May 31, 2005 and the period from inception
+ (June 10, 2004) through May 31, 2006
+
+ 
+ 
+ F-5
+
+ 
+ 
+
+ 
+ 
+ Notes
+ to Financial Statements
+
+ 
+ 
+ F-6
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ REPORT
+ OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+
+ 
+
+ 
+
+ To
+ the
+ Board of Directors
+
+ Radiate
+ Research, Inc.
+
+ (A
+ Development Stage Company)
+
+ Ottawa,
+ Canada
+
+ 
+
+ We
+ have
+ audited the accompanying balance sheet of Radiate Research, Inc. as of May
+ 31,
+ 2006, and the related statements of operations, changes in shareholders equity
+ (defecit), and cash flows for the year ended May 31, 2006 and for the
+ period from June 10, 2004 (inception) to May 31, 2005. These financial
+ statements are the responsibility of the management of Radiate Research,
+ Inc.
+ Our responsibility is to express an opinion on these financial statements
+ based
+ on our audits.
+
+ 
+
+ We
+ conducted our audits in accordance with standards of the Public Company
+ Accounting Oversight Board (United States). These standards require that
+ we plan
+ and perform the audit to obtain reasonable assurance about whether the financial
+ statements are free of material misstatement. An audit includes examining,
+ on a
+ test basis, evidence supporting the amounts and disclosures in the financial
+ statements. An audit also includes assessing the accounting principles used
+ and
+ significant estimates made by management, as well as evaluating the overall
+ financial statement presentation. We believe that our audits provide a
+ reasonable basis for our opinion.
+
+ 
+
+ In
+ our
+ opinion, the accompanying financial statements present fairly, in all material
+ respects, the financial position of Radiate Research, Inc. as of May 31,
+ 2006,
+ and the results of its operations and cash flows for the periods described
+ above
+ in conformity with accounting principles generally accepted in the United
+ States
+ of America.
+
+ 
+
+ The
+ accompanying financial statements have been prepared assuming that Radiate
+ Research Inc. will continue as a going concern. As discussed in Note 2 to
+ the
+ financial statements, Radiate Research Inc. had total assets of $16,181 and
+ incurred net loss of $583,224 for the year ended May 31, 2006, which raise
+ substantial doubt about its ability to continue as a going concern. Management s
+ plans in regard to those matters are described in Note 2. The financial
+ statements do not include any adjustments that might result from the outcome
+ of
+ this uncertainty.
+
+ 
+
+ Malone
+ & Bailey, PC
+
+ www.malone-bailey.com
+
+ Houston,
+ Texas
+
+ 
+
+ October
+ 19, 2006
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ RADIATE
+ RESEARCH INC.
+
+ (A
+ Development Stage Company)
+
+ BALANCE
+ SHEET
+
+ May
+ 31, 2006
+
+ (Amounts
+ in Canadian dollars, unless otherwise noted)
+
+ 
+
+ 
+ 
+
+ 
+ 
+ ASSETS
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Current
+ assets
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Cash
+
+ 
+ 
+ $
+ 688
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Accounts
+ receivable, net
+
+ 
+ 
+ 2,145
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Value
+ added taxes recoverable
+
+ 
+ 
+ 5,962
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Inventory
+
+ 
+ 
+ 4,346
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ current assets
+
+ 
+ 
+ 13,141
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Capital
+ assets, net of $740 accumulated depreciation 
+
+ 
+ 
+ 3,040
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ assets
+
+ 
+ 
+ $
+ 16,181
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ LIABILITIES
+ AND SHAREHOLDERS DEFICIT 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Current
+ liabilities
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Accounts
+ payable and accrued liabilities
+
+ 
+ 
+ $
+ 62,210
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Accounts
+ payable due to related parties
+
+ 
+ 
+ 11,413
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Due
+ to former officer
+
+ 
+ 
+ 5,085
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ current liabilities
+
+ 
+ 
+ 78,708
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Derivative
+ liability
+
+ 
+ 
+ 156,883
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ liabilities 
+
+ 
+ 
+ 235,591
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Shareholders 
+ deficit
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Special
+ Shares:
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Class
+ A convertible special shares, without par value, 11,632,600 shares
+ authorized, issued and outstanding
+
+ 
+ 
+ 421,129
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Class
+ B convertible special shares, without par value, 170,000 shares
+ authorized, 70,000 issued and outstanding
+
+ 
+ 
+ 26,250
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Class
+ A common stock, without par value, unlimited shares authorized,
+ 1,637,400
+ shares issued and outstanding
+
+ 
+ 
+ 129,974
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Deficit
+ accumulated during the development stage
+
+ 
+ 
+ (796,763)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ shareholders deficit
+
+ 
+ 
+ (219,410)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ liabilities and shareholders deficit
+
+ 
+ 
+ $
+ 16,181
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ See
+ summary of significant accounting policies and notes to financial
+ statements.
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ RADIATE
+ RESEARCH INC.
+
+ (A
+ Development Stage Company)
+
+ STATEMENTS
+ OF OPERATIONS
+
+ (Amounts
+ in Canadian dollars, unless otherwise noted)
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ For
+ the year ended May 31, 2006
+
+ 
+ 
+ Inception
+ (June 10, 2004) Through May 31, 2005
+
+ 
+ 
+ Inception
+ (June 10, 2004) Through May 31, 2006
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Sales
+
+ 
+ 
+ $
+ 31,112
+
+ 
+ 
+ $
+ 7,454
+
+ 
+ 
+ $
+ 38,566
+
+ 
+ 
+
+ 
+ 
+ Cost
+ of goods sold
+
+ 
+ 
+ 40,789
+
+ 
+ 
+ 13,014
+
+ 
+ 
+ 53,803
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Gross
+ loss
+
+ 
+ 
+ (9,677)
+
+ 
+ 
+ (5,560)
+
+ 
+ 
+ (15,237)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Operating
+ costs
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Consulting
+
+ 
+ 
+ 213,788
+
+ 
+ 
+ 91,750
+
+ 
+ 
+ 305,538
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Research
+ and development
+
+ 
+ 
+ 3,329
+
+ 
+ 
+ 54,970
+
+ 
+ 
+ 58,299
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Professional
+ fees
+
+ 
+ 
+ 114,348
+
+ 
+ 
+ 16,010
+
+ 
+ 
+ 130,358
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Other
+ general and administrative
+
+ 
+ 
+ 85,199
+
+ 
+ 
+ 45,249
+
+ 
+ 
+ 130,448
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ operating costs
+
+ 
+ 
+ 416,664
+
+ 
+ 
+ 207,979
+
+ 
+ 
+ 624,643
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net
+ loss from operations
+
+ 
+ 
+ (426,341)
+
+ 
+ 
+ (213,539)
+
+ 
+ 
+ (639,880)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Loss
+ on derivative liability
+
+ 
+ 
+ 156,883
+
+ 
+ 
+ -
+
+ 
+ 
+ 156,883
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net
+ Loss
+
+ 
+ 
+ $
+ (583,224)
+
+ 
+ 
+ $
+ (213,539)
+
+ 
+ 
+ $
+ (796,763)
+
+ 
+ 
+
+ 
+ 
+ Net
+ loss per share, basic and diluted
+
+ 
+ 
+ $
+ (0.05) 
+
+ 
+ 
+ $
+ (1.96)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Weighted
+ average shares outstanding used in per share computations
+
+ 
+ 
+ 12,180,521
+
+ 
+ 
+ 109,000
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ See
+ summary of significant accounting policies and notes to financial
+ statements.
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ RADIATE
+ RESEARCH INC.
+
+ (A
+ Development Stage Company)
+
+ STATEMENTS
+ OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
+
+ For
+ the Year Ended May 31, 2006, 
+
+ the
+ Period from June 10, 2004 (Inception) Through May 31, 2005 and
+
+ the
+ Period from June 10, 2004 (Inception) Through May 31, 2006
+
+ (Amounts
+ in Canadian dollars, unless otherwise noted)
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Class
+ A Special Shares
+
+ 
+ 
+ Class
+ B Special Shares
+
+ 
+ 
+ Class
+ A Common Stock
+
+ 
+ 
+ Subscription
+
+ Receivable
+
+ 
+ 
+ Deficit
+ Accumulated During the Development
+
+ Stage
+
+ 
+ 
+ Total
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Shares
+
+ 
+ 
+ Amount
+
+ 
+ 
+ Shares
+
+ 
+ 
+ Amount
+
+ 
+ 
+ Shares
+
+ 
+ 
+ Amount
+
+ 
+ 
+
+ 
+ 
+ Stock
+ issued 
+
+ for
+ cash
+
+ 
+ 
+ 10,633,000
+
+ 
+ 
+ $
+ 216,271
+
+ 
+ 
+ -
+
+ 
+ 
+ $
+ -
+
+ 
+ 
+ 217,000
+
+ 
+ 
+ $
+ 4,414
+
+ 
+ 
+ $
+ (709) 
+
+ 
+ 
+ $
+ -
+
+ 
+ 
+ $
+ 219,976
+
+ 
+ 
+
+ 
+ 
+ Net
+ loss
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ (213,539)
+
+ 
+ 
+ (213,539)
+
+ 
+ 
+
+ 
+ 
+ Balance
+ at 
+
+ May
+ 31, 2005
+
+ 
+ 
+ 10,633,000
+
+ 
+ 
+ 216,271
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ 217,000
+
+ 
+ 
+ 4,414
+
+ 
+ 
+ (709)
+ 
+
+ 
+ 
+ (213,539)
+
+ 
+ 
+ 6,437
+
+ 
+ 
+
+ 
+ 
+ Cancelled
+ shares
+
+ 
+ 
+ (49,000)
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ (1,000)
+
+ 
+ 
+ 
+
+ 
+ 
+ 5
+
+ 
+ 
+ 
+
+ 
+ 
+ 5
+
+ 
+ 
+
+ 
+ 
+ Stock
+ issued 
+
+ for
+ cash
+
+ 
+ 
+ 1,048,600
+
+ 
+ 
+ 204,858
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ 1,421,400
+
+ 
+ 
+ 125,560
+
+ 
+ 
+ 704
+
+ 
+ 
+ 
+
+ 
+ 
+ 331,122
+
+ 
+ 
+
+ 
+ 
+ Stock
+ issued for services
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 70,000
+
+ 
+ 
+ 26,250
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 26,250
+
+ 
+ 
+
+ 
+ 
+ Net
+ loss
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ -
+
+ 
+ 
+ (583,224)
+
+ 
+ 
+ (583,224)
+
+ 
+ 
+
+ 
+ 
+ Balance
+ at 
+
+ May
+ 31, 2006
+
+ 
+ 
+ 11,632,600
+
+ 
+ 
+ $
+ 421,129
+
+ 
+ 
+ 70,000
+
+ 
+ 
+ $
+ 26,250
+
+ 
+ 
+ 1,637,400
+
+ 
+ 
+ $
+ 129,974
+
+ 
+ 
+ $
+ -
+
+ 
+ 
+ $
+ (796,763)
+
+ 
+ 
+ $(219,410)
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ See
+ summary of significant accounting policies and notes to financial
+ statements.
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ RADIATE
+ RESEARCH INC. 
+
+ (A
+ Development Stage Company)
+
+ STATEMENTS
+ OF CASH FLOWS
+
+ (Amounts
+ in Canadian dollars, unless otherwise noted)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ For
+ the year ended 
+
+ May
+ 31, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+ Inception
+ (June 10, 2004) Through May 31, 2005
+
+ 
+ 
+ 
+
+ 
+ 
+ Inception
+ (June 10, 2004) Through May 31, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ CASH
+ FLOWS FROM OPERATING ACTIVITIES
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Net
+ loss
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (583,224
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (213,539
+
+ 
+ 
+ )
+
+ 
+ 
+ $
+
+ 
+ 
+ (796,763
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Adjustments
+ to reconcile net loss to cash used in operating
+ activities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Deprecation
+ expense
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 740
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 740
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Bad
+ debt expense
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 19,260
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 19,260
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Shares
+ for services
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 26,250
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 26,250
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Loss
+ on derivative liability 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 156,883
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 156,883
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Changes
+ in operating assets and liabilities:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accounts
+ receivable
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (19,493
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (1,912
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (21,405
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Value
+ added taxes recoverable
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (2,890
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,072
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (5,962
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Inventory
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 3,932
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (8,278
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (4,346
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ Prepaid
+ assets
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 7,500
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (7,500
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accounts
+ payable and accrued liabilities
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 39,731
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 23,019
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 62,750
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Accounts
+ payable due to related parties
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 11,413
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 11,413
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Sales
+ taxes payable
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (444
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 444
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ NET
+ CASH USED IN OPERATING ACTIVITIES
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (340,342
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (210,838
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ (551,180
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ CASH
+ FLOWS FROM INVESTING ACTIVITIES
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Purchase
+ of fixed assets
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,780
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (3,780
+
+ 
+ 
+ )
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ CASH
+ FLOWS FROM FINANCING ACTIVITIES
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Due
+ to former officer
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 4,545
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 4,545
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Issuance
+ of common shares for cash
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 331,127
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 219,976
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 551,103
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ NET
+ CASH PROVIDED BY FINANCING ACTIVITIES
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 331,127
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 224,521
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 555,648
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ NET
+ CHANGE IN CASH
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ (12,995
+
+ 
+ 
+ )
+
+ 
+ 
+ 
+
+ 
+ 
+ 13,683
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 688
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ CASH
+ AT BEGINNING OF PERIOD
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 13,683
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ CASH
+ AT END OF PERIOD
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 688
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 13,983
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ 688
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ SUPPLEMENTAL
+ DISCLOSURES:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash
+ paid for interest
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ Cash
+ paid for income taxes
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+ $
+
+ 
+ 
+ -
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ See
+ summary of significant accounting policies and notes to financial
+ statements.
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ RADIATE
+ RESEARCH INC.
+
+ (A
+ Development Stage Company)
+
+ NOTES
+ TO THE FINANCIAL STATEMENTS
+
+ AT
+ MAY 31, 2006
+
+ (Amounts
+ in Canadian dollars, unless otherwise noted)
+
+ 
+
+ NOTE
+ 1 - BASIS OF FINANCIAL STATEMENTS
+
+ 
+
+ 
+
+ Nature
+ of
+ business
+
+ 
+
+ Radiate
+ Research Inc. ( Radiate ) was incorporated under the Canada Business
+ Corporations Act on June 10, 2004, and filed Articles of Amendment on
+ November 9, 2005. Radiate Research Inc. develops baby and infant products
+ for manufacture by third party licensees utilizing a unique foil heating
+ technology.
+
+ 
+
+ Revenue
+ recognition
+
+ 
+
+ Radiate
+ recognizes revenue from (1) the sale of Mothers' Warmth heating pads and
+ (2) the
+ design, and installation of foil-based low-energy radiant heating systems.
+ Radiate s revenue recognition policies are based on the guidance in Staff
+ Accounting Bulletin No. 104, Revenue Recognition, in conjunction with Emerging
+ Issues Task Force ( EITF ) Issue Number 00-21, Revenue Arrangements with
+ Multiple Deliverables . Radiate recognizes revenue when:
+
+ 
+
+ (1)
+ persuasive evidence of an arrangement exists,
+
+ 
+
+ (2)
+ delivery has occurred or services have been rendered,
+
+ 
+
+ (3)
+ the
+ sales price is fixed or determinable, and
+
+ 
+
+ (4)
+ collectibility of the resulting accounts receivable is reasonably
+ assured.
+
+ 
+
+ Allowance
+ Method Used to Record Bad Debts
+
+ 
+
+ Radiate
+ uses the allowance method to account for uncollectible accounts receivable.
+ Accounts receivable are presented net of an allowance for doubtful accounts
+ of
+ $19,260 at May 31, 2006.
+
+ 
+
+ Research
+ and development
+
+ 
+
+ Research
+ costs are expensed as incurred. Development costs are expensed in the year
+ incurred unless management believes a development project meets the generally
+ accepted accounting criteria for deferral and amortization. In the opinion
+ of
+ management, no development costs incurred to date meet all the criteria for
+ deferral and amortization. Therefore, all development costs have been expensed
+ as incurred. While there are government programs available to provide assistance
+ on eligible research and development expenses, it is not presently Radiate s
+ intention to apply for such assistance given the relatively modest amounts
+ involved vs. the effort required.
+
+ 
+
+ Capital
+ assets
+
+ 
+
+ Capital
+ assets are recorded at cost. Expenditures for major additions and improvements
+ are capitalized and minor replacements, maintenance, and repairs are charged
+ to
+ expense as incurred. When property and equipment are retired or otherwise
+ disposed of, the cost and accumulated depreciation are removed from the accounts
+ and any resulting gain or loss is included in the results of operations for
+ the
+ respective period. Depreciation is provided over the estimated useful lives
+ of
+ the related assets using the declining balance method. The estimated useful
+ lives for significant property and equipment categories are as
+ follows:
+
+ 
+
+ 
+ 
+
+ 
+ 
+ Computer
+ Equipment
+
+ 
+ 
+ 3
+ years
+
+ 
+ 
+ 
+
+ 
+ 
+ Computer
+ Software
+
+ 
+ 
+ 2
+ years
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ Inventory
+
+ 
+
+ Radiate
+ uses FIFO as a method of inventory calculation. Inventories are stated at
+ the
+ lower of cost or market (net realizable value).
+
+ 
+
+ Income
+ taxes
+
+ 
+
+ Future
+ tax assets and liabilities are recognized for the future tax consequences
+ attributable to differences between the financial statement carrying amounts
+ of
+ existing assets and liabilities and their respective tax bases. Future tax
+ assets and liabilities are measured using enacted or substantively enacted
+ tax
+ rates expected to apply to taxable income in the years in which those temporary
+ differences are expected to be recovered or settled. The effect on future
+ tax
+ assets and liabilities of a change in tax rates is recognized in income in
+ the
+ period that includes the enactment date.
+
+ 
+
+ Foreign
+ currency
+
+ 
+
+ Foreign
+ currency transactions are translated into Canadian dollars at exchange rates
+ in
+ effect on the date of the transactions. Monetary assets and liabilities are
+ translated into Canadian dollars at the exchange rate in effect as at the
+ balance sheet date. Foreign currency gains and losses are included in
+ income.
+
+ 
+
+ Use
+ of
+ estimates
+
+ 
+
+ The
+ preparation of financial statements in conformity with US generally accepted
+ accounting principles requires management to make estimates and assumptions
+ that
+ affect the reported amounts of assets and liabilities and disclosures of
+ contingent assets and liabilities at the date of the financial statements
+ and
+ the reported amounts of revenues and expenses during the period. Actual results
+ could differ from those estimates.
+
+ 
+
+ Earnings
+ (loss) per share
+
+ 
+ 
+
+ 
+ For
+ the
+ purposes of the basic and fully diluted earnings (loss) per share computation,
+ the weighted average number of common shares has been used. Radiate has
+ determined in accordance with the provisions of EITF 03-06 Participating
+ Securities and the Two-Class Method under FASB Statement No. 128, Earnings
+ Per
+ Share that the Class A Special Shares and the Class B Special Shares are to
+ be included as common share equivalents for basic earnings (loss) per
+ share.
+
+ 
+
+ 
+
+ Concentrations
+ of credit risk
+
+ 
+
+ Radiate
+ is exposed to credit-related losses in the event of non-performance by
+ counterparties. Credit exposure is minimized by dealing with only creditworthy
+ counterparties.
+
+ 
+
+ Fair
+ values
+
+ 
+
+ The
+ carrying values of cash and cash equivalents, accounts receivable, accounts
+ payable and accrued liabilities and notes payable approximate fair values
+ due to
+ the short-term maturities of these instruments.
+
+ 
+
+ Derivative
+ financial instruments
+
+ 
+
+ Radiate
+ does not use derivative instruments to hedge exposures to cash flow, market,
+ or
+ foreign currency risks. 
+
+ 
+
+ Derivative
+ financial instruments are initially measured at their fair value. For derivative
+ financial instruments that are accounted for as liabilities, the derivative
+ instrument is initially recorded at its fair value and is then re-valued
+ at each
+ reporting date, with changes in the fair value reported as charges or credits
+ to
+ income. For option-based derivative financial instruments, Radiate uses the
+ Black-Scholes option-pricing model to value the derivative instruments.
+
+ 
+
+ The
+ classification of derivative instruments, including whether such instruments
+ should be recorded as liabilities or as equity, is re-assessed at the end
+ of
+ each reporting period. Derivative instrument liabilities are classified in
+ the
+ balance sheet as current or non-current based on whether or not net-cash
+ settlement of the derivative instrument could be required within 12 months
+ of
+ the balance sheet date.
+
+ 
+
+ Recently
+ issued accounting pronouncements
+
+ 
+
+ Radiate
+ does not expect the adoption of recently issued accounting pronouncements
+ to
+ have a significant impact on Radiate s results of operations, financial position
+ or cash flows.
+
+ 
+
+ 
+
+ NOTE
+ 2 - GOING CONCERN
+
+ 
+
+ Radiate
+ has had minimal operations since inception, is a development stage company
+ and
+ has limited capital resources. As shown in the attached financial statements,
+ Radiate had total assets of $16,181 and had incurred net loss of $583,224
+ for
+ the year ended May 31, 2006. The accompanying financial statements have been
+ prepared on a going concern basis, which contemplates the realization of
+ assets
+ and satisfaction of liabilities in the normal course of business. These
+ financials statements do not include any adjustments relating to the recovery
+ of
+ the recorded assets or the classification of the liabilities that might be
+ necessary should Radiate be unable to continue as a going concern. Radiate s
+ continued existence is dependent upon its ability to raise capital through
+ private securities offerings and secure debt financing and use these sources
+ of
+ capital to develop and enhance its lines of foil heating system products
+ and
+ grow its sales of the Mothers Warmth Comfort Change System product line.
+ Management is focusing on targeting its existing product line in retail stores
+ that specialize in baby products, continuing its marketing efforts in Canada
+ and
+ expanding marketing activities in the United States. Through organic growth
+ and
+ funding via loans and private placement offerings, Radiate plans to continue
+ to
+ increase the profitability of its operations necessary to support operating
+ requirements. There can be no assurance that any of management s plans as
+ described above will be successfully implemented or that Radiate will continue
+ as a going concern.
+
+ 
+
+ NOTE
+ 3 - EQUITY
+
+ 
+
+ On
+ November 9, 2005, Radiate amended its Articles of Incorporation to:
+
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (a)
+
+ 
+ 
+ Change
+ the status of Radiate from Private to
+ Public
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (b)
+
+ 
+ 
+ Create
+ a new class of shares of the Corporation consisting of an unlimited
+ number
+ of shares and designated as the Class A Common Shares ( Class A Common
+ Shares )
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (c)
+
+ 
+ 
+ Create
+ a new class of shares in the capital of the Corporation consisting
+ of
+ 11,632,600 shares and designated as the Class A Special Shares
+ ( Class A
+ Convertible Special Shares )
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (d)
+
+ 
+ 
+ Create
+ a new class of shares in the capital of the Corporation consisting
+ of
+ 170,000 shares and designated as the Class B Special Shares ( Class B
+ Convertible Special Shares )
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ The
+ Share
+ Capital at May 31, 2006, after giving effect to the changes above, is as
+ follows:
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (a)
+
+ 
+ 
+ Special
+ shares
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 1. Class
+ A
+ Convertible Special Shares 
+
+ 
+
+ Rank
+ in
+ priority to the Common Shares and any other class of shares currently
+ outstanding or created hereafter, other than the Class B Convertible Special
+ Shares. Except in the case of liquidation, no
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001347815_flagstone_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001347815_flagstone_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..09a7a7658cbe3d7b94327558051a16b599352fa4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001347815_flagstone_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain matters as to U.S. law in connection with this offering will be passed upon for us by Carter Ledyard & Milburn LLP, New York, New York. Certain matters as to Canadian law in connection with this offering will be passed upon for us by Stewart McKelvey, Halifax, Canada. Certain matters as to U.K. law in connection with this offering will be passed upon for us by Kendall Freeman, London, United Kingdom. Certain matters as to Indian law in connection with this offering will be passed upon for us by Fox Mandal, Hyderabad, India. Certain matters as to Swiss law in connection with this offering will be passed upon for us by Lenz & Staehelin, Geneva, Switzerland. The validity of the issuance of common shares under Bermuda law will be passed upon for us by Attride-Stirling & Woloniecki, Hamilton, Bermuda. Certain legal matters in connection with this offering will be passed upon for the underwriters by LeBoeuf, Lamb, Greene & MacRae LLP, New York, New York and by Conyers Dill & Pearman, Hamilton, Bermuda.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001351051_genesis_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001351051_genesis_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a5659e115498444ba2f7bcef6f161eae8468a112
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001351051_genesis_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of class A common stock offered hereby will be passed upon for us by Latham Watkins LLP, Costa Mesa, California. Certain regulatory matters will be passed upon for us by Hooper, Lundy Bookman, Inc. The underwriters have been represented by Cravath, Swaine Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001351901_commonweal_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001351901_commonweal_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..669db2e7c756820d5be0b7827ccec19790e2fcfe
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001351901_commonweal_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS In connection with the units offered hereby Reed Smith LLP, Philadelphia, Pennsylvania, counsel to the dealer manager, the general partner and CIGF6, has passed upon legal matters for CIGF6 and the general partner regarding the valid issuance of the units, and the United States federal income tax consequences of an investment in the units.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001352801_burger_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001352801_burger_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..331cc09f768693128683cc2df8277a9e7f69712d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001352801_burger_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the shares of common stock offered hereby will be passed upon for us by Holland Knight LLP, Miami, Florida, and certain legal matters will be passed upon for the underwriters by Cleary Gottlieb Steen Hamilton LLP, New York, New York. Cleary Gottlieb Steen Hamilton LLP has in the past provided legal services to us and the sponsors, including in connection with the acquisition of BKC in December 2002, and may in the future continue to provide legal services to us and the sponsors. In addition, Cleary Gottlieb Steen Hamilton LLP currently provides legal services to the sponsors.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001354166_highland_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001354166_highland_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1ccc868ceb319fc14ee17388e11f22b82ed948e0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001354166_highland_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon for us by Skadden, Arps, Slate, Meagher Flom LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355467_sungard_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355467_sungard_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355467_sungard_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355473_eyeonics_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355473_eyeonics_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a9e5d4b807f229464faebbed232f634cabe56513
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355473_eyeonics_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Wilson Sonsini Goodrich Rosati, Professional Corporation, San Diego, California. Certain members of, investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich Rosati beneficially hold an aggregate of 50,856 shares of our common stock on an as-converted basis, which represents less than 1% of our outstanding shares of common stock. The underwriters are being represented by Latham Watkins LLP, Costa Mesa, California, in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355610_assent_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355610_assent_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355610_assent_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355611_asc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355611_asc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355611_asc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355621_data_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355621_data_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355621_data_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355634_microhedge_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355634_microhedge_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355634_microhedge_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355635_wall_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355635_wall_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355635_wall_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355636_world_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355636_world_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355636_world_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355638_plaid_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355638_plaid_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355638_plaid_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001355639_portfolio_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001355639_portfolio_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001355639_portfolio_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356104_mellanox_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356104_mellanox_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3c208b3f2b9b60434138239b264f76140b718621
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356104_mellanox_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the ordinary shares offered by this prospectus will be passed upon for us, with respect to U.S. law, by Latham Watkins LLP, Menlo Park, California, and, with respect to Israeli law, by Yigal Arnon Co., Jerusalem, Israel. Partners of Latham Watkins LLP hold an aggregate of, or have an interest in, 14,285 Series A-1 preferred shares, 2,688 Series B-1 preferred shares and 6,310 Series D redeemable preferred shares (which will convert into an aggregate of 29,142 ordinary shares upon the consummation of this offering, assuming an initial public offering price of $15.00 per ordinary share and as adjusted to reflect the 1.75-to-1 reverse split), 815 ordinary shares of the company and options to purchase 5,714 ordinary shares, and partners of Yigal Arnon Co. hold an aggregate of 7,564 Series B-1 preferred shares (which will convert into an aggregate of 4,322 ordinary shares upon the consummation of this offering, as adjusted to reflect the 1.75-to-1 reverse share split). Certain legal matters in connection with the offering will be passed upon for the underwriters, with respect to U.S. law, by Morrison Foerster LLP, San Francisco, California, and, with respect to Israeli law, by Meitar Liquornik Geva Leshem Brandwein, Ramat Gan, Israel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356709_cpg_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356709_cpg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356709_cpg_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356712_scranton_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356712_scranton_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356712_scranton_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356713_azek_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356713_azek_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356713_azek_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356715_santana_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356715_santana_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356715_santana_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356719_procell_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356719_procell_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356719_procell_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356720_cpg-sub-i_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356720_cpg-sub-i_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356720_cpg-sub-i_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356721_vycom-corp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356721_vycom-corp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356721_vycom-corp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356722_sanatec_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356722_sanatec_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f231d07e638cdfbd018452f6bb9fd2d7ca92e477
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356722_sanatec_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the notes offered hereby and the guarantees thereof will be passed on for us by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001356949_houston_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001356949_houston_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..644e5ffac4369a46d2ceb6b532f85270bea55bbe
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001356949_houston_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby has been passed upon for us by Schiff Hardin LLP, Chicago, Illinois. Schiff Hardin LLP is also serving as counsel for the selling stockholders. Four partners of Schiff Hardin LLP are general partners in a general partnership that is a limited partner in Code, Hennessy & Simmons II, L.P., which may be deemed to have an aggregate economic interest of $1,034,357 in our shares, assuming a price of $25.34 per share. In addition, two of these partners are partners in HW Investors, a general partnership that owns 79,890 shares of our common stock and is a selling stockholder. Legal matters in connection with this offering will be passed upon for the underwriters by Sidley Austin LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001358071_concho_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001358071_concho_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bc71b8f09ab4f69041ff6ddf6fdf1b6eaf44dc04
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001358071_concho_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of our shares of common stock offered by this prospectus will be passed upon for us by Vinson Elkins L.L.P., Houston, Texas. Certain legal matters in connection with this offering will be passed upon for Chase Oil Corporation and Caza Energy LLC by Bracewell Giuliani LLP, Houston, Texas. Legal matters in connection with this offering will be passed upon for the underwriters by Cahill Gordon Reindel llp, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001360537_castlepoin_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001360537_castlepoin_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..84defde66c13e00efcbe4da8662d1d234a83df11
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001360537_castlepoin_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares under Bermuda law has been passed upon for us by Conyers Dill & Pearman, Hamilton, Bermuda.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001361009_campusu_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001361009_campusu_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5e437690c56d4afbf0ab22cd31e5367863aea8b2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001361009_campusu_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., New York, New York. Ellenoff Grossman & Schole LLP, New York, New York, is acting as counsel for the underwriters in this offering. As of the date of this prospectus, persons and entities affiliated with Mintz Levin own an aggregate of 87,652 shares of common stock and no options or warrants to purchase shares of common stock. Mintz Levin has previously represented Maxim Group LLC and may do so again in the future.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001361872_westway_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001361872_westway_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0a8b469046c3101375c62c3be37737bbfedafcc6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001361872_westway_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Dechert LLP will pass upon the validity of the securities offered in this prospectus for us. Certain legal matters with respect to this offering will be passed upon for the underwriters by Bingham McCutchen LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001362120_pinnacle_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001362120_pinnacle_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..46dc917f7addff690136eff50cda30dc8a7fccd5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001362120_pinnacle_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered by this prospectus will be passed upon for us by our counsel, Andrews Kurth LLP, Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001363171_renaissanc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001363171_renaissanc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d82309d1bb4d48505600c1125a27e8dddf956204
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001363171_renaissanc_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the securities offered in this prospectus is being passed upon for us by Dechert LLP, New York, New York. Graubard Miller, New York, New York, is acting as counsel for the underwriter in this offering. Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001363613_uib-group_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001363613_uib-group_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7295c45c30af7d941e13d423b8e9f5bb37a992a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001363613_uib-group_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by DLA Piper US LLP, New York, New York. Ellenoff Grossman & Schole LLP, New York, New York, is acting as counsel for the underwriters in this offering. Legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. DLA Piper US LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001364099_innophos_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001364099_innophos_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8ba442ab231724a2514d98edf1b35a66ea5885d3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001364099_innophos_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters relating to this offering will be passed upon for us by Kirkland & Ellis LLP, New York, New York. Certain legal matters relating to this offering will be passed upon for the underwriters by Latham & Watkins LLP, New York, New York. Kirkland & Ellis is acting as counsel to the selling shareholders. An investment partnership composed of partners of Kirkland & Ellis LLP has an equity interest in Innophos Holdings, Inc.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001365216_sucampo_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001365216_sucampo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..01af9729e852e549468e7a0238b7cb3d0fd63ce0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001365216_sucampo_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the class A common stock offered by us in this offering will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C. Cleary Gottlieb Steen Hamilton LLP has acted as counsel for the underwriters in connection with certain legal matters related to this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001365742_acorn_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001365742_acorn_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4383872c7e5ee13355c35c027ed7b12ab67794e8
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001365742_acorn_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS We are being represented by O Melveny & Myers LLP with respect to legal matters of United States federal securities and New York State law. Certain legal matters of United States federal securities and New York State law in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP. The validity of the ordinary shares represented by the ADSs offered in this offering and legal matters as to Cayman Islands law will be passed upon for us by Conyers, Dill & Pearman. Certain legal matters as to PRC law will be passed upon for us by Haiwen & Partners and for the underwriters by Commerce & Finance Law Offices. Conyers, Dill & Pearman and O Melveny & Myers LLP may rely upon Haiwen & Partners with respect to matters governed by PRC law. Shearman & Sterling LLP may rely upon Commerce & Finance Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001365790_glg_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001365790_glg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c602c335db141b0a0b056ac545b097e3402992a4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001365790_glg_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock and warrants offered hereby will be passed upon for us by Greenberg Traurig, LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001366649_dialogic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001366649_dialogic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..130928083e1bb27bfde537fb2adb4f0868bb5bc6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001366649_dialogic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Cooley Godward Kronish LLP, Palo Alto, California. Certain legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich Rosati, Professional Corporation.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001366751_mbf_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001366751_mbf_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c243e1a8b9df3eafffb481e04290270a30643ab2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001366751_mbf_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Akerman Senterfitt will pass upon the validity of the securities offered in this prospectus for us. Certain legal matters with respect to this offering will be passed upon for the underwriters by Bingham McCutchen LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001366922_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001366922_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4302d99790a132614a1e8e3394f40d97f08914ee
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001366922_china_legal_matters.txt
@@ -0,0 +1,1926 @@
+LEGAL
+ MATTERS
+
+ 
+
+ Venable LLP will pass upon the validity of the securities
+ offered in this prospectus for us. Certain legal matters with
+ respect to this offering will be passed upon for the
+ underwriters by Gersten Savage LLP.
+
+ 
+
+ 67
+
+ 
+
+ 
+
+ EXPERTS
+
+ 
+
+ The financial statements included in this prospectus and in the
+ registration statement have been audited by Goldstein Golub
+ Kessler LLP, to the extent and for the period set forth in their
+ report appearing elsewhere in this prospectus and in the
+ registration statement. The financial statements and the report
+ of Goldstein Golub Kessler LLP are included in reliance upon
+ their report given upon the authority of Goldstein Golub Kessler
+ LLP as experts in auditing and accounting.
+
+ 
+
+ WHERE YOU
+ CAN FIND ADDITIONAL INFORMATION
+
+ 
+
+ We have filed with the SEC a registration statement on
+ Form S-1,
+ which includes exhibits, schedules and amendments, under the
+ Securities Act of 1933, with respect to this offering of our
+ securities. Although this prospectus, which forms a part of the
+ registration statement, contains all material information
+ included in the registration statement, parts of the
+ registration statement have been omitted as permitted by rules
+ and regulations of the SEC. We refer you to the registration
+ statement and its exhibits for further information about us, our
+ securities and this offering. The registration statement and its
+ exhibits, as well as our other reports filed with the SEC, can
+ be inspected and copied at the SEC s public reference room
+ at 100 F Street, N.E., Washington, D.C. 20549. The public
+ may obtain information about the operation of the public
+ reference room by calling the SEC at
+ 1-800-SEC-0330.
+ In addition, the SEC maintains a web site at http://
+ www.sec.gov which contains the
+ Form S-1
+ and other reports, proxy and information statements and
+ information regarding issuers that file electronically with the
+ SEC.
+
+ 
+
+ 68
+
+ 
+
+ CHINA
+ HEALTHCARE ACQUISITION CORP.
+
+ 
+
+ INDEX TO FINANCIAL STATEMENTS
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ Page
+
+ 
+
+ Financial Statements
+
+ 
+
+ 
+
+ Report of independent registered
+ public accounting firm
+ 
+
+ 
+
+ F-2
+ 
+
+ Balance sheet as of
+ December 31, 2006
+ 
+
+ 
+
+ F-3
+ 
+
+ Statement of operations for the
+ period from June 7, 2006 (date of inception) to
+ December 31, 2006
+ 
+
+ 
+
+ F-4
+ 
+
+ Statement of stockholders 
+ equity for the period from June 7, 2006 (date of inception)
+ through December 31, 2006
+ 
+
+ 
+
+ F-5
+ 
+
+ Statement of cash flows for the
+ period from June 7, 2006 (date of inception) to
+ December 31, 2006
+ 
+
+ 
+
+ F-6
+ 
+
+ Notes to financial statements
+ 
+
+ 
+
+ F-7
+ 
+
+ 
+
+ F-1
+
+ 
+
+ 
+
+ REPORT OF
+ INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+
+ 
+
+ To the Board of Directors
+
+ China Healthcare Acquisition Corp.
+
+ 
+
+ We have audited the accompanying balance sheet of China
+ Healthcare Acquisition Corp. (a development stage company) as of
+ December 31, 2006, and the related statements of
+ operations, stockholders equity and cash flows for the
+ period from June 7, 2006 (inception) to December 31,
+ 2006. These financial statements are the responsibility of the
+ Company s management. Our responsibility is to express an
+ opinion on these financial statements based on our audit.
+
+ 
+
+ We conducted our audit in accordance with the standards of the
+ Public Company Accounting Oversight Board (United States). Those
+ standards require that we plan and perform the audit to obtain
+ reasonable assurance about whether the financial statements are
+ free of material misstatement. An audit includes examining, on a
+ test basis, evidence supporting the amounts and disclosures in
+ the financial statements. An audit also includes assessing the
+ accounting principles used and significant estimates made by
+ management, as well as evaluating the overall financial
+ statement presentation. We believe that our audit provides a
+ reasonable basis for our opinion.
+
+ 
+
+ In our opinion, the financial statements referred to above
+ present fairly, in all material respects, the financial position
+ of China Healthcare Acquisition Corp. as of December 31,
+ 2006, and the results of its operations and its cash flows for
+ the period from June 7, 2006 (inception) to
+ December 31, 2006 in conformity with United States
+ generally accepted accounting principles.
+
+ 
+
+ The accompanying financial statements have been prepared
+ assuming China Healthcare Acquisition Corp. will continue as a
+ going concern. China Healthcare Acquisition Corp. has a net
+ loss, a working capital deficiency and has no operations. This
+ raises substantial doubt about China Healthcare Acquisition
+ Corp. s ability to continue as a going concern. As
+ discussed in Notes 1 and 5, China Healthcare Acquisition
+ Corp. is in the process of raising capital through a Proposed
+ Offering. The financial statements do not include any
+ adjustments that might result from the outcome of this
+ uncertainty.
+
+ 
+
+ GOLDSTEIN GOLUB KESSLER LLP
+
+ New York, New York
+
+ 
+
+ March 6, 2007
+
+ 
+
+ F-2
+
+ 
+
+ CHINA
+ HEALTHCARE ACQUISITION CORP.
+
+ (a development stage company)
+
+ 
+
+ BALANCE SHEET
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2006
+
+ 
+
+ 
+
+ ASSETS
+
+ Current Assets
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash
+ 
+
+ 
+
+ $
+
+ 49,349
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total Current Assets:
+ 
+
+ 
+
+ 
+
+ 49,349
+
+ 
+
+ Deferred offering costs
+ 
+
+ 
+
+ 
+
+ 331,479
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ TOTAL ASSETS
+
+ 
+
+ $
+
+ 380,828
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ LIABILITIES AND
+ STOCKHOLDERS EQUITY
+
+ Current Liabilities
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accounts payable and accrued
+ expenses
+ 
+
+ 
+
+ $
+
+ 208,828
+
+ 
+
+ Note payable to stockholder
+ 
+
+ 
+
+ 
+
+ 150,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total current liabilities
+ 
+
+ 
+
+ 
+
+ 358,828
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ COMMITMENTS
+
+ 
+
+ 
+
+ 
+
+ 
+
+ STOCKHOLDERS 
+ EQUITY
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Preferred stock 
+ $.0001 par value; 1,000,000 shares authorized; 0
+ issued and outstanding
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Common stock 
+ $.0001 par value; 50,000,000 shares authorized;
+ 2,500,000 issued and outstanding
+ 
+
+ 
+
+ 
+
+ 250
+
+ 
+
+ Additional paid-in capital
+ 
+
+ 
+
+ 
+
+ 24,750
+
+ 
+
+ Deficit accumulated during the
+ development stage
+ 
+
+ 
+
+ 
+
+ (3,000
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total stockholders equity
+ 
+
+ 
+
+ 
+
+ 22,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total liabilities and
+ stockholders equity
+ 
+
+ 
+
+ $
+
+ 380,828
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes should be read in conjunction with the
+ financial statements
+
+ 
+
+ F-3
+
+ 
+
+ CHINA
+ HEALTHCARE ACQUISITION CORP.
+
+ (a development stage company)
+
+ 
+
+ STATEMENT OF OPERATIONS
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ For the period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ June 7, 2006
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (date of inception)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ to December 31, 2006
+
+ 
+
+ 
+
+ Formation and operating
+ costs
+
+ 
+
+ 
+
+ $3,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+
+ 
+
+ 
+
+ ($3,000
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss per share
+
+ 
+
+ 
+
+ ($0.00
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Weighted average number of
+ shares outstanding
+
+ 
+
+ 
+
+ 2,500,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes should be read in conjunction with the
+ financial statements
+
+ 
+
+ F-4
+
+ 
+
+ CHINA
+ HEALTHCARE ACQUISITION CORP.
+
+ (a development stage company)
+
+ 
+
+ STATEMENT OF STOCKHOLDERS EQUITY
+
+ 
+
+ For the
+ period from June 7, 2006 (date of inception) to
+ December 31, 2006
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Deficit
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ accumulated
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Additional
+
+ 
+
+ 
+
+ 
+
+ during the 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Common Stock
+
+ 
+
+ 
+
+ paid-in
+
+ 
+
+ 
+
+ 
+
+ development
+
+ 
+
+ 
+
+ 
+
+ Total
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shares
+
+ 
+
+ 
+
+ Amount
+
+ 
+
+ 
+
+ capital
+
+ 
+
+ 
+
+ stage
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Issuance of common stock to
+ founders and insiders on June 7, 2006 at $.01 per
+ share
+
+ 
+
+ 
+
+ 2,500,000
+
+ 
+
+ 
+
+ $
+
+ 250
+
+ 
+
+ 
+
+ $
+
+ 24,750
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 25,000
+
+ 
+
+ Net Loss
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ ($
+
+ 3,000
+
+ )
+
+ 
+
+ 
+
+ (3,000
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Balance 
+ December 31, 2006
+
+ 
+
+ 
+
+ 2,500,000
+
+ 
+
+ 
+
+ $
+
+ 250
+
+ 
+
+ 
+
+ $
+
+ 24,750
+
+ 
+
+ 
+
+ ($
+
+ 3,000
+
+ )
+
+ 
+
+ $
+
+ 22,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes should be read in conjunction with the
+ financial statements
+
+ 
+
+ F-5
+
+ 
+
+ CHINA
+ HEALTHCARE ACQUISITION CORP.
+
+ (a development stage company)
+
+ 
+
+ STATEMENT OF CASH FLOWS
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ For the period
+
+ 
+
+ 
+
+ 
+
+ 
+
+ from June 7, 2006
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (date of inception)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ to December 31, 2006
+
+ 
+
+ 
+
+ Cash Flow from Operating
+ Activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net Loss
+ 
+
+ 
+
+ $
+
+ (3,000
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash used in operating
+ activities
+
+ 
+
+ 
+
+ (3,000
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash Flows from Financing
+ Activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Proceeds from issuance of common
+ stock
+ 
+
+ 
+
+ 
+
+ 25,000
+
+ 
+
+ Proceeds from note payable
+ 
+
+ 
+
+ 
+
+ 150,000
+
+ 
+
+ Payment of proposed offering costs
+ 
+
+ 
+
+ 
+
+ (122,651
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash provided by financing
+ activities
+ 
+
+ 
+
+ 
+
+ 52,349
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net increase in cash 
+
+ 
+
+ 
+
+ 49,439
+
+ 
+
+ Cash beginning of
+ period
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash end of
+ period
+
+ 
+
+ $
+
+ 49,349
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Supplemental schedule of
+ non-cash financing activity:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accrual of costs of proposed
+ offering
+ 
+
+ 
+
+ $
+
+ 208,828
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes should be read in conjunction with the
+ financial statements.
+
+ 
+
+ F-6
+
+ 
+
+ CHINA
+ HEALTHCARE ACQUISITION CORP.
+
+ (A Development Stage Company)
+
+ 
+
+ NOTES TO FINANCIAL STATEMENTS
+
+ December 31, 2006
+
+ 
+
+ Note 1 
+ Summary of Significant Accounting Policies
+
+ 
+
+ Nature
+ of business
+
+ 
+
+ China Healthcare Acquisition Corp.(also hereinafter referred to
+ as CHAC or the Company ) was incorporated
+ in Delaware on June 7, 2006 for the purpose of acquiring an
+ operating business.
+
+ 
+
+ Development
+ stage company
+
+ 
+
+ As of December 31, 2006, the Company had not yet commenced
+ any operations. All activity through December 31, 2006
+ relates to the Company s formation and proposed public
+ offering. The Company has selected December 31 as its
+ fiscal year end.
+
+ 
+
+ The Company s ability to commence operations is contingent
+ upon obtaining adequate financial resources through a proposed
+ public offering of up to 8,500,000 units
+ ( Units ) which is discussed in Note 5
+ ( Proposed Offering ). The Company s management
+ has broad discretion with respect to the specific application of
+ the net proceeds of this Proposed Offering, although
+ substantially all of the net proceeds of this Proposed Offering
+ are intended to be generally applied toward consummating a
+ business combination with an operating business that has
+ operations in China ( Business Combination ). There is
+ no assurance that the Company will be able to successfully
+ effect a Business Combination. This factor raises substantial
+ doubt about the Company s ability to continue as a going
+ concern. The accompanying financial statements are prepared
+ assuming the Company will continue as a going concern. The
+ financial statements do not include any adjustments that might
+ result from the outcome of this uncertainty. Upon the closing of
+ the Proposed Offering, management has agreed that at least
+ $5.89 per Unit sold in the Proposed Offering will be held
+ in a trust account ( Trust Account ) and invested
+ in United States government securities within the
+ meaning of Section 2(a)(16) of the Investment Company Act
+ of 1940 having a maturity of 180 days or less or in money
+ market funds meeting certain conditions under
+ Rule 2a-7
+ promulgated under the Investment Company Act of 1940 until the
+ earlier of (i) the consummation of its first Business
+ Combination and (ii) liquidation of the Company. The
+ placing of funds in the Trust Account may not protect those
+ funds from third party claims against the Company. Although the
+ Company will seek to have all vendors, prospective target
+ businesses or other entities it engages, execute agreements with
+ the Company waiving any right, title, interest or claim of any
+ kind in or to any monies held in the Trust Account, there
+ is no guarantee that they will execute such agreements. The
+ Company s Chairman has agreed that he will be personally
+ liable under certain circumstances to ensure that the proceeds
+ in the Trust Account are not reduced by the claims of
+ target businesses or vendors or other entities that are owed
+ money by the Company for services rendered contracted for or
+ products sold to the Company. However, there can be no assurance
+ that he will be able to satisfy those obligations. Expenses
+ related to investigation and selection of a target company and
+ negotiation of an agreement to effect a Business Combination
+ will be paid, prior to a Business Combination only from interest
+ earned on the principal in the trust account up to an aggregate
+ of $1,200,000, net of income taxes. The Company, after signing a
+ definitive agreement for the acquisition of a target business,
+ is required to submit such transaction for stockholder approval.
+ In the event that stockholders owning 20% or more of the shares
+ sold in the Proposed Offering vote against the Business
+ Combination and exercise their conversion rights described
+ below, the Business Combination will not be consummated. All of
+ the Company s stockholders prior to the Proposed Offering,
+ including all of the officers and directors of the Company
+ ( Initial Stockholders ), have agreed to vote their
+ founding shares of common stock in accordance with the vote of
+ the majority in interest of all other stockholders of the
+ Company ( Public Stockholders ) with respect to any
+ Business Combination. After consummation of a Business
+ Combination, these voting safeguards will no longer be
+ applicable.
+
+ 
+
+ With respect to a Business Combination which is approved and
+ consummated, any Public Stockholder who votes against the
+ Business Combination may contemporaneously demand that the
+ Company convert his or her shares. We will not proceed with a
+ business combination if public stockholders owning 20% or more
+ of the shares
+
+ 
+
+ F-7
+
+ 
+
+ sold in this offering vote against the business combination and
+ exercise their conversion rights. Accordingly, if public
+ shareholders owning a majority of the shares sold in this
+ offering approve a business combination, we may effect that
+ business combination even if public stockholders owning up to
+ approximately 19.99% of the shares sold in this offering
+ exercise their conversion rights. If this occurs, we would be
+ required to convert to cash up to approximately 19.99% of the
+ 8,500,000 shares of common stock sold in this offering, or
+ 1,699,150 shares of common stock, at an initial per-share
+ conversion price of approximately $5.89, without taking into
+ account interest earned on the trust account, if we choose to
+ pursue the Business Combination and such business combination is
+ completed.
+
+ 
+
+ We must complete a Business Combination with a fair market value
+ of at least 80% of our net assets (excluding the non-accountable
+ expense allowance and the deferred portion of the underwriting
+ discount held in the trust account for the benefit of the
+ underwriters) at the time of acquisition within 24 months
+ after the consummation of this offering. If we fail to
+ consummate a Business Combination within the required time
+ frame, we will be forced to liquidate our assets. In the event
+ of liquidation, it is likely that the per share value of the
+ residual assets remaining available for distribution (including
+ Trust Fund assets) will be less than the initial public
+ offering price per share in the Proposed Offering (assuming no
+ value is attributed to the Warrants contained in the Units to be
+ offered in the Proposed Offering discussed in Note 5).
+
+ 
+
+ Use of
+ estimates
+
+ 
+
+ The preparing of financial statements in conformity with
+ accounting principles generally accepted in United State of
+ America requires management to makes estimates and assumptions
+ that affect the reported amounts of assets and liabilities at
+ the date of the financial statements and the reported amounts of
+ expenses during the reporting period. Actual results could
+ differ from those estimates.
+
+ 
+
+ Recent
+ Accounting Standards
+
+ 
+
+ In July 2006, the Financial Accounting Standards Board
+ ( FASB ) issued FASB Interpretation No. 48,
+ Accounting for Uncertainty in Income Taxes , an
+ interpretation of FASB Statement No. 109 ( FIN 48 ),
+ which provides criteria for the recognition, measurement,
+ presentation and disclosure of uncertain tax positions. A tax
+ benefit from an uncertain position may be recognized only if it
+ is more likely than not that the position is
+ sustainable based on its technical merits. The provisions of FIN
+ 48 are effective for fiscal years beginning after December 15,
+ 2006. The Company does not expect FIN 48 will have a material
+ effect on its financial condition or results of operations.
+
+ 
+
+ Management does not believe that any other recently issued, but
+ not yet effective, accounting standards if currently adopted
+ would have a material effect on the accompanying financial
+ statements.
+
+ 
+
+ Basic
+ net loss per share
+
+ 
+
+ The basic net loss per common share is computed by dividing the
+ net loss by the weighted average number of common shares
+ outstanding.
+
+ 
+
+ Income
+ Taxes
+
+ 
+
+ Deferred income tax assets and liabilities are computed for
+ differences between the financial statement and tax basis of
+ assets and liabilities that will result in future taxable or
+ deductible amounts and are based on enacted tax laws and rates
+ applicable to the periods in which the differences are expected
+ to effect taxable income. Valuation allowances are established
+ when necessary to reduce deferred income tax assets to the
+ amount expected to be realized.
+
+ 
+
+ The Company has recorded a deferred tax asset for the effect of
+ temporary differences, aggregating approximately $1,000 at
+ December 31, 2006, respectively. In recognition of the
+ uncertainty regarding the ultimate amount of income tax benefit
+ to be derived, the Company has recorded a full valuation
+ allowance at December 31, 2006.
+
+ 
+
+ F-8
+
+ 
+
+ Note 2 
+ Deferred Offering Costs
+
+ 
+
+ Deferred offering costs consist of legal fees, accounting fees
+ and other costs incurred through the balance sheet date that are
+ directly related to the proposed initial public offering
+ described in Note 5 and which are being deferred until such
+ time the offering is effective or it is aborted. When effective,
+ the deferred offering costs will be charged to equity against
+ the proceeds raised.
+
+ 
+
+ Note 3 
+ Note Payable to Stockholder
+
+ 
+
+ The Company issued a $150,000 unsecured promissory note to its
+ Initial Stockholder on June 12, 2006. The note does not
+ bear interest and is payable on earlier of June 30, 2007,
+ or the consummation of the proposed offering described in
+ Note 5. Due to the short-term nature of the note, the fair
+ market value approximates the carrying amount.
+
+ 
+
+ Note 4 
+ Stockholders Equity
+
+ 
+
+ The Company is authorized to issue 1,000,000 shares of
+ preferred stock with such designations, voting and other rights
+ and preference as may be determined from time to time by the
+ Board of Directors. At inception, CHAC issued
+ 2,500,000 shares of common stock for $25,000 in cash. In
+ January 2007, the Initial Stockholders surrendered 375,000
+ shares for cancellation. (See Note 7)
+
+ 
+
+ Note 5 
+ Proposed Initial Public Offering
+
+ 
+
+ CHAC s Proposed Offering offers for public sale up to
+ 8,500,000 Units at $6 per unit. Each Unit consists of
+ one share of common stock and two redeemable common stock
+ purchase warrants. In connection with the proposed initial
+ public offering, the Company has committed to pay to the
+ underwriters a fee equal to 3.25% of the gross offering proceeds
+ upon the consummation of the proposed initial public offering.
+ The underwriters have agreed to defer additional fees equal to
+ 4.00% of the gross proceeds of the initial public offering
+ (approximately $2,040,000) and deposit them into the
+ Trust Account until the consummation of a Business
+ Combination. Upon the consummation of a Business Combination, we
+ will pay such deferred underwriting discount and non-accountable
+ expense allowance to the underwriters out of the proceeds of
+ this offering held in trust. Approximately 90 days after
+ the effective date or earlier, at the discretion of the
+ representative of the underwriters, the warrants will separate
+ from the units and begin to trade.
+
+ 
+
+ After separation, each warrant will entitle the holder to
+ purchase one share of common stock at an exercise price of
+ $5.00. The warrants have a life of five years after which they
+ will expire. CHAC has a right to redeem the warrants at
+ $0.01 per warrant, provided the common stock has traded at
+ a closing price of at least $8.50 per share for any 20
+ trading days within a 30 trading day period ending on the third
+ business day prior to the date on which notice of redemption is
+ given. If CHAC redeems the warrants, the holder will either have
+ to exercise the warrants by purchasing the common stock from
+ CHAC for $5.00 or sell the warrants, or the warrants will be
+ redeemed. The Company will not be obligated to deliver
+ securities, and there are no contractual penalties for failure
+ to deliver securities, if a registration statement is not
+ effective at the time of exercise. Additionally, in the event
+ that a registration statement is not effective at the time of
+ exercise, the holder of such warrant shall not be entitled to
+ exercise such warrant and in no event (whether in the case of a
+ registration statement not being effective or otherwise) will
+ the Company be required to net cash settle the warrant exercise.
+ Consequently, the warrants may expire unexercised and
+ unredeemed. The Company has determined that the warrants should
+ be classified in stockholders equity upon their issuance
+ in accordance with the guidance of
+ EITF 00-19,
+ Accounting for Derivative Financial Instruments Indexed to,
+ and Potentially Settled in, a Company s Own Stock
+
+ 
+
+ In addition, CHAC has agreed to sell to the underwriters for
+ $100, an option to purchase up to a total of 500,000 Units.
+ This option will be issued upon closing of the Proposed Initial
+ Offering. The units that would be issued upon exercise of this
+ option are identical to those offered in the Proposed Offering,
+ except that each of the warrants underlying this option entitles
+ the holder to purchase one share of our common stock at a price
+ of $6.25. This option is exercisable at $7.50 per Unit
+ commencing on the later of one year from the effective date or
+ the consummation of a Business Combination and may be exercised
+ on a cashless basis. The option will have a life of five years
+ from the effective date. The Company will have no obligation to
+ net cash settle the exercise of the option or the warrants
+ underlying the option. The holder of the option will not be
+ entitled to exercise the option or the
+
+ 
+
+ F-9
+
+ 
+
+ warrants underlying the option unless a registration statement
+ covering the securities underlying the option is effective or an
+ exemption from registration is available. If the holder is
+ unable to exercise the option or underlying warrants, the option
+ or warrants, as applicable, will expire worthless.
+
+ 
+
+ The sale of the option will be accounted for as an equity
+ transaction. Accordingly, there will be no net impact on
+ CHAC s financial position or results of operations, except
+ for the recording of the $100 proceeds from the sale. CHAC has
+ determined, based upon a Black-Scholes model, that the fair
+ value of the option on the date of sale would be approximately
+ $1,742,500 for the option to the underwriters, using an expected
+ life of five years, volatility of 72.36% and a risk-free
+ interest rate of 4.39%.
+
+ 
+
+ The volatility calculation of 72.36% for the option to the
+ underwriters is based on the average volatility of a basket of
+ companies with similar capitalization sizes that trade in the
+ United States. Because CHAC does not have a trading history,
+ CHAC needed to estimate the potential volatility of its common
+ stock price, which will depend on a number of factors which
+ cannot be ascertained at this time. CHAC s management
+ believes that this volatility is a reasonable benchmark to use
+ in estimating the expected volatility for CHAC s common
+ stock. Utilizing a higher volatility would have had the effect
+ of increasing the implied value of the option.
+
+ 
+
+ Note 6 
+ Commitments
+
+ 
+
+ The Company presently occupies office space provided by an
+ affiliate of one of the Company s executive officers. Such
+ affiliate has agreed that until the Company consummates a
+ Business Combination, it will make such office space, as well as
+ certain office and secretarial services available to the
+ Company, as may be required by the Company from time to time.
+ The Company has agreed to pay such affiliate up to
+ $5,000 per month commencing on the date of the effective
+ date of the Proposed Offering.
+
+ 
+
+ The Chairman has agreed with the underwriter that, immediately
+ prior to the Proposed Offering, he or his designees shall
+ purchase in the aggregate, 3,000,000 of the warrants from the
+ Company at a purchase price of $0.50 per warrant
+ ($1,500,000 in the aggregate) in a private placement. These
+ warrants, and the warrants issued as part of the Units in the
+ Public Offering, do not have any liquidation rights.
+
+ 
+
+ The Initial Stockholders will be entitled to registration rights
+ with respect to their founding shares pursuant to an agreement
+ to be signed prior to or on the effective date of the Proposed
+ Offering. The holders of the majority of these shares are
+ entitled to make up to two demands that the Company register
+ these shares at any time commencing three months prior to the
+ third anniversary of the effective date of the Proposed
+ Offering. In addition, the Initial Stockholders has certain
+ piggy-back registration rights on registration
+ statements filed subsequent to the third anniversary of the
+ effective date of the Proposed Offering.
+
+ 
+
+ Upon the consummation of the Proposed Offering and the repayment
+ of the non-interest bearing note of $150,000 described in
+ Note 3, the Chairman of the Company will loan the Company
+ $150,000. The loan will bear interest at 4% per annum and
+ will be paid from the interest on the amounts in the
+ Trust Fund.
+
+ 
+
+ Note 7 
+ Subsequent Event
+
+ 
+
+ The Initial Stockholders surrendered 375,000 shares for
+ cancellation in January, 2007.
+
+ 
+
+ F-10
+
+ 
+
+ 
+
+ Until ,
+ 2007, all dealers that effect transactions in these securities,
+ whether or not participating in this offering, may be required
+ to deliver a prospectus. This is in addition to the
+ dealers obligation to deliver a prospectus when acting as
+ underwriters and with respect to their unsold allotments or
+ subscriptions.
+
+ 
+
+ No dealer, sales person or any other person is authorized to
+ give any information or make any representations in connection
+ with this offering other than those contained in this prospectus
+ and, if given or made, the information or representations must
+ not be relied upon as having been authorized by us. This
+ prospectus does not constitute an offer to sell or a
+ solicitation of an offer to buy any security other than the
+ securities offered by this prospectus, or an offer to sell or a
+ solicitation of an offer to buy any securities by anyone in any
+ jurisdiction in which the offer or solicitation is not
+ authorized or is unlawful.
+
+ 
+
+ 
+
+ TABLE OF
+ CONTENTS
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001367660_geneva_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001367660_geneva_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..32fb663e71100efb583d4d4adef8c33f99e5373f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001367660_geneva_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Davis, Malm & D'Agostine, P.C., Boston, Massachusetts. Graubard Miller, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001367880_churchill_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001367880_churchill_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..45ad40ae85e9dfded29ab90ec9f7214f5ead9850
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001367880_churchill_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Reitler Brown & Rosenblatt LLC, New York, New York. Bingham McCutchen LLP is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368147_whitehall_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368147_whitehall_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1baf095f767e2696629e01dd4e4f052a589c312c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368147_whitehall_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock offered hereby will be passed upon for us by Schulte Roth & Zabel LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368613_apex_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368613_apex_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6242a889525c61689715bc288405df7ee0f73500
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368613_apex_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York. Kramer Levin Naftalis & Frankel LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368812_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368812_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368812_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368813_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368813_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368813_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368814_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368814_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368814_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368815_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368815_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368815_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368879_tailwind_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368879_tailwind_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a4804b8d8a404befd92439b27c40929e1d499994
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368879_tailwind_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Bingham McCutchen LLP, New York, New York. Skadden, Arps, Slate, Meagher & Flom, LLP, Los Angeles, California, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001368925_taliera_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001368925_taliera_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..338a818cb05b63d587d5f74ef1166d387ab66ccc
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001368925_taliera_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Ice Miller, LLP, Indianapolis, Indiana. Graubard Miller, New York, New York, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001370314_double_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001370314_double_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e7b9d4208720883ae67a0ffda35e7f6d1669018d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001370314_double_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The legal validity of the shares of common stock offered by this prospectus will be passed upon for Double-Take Software and the selling stockholders by Hogan Hartson L.L.P., Baltimore, Maryland. Hogan Hartson L.L.P. has in the past provided, and may continue to provide, legal services to ABS Capital Partners and its affiliates. Hogan Hartson L.L.P. owns a limited partnership interest of less than 1% in ABS Capital Partners IV, L.P., which is a principal stockholder of Double-Take Software. Selected legal matters will be passed upon for the underwriters by Wilson Sonsini Goodrich Rosati, Professional Corporation, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001370431_vedanta_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001370431_vedanta_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f36455bdd9a0580374d3a1ba0bef3f068048d38c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001370431_vedanta_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the equity shares represented by the ADSs offered by this prospectus will be the subject of a legal opinion by Amarchand Mangaldas Suresh A. Shroff Co., our Indian counsel. Certain matters relating to US federal law in connection with this offering will be passed upon by Latham Watkins LLP, our US counsel. Latham Watkins LLP may rely upon Amarchand Mangaldas Suresh A. Shroff Co. with respect to certain matters governed by Indian law. Certain matters relating to Indian law will be passed upon on behalf of the underwriters by S R Associates, Indian counsel for the underwriters. Certain matters relating to US federal law in connection with this offering will be passed upon on behalf of the underwriters by Shearman Sterling LLP, US counsel for the underwriters. Shearman Sterling LLP may rely upon S R Associates with respect to certain matters governed by Indian law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001370433_trans_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001370433_trans_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5c06286a4064c1ea5eae8aa2336a1003ecb02f5e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001370433_trans_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered hereby will be passed upon for us by Hayden Bergman Rooney, Professional Corporation, San Francisco, California. Hayden Bergman Rooney has agreed that the legal fees that we will owe it for these services will be paid by us only upon the successful consummation of this offering. Certain legal matters with respect to this offering will be passed upon for the underwriters by Dilworth Paxson LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001370618_union_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001370618_union_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9a6939156da05bd50481e52a768cfa3d0033e479
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001370618_union_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Arnold & Porter LLP will pass upon the validity of the securities offered in this prospectus for us. Certain legal matters with respect to this offering will be passed upon for the underwriters by Sidley Austin LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001371011_switch_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001371011_switch_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6b24af9492b3a9aea73ab1eb24eebdfb075175be
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001371011_switch_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the validity of the shares of common stock offered hereby will be passed upon for us by Holland & Knight LLP, Tampa, Florida. The underwriters are being represented in connection with this offering by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001371455_claymont_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001371455_claymont_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2394cd6bdcbfb8f8f4e4123d1adcae67f9093572
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001371455_claymont_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Morgan, Lewis & Bockius LLP, Pittsburgh, Pennsylvania. Certain legal matters will be passed upon for the underwriters by White & Case LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001371468_community_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001371468_community_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8a2bb9893ec766d893991b73b95dba28a6201959
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001371468_community_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the preferred units offered hereby and the common units issuable upon conversion of the preferred units will be passed upon for us by Dickstein Shapiro LLP, Washington, District of Columbia.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001372813_animal_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001372813_animal_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..92d002f08925fc67c85e540579eb62340dca76a9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001372813_animal_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Goodwin Procter LLP, Boston, Massachusetts, has passed upon the validity of the shares of common stock offered hereby. Legal matters relating to this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001372989_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001372989_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001372989_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373025_liberty_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373025_liberty_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e08255009a8b7a95dd21a045b419ed8671362ef9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373025_liberty_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the units will be passed on for us by Jackson Walker L.L.P., 100 Congress, Suite 1100, Austin, Texas 78701.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373060_mindray_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373060_mindray_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1b7abf8bad89d93e5e36700b9186e29f6b796bff
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373060_mindray_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS We are being represented by O Melveny Myers LLP with respect to legal matters of United States federal securities and New York State law. The underwriters are being represented by Sullivan Cromwell LLP with respect to legal matters of United States federal securities and New York State law. The validity of the Class A ordinary shares represented by the ADSs offered in this offering and certain legal matters as to Cayman Islands law will be passed upon for us by Conyers Dill Pearman. Certain legal matters as to PRC law will be passed upon for us by Jun He Law Offices and for the underwriters by Commerce Finance Law Offices. Conyers Dill Pearman and O Melveny Myers LLP may rely upon Jun He Law Offices with respect to matters governed by PRC law. Sullivan Cromwell LLP may rely upon Commerce Finance Law Offices with respect to matters governed by PRC law. Certain members of O Melveny Myers LLP beneficially hold an aggregate of 6,500 of our ADSs, which represents less than 0.0001% of our outstanding ordinary shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373506_highpoint_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373506_highpoint_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8adca850cd18d39a89fe777642a2d320f95fe346
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373506_highpoint_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the securities offered in this prospectus is being passed upon for us by Blank Rome LLP, New York, New York. Lowenstein Sandler PC, Livingston, New Jersey, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373746_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373746_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373746_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373747_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373747_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373747_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373752_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373752_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373752_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373755_ishares_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373755_ishares_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0d7e1ca9c60f5502055a9c537060b490cd1e1c7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373755_ishares_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Cleary Gottlieb Steen & Hamilton LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust, Investing Pool and the Shares.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001373988_essex_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001373988_essex_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b2a78ef1b7e1f17c72da08840883b8f75a55da52
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001373988_essex_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. We have paid Graubard Miller a retainer of $25,000 for such services. Graubard Miller has agreed that the balance of the legal fees that we will owe to it for these services will be paid by us only upon the successful consummation of this offering. Andrews Kurth LLP, Houston, Texas, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001374061_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001374061_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5a6ee90d100f239dea1280d21747313b3cb0cfa5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001374061_china_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the securities offered in this prospectus is being passed upon for us by Graubard Miller, New York, New York. We have paid Graubard Miller a retainer of $25,000 for such services. Graubard Miller has agreed that the balance of the legal fees that we will owe to it for these services will be paid by us only upon the successful consummation of this offering. Blank Rome LLP, New York, New York, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001374535_altra_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001374535_altra_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cdbae3eb791bfd7e610f75cf520122b0d50ae593
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001374535_altra_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Weil, Gotshal Manges LLP, Redwood Shores, California has passed upon the validity of the shares of common stock offered hereby on our behalf. The underwriters have been represented by Fried, Frank, Harris, Shriver Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001374796_advanced_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001374796_advanced_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cbae208ab1bf8138c9794591263d1c37e40b0fe1
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001374796_advanced_legal_matters.txt
@@ -0,0 +1,310 @@
+Legal Matters
+
+ 
+83
+
+ 
+
+Experts
+
+ 
+83
+
+ 
+
+Where You Can Find Additional Information
+
+ 
+83
+
+ , 2007
+
+Financial Statements
+
+F-1
+
+ 
+
+ 
+
+ 
+
+ 
+
+PART II
+
+INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and Distribution.
+
+The estimated expenses payable by us in connection with the offering described in this registration statement (other than the underwriting discount and commissions) will be as follows:
+
+ Amount to
+
+Be Paid
+
+ 
+
+ 
+
+ 
+
+SEC registration fee
+
+ 
+
+$
+
+45,684
+
+ 
+
+NASD filing fee
+
+ 43,195
+
+ 
+
+American Stock Exchange listing fee
+
+ 70,000
+
+ 
+
+Legal fees and expenses
+
+ 350,000
+
+ 
+
+Blue Sky fees and expenses
+
+ 40,000
+
+ 
+
+Accounting fees and expenses
+
+ 35,000
+
+ 
+
+Printing and engraving expenses
+
+ 35,000
+
+ 
+
+Initial Trustee s fee
+
+ 1,000
+
+(1)
+
+Miscellaneous
+
+ 121
+
+(2)
+
+Total
+
+ $
+
+620,000
+
+ 
+
+ 
+
+(1)
+
+In addition to the initial fee that is charged by Continental Stock Transfer & Trust Company, as trustee, the registrant will be required to pay to Continental Stock Transfer & Trust Company annual fees of $3,000 for acting as trustee, $4,800 for acting as transfer agent of the registrant s common stock, $2,400 for acting as warrant agent for the registrant s warrants and $1,800 for acting as escrow agent.
+
+(2)
+
+This amount represents additional expenses that may be incurred by the Company in connection with the offering over and above those specifically listed above, including distribution and mailing costs.
+
+Item 14. Indemnification of Directors and Officers.
+
+Our certificate of incorporation provides that all directors, officers, employees and agents of the registrant shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law.
+
+Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below.
+
+ Section 145. Indemnification of officers, directors, employees and agents; insurance.
+
+(a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any crimi
+
+nal action or proceeding, had no reasonable cause to believe the person s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person s conduct was unlawful.
+
+(b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a 
+
+II-1
+
+judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the a
+
+djudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
+
+(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith.
+
+(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.
+
+(e) Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.
+
+(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office.
+
+(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.
+
+(h) For purposes of this section, references to the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.
+
+(i) For purposes of this section, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to any employee benefit plan; 
+
+II-2
+
+and references to serving at the request of the corporation shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the corporation as referred to in this section.
+
+(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
+
+(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation s obligation to advance expenses (including attorneys fees). 
+
+Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities A
+
+ct and will be governed by the final adjudication of such issue.
+
+Paragraph B of Article Eighth of our certificate of incorporation provides:
+
+ The Corporation, to the full extent permitted by Section 145 of the GCL, as amended from time to time, shall indemnify all persons whom it may indemnify pursuant thereto. Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which such officer or director may be entitled to indemnification hereunder shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereby. 
+
+Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the Underwriters and the Underwriters have agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act.
+
+Item 15. Recent Sales of Unregistered Securities.
+
+(a) During the past three years, we sold the following shares of common stock without registration under the Securities Act:
+
+Stockholder
+
+ Number of
+
+Shares
+
+ 
+
+M.O.T.A. Holdings Ltd.
+
+ 
+
+1,747,500
+
+FSGL Holdings Ltd
+
+ 1,747,500
+
+OLEV Holdings Ltd
+
+ 1,747,500
+
+Shrem, Fudim, Kelner Technologies Ltd. 
+
+ 583,333
+
+Shrem, Fudim, Kelner & Co. Ltd.
+
+ 291,667
+
+Elisha Yanay
+
+ 82,500
+
+Josef Neuhaus Ltd
+
+ 30,000
+
+Avigdor Kaplan
+
+ 20,000
+
+Such shares were issued on September 25, 2006 in connection with our organization. Such issuance was made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended (the Securities Act ). Specifically, such shares were sold to various limited partnerships and two sophisticated, wealthy 
+
+II-3
+
+individuals, each of whom was an accredited investor as defined in Rule 501(a) of the Securities Act. The shares issued to the entities and individuals listed above were sold for an aggregate offering price of $25,000, or at a purchase price of $0.004 per share.
+
+In February 2007, Josef Neuhaus Ltd, an entity affiliated with Josef Neuhaus, who served as our Chief Financial Officer from our inception through January 31, 2007, sold 15,000 of its shares to Ido Bahbut, who is our current Chief Financial Officer. Mr. Bahbut paid the same price for these shares specifically, $0.004 per share or an aggregate of $60 as was paid by our other initial stockholders. The foregoing transfer was made in reliance upon exemptions from registration pursuant to the so-called Section 4(1-1/2) exemption. The foregoing transfer was made by persons or entities other than the company, an underwriter or dealer and not involving any public offering. The transfer was made between accredited and sophisticated individuals or entities with no consideration being received by us and no underwriting discounts or commissions being paid with respect to such transfer. Furthermore, the transferee acknowledged that he was acq
+
+uiring the shares for his own account, for investment purposes only and that he had no present intention of selling or otherwise disposing of the shares in violation of the securities laws of the United States.
+
+In addition, certain of our initial stockholders have committed to purchase an aggregate of 3,625,000 warrants (the founder warrants ) at a purchase price of $1.00 per warrant (for an aggregate purchase price of $3,625,000) from us. This purchase will take place on a private placement basis simultaneously with the consummation of our initial public offering. This issuance will be made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act. Prior to the closing of this offering, two of
+the underwriters, CRT Capital Group LLC and I-Bankers Securities, Inc.,
+will loan to certain of the founders $500,000 to be used to purchase a portion of the founder warrants. Such loan will be secured by a pledge of 
+500,000 founder
+ warrants. The founders will not be required to repay this loan unless a business combination is completed. The initial stockholders will not be required to pay interest on the loans, unless they default on the loan which would occur if the initial stockholders fail to make required payments or become insolvent.
+Under the terms of the note, within five business days after the completion of the business combination, the founders will transfer to 
+CRT Capital Group LLC and I-Bankers Securities, Inc.
+500,000 of the founder warrants. In addition, within five business days after the expiration of the escrow period, the founders will repay the principal amount of the loan to 
+CRT Capital Group LLC and I-Bankers Securities, Inc.
+ The initial stockholders will fund the remainder of the purchase price ($3,125,000) by using their own funds. 
+
+No underwriting discounts or commissions were paid with respect to any of the sales described above.
+
+Item 16. Exhibits and Financial Statement Schedules.
+
+(a) The following exhibits are filed as part of this Registration Statement:
+
+Number
+
+ Description
+
+1.1 *
+
+ 
+
+Form of Underwriting Agreement.
+
+ 1.2
+
+ Form of Selected Dealers Agreement.
+
+3.1*
+
+ Form of Amended and Restated Certificate of Incorporation.
+
+3.2*
+
+ By-laws.
+
+4.1*
+
+ Specimen Unit Certificate.
+
+4.2*
+
+ Specimen Common Stock Certificate.
+
+4.3*
+
+ Specimen Warrant Certificate.
+
+4.4*
+
+ Specimen Founder Warrant Certificate.
+
+4.5*
+
+ Specimen Underwriters Unit Certificate.
+
+4.6*
+
+ Specimen Underwriters Warrant Certificate.
+
+4.7
+
+ Form of Unit Purchase Option to be granted to certain of
+the Underwriters.
+
+4.8*
+
+ Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant.
+
+5.1*
+
+ Opinion of
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375092_paradigm_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375092_paradigm_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..48dc4ff1c3be595a42b40e3f91ab86500f9bec52
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375092_paradigm_legal_matters.txt
@@ -0,0 +1,15 @@
+LEGAL MATTERS 
+ 
+
+ Certain legal matters with respect to the validity of the shares of our Class A ordinary shares offered by this prospectus will be passed upon by Walkers,
+Grand Cayman, Cayman Islands. Certain legal matters in connection with this offering will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. Certain
+legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, San Francisco, California. 
+
+ 
+ 
+
+EXPERTS 
+ 
+
+ The consolidated financial statements of Paradigm B.V. as of December 31, 2006 and 2005 and for each of the three years in the period ended
+December 31, 2006, the balance sheet of
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375476_power_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375476_power_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a0a110db0cb84401d75f68e76b56458f1799902e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375476_power_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Morton & Company has opined on the validity of the Common shares being offered hereby.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375890_education_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375890_education_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375890_education_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375891_education_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375891_education_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375891_education_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375892_mcm_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375892_mcm_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375892_mcm_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375893_edmc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375893_edmc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375893_edmc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375894_edmc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375894_edmc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375894_edmc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375895_brown_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375895_brown_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375895_brown_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375896_connecting_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375896_connecting_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375896_connecting_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375897_argosy_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375897_argosy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375897_argosy_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375898_aiim_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375898_aiim_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375898_aiim_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375899_aih_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375899_aih_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375899_aih_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375900_aid_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375900_aid_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375900_aid_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001375901_higher_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001375901_higher_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..07c0c1b3801d1c5c348387eb6c9e89a0e3ff5d4c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001375901_higher_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the offers will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001376074_leaf_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001376074_leaf_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b85be37a645a85576cb2f4d81374125048663732
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001376074_leaf_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Kunzman & Bollinger, Inc., 5100 N. Brookline, Suite 600, Oklahoma City, OK 73112, has issued its opinion to our general partner regarding the validity and due issuance of our units including assessibility, and its opinion on the material and any significant federal income tax issues to typical individual investors in us. However, the factual statements in this prospectus are our statements or those of our general partner, and counsel has not given any opinions with respect to any of the other tax or legal aspects of this offering except as expressly set forth above.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001376110_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001376110_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d1e946d2d329fb2c7df92d59680f8b37c94c6769
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001376110_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Graubard Miller, New York, New York. We have paid Graubard Miller a retainer of $25,000 for such services. Graubard Miller has agreed that the balance of the legal fees that we will owe to it for these services will be paid by us only upon the successful consummation of this offering. Legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. Graubard Miller may rely upon Maples and Calder with respect to matters governed by Cayman Islands law. Maples and Calder has agreed that the legal fees that we will owe it for these services will be paid by us only upon the successful consummation of this offering. Blank Rome LLP, New York, New York, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001376556_vaughan_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001376556_vaughan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ca967d5f84b307c36ca9ea1a92715a5f89e4ba1f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001376556_vaughan_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares offered by this prospectus will be passed upon for us by Morse, Zelnick, Rose & Lander LLP, New York, New York. Stoel Rives LLP will pass upon certain matters for the underwriters named in this prospectus in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001376634_transtech_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001376634_transtech_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3bcd264ed443b771ea2ea0a572c01ed1a78874ac
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001376634_transtech_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Katten Muchin Rosenman LLP, New York, New York. Sidley Austin LLP, New York, New York, and Ellenoff Grossman & Schole LLP, New York, New York, are acting as counsel for the underwriters in this offering. EXPERTS The financial statements included in this prospectus and in the registration statement have been audited by Goldstein Golub Kessler LLP, independent registered public accounting firm, to the extent and for the period set forth in their report appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of Goldstein Golub Kessler LLP are included in reliance upon their report given upon the authority of Goldstein Golub Kessler LLP as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 with respect to this offering of or securities which includes exhibits, schedules and amendments. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form S-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC. $36,000,000 4,500,000 Units PROSPECTUS Cowen and Company Maxim Group LLC _____________, 2007 Until , 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The estimated expenses payable by us in connection with the offering described in this Registration Statement (other than the underwriting discount and commissions) will be as follows: Initial Trustees fee(1) $ 1,000 SEC Registration Fee 7,886 NASD filing fee 7,745 Accounting fees and expense 75,000 Printing and engraving expenses 50,000 Legal fees and expenses 250,000 Miscellaneous(2) 58,369 Total $ 450,000 (1) In addition to the initial acceptance fee that is charged by Continental Stock Transfer & Trust Company, as trustee, the Company will be required to pay to Continental Stock Transfer & Trust Company annual fees of $3,000 for acting as trustee, $4,800 for acting as transfer agent of the Company s common stock, $2,400 for acting as warrant agent for the registrant s warrants and $2,400 for acting as escrow agent. (2) This amount represents additional expenses that may be incurred by the Company in connection with the offering over and above those specifically listed above, including distribution and mailing costs. Item 14. Indemnification of Directors and Officers. Our certificate of incorporation provides that all officers, directors, employees and agents of the registrant shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law. Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below. Section 145. Indemnification of officers, directors, employees and agents; insurance. (a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person s conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best II-1 interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (e) Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. (h) For purposes of this section, references to the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to serving at the request of the corporation shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the corporation as referred to in this section. II-2 (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation s obligation to advance expenses (including attorneys fees). Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our officers, directors, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by an officer, director or controlling person in a successful defense of any action, suit or proceeding) is asserted by such officer, direct or controlling person in connection with the securities being registered, we 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 us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Article Ninth of our certificate of incorporation provides: The Corporation shall, to the fullest extent legally permissible under the provisions of the General Corporation Law of the State of Delaware, as the same may be amended from time to time, indemnify and hold harmless any and all persons whom it shall have power to indemnify under said provisions from and against all liabilities (including expenses) imposed upon or reasonably incurred by him or her in connection with any action, suit or other proceeding in which he or she may be involved or with which he or she may be threatened, or other matters referred to in or covered by said provisions both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer of the Corporation. Such indemnification provided shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement or resolution adopted by the stockholders entitled to vote thereon after notice. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the underwriters and the underwriters have agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. Item 15. Recent Sales of Unregistered Securities. (a) During the past three years, we sold the following shares of common stock without registration under the Securities Act: Name Number of Shares TSP Ltd. 533,919 Suresh Rajpal 255,405 LM Singh 109,460 Frederick Smithline 27,365 Susan Smithline 27,365 Dr. Pervez Ahmed 7,297 Chandru Jagwani 43,784 Lotus Capital LLC 72,973 Canak Associates LLC 47,432 Such shares were issued on September 14, 2006, in connection with our organization pursuant to the exemption from registration contained in Section 4(2) of the Securities Act as they were sold to sophisticated, wealthy individuals and/or entities. The shares issued to the individuals and entities above were sold for an aggregate offering price of $25,000, or $0.022 per share. No underwriting discounts or commissions were paid with respect to such sales. On January 10, 2007, we effected a 3 for 4 reverse stock split of our outstanding shares of common stock. On February 14, 2007, we effected a 0.972973 for 1 reverse stock split for our outstanding shares of common stock. II-3 TSP Ltd., one of our existing stockholders, has entered into a binding subscription agreement to purchase 1,191,667 warrants to purchase 1,191,667 shares of our common stock units prior to the effective date of our public offering in a Regulation D transaction pursuant to, and in accordance with, Regulation D under the Securities Act of 1933, at $1.20 per warrant. Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation* 3.2 Form of Amended and Restated Certificate of Incorporation* 3.3 Form of Second Amended and Restated Certificate of Incorporation* 3.4 Form of Third Amended and Restated Certificate of Incorporation* 3.5 Bylaws* 4.1 Specimen Unit Certificate 4.2 Specimen Common Stock Certificate* 4.3 Specimen Warrant Certificate 4.4 Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant 4.5 Form of Unit Purchase Option Agreement between the Registrant, Cowen and Company, LLC, and Maxim Group LLC 5.1 Opinion of Katten Muchin Rosenman LLP* 10.1 Form of Letter Agreement among the Registrant, Cowen and Company, LLC, Maxim Group LLC and each Sponsor 10.2 Form of Letter Agreement among the Registrant, Cowen and Company, LLC, Maxim Group LLC and each Director* 10.3 Form of Letter Agreement among the Registrant, Cowen and Company, LLC, Maxim Group LLC and each Existing Stockholder* 10.4 Form of Letter Agreement among the Registrant, Cowen and Company, LLC, and Maxim Group LLC and TSP Ltd. 10.5 Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant 10.6 Form of Securities Escrow Agreement between the Registrant, Continental Stock Transfer & Trust Company and the Existing Stockholders* 10.7 Form of Services Agreement between Lotus Capital LLC and the Registrant* 10.8 Promissory Note issued to LM Singh in the principal amount of $65,000* 10.9 Promissory Note issued to Suresh Rajpal in the principal amount of $60,000* 10.10 Form of Registration Rights Agreement among the Registrant and the Existing Stockholders 10.11 Second Amended and Restated Subscription Agreement between the Registrant and TSP Ltd. 23.1 Consent of Goldstein Golub Kessler LLP 23.2 Consent of Katten Muchin Rosenman LLP (included in Exhibit 5.1)* 24 Power of Attorney (included on the signature page of this Registration Statement)* * Previously filed. 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; 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, II-4 represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement. iii. To include any 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; provided, however, that: A. Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement; and B. Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement. (2) That, 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 under the Securities Act of 1933 to any purchaser: (i) If the registrant is relying on Rule 430B: A. Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and B. Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 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 effective date, 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 effective date; or (ii) If the registrant is subject to Rule 430C; each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the II-5 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. (5) 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 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. (b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as may be amended, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the 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. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act 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. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York on May 16, 2007. May 16, 2007 TRANSTECH SERVICES PARTNERS INC. By: /s/ Suresh Rajpal Suresh Rajpal, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated. Signatures Title Date * Chief Executive Officer; President and Chairman May 16, 2007 Suresh Rajpal of the Board * Director of Strategy; Director May 16, 2007 Graham Norton-Standen * Chief Financial Officer; Executive Vice President; May 16, 2007 LM Singh Treasurer; Secretary and Director (Principal Accounting Officer) * Director May 16, 2007 Frederick Smithline * Director May 16, 2007 Hement Sonawala * By: /s/ LM Singh LM Singh As attorney-in-fact * By: /s/ Suresh Rajpal Suresh Rajpal As attorney-in-fact REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders TransTech Services Partners Inc. We have audited the accompanying balance sheet of TransTech Services Partners Inc. (a corporation in the development stage) as of December 31, 2006, and the related statements of operations, stockholders deficit and cash flows for the period from August 16, 2006 (inception) to December 31, 2006. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TransTech Services Partners Inc. as of December 31, 2006, and its results of operations and its cash flows for the period from August 16, 2006 (inception) to December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has no present revenue, its business plan is dependent on completion of an initial public offering and the Company s cash and working capital as of December 31, 2006 are not sufficient to complete its planned activities for the upcoming year. These conditions raise substantial doubt about the Company s ability to continue as a going concern. Management s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GOLDSTEIN GOLUB KESSLER LLP New York, New York January 23, 2007, except for Note 9B, as to which the date is February 14, 2007 and the fourth paragraph of Note 1, Note 6 and Note 8, as to which the date is May 14, 2007, TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) BALANCE SHEETS December 31, 2006 March 31, 2007 (unaudited) ASSETS Current Assets: Cash and cash equivalents $ 62,586 $ 61,916 Deferred registration costs (Note 3) 308,249 398,813 Total assets $ 370,835 $ 460,729 LIABILITIES AND STOCKHOLDERS DEFICIT Current Liabilities: Accrued registration costs $ 214,197 304,196 Accrued expenses 7,162 18,483 Due to affiliate 34,052 34,052 Notes payable to initial stockholders including related interest (Note 4) 126,479 127,712 Total current liabilities 381,890 484,443 Commitments (Note 6) Stockholders Deficit (Note 8): Preferred stock, par value $.0001 per share, 1,000,000 shares authorized, none outstanding Common stock, par value $.0001 per share 20,918,920 shares authorized, 1,125,000 shares issued and outstanding 112 112 Additional paid-in capital 24,888 24,888 Deficit accumulated in the development stage (36,055 ) (48,714 ) Total stockholders deficit (11,055 ) (23,714 ) Total liabilities and stockholders deficit $ 370,835 $ 460,729 The accompanying notes should be read in conjunction with the financial statements. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) STATEMENTS OF OPERATIONS From August 16, 2006 (inception) to December 31, 2006 For the three months ended March 31, 2007 From August 16, 2006 (inception) to March 31, 2007 (unaudited) (unaudited) Formation and operating costs $ 36,055 $ 12,659 $ 48,714 Loss before provision for income taxes (36,055) $ (12,659 ) (48,714 ) Provision for income taxes (Note 5) Net loss for the period $ (36,055 ) $ (12,659 ) $ (48,714 ) Weighted average number of shares outstanding, basic and diluted 1,125,000 1,125,000 1,125,000 Net loss per share, basic and diluted $ (0.03 ) $ (0.01 ) $ (0.04 ) The accompanying notes should be read in conjunction with the financial statements. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) STATEMENTS OF STOCKHOLDERS DEFICIT From August 16, 2006 (inception) to March 31, 2007 Common Stock Additional Paid-In Capital Deficit Accumulated in the Development Stage Total Stockholders Deficit Shares Amount Issuance of the Common Stock on September 13, 2006 at $0.022 per share to initial stockholders 1,125,000 $ 112 $ 24,888 $ $ 25,000 Net loss for the period (36,055 ) (36,055 ) Balance, December 31, 2006 1,125,000 $ 112 $ 24,888 $ (36,055 ) $ (11,055 ) Net loss for the period (unaudited) (12,659 ) (12,659 ) Balance, March 31, 2007 (unaudited) 1,125,000 $ 112 $ 24,888 $ (48,714 ) $ (23,714 ) The accompanying notes should be read in conjunction with the financial statements. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) INDEX TO FINANCIAL STATEMENTS Pages Report of Independent Registered Public Accounting Firm F-2 Financial Statements: Balance Sheets, December 31, 2006 and March 31, 2007 (unaudited) F-3 Statements of Operations, from August 16, 2006 (inception) to December 31, 2006, for the three months ended March 31, 2007 (unaudited) and August 16, 2006 (inception) to March 31, 2007 (unaudited) F-4 Statements of Stockholders Deficit, from August 16, 2006 (inception) to December 31, 2006 and for the period ended March 31, 2007 (unaudited) F-5 Statements of Cash Flows, from August 16, 2006 (inception) to December 31, 2006, for the three months ended March 31, 2007 (unaudited) and August 16, 2006 (inception) to March 31, 2007 (unaudited) TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) STATEMENTS OF CASH FLOWS From August 16, 2006 (inception) to December 31, 2006 For the three months ended March 31, 2007 From August 16, 2006 (inception) to March 31, 2007 (unaudited) (unaudited) OPERATING ACTIVITIES Net loss for the period $ (36,055 ) $ (12,659 ) $ (48,714 ) Adjustments to reconcile net loss to net cash used in operating activities: Change in operating liability: Accrued expenses 7,162 11,321 18,483 Accrued interest on notes payable to initial stockholders 1,479 1,233 2,712 Net cash used in operating activities (27,414 ) (105 ) (27,519 ) FINANCING ACTIVITIES Payment of registration costs (94,052 ) (565 ) (94,617 ) Proceeds from issuance of common stock to initial stockholders 25,000 25,000 Advances from affiliate 34,052 34,052 Proceeds from notes payable to initial stockholders 125,000 125,000 Net cash provided by financing activities 90,000 (565 ) 89,435 Net increase in cash and cash equivalents 62,586 (670 ) 61,916 Cash and Cash Equivalents Beginning of period 62,586 End of period $ 62,586 $ 61,916 $ 61,916 Supplemental disclosure of non-cash financing activity: Accrued registration costs $ 214,197 $ 89,999 $ 304,196 The accompanying notes should be read in conjunction with the financial statements. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) NOTES TO FINANCIAL STATEMENTS (the information as of March 31, 2007 and for the periods ended March 31, 2007 is unaudited) Note 1 Discussion of the Company s Activities; Going Concern Consideration Organization and activities TransTech Services Partners Inc. (the Company ) was incorporated in Delaware on August 16, 2006 for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, one or more small to mid-market U.S. and/or European based operating companies engaged in the delivery of Information Technology and Information Technology Enabled Services, Business Process Outsourcing and/or Knowledge Process Outsourcing, whose operations are particularly suitable for operational and productivity improvements which would include leveraging delivery centers located in offshore countries, such as India (a Target Business ). All activity from inception (August 16, 2006) through March 31, 2007 was related to the Company s formation and capital raising activities. The Company is considered to be a development stage company and as such the financial statements presented herein are presented in accordance with Statement of Financial Accounting Standards ( SFAS ) No. 7. The Company intends to raise $36,000,000 in a public offering of its securities in which it would propose to issue 4,500,000 Units (the Units or a Unit ) (plus up to an additional 675,000 Units solely to cover over-allotments, if any) ( Proposed Offering ). Each Unit will consist of one share of the Company s common stock and one warrant (a Warrant ). The Company s management has broad discretion with respect to the specific application of the proceeds of this Proposed Offering of Units, although the Company intends to apply substantially all of the net proceeds of the Proposed Offering toward consummating a Business Combination. However, there is no assurance that the Company will be able to successfully effect a Business Combination. Upon the closing of the Proposed Offering, management has agreed that approximately $7.90 per Unit sold in the Proposed Offering will be held in a trust account ( Trust Account ) and invested in permitted United States government securities, of which, $0.26 per Unit will be paid to the underwriter upon the consummation of a Business Combination pro-rata with respect to those shares which stockholders do not exercise their conversion rights. The placing of funds in the Trust Account may not protect those funds from third party claims against the Company. Although the Company will seek to have all vendors, prospective acquisition targets or other entities it engages, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account, there is no guarantee that they will execute such agreements. Approximately $600,000 of after tax interest earned on the monies held in the Trust Account and $100,000 transferred to the Company at the close of the Proposed Offering may be used to pay for due diligence of prospective Target Businesses, legal and accounting fees relating to Securities and Exchange Commission ( SEC ) reporting obligations and working capital to cover miscellaneous expenses, director and officer insurance and reserves (Note 6). The Company, after signing a definitive agreement for a Business Combination, is obliged to submit such transaction for approval by a majority of the public stockholders of the Company. Stockholders that vote against such proposed Business Combination and exercise their conversion rights are, under certain conditions described below, entitled to convert their shares into a pro-rata distribution from the Trust Account (the Conversion Right ). The Company s stockholders prior to the Proposed Offering ( Initial Stockholders ), have agreed to vote their 1,125,000 founding shares of common stock in accordance with the manner in which the majority of the shares of common stock offered in the Proposed Offering are voted by the Company s public stockholders ( Public Stockholders ) with respect to a Business Combination. In the event that a majority of the outstanding shares of common stock voted by the Company s public stockholders vote for the approval of the Business Combination and holders owning 20% or more of the outstanding common stock do not vote against the Business Combination and do not exercise their Conversion Rights, the Business Combination may then be consummated. If the Company does not execute a letter of intent, agreement in principle or definitive agreement for a Business Combination prior to 18 months from the date of the Proposed Offering, the Company s board will convene, adopt and recommend to their stockholders a plan of dissolution and distribution and file a proxy statement with the SEC TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) NOTES TO FINANCIAL STATEMENTS (the information as of March 31, 2007 and for the periods ended March 31, 2007 is unaudited) Note 1 Discussion of the Company s Activities; Going Concern Consideration (continued) seeking stockholder approval for such plan. If, however, a letter of intent, agreement in principle or definitive agreement for a Business Combination has been executed prior to 18 months from the date of the Proposed Offering, the Company will abandon their plan of dissolution and distribution and seek the consummation of that Business Combination. If a proxy statement seeking the approval of the Company s stockholders for that Business Combination has not been filed prior to 24 months from the date of the Proposed Offering, the Company s board will convene, adopt and recommend to their stockholders a plan of dissolution and distribution and file a proxy statement with the SEC seeking stockholder approval for such plan. In the event there is no Business Combination within the 18 and 24-month deadlines (the Target Business Combination Period ), the Company will dissolve and distribute to its Public Stockholders, in proportion to their respective equity interests, the amount held in the Trust Account, and any remaining net assets, after the distribution of the Trust Account. In the event of liquidation, the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the Proposed Offering. With respect to a Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination prior to such vote exercise their Conversion Right and their common shares would be cancelled and returned to the status of authorized but unissued shares. The per share conversion price will equal the amount in the Trust Account, calculated as of two business days prior to the consummation of the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Proposed Offering. Accordingly, Public Stockholders holding less than 20% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Account computed without regard to the founding shares and the shares underlying the Insider Units (but not shares acquired in the Proposed Offering or in the secondary market) held by Initial Stockholders. Going concern consideration As indicated in the accompanying financial statements, at December 31, 2006 and March 31, 2007, respectively, the Company had $62,586 and $61,916 in cash and cash equivalents and a working capital deficiency of $319,304 and $422,527. Further, the Company has incurred and expects to continue to incur significant costs in pursuit of its financing and acquisition plans. These factors, among others, raise substantial doubt that the Company will be able to continue operations as a going concern unless the Proposed Offering is consummated. There is no assurance that the Company s plans to raise capital or to consummate a Business Combination will be successful or successful within the Target Business Combination Period. No adjustments have been made in the accompanying financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern. Note 2 Summary of Significant Accounting Policies Unaudited Interim Financials Statements The financial statements at March 31, 2007 and for the periods ended March 31, 2007 are unaudited. In the opinion of management, all adjustments (consisting of normal accruals) have been made that are necessary to present fairly the financial position of the Company as of March 31, 2007 and the results of its operations and cash flows for the three months ended March 31, 2007 and the period from August 16, 2006 (inception) to March 31, 2007 and its stockholders equity for the three months March 31, 2007. Operating results for the interim period presented are not necessarily indicative of the results to be expected for a full year. Cash and Cash Equivalents Cash and cash equivalents are deposits with financial institutions as well as short-term money market instruments with maturities of three months or less when purchased. The Company did not hold any cash equivalents as of December 31, 2006 and March 31, 2007. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) NOTES TO FINANCIAL STATEMENTS (the information as of March 31, 2007 and for the periods ended March 31, 2007 is unaudited) Note 2 Summary of Significant Accounting Policies (continued) Concentration of Credit Risk Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents. The Company may maintain deposits in federally insured financial institutions in excess of federally insured limits. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Net Loss Per Share Net loss per share is computed based on the weighted average number of shares of common stock outstanding. Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. No such securities are outstanding as of December 31, 2006 and March 31, 2007. Basic and diluted loss per share were the same for the period from inception (August 16, 2006) through December 31, 2006, for the three months ended March 31, 2007 and from August 16, 2006 (inception) to March 31, 2007, as no potentially dilutive securities have been issued. Fair Value of Financial Instruments The fair values of the Company s assets and liabilities that qualify as financial instruments under SFAS No. 107 Disclosures about Fair Value of Financial Instrument, approximate their carrying amounts presented in the balance sheet at December 31, 2006 and March 31, 2007. The Company accounts for derivative instruments, if any, in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended, ( SFAS 133 ) which establishes accounting and reporting standards for derivative instruments. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. New Accounting Pronouncements In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ( FIN 48 ), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a significant effect on the Company s balance sheets or statements of operations. The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) NOTES TO FINANCIAL STATEMENTS (the information as of March 31, 2007 and for the periods ended March 31, 2007 is unaudited) Note 3 Deferred Registration Costs As of December 31, 2006 and March 31, 2007, respectively, the Company has incurred deferred registration costs of $308,249 and $398,813 relating to expenses incurred in connection to the Proposed Offering. Upon consummation of this Proposed Offering, the deferred registration costs will be charged to equity. Should the Proposed Offering prove to be unsuccessful, these deferred costs as well as additional expenses to be incurred, will be charged to operations. Note 4 Notes Payable to Stockholders and Due to Affiliate The Company issued an aggregate of $125,000 unsecured promissory notes to its sponsors in September 2006 (the Notes ). The Company s sponsors funded $75,000 of the Notes in cash directly to the Company and paid $50,000 directly to vendors on behalf of the Company. The Notes bear interest at a rate of 4% per annum and are payable on the earlier of the consummation of the Proposed Offering or January 31, 2008. Due to the short term nature of the Notes, the fair value of the Notes approximate their carrying amount. From August 16, 2006 (inception) to December 31, 2006 and for the three months ended March 31, 2007, respectively, $1,479 and $1,233 (an aggregate of, $2,712) of interest has accured on the Notes and is included in formation and operating costs on the accompanying statements of operations. The Company has recorded a due to affiliate on the accompanying balance sheet at December 31, 2006 and March 31, 2007 for certain registration costs paid by one of its sponsors. Note 5 Income Taxes Significant components of the Company s future tax assets are as follows: From August 16, 2006 (inception) to December 31, 2006 For the three months ended March 31, 2007 (unaudited) Expenses deferred for income tax purposes $ 12,259 $ 16,563 Less valuation allowance (12,259 ) (16,563 ) Totals $ $ Management has recorded a full valuation allowance against its deferred tax assets because it does not believe it is more likely than not that the deferred tax asset will be realized. Note 6 Commitments Administrative Fees The Company is permitted to utilize $600,000 ($800,000 if the underwriters over-allotment option is exercised in full) of after tax interest earned upon monies in the Trust Account in addition to $100,000 to be transferred to the Company upon consummation of the Proposed Offering for working capital purposes. The working capital will be used to pay for director and officer liability insurance premiums and general and administrative services, including office space, utilities and secretarial support, with the balance being held in reserve for other expenses, such as due diligence, legal, accounting, and other fees and expenses for structuring and negotiating business combinations, and deposits, down payments and/or funding of no shop provisions in connection with business combinations as well as for reimbursement of any out-of-pocket expenses incurred by the Initial Stockholders in connection with activities undertaken on the Company s behalf. The Company has agreed to pay an affiliate of one of its sponsors $7,500 per month commencing on effectiveness of the Proposed Offering for office, secretarial and administrative services. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) NOTES TO FINANCIAL STATEMENTS (the information as of March 31, 2007 and for the periods ended March 31, 2007 is unaudited) Note 6 Commitments (continued) Underwriting Agreement In connection with the Proposed Offering, the Company will enter into an underwriting agreement (the Underwriting Agreement ) with the underwriters in the Proposed Offering. Pursuant to the Underwriting Agreement, the Company will be obligated to Cowen and Company, LLC and Maxim Group LLC (together the Representatives ), the representatives of the underwriters, for certain fees and expenses related to the Proposed Offering, including underwriting discounts of $2,520,000, or $2,898,000 if the underwriters over-allotment option is exercised in full. The Company and the Representatives have agreed that payment of $1,350,000 or $1,525,500 if the underwriters over-allotment option is exercised in full, of the underwriting discounts will be paid upon closing of the Proposed Offering. The Company and the Representatives have agreed that payment of the underwriting discount of $1,170,000, or $1,372,500 if the underwriters over-allotment option is exercised in full, will be deferred until consummation of the Business Combination. The Company will sell to the Representatives for $100, an option to purchase up to 281,250 units at $10.00 per unit (the Unit Purchase Option or the UPO ). The units issuable upon exercise of the UPO are identical to those offered by the Proposed Offering. The UPO commences on the later of the consummation of a business combination or 180-days from the date of the prospectus with respect to the Proposed Offering and expires three years from the date of the prospectus. The Company estimates that the fair value of the UPO is approximately $712,000 ($2.53 per unit) using a Black-Scholes option-pricing model. The fair value of the UPO has been estimated using the following assumptions: (1) expected volatility of 51.54% (2) risk-free interest rate of 4.54% and (3) contractual life of 3 years. The expected volatility in the preceding sentence was calculated as an average of the volatilities of similar companies that trade on U.S. Stock Exchanges. In calculating volatility for the representative companies, the Company used daily historical volatilities for the period of time equal to the term of the option (3 years). Initial Stockholders Pursuant to letter agreements with the Company and the Representatives in the Proposed Offering and the private placement offering, the Initial Stockholders have waived their right to receive distributions with respect to their founding shares and the shares underlying the Insider Units (but not shares purchased in the Proposed Offering or in the secondary market) in the event of the Company s liquidation. On or prior to the closing of the Proposed Offering, the Company will sell to one of its Initial Stockholders 1,191,667 warrants ( Private Warrants ) in a private placement, at a price of $1.20 per Private Warrant, for an aggregate of $1,430,000 (Note 8). The Initial Stockholders have agreed to surrender, without consideration, up to an aggregate of 99,973 of their shares of common stock to the Company for cancellation upon consummation of a business combination in the event Public Stockholders exercise their right to have the Company convert their shares for cash. Accordingly, for approximately every nine shares converted by Public Stockholders, the founders have agreed to surrender one share for cancellation. Note 7 Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. TRANSTECH SERVICES PARTNERS INC. (a corporation in the development stage) NOTES TO FINANCIAL STATEMENTS (the information as of March 31, 2007 and for the periods ended March 31, 2007 is unaudited) Note 8 Equity Public Warrants Each warrant sold in the Proposed Offering (a Public Warrant ) is exercisable for one share of common stock. Except as set forth below, the Public Warrants entitle the holder to purchase shares at $5.00 per share, subject to adjustment in the event of stock dividends and splits, reclassifications, combinations and similar events for a period commencing on the later of: (a) completion of the Business Combination and (b) one year from the effective date of the Proposed Offering of the Company s securities, and ending four years from the date of the Proposed Offering. The Company has the ability to redeem the Public Warrants, in whole or in part, at a price of $.01 per Public Warrant, at any time after the Public Warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sale price of the Company s common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending three business days before the Company sent the notice of redemption. If the Company dissolves before the consummation of a Business Combination, there will be no distribution from the Trust Account with respect to such Public Warrants, which will expire worthless. Private Warrants The Private Warrants are identical to the Public Warrants and may not be sold or transferred, except in limited circumstances, until after the consummation of a Business Combination. If the Company dissolves before the consummation of a Business Combination, there will be no distribution from the Trust Account with respect to such Private Warrants, which will expire worthless.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001376972_homeinns_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001376972_homeinns_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..563ffa961d8c7447a6eb606abb4b054e9448ed09
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001376972_homeinns_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to United States federal law and New York law in connection with this offering will be passed upon for us by Latham & Watkins LLP. Certain legal matters as to United States federal law and New York law in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP. The validity of the ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Maples and Calder. Latham & Watkins LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law, Commerce & Finance Law Offices with respect to matters governed by PRC law and Li & Partners with respect to matters governed by Hong Kong law. Simpson Thacher & Bartlett LLP may rely upon Maples and Calder and Haiwen and Partners with respect to matters governed by Cayman Islands law and PRC law, respectively, and Li & Partners with respect to matters governed by Hong Kong law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001377490_pinpoint_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001377490_pinpoint_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..46c935871cc8ad07a04f46ddfdd481a484d57f0c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001377490_pinpoint_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Ellenoff Grossman & Schole LLP, New York, New York. Such firm has previously represented Maxim Group LLC and expects to do so again in the future. Richardson & Patel LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001377902_etelecare_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001377902_etelecare_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..013d3bf0e80e329a6968a62308a119270c8141e9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001377902_etelecare_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares represented by the ADSs we are offering by this prospectus will be the subject of a legal opinion by Picazo Buyco Tan Fider Santos, our Philippine counsel. U.S. securities matters in connection with this offering will be passed upon by Pillsbury Winthrop Shaw Pittman LLP, Palo Alto, California, our U.S. counsel, and certain matters relating to Philippine law will be passed upon in connection with this offering by Picazo Buyco Tan Fider Santos, our Philippine counsel. Certain U.S. legal matters relating to the offering will be passed upon for the underwriters by Latham Watkins LLP, Menlo Park, California, U.S. counsel for the underwriters, and certain Philippine legal matters relating to the offering will be passed upon for the underwriters by SyCip Salazar Hernandez Gatmaitan, Philippine counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001378355_western_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001378355_western_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f305814338fcd78c846ba2a86a6dc73e18bc0438
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001378355_western_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Skadden, Arps, Slate, Meagher & Flom, LLP, Los Angeles, California. Jenkens & Gilchrist, P.C. is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001378451_alyst_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001378451_alyst_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8fdba861e7850bce324de8d8d8d495d9557b8167
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001378451_alyst_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Graubard Miller, New York, New York. We have paid Graubard Miller a retainer of $25,000 for such services. Graubard Miller has agreed that the balance of the legal fees that we will owe to it for these services will be paid by us only upon the successful consummation of this offering. Greenberg Traurig, LLP, New York, New York, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001379191_platform_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001379191_platform_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b4dfb848083fa071f119c19bb978e535db17db81
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001379191_platform_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Morgan, Lewis & Bockius LLP, New York, New York. Certain legal matters with respect to this offering will be passed upon for the underwriter by Kelley Drye & Warren LLP, Stamford, Connecticut and New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001379932_amwins_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001379932_amwins_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4a03a5423afce6962fb79963eecc49a94c1df6e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001379932_amwins_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered in this offering will be passed upon for us by Robinson, Bradshaw Hinson, P.A., Charlotte, North Carolina. Certain legal matters in connection with this offering will be passed upon for the underwriters by LeBoeuf, Lamb, Greene MacRae LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001380180_isotis-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001380180_isotis-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d1ba95563aab808594ab0fe8f1fcb64d44261d9f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001380180_isotis-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Latham Watkins LLP, Costa Mesa, California. Willkie Farr Gallagher LLP, New York, New York, will act as counsel for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001380509_hff-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001380509_hff-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f519afc43601d4b60d7208c5c707543d80fda248
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001380509_hff-inc_legal_matters.txt
@@ -0,0 +1 @@
+legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001381081_lifewatch_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001381081_lifewatch_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ad54198458cb8255830d610b5c7cc0152ca49792
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001381081_lifewatch_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered hereby will be passed upon for us by Proskauer Rose LLP, New York, New York. Davis Polk & Wardwell, New York, New York is representing the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001381117_gsc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001381117_gsc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1e2d45119fd5e3bbbb19b7736f7e1380fa449df4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001381117_gsc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered by this prospectus will be passed upon by Davis Polk & Wardwell, New York, New York. In connection with this offering, Bingham McCutchen LLP is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001381526_columbus_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001381526_columbus_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..00df982eb0c601378b784c833f34b2b97b852cd4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001381526_columbus_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by LeBoeuf, Lamb, Greene & MacRae LLP, New York, New York. Graubard Miller, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001381531_domtar_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001381531_domtar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f280c947c2fdb9ded8041d02db5d39a0ec3caeea
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001381531_domtar_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of Company common stock offered hereby are being passed upon for the Company by Debevoise & Plimpton LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001381697_imperium_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001381697_imperium_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8525290c1201bbf914544c5e049dbb20adac352d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001381697_imperium_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by our counsel, DLA Piper US LLP, Seattle, Washington. Sidley Austin LLP, San Francisco, California is acting as counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001382230_essa_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001382230_essa_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..027a64bed1af2844f472c2ff213d5518e16ead71
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001382230_essa_legal_matters.txt
@@ -0,0 +1,2351 @@
+LEGAL MATTERS 
+ Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to ESSA Bancorp, Inc.,
+ESSA Bank & Trust and ESSA Bank & Trust, will issue to ESSA Bancorp, Inc. its opinion regarding the legality of the common stock and the federal income tax consequences of the conversion. Certain legal matters will be passed upon
+for Ryan Beck & Co., Inc. by Rhoads & Sinon LLP, Harrisburg, Pennsylvania. 
+ 
+
+ 143 
+
+Table of Contents
+
+ 
+WHERE YOU CAN FIND ADDITIONAL INFORMATION 
+ ESSA Bancorp, Inc. has filed with the Securities and Exchange
+Commission a registration statement under the Securities Act of 1933 with respect to the shares of common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all
+the information set forth in the registration statement. Such information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at the public reference facilities of the Securities and
+Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549, and copies of such material can be obtained from the Securities and Exchange Commission at prescribed rates. The Securities and Exchange Commission telephone number is
+1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the
+Securities and Exchange Commission, including ESSA Bancorp, Inc. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions
+of the material terms of, and should be read in conjunction with, such contract or document. 
+ ESSA Bank & Trust has filed with the
+Office of Thrift Supervision an Application on Form AC with respect to the conversion. This prospectus omits certain information contained in the application. The application may be examined at the principal office of the Office of Thrift
+Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and at the Northeast Regional Office of the Office of Thrift Supervision, located at Harborside Financial Center Plaza Five, Suite 1600, Jersey City, New Jersey 07311. 
+ In connection with the offering, ESSA Bancorp, Inc. will register its common stock under Section 12(b) of the Securities Exchange Act of 1934
+and, upon such registration, ESSA Bancorp, Inc. and the holders of its common stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on common stock purchases and sales by directors, officers and greater
+than 10% stockholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of conversion, ESSA Bancorp, Inc. has undertaken that it will not terminate such registration for a period
+of at least three years following the conversion and the offering. 
+ 
+
+ 144 
+
+Table of Contents
+
+ 
+ESSA BANK & TRUST AND SUBSIDIARIES 
+ INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
+
+ 
+
+ 
+ 
+Page
+Number
+
+ Report of Independent Registered Public Accounting Firm
+
+ 
+F-1
+
+ Report of Independent Registered Public Accounting Firm
+
+ 
+F-2
+
+ Financial Statements
+
+ 
+
+ Consolidated Balance Sheet At September 30, 2006 and 2005
+
+ 
+F-3
+
+ Consolidated Statement of Income for the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-4
+
+ Consolidated Statement of Changes in Equity for the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-5
+
+ Consolidated Statement of Cash Flows for the Years Ended September 30, 2006,2005 and 2004
+
+ 
+F-6
+
+ Notes to the Consolidated Financial Statements
+
+ 
+F-7 F-31
+
+ All schedules are omitted as the required information either is not applicable or is included in the consolidated
+financial statements or related notes. 
+ ESSA Bancorp, Inc. was incorporated in the Commonwealth of Pennsylvania on December 6, 2006. Therefore the
+financial statements that follow are those of ESSA Bank & Trust and its subsidiaries. 
+ 
+
+ 145 
+
+Table of Contents
+
+ REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+ Board of Directors 
+ ESSA Bank & Trust 
+ We have audited the consolidated balance sheet of ESSA Bank & Trust and subsidiaries as of September 30, 2006 and 2005, and the related consolidated
+statements of income, changes in equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these consolidated
+financial statements based on our audits. 
+ We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
+(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
+the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that
+our audits provide a reasonable basis for our opinion. 
+ In our opinion, the consolidated financial statements referred to above present fairly, in all
+material respects, the consolidated financial position of ESSA Bank & Trust and subsidiaries as of September 30, 2006 and 2005, and the consolidated results of their operations and their cash flows for the years then ended in
+conformity with U.S. generally accepted accounting principles. 
+ 
+
+/s/ S.R. Snodgrass, A.C.
+
+Wexford, PA
+
+October 27, 2006
+
+ 
+
+ F-1 
+
+Table of Contents
+
+ REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+ To the Board of Directors 
+ ESSA Bank & Trust 
+ Stroudsburg, Pennsylvania 
+ We have audited the accompanying
+consolidated statements of income, changes in equity, and cash flows of ESSA Bank & Trust for the year ended September 30, 2004. These consolidated financial statements are the responsibility of the Bank s management. Our
+responsibility is to express an opinion on these consolidated financial statements based on our audit. 
+ We conducted our audit in
+accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
+misstatement. The Bank is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit
+procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
+examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
+presentation. We believe that our audit provides a reasonable basis for our opinion. 
+ In our opinion, the consolidated financial statements
+referred to above present fairly, in all material respects, the results of operations and cash flows of ESSA Bank & Trust and subsidiaries for the year ended September 30, 2004, in conformity with U.S. generally accepted accounting
+principles. 
+ /s/ Beard Miller Company LLP 
+ Beard Miller Company LLP 
+ Harrisburg, Pennsylvania 
+ October 29, 2004 
+ 
+
+ F-2 
+
+Table of Contents
+
+ ESSA BANK & TRUST AND SUBSIDIARIES 
+ CONSOLIDATED BALANCE SHEET 
+ 
+
+ 
+ 
+September 30,
+ 
+
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ ASSETS
+
+ 
+
+ 
+
+ Cash and due from banks
+
+ 
+$
+11,677
+ 
+ 
+$
+12,240
+ 
+
+ Interest-bearing deposits with other institutions
+
+ 
+ 
+1,053
+ 
+ 
+ 
+1,068
+ 
+
+ Commercial paper
+
+ 
+ 
+ 
+ 
+ 
+ 
+6,982
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total cash and cash equivalents
+
+ 
+ 
+12,730
+ 
+ 
+ 
+20,290
+ 
+
+ Investment securities available for sale
+
+ 
+ 
+89,122
+ 
+ 
+ 
+62,506
+ 
+
+ Investment securities held to maturity (market value of $19,193 and $21,297)
+
+ 
+ 
+19,715
+ 
+ 
+ 
+21,505
+ 
+
+ Loans receivable (net of allowance for loan losses of $3,855 and $3,563)
+
+ 
+ 
+556,677
+ 
+ 
+ 
+508,981
+ 
+
+ Federal Home Loan Bank stock
+
+ 
+ 
+13,675
+ 
+ 
+ 
+11,916
+ 
+
+ Premises and equipment
+
+ 
+ 
+11,447
+ 
+ 
+ 
+11,560
+ 
+
+ Bank-owned life insurance
+
+ 
+ 
+13,376
+ 
+ 
+ 
+12,864
+ 
+
+ Other assets
+
+ 
+ 
+9,054
+ 
+ 
+ 
+6,444
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ TOTAL ASSETS
+
+ 
+$
+725,796
+ 
+ 
+$
+656,066
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ LIABILITIES
+
+ 
+
+ 
+
+ Deposits
+
+ 
+$
+402,153
+ 
+ 
+$
+374,759
+ 
+
+ Short-term borrowings
+
+ 
+ 
+35,299
+ 
+ 
+ 
+27,479
+ 
+
+ Other borrowings
+
+ 
+ 
+224,000
+ 
+ 
+ 
+194,000
+ 
+
+ Advances by borrowers for taxes and insurance
+
+ 
+ 
+2,198
+ 
+ 
+ 
+1,591
+ 
+
+ Other liabilities
+
+ 
+ 
+3,809
+ 
+ 
+ 
+3,866
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ TOTAL LIABILITIES
+
+ 
+ 
+667,459
+ 
+ 
+ 
+601,695
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Commitment and contingencies (Note 11)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ EQUITY
+
+ 
+
+ 
+
+ Retained earnings
+
+ 
+ 
+58,526
+ 
+ 
+ 
+54,572
+ 
+
+ Accumulated other comprehensive loss
+
+ 
+ 
+(189
+)
+ 
+ 
+(201
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ TOTAL EQUITY
+
+ 
+ 
+58,337
+ 
+ 
+ 
+54,371
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ TOTAL LIABILITIES AND EQUITY
+
+ 
+$
+725,796
+ 
+ 
+$
+656,066
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ See accompanying notes to the consolidated financial statements. 
+ 
+
+ F-3 
+
+Table of Contents
+
+ ESSA BANK & TRUST AND SUBSIDIARIES 
+ CONSOLIDATED STATEMENT OF INCOME 
+ 
+
+ 
+ 
+Year Ended September 30,
+
+ 
+ 
+2006
+ 
+2005
+ 
+ 
+2004
+
+ 
+ 
+(dollars in thousands)
+
+ INTEREST INCOME
+
+ 
+
+ 
+
+ 
+
+ Loans receivable
+
+ 
+$
+31,744
+ 
+$
+28,829
+ 
+ 
+$
+27,152
+
+ Investment securities:
+
+ 
+
+ 
+
+ 
+
+ Taxable
+
+ 
+ 
+3,579
+ 
+ 
+2,225
+ 
+ 
+ 
+1,070
+
+ Exempt from federal income tax
+
+ 
+ 
+278
+ 
+ 
+267
+ 
+ 
+ 
+274
+
+ Other investment income
+
+ 
+ 
+850
+ 
+ 
+598
+ 
+ 
+ 
+314
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total interest income
+
+ 
+ 
+36,451
+ 
+ 
+31,919
+ 
+ 
+ 
+28,810
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ INTEREST EXPENSE
+
+ 
+
+ 
+
+ 
+
+ Deposits
+
+ 
+ 
+9,012
+ 
+ 
+5,851
+ 
+ 
+ 
+5,011
+
+ Short-term borrowings
+
+ 
+ 
+1,081
+ 
+ 
+554
+ 
+ 
+ 
+141
+
+ Other borrowings
+
+ 
+ 
+9,124
+ 
+ 
+7,918
+ 
+ 
+ 
+6,781
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total interest expense
+
+ 
+ 
+19,217
+ 
+ 
+14,323
+ 
+ 
+ 
+11,933
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ NET INTEREST INCOME
+
+ 
+ 
+17,234
+ 
+ 
+17,596
+ 
+ 
+ 
+16,877
+
+ Provision for loan losses
+
+ 
+ 
+300
+ 
+ 
+550
+ 
+ 
+ 
+530
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
+
+ 
+ 
+16,934
+ 
+ 
+17,046
+ 
+ 
+ 
+16,347
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ NONINTEREST INCOME
+
+ 
+
+ 
+
+ 
+
+ Service fees on deposit accounts
+
+ 
+ 
+3,825
+ 
+ 
+3,747
+ 
+ 
+ 
+2,825
+
+ Services charges and fees on loans
+
+ 
+ 
+491
+ 
+ 
+486
+ 
+ 
+ 
+475
+
+ Trust and investment fees
+
+ 
+ 
+642
+ 
+ 
+404
+ 
+ 
+ 
+515
+
+ Impairment loss on securities
+
+ 
+ 
+ 
+ 
+ 
+(130
+)
+ 
+ 
+ 
+
+ Gain on sale of loans, net
+
+ 
+ 
+7
+ 
+ 
+96
+ 
+ 
+ 
+ 
+
+ Earnings on Bank-owned life insurance
+
+ 
+ 
+512
+ 
+ 
+495
+ 
+ 
+ 
+369
+
+ Other
+
+ 
+ 
+41
+ 
+ 
+183
+ 
+ 
+ 
+96
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total noninterest income
+
+ 
+ 
+5,518
+ 
+ 
+5,281
+ 
+ 
+ 
+4,280
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ NONINTEREST EXPENSE
+
+ 
+
+ 
+
+ 
+
+ Compensation and employee benefits
+
+ 
+ 
+9,194
+ 
+ 
+9,035
+ 
+ 
+ 
+7,872
+
+ Occupancy and equipment
+
+ 
+ 
+2,395
+ 
+ 
+2,218
+ 
+ 
+ 
+2,054
+
+ Professional fees
+
+ 
+ 
+736
+ 
+ 
+828
+ 
+ 
+ 
+955
+
+ Data processing
+
+ 
+ 
+1,819
+ 
+ 
+1,896
+ 
+ 
+ 
+2,163
+
+ Advertising
+
+ 
+ 
+577
+ 
+ 
+477
+ 
+ 
+ 
+503
+
+ Contributions
+
+ 
+ 
+423
+ 
+ 
+484
+ 
+ 
+ 
+416
+
+ Other
+
+ 
+ 
+1,541
+ 
+ 
+1,555
+ 
+ 
+ 
+1,577
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total noninterest expense
+
+ 
+ 
+16,685
+ 
+ 
+16,493
+ 
+ 
+ 
+15,540
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income before income taxes
+
+ 
+ 
+5,767
+ 
+ 
+5,834
+ 
+ 
+ 
+5,087
+
+ Income taxes
+
+ 
+ 
+1,813
+ 
+ 
+1,383
+ 
+ 
+ 
+1,172
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ NET INCOME
+
+ 
+$
+3,954
+ 
+$
+4,451
+ 
+ 
+$
+3,915
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ See accompanying notes to the consolidated financial statements. 
+ 
+
+ F-4 
+
+Table of Contents
+
+ ESSA BANK & TRUST AND SUBSIDIARIES 
+ CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 
+ 
+
+ 
+ 
+Retained
+Earnings
+ 
+Accumulated
+Other
+Comprehensive
+Income (Loss)
+ 
+ 
+Total
+Equity
+ 
+ 
+Comprehensive
+Income
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ Balance, September 30, 2003
+
+ 
+$
+46,206
+ 
+$
+175
+ 
+ 
+$
+46,381
+ 
+ 
+
+ Net income
+
+ 
+ 
+3,915
+ 
+ 
+ 
+ 
+ 
+ 
+3,915
+ 
+ 
+$
+3,915
+ 
+
+ Other comprehensive loss:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Unrealized loss on securities available for sale, net of income tax benefit of $12
+
+ 
+ 
+ 
+ 
+ 
+(36
+)
+ 
+ 
+(36
+)
+ 
+ 
+(36
+)
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+$
+3,879
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 30, 2004
+
+ 
+ 
+50,121
+ 
+ 
+139
+ 
+ 
+ 
+50,260
+ 
+ 
+
+ Net income
+
+ 
+ 
+4,451
+ 
+
+ 
+ 
+4,451
+ 
+ 
+$
+4,451
+ 
+
+ Other comprehensive loss:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Unrealized loss on securities available for sale, net of reclassification adjustment, net of income tax benefit of $176
+
+ 
+
+ 
+ 
+(340
+)
+ 
+ 
+(340
+)
+ 
+ 
+(340
+)
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+$
+4,111
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 30, 2005
+
+ 
+ 
+54,572
+ 
+ 
+(201
+)
+ 
+ 
+54,371
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net income
+
+ 
+ 
+3,954
+ 
+
+ 
+ 
+3,954
+ 
+ 
+$
+3,954
+ 
+
+ Other comprehensive income:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Unrealized gain on securities available for sale, net of income taxes of $6
+
+ 
+
+ 
+ 
+12
+ 
+ 
+ 
+12
+ 
+ 
+ 
+12
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+$
+3,966
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 30, 2006
+
+ 
+$
+58,526
+ 
+$
+(189
+)
+ 
+$
+58,337
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+2004
+ 
+
+ Components of other comprehensive income (loss):
+
+ 
+
+ 
+
+ 
+
+ Change in net unrealized gain (loss) on investment securities available for sale
+
+ 
+$
+12
+ 
+ 
+$
+(426
+)
+ 
+$
+(36
+)
+
+ Realized impairment loss included in net income, net of taxes of $44 in 2005
+
+ 
+ 
+ 
+ 
+ 
+ 
+(86
+)
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+
+ 
+$
+12
+ 
+ 
+$
+(340
+)
+ 
+$
+(36
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ See accompanying notes to the consolidated financial statements. 
+ 
+
+ F-5 
+
+Table of Contents
+
+ ESSA BANK & TRUST AND SUBSIDIARIES 
+ CONSOLIDATED STATEMENT OF CASH FLOWS 
+ 
+
+ 
+ 
+Year Ended September 30,
+ 
+
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+2004
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ OPERATING ACTIVITIES
+
+ 
+
+ 
+
+ 
+
+ Net income
+
+ 
+$
+3,954
+ 
+ 
+$
+4,451
+ 
+ 
+$
+3,915
+ 
+
+ Adjustments to reconcile net income to net cash provided by operating activities:
+
+ 
+
+ 
+
+ 
+
+ Provision for loan losses
+
+ 
+ 
+300
+ 
+ 
+ 
+550
+ 
+ 
+ 
+530
+ 
+
+ Provision for depreciation and amortization.
+
+ 
+ 
+1,063
+ 
+ 
+ 
+969
+ 
+ 
+ 
+956
+ 
+
+ Amortization (accretion) of discounts and premiums
+
+ 
+ 
+(500
+)
+ 
+ 
+(394
+)
+ 
+ 
+348
+ 
+
+ Impairment loss on securities
+
+ 
+ 
+ 
+ 
+ 
+ 
+130
+ 
+ 
+ 
+ 
+ 
+
+ Gain on sale of loans, net
+
+ 
+ 
+(7
+)
+ 
+ 
+(96
+)
+ 
+ 
+ 
+ 
+
+ Decrease (increase) in accrued interest receivable
+
+ 
+ 
+(530
+)
+ 
+ 
+(303
+)
+ 
+ 
+76
+ 
+
+ Increase (decrease) in accrued interest payable
+
+ 
+ 
+551
+ 
+ 
+ 
+139
+ 
+ 
+ 
+(2,924
+)
+
+ Increase in other receivables
+
+ 
+ 
+(1,841
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Earnings on Bank-owned life insurance
+
+ 
+ 
+(512
+)
+ 
+ 
+(495
+)
+ 
+ 
+(369
+)
+
+ Deferred federal income taxes
+
+ 
+ 
+76
+ 
+ 
+ 
+159
+ 
+ 
+ 
+183
+ 
+
+ Other, net
+
+ 
+ 
+(708
+)
+ 
+ 
+(180
+)
+ 
+ 
+352
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by operating activities
+
+ 
+ 
+1,846
+ 
+ 
+ 
+4,930
+ 
+ 
+ 
+3,067
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ INVESTING ACTIVITIES
+
+ 
+
+ 
+
+ 
+
+ Investment securities available for sale:
+
+ 
+
+ 
+
+ 
+
+ Proceeds from principal repayments and maturities
+
+ 
+ 
+23,537
+ 
+ 
+ 
+11,356
+ 
+ 
+ 
+16,165
+ 
+
+ Purchases
+
+ 
+ 
+(50,213
+)
+ 
+ 
+(27,126
+)
+ 
+ 
+(38,639
+)
+
+ Investment securities held to maturity:
+
+ 
+
+ 
+
+ 
+
+ Proceeds from principal repayments and maturities
+
+ 
+ 
+3,753
+ 
+ 
+ 
+3,293
+ 
+ 
+ 
+3,950
+ 
+
+ Purchases
+
+ 
+ 
+(1,988
+)
+ 
+ 
+(17,191
+)
+ 
+ 
+(10,305
+)
+
+ Increase in loans receivable, net
+
+ 
+ 
+(47,800
+)
+ 
+ 
+(36,244
+)
+ 
+ 
+(39,906
+)
+
+ Proceeds from sale of loans
+
+ 
+ 
+340
+ 
+ 
+ 
+5,605
+ 
+ 
+ 
+ 
+ 
+
+ Redemption of FHLB stock
+
+ 
+ 
+2,325
+ 
+ 
+ 
+2,696
+ 
+ 
+ 
+1,394
+ 
+
+ Purchase of FHLB stock
+
+ 
+ 
+(4,084
+)
+ 
+ 
+(3,254
+)
+ 
+ 
+(3,565
+)
+
+ Purchase of Bank-owned life insurance
+
+ 
+ 
+ 
+ 
+ 
+ 
+(2,000
+)
+ 
+ 
+(10,000
+)
+
+ Proceeds from sale of other real estate
+
+ 
+ 
+83
+ 
+ 
+ 
+118
+ 
+ 
+ 
+221
+ 
+
+ Purchase of premises, equipment, and software
+
+ 
+ 
+(1,180
+)
+ 
+ 
+(1,053
+)
+ 
+ 
+(2,152
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used for investing activities
+
+ 
+ 
+(75,227
+)
+ 
+ 
+(63,800
+)
+ 
+ 
+(82,837
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ FINANCING ACTIVITIES
+
+ 
+
+ 
+
+ 
+
+ Increase in deposits, net
+
+ 
+ 
+27,394
+ 
+ 
+ 
+41,232
+ 
+ 
+ 
+14,032
+ 
+
+ Net increase (decrease) in short-term borrowings
+
+ 
+ 
+7,820
+ 
+ 
+ 
+16,345
+ 
+ 
+ 
+(6,786
+)
+
+ Proceeds from other borrowings
+
+ 
+ 
+57,000
+ 
+ 
+ 
+23,000
+ 
+ 
+ 
+64,000
+ 
+
+ Repayment of other borrowings
+
+ 
+ 
+(27,000
+)
+ 
+ 
+(23,000
+)
+ 
+ 
+(13,000
+)
+
+ Increase (decrease) in advances by borrowers for taxes and insurance
+
+ 
+ 
+607
+ 
+ 
+ 
+125
+ 
+ 
+ 
+(105
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by financing activities
+
+ 
+ 
+65,821
+ 
+ 
+ 
+57,702
+ 
+ 
+ 
+58,141
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Decrease in cash and cash equivalents
+
+ 
+ 
+(7,560
+)
+ 
+ 
+(1,168
+)
+ 
+ 
+(21,629
+)
+
+ CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
+
+ 
+ 
+20,290
+ 
+ 
+ 
+21,458
+ 
+ 
+ 
+43,087
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ CASH AND CASH EQUIVALENTS AT END OF YEAR
+
+ 
+$
+12,730
+ 
+ 
+$
+20,290
+ 
+ 
+$
+21,458
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ SUPPLEMENTAL CASH FLOW DISCLOSURES
+
+ 
+
+ 
+
+ 
+
+ Cash paid:
+
+ 
+
+ 
+
+ 
+
+ Interest
+
+ 
+$
+18,666
+ 
+ 
+$
+14,303
+ 
+ 
+$
+11,982
+ 
+
+ Income taxes
+
+ 
+ 
+1,550
+ 
+ 
+ 
+900
+ 
+ 
+ 
+1,375
+ 
+
+ Noncash items:
+
+ 
+
+ 
+
+ 
+
+ Other real estate owned
+
+ 
+ 
+74
+ 
+ 
+ 
+42
+ 
+ 
+ 
+81
+ 
+
+ See accompanying notes to the consolidated financial statements. 
+ 
+
+ F-6 
+
+Table of Contents
+
+ ESSA BANK & TRUST AND SUBSIDIARIES 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
+ 
+
+1.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001382234_ccc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001382234_ccc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..28440331684487e20ef6b9358d61f94f46c5c58b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001382234_ccc_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the issuance of the notes, including the related guarantees and the common stock issuable upon conversion of the notes, will be passed upon for us by Kirkpatrick Lockhart Preston Gates Ellis LLP, Pittsburgh, Pennsylvania.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001382235_bsc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001382235_bsc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..28440331684487e20ef6b9358d61f94f46c5c58b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001382235_bsc_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the issuance of the notes, including the related guarantees and the common stock issuable upon conversion of the notes, will be passed upon for us by Kirkpatrick Lockhart Preston Gates Ellis LLP, Pittsburgh, Pennsylvania.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001382236_calgon_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001382236_calgon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..28440331684487e20ef6b9358d61f94f46c5c58b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001382236_calgon_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the issuance of the notes, including the related guarantees and the common stock issuable upon conversion of the notes, will be passed upon for us by Kirkpatrick Lockhart Preston Gates Ellis LLP, Pittsburgh, Pennsylvania.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001382696_fuqi_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001382696_fuqi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2b4a0bb854f764cffb7b0dfee94eee95c4aa2b92
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001382696_fuqi_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Kirkpatrick & Lockhart Preston Gates Ellis LLP, Los Angeles, California. DLA Piper US LLP, New York, New York, is acting as counsel for the underwriters. Shujin Law Firm, Shenzhen, PRC, is acting as legal counsel for us with respect to PRC laws.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001383790_3sbio-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001383790_3sbio-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..290988002fe5665b0320d073a3b444100044d622
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001383790_3sbio-inc_legal_matters.txt
@@ -0,0 +1 @@
+legal matters since joining Shenyang Sunshine in 1993. Before that he acted as office manager for Shenyang Army Medical Research Center from 1976 to 1993. He received his MBA from Qinghua University in 2002 and a bachelor s degree in engineering from the Northeast University in 1987. Lawrence S. Wizel has served as a director since September 2006. He was a partner at Deloitte & Touche LLP from 1980 to June 2006. He also served as deputy professional practice director and northeast region China service group leader of Deloitte & Touche LLP from 2002 to 2006. He has extensive experience serving a diverse client base of both publicly-held and private companies and has also assisted numerous Chinese companies with their US filings with the Securities and Exchange Commission. He is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. He also serves as the Chairman of Board of Trustees of Helen Keller Services for the Blind. He received his bachelor s degree in science from Michigan State University. Guanjin Hu has served as one of our directors since August 2006. He has also served as the President of Huaxi Securities Co. Ltd. since 2004. Prior to joining us he served as the Chairman and President of Guoxin Securities Co. Ltd. from 1996 to 2004. Currently Mr. Hu is a vice-chairman of the Securities Association of China and a director member of the Investment Bank Committee of the Securities Association of China. Mr. Hu possesses twelve years of experience in the securities industry in China. He received his bachelor s degree in economics from Hangzhou University in 1982. Moujia Qi has served as one of our directors since August 2006. He has also served as the Chairman of the China Starch Industry Association for the past five years. He was the deputy director and chief engineer of Huabei Pharmaceutical Factory and has held several management positions in various state-owned companies in the pharmaceutical industry. He has also served as the deputy director and chief director of Administration, before he retired in 1994. Clara Mak has been our principal financial and accounting officer since June 2006. From April 1998 to December 2004, Ms. Mak was an investment fund manager for Suez Asia Holdings (Hong Kong) Ltd., a leading private equity firm in Asia. Before that, she worked as a financial auditor with Arthur Andersen LLP and Deloitte & Touche LLP in Toronto, Canada and PricewaterhouseCoopers LLP in Hong Kong. Prior to joining the Company, she served as senior financial advisor for a Nasdaq listed company. Ms. Mak is a qualified chartered accountant in Canada and a certified public accountant in the U.S. She received her MBA from the University of Toronto in 1994. Dr. Yingfei Wei, our chief scientific officer and vice president for Business Development, joined us in August 2006. She has over fifteen years of research and development experience in the biotechnology and pharmaceutical sectors. Before joining us, she was the co-founder, president and chief executive officer of Elixirin Corporation from 2004 to 2005, responsible for overseeing contract research, manufacturing, regulatory approvals and marketing of anti-aging products in the U.S. and China. Before that, she was director of biotechnology research at Bayer HealthCare Global from 1998 to 2004 and group leader at the discovery research department of Human Genome Sciences Inc. from 1993 to 1998. Dr. Wei is 2003 2004 2005 2005 2005 2006 2006 RMB 000 RMB 000 RMB 000 US$ 000 RMB 000 RMB 000 US$ 000 Balance at beginning of year/period 2,274 2,488 2,227 282 2,227 2,663 337 Charged/(credited) to income 214 (261 ) 436 55 2003 2004 2005 2005 2005 2006 2006 Note RMB RMB RMB US$ RMB RMB (restated) US$ (restated) Cash flow from operating activities Net income 510 6,610 16,055 2,031 12,896 23,393 2,959 Adjustments to reconcile net income to net cash (used in)/provided by operating activities: (Gain)/loss on disposal of property, plant and equipment (94 ) 2 841 106 857 228 29 Depreciation of property, plant and equipment 15 6,479 7,252 7,488 948 5,796 4,046 512 Amortization of intangible assets 9 1,235 1,235 823 104 823 Amortization of deferred grant income (1,468 ) (1,284 ) (1,050 ) (133 ) (800 ) (712 ) (91 ) Minority interests, net of tax (349 ) (182 ) (144 ) (18 ) (153 ) (1 ) Deferred income taxes, deferred tax charges and deferred credit 1,138 226 1,421 180 1,317 1,216 154 Changes in operating assets and liabilities: Lease prepayments 8 22 22 (9,461 ) (1,197 ) (9,549 ) 265 33 Accounts receivable, net 1,190 (10,522 ) 5,772 730 (484 ) (3,584 ) (454 ) Inventories (3,259 ) 2,735 2,238 283 2,606 (1,896 ) (240 ) Prepaid expenses and other receivables (401 ) (241 ) 1,367 173 635 (6,415 ) (811 ) Accounts payable (8,768 ) (202 ) 88 11 (264 ) (355 ) (45 ) Accrued expenses and other payables (13,470 ) 1,470 (480 ) (61 ) 489 3,535 447 Amount due to investee company 1,813 (1,813 ) (229 ) Income tax prepaid/ payable (693 ) 71 (119 ) (14 ) 351 1,512 Net income per share, basic and diluted 0.01 0.07 0.16 0.02 0.13 0.23 0.03 Total current assets 96,639 96,012 12,147 100,877 12,762 Property, plant and equipment, net 7 45,568 42,472 5,374 43,829 5,545 Lease prepayments 8 492 9,953 1,259 9,688 1,226 Intangible assets, net 9 823 Deferred tax assets 16 2,727 2,124 269 1,577 Represented by: Current portion 3,692 2,717 344 1,940 245 Non-current portion 2,727 2,124 269 1,577 continue to contribute to the discovery and development of new pharmaceutical products. The advantages of applying biotechnology in the research and development of pharmaceutical products are as follows: biotechnology can create substances that cannot be found in nature and can avoid the use of blood-born products; and biotechnology may be able to increase the quantity of some biological products at substantially lower production costs. In 1982, human insulin, the world s first genetic engineering pharmaceutical product, was released to the market. Ever since then there have been over 254 biotechnology drugs that have been approved for 385 indications by December 2005 based on the data from Biotechnology Industry Organization (http://www.bio.org/speeches/pubs/er/approveddrugs.asp). The table below sets forth the actual and estimated global combined market sizes for sales of key first-generation biologic product types (assuming no biogenerics) for 2004 through 2010: 2004 ($m) 2006 ($m) 2008 ($m) 2010 ($m) CAGR 2004-10 (%) Epoetin 8,413 8,289 7,758 7,133 (2.7 ) Insulin 3,774 3,190 2,456 2,101 (9.3 ) Interferon beta 3,527 4,608 4,996 4,894 5.6 Growth hormone 2,255 2,532 2,738 2,850 4.0 CSFs 1,822 1,537 1,450 1,441 (3.8 ) Interferon alpha 417 304 231 Weighted average number of shares outstanding 100,000,998 100,000,998 100,000,998 100,000,998 100,000,998 100,000,998 100,000,998 Year ended December 31, 2005 (US$ 000) 43 180 Year ended December 31, 2004 226 Net income per ADS, basic and diluted (unaudited) 0.04 0.46 1.12 0.14 0.90 1.64 0.21 Due to LifeGen, Inc. (ii) 1,813 1,813 Weighted average number of ADSs outstanding (unaudited) 14,285,857 14,285,857 14,285,857 14,285,857 14,285,857 14,285,857 14,285,857 2004 2005 2005 2006 2006 Note RMB RMB US$ RMB US$ (restated) (restated) Assets Current assets Cash and cash equivalents 20,151 25,746 3,257 42,813 5,416 Accounts receivable, less allowance for doubtful accounts: December 31, 2004 RMB5,586; December 31, 2005 RMB5,892 (US$745); September 30, 2006 RMB5,892 (US$745) 4 40,148 34,376 4,349 37,960 4,803 Inventories 5 8,688 6,450 816 8,346 1,056 Prepaid expenses and other receivables 6 4,485 6,927 876 9,818 1,242 Amount due from shareholder 18 (b) 19,473 19,675 2,489 Income tax prepaid 2 121 16 Deferred tax assets 16 3,692 2,717 344 1,940 Table of Contents The table below sets forth revenues from the sales of our products expressed as a percentage of our net revenues for the periods indicated: For the year ended December 31, For the nine months ended September 30, Net Revenues 2003 2004 2005 2005 2006 EPIAO 61.5 % 84.1 % 83.1 % 84.9 % 78.7 % TPIAO 2.7 1.1 11.0 Intefen 31.3 10.0 6.7 7.0 3.7 Inleusin 5.9 3.5 1.6 1.8 0.9 Export 1.2 2.2 4.9 4.2 5.0 Others 0.1 0.2 1.0 1.0 0.7 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % As of September 30, 2006 2,202 Table of Contents Risk factors Investment in our ADSs involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our consolidated financial statements and related notes, before you decide to buy our ADSs. In particular, because we conduct our operations principally in China, there are risks associated with investing in our ADSs that are not typical with investments in shares of U.S. issuers. If any of the following risks actually occurs, our business, financial condition and results of operations would likely suffer. In such case, the trading price of our ADSs may decline, and you could lose all or part of your investment. RISKS RELATED TO OUR COMPANY We are currently dependent on our flagship product, EPIAO. A reduction in revenues of EPIAO would cause our revenues to decline and could materially harm our business. We are largely dependent on sales of our erythropoietin, or EPO, product, which we market under the name of EPIAO. We began marketing and selling EPIAO in 1998, and it has been our top-selling product since 2002. Revenues from sales of EPIAO accounted for 83.1% of our total revenues for the year ended December 31, 2005 and 78.7% for the nine months ended September 30, 2006. We plan to expand our EPO franchise to include a higher dosage form of EPIAO and a second-generation version with enhanced half life. If developed and commercially launched, these products would increase our reliance on EPO-based products. We expect that sales of EPIAO will continue to comprise a substantial portion of our revenues in the future. Any reduction in revenues from EPIAO will have a direct negative impact on our business, financial condition and results of operations. Our EPO franchise and associated revenues could be adversely affected by a variety of factors, including: increased competition; new product introductions; government-imposed pricing constraints; intellectual property issues; problems with raw materials supply; disruptions in manufacturing or distribution; and newly discovered safety issues. Due to our relative lack of product diversification, an investment in our company may entail more risk than investments in companies that offer a wider variety of products or services. Despite our efforts, we may be unable to develop or acquire new products that would enable us to diversify our business and reduce our dependence on EPIAO products. The commercial success of our products depends upon the degree of market acceptance among the medical community. Failure to attain market acceptance among the medical community would have an adverse impact on our operations and profitability. The commercial success of our products depends upon the degree of market acceptance they achieve among the PRC medical community, particularly physicians and hospitals. Physicians may not prescribe Table of Contents Risk factors or recommend our products to patients, and procurement departments of hospitals may not purchase our products. The acceptance of any of our products among the medical community will depend upon several factors, including: the safety and effectiveness of the product; the effectiveness of our efforts to market our products to hospitals and physicians; the product s cost effectiveness; the product s perceived advantages and disadvantages relative to competing products or treatments; and the prevalence and severity of side effects. If our products fail to attain market acceptance among the medical community, our operations and profitability would be adversely affected. The selling prices of our products tend to decline over time. Our success depends on our ability to successfully develop and commercialize additional pharmaceutical products. Our product development efforts may not result in commercially viable products. As is typical in the Chinese pharmaceutical industry, the average selling prices of our products tend to decline significantly over the life of the product. These declines principally result from increased competition. For example, from 2004 to 2005 the average selling price of Intefen declined by 20%. Historically we have sought to mitigate downward pricing pressure by introducing new products or enhanced versions of existing products with higher margins. For example, in 2006 we launched TPIAO, which has quickly become our second largest revenue generator and accounted for approximately 11.0% of our total revenues for the nine months ended September 30, 2006. We must therefore constantly identify product candidates that can be developed into cost-effective therapeutic products. We plan to devote substantial resources to our research and development efforts; however, successful product development in our industry is highly uncertain, and relatively few research and development projects produce commercially viable products. If we cannot offset any decline in revenues and margins of our marketed products with new product introductions, our overall results of operations will suffer. Our products face substantial competition. Other companies may discover, develop, acquire or commercialize products before or more successfully than we do. We operate in a highly competitive environment. Our products compete with other products or treatments for diseases for which our products may be indicated. EPIAO competes with both existing EPO drugs and potential new drug candidates. In China, EPO drugs are offered by established international companies such as Kirin Brewery Company Limited, or Kirin, and F. Hoffmann-La Roche, Ltd., or Roche, and domestic pharmaceutical companies such as Di ao Group Chengdu Diao Jiuhong Pharmaceutical Factory. Competitors for interferon alpha-2 drugs include Schering-Plough (Brinny) Co. and Beijing Tri-Prime Genetic Engineering Co., Ltd., and competitors for interleukin-2 include Beijing SL Pharmaceutical Co., Ltd. and Beijing Four Rings Biopharmaceutical Co., Ltd. Competitors for Tietai Iron Sucrose Supplement include Beijing Novartis Pharmaceutical Co., Ltd. and Nanjing Hencer Pharmaceutical Co., Ltd. and competitors for Baolijin include Kirin, Hangzhou Jiuyuan Gene Engineering Co., Ltd. and Qilu Pharmaceutical Co., Ltd. In addition, while we believe TPIAO is the only TPO-based therapeutic available in the Chinese market to date, we are aware of another Chinese RMB (Restated)(4) US$ (Restated)(4) RMB(1) US$ (in thousands except share data) Short-term bank loans 44,000 5,567 44,000 5,567 Long-term bank loans 25,000 3,163 25,000 3,163 Shareholders equity: Ordinary shares, US$0.0001 par value per share; 500,000,000 ordinary shares authorized, 100,000,998 shares issued and outstanding(2); 150,315,717 shares issued and outstanding, as adjusted 80 10 119 15 Additional paid-in capital 78,141 9,886 725,446 91,782 Statutory reserves 2,266 287 2,266 Balance as of December 31, 2005 US$ 7,967 1,919 Balance as of September 30, 2006 US$ (restated) 2 100,000,998 10 9,886 Table of Contents Risk factors pharmaceutical company, Shanghai CP Guojian Pharmaceutical Company Limited, or CP Guojian, which we believe may be conducting clinical trials for a TPO-based therapeutic in China. If CP Guojian obtained the approval for any clinical trials prior to the commencement of the monitoring period for TPIAO, CP Guojian may not be prohibited from manufacturing and marketing its TPO product during TPIAO s monitoring period. We have no information on when CP Guojian plans to bring their product to market, nor are we aware of any other company that is developing a similar product. Our products may compete against products that have lower prices, superior performance, greater ease of administration or other advantages compared to our products. We do not have patents of any commercial significance covering EPIAO, our legacy products, or many of our product candidates with which to protect these products from direct competition. Our inability to compete effectively could reduce sales or margins, which could have a material adverse effect on our results of operations. Certain of our competitors, including biotechnology and pharmaceutical companies, market products or are actively engaged in research and development in areas where we have products or where we are developing product candidates or new indications for existing products. In the future, we expect that our products will compete with new drugs currently in development, drugs approved for other indications that may be approved for the same indications as those of our products and drugs approved for other indications that are used off-label. If less invasive or less expensive alternatives to our products are dispensed or prescribed to patients, our sales could be negatively impacted. An increasing number of foreign pharmaceutical companies have introduced their pharmaceutical products into the Chinese market. As we expand our product portfolio by adding new products and indications, as well as developing second-generation versions of existing products with the same or overlapping labels, certain of our products may be used as a substitute for our other products in the same end markets. For instance, although EPIAO and TPIAO are targeted towards patients with different indications and TPIAO is not intended to replace EPIAO in the oncology market, some doctors may prescribe TPIAO for their patients when they would have otherwise prescribed EPIAO. Consequently, the introduction of TPIAO may adversely impact sales of EPIAO. Large Chinese state-owned and privately-owned pharmaceutical companies and foreign pharmaceutical companies may have greater clinical, research, regulatory, manufacturing, marketing, financial and human resources than we do. In addition, some of our competitors may have technical or competitive advantages over us for the development of technologies and processes. These resources may make it difficult for us to compete with them to successfully discover, develop and market new products and for our current products to compete with new products or new product indications that these competitors may bring to market. There may also be significant consolidation in the pharmaceutical industry among our competitors, alliances may develop among competitors and these alliances may rapidly acquire significant market share. Furthermore, in order to gain market share in China, competitors may significantly increase their advertising expenditures and promotional activities or engage in irrational or predatory pricing behavior. In addition, our competitors may engage in illegal acts, such as bribery. Third parties may actively engage in activities designed to undermine our brand name and product quality or to influence customer confidence in our products. Increased competition may result in price reductions, reduced margins and loss of market share, any of which could materially adversely affect our profit margins. We may not be able to compete effectively against current and future competitors. Our competitors may have the ability to manufacture pharmaceutical products substantially similar to ours. Our ability to compete against our competitors is, to a significant extent, dependent upon our ability to distinguish our products from those of our competitors by providing high quality products at reasonable Table of Contents Risk factors prices that appeal to our consumers. Many of our competitors may have been in business longer than we have, may have substantially greater financial and other resources than we have and may be better established in our markets. Our competitors in any particular market may also benefit from raw material sources or production facilities that are closer to such markets, which may provide them with competitive advantages in terms of cost and proximity to consumers. We have exclusivity for the manufacturing and marketing of one indication of EPIAO under an administrative protection period through 2007. We also have a monitoring period for TPIAO through May 2010. Upon expiration of the protection period or the monitoring period, other manufacturers in China may apply for approval by the State Food and Drug Administration, or the SFDA, to manufacture such products using similar formulae or production techniques. If other manufacturers introduce the same products or products substantially similar to ours, we will face more competitive pressure in the market and our sales and profit margin may be adversely affected. The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation; any requirement to obtain CSRC approval could significantly delay this offering or could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering. The regulation also establishes more complex procedures for acquisitions by foreign investors, which could make it more difficult to pursue growth through acquisitions. On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or the MOFCOM, and the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. The New M&A Rule, among other things, purports to require an offshore special purpose vehicle, or SPV, formed for the purpose of listing the SPV s securities on an offshore securities exchange and controlled directly or indirectly by PRC companies or individuals, to obtain the approval of the CSRC prior to such offshore listing and trading. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, substantial uncertainty remains regarding the scope and applicability of the New M&A Rule to overseas listing of offshore SPVs. Our PRC counsel, Jingtian & Gongcheng, has advised us that, based on their understanding of the current PRC laws, regulations and rules, it is not necessary for us to obtain the CSRC s approval for this offering because we obtained approval from the Shenyang branch of MOFCOM for the acquisition of Shenyang Sunshine, our wholly owned subsidiary in the PRC, before September 8, 2006, the effective date of the new regulation. A copy of Jingtian & Gongcheng s legal opinion regarding this new PRC regulation is filed as an exhibit to our registration statement on Form F-1. However, we cannot assure you that the relevant PRC government agency, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or another PRC regulatory body subsequently determines that we need to obtain the CSRC s approval for this offering, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering Table of Contents Risk factors before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. Also, if the CSRC later requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our ADSs. The New M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. Complying with the requirements of the New M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. Our business depends on our Shenyang Sunshine and EPIAO brands, and if we are not able to maintain and enhance our brands to maintain our competitive advantage, our reputation, business and operating results may be harmed. We believe that market awareness of our Shenyang Sunshine and EPIAO brands has contributed significantly to the success of our business. We also believe that maintaining and enhancing the Shenyang Sunshine and EPIAO brands is critical to maintaining our competitive advantage. In order to further penetrate our markets and launch new products, we must expand our manufacturing and sales and marketing efforts. Maintaining quality and cost-effectiveness may be more difficult to achieve. While our sales and marketing staff will continue to further promote our brand to remain competitive, we may not be successful. If we are unable to further enhance our brand recognition and increase awareness of our products, or if we incur excessive marketing and promotion expenses, our business and results of operations may be materially and adversely affected. Certain of our raw materials, medical devices and components are single-sourced from third parties; third-party supply failures could adversely affect our ability to supply our products. Certain raw materials necessary for commercial manufacturing and formulation of our products are provided by single-source unaffiliated third-party suppliers. Also, certain medical devices and components necessary for formulation, fill, and finish of our products are provided by single-source unaffiliated third-party suppliers, including the EPO Elisa Kit by R&D Systems Inc., the GIBCO cell culture medium by Invitrogen Inc., the Pharmacia EPO chromatography purification medium by GE Healthcare, a division of GE, and Disc, a microcarrier for cell cultures, by New Brunswick Scientific Inc. For more details, see Business Manufacturing. Certain of these raw materials, medical devices, and components are the proprietary products of these unaffiliated third-party suppliers. We would be unable to obtain these raw materials, medical devices, or components for an indeterminate period of time if these third-party single-source suppliers were to cease or interrupt production or otherwise fail to supply these materials or products to us for any reason, including due to regulatory requirements or action, due to adverse financial developments at or affecting the supplier, and/or due to unexpected demand, labor shortages or disputes. We would also be unable to obtain these materials, devices and components for an indeterminate period of time if such supply was subsequently found to Table of Contents Risk factors not be in compliance with our quality standards or resulted in quality failures or product contamination and/or recall when used to manufacture, formulate, fill, or finish our products. These events could adversely affect our ability to satisfy demand for our products, which could adversely affect our product sales and operating results materially. For example, we have occasionally experienced shortages in certain components necessary for the formulation, fill, and finish of certain of our products in our Shenyang facility without impact on our ability to supply these products. However, we may experience the shortages in the future resulting in delayed shipments, supply constraints, stock-outs and/or recalls of our products, which could result in interruptions to our production. We depend on our distributors for sales of our products. We rely on our network of approximately 80 distributors to distribute our own and our in-licensed products. Our distributors do not sell our products on an exclusive basis. As a result, our products face competition from similar products sold by our distributors. Our success will depend in part on our ability to form relationships with and manage an increasing number of distributors. If our distribution network in China suffers a disruption, our financial condition and results of operations may be adversely affected. While we have long-standing business relationships with most of our distributors and we have not, in the past three years, lost any significant distributors, we do not have long-term contracts with any distributor. Moreover, a significant amount of our revenue is generated by product sales to relatively few distributors, whose mix changes from year to year. The tables below set forth the aggregate sales to our top five distributors, expressed in RMB and as a percentage of our total sales, for the periods indicated. Sales to top five distributors Balance at end of year/period 2,488 2,227 2,663 337 2,398 2,352 Sales to top five distributors Total Table of Contents Risk factors Sales to top five distributors Sales to top five distributors If any one of these distributors were to voluntarily or involuntarily suspend or terminate product purchases from us, we would need to divert product sales to other distributors, which could cause short-term disruptions to our revenues and profitability. If we fail to achieve specified sales goals with respect to an in-licensed product, the license agreement relating to that product may be terminated and our results of operations may suffer. We have recently begun to distribute third-party products pursuant to in-licensing agreements with domestic pharmaceutical corporations. For example, we currently in-license Tietai Iron Sucrose Supplement and Baolijin. We anticipate that an increasing portion of our revenues during the next several years will be generated from in-licensed products. However, if we fail to achieve certain sales targets, our licensing agreement in relation to Tietai Iron Sucrose Supplement with Shenyang Borui Pharmaceutical Company Limited will become terminable on short notice and our deposit in the amount of RMB1 million will be partially or fully forfeited. Given these risks, there is a great deal of uncertainty regarding the success of our current and future collaborative efforts. We are highly dependent on senior management and key research and development personnel. We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new technologies and applications and the enhancement of our existing products. In particular, we rely substantially on our chief executive officer, Dr. Jing Lou, to manage our operations. We also depend on our key research personnel such as Ms. Dongmei Su. In addition, we also rely on sales personnel, and other personnel with industry knowledge, to market and sell our products. We do not maintain key man life insurance on any of our Table of Contents Risk factors If we are unable to protect our products through intellectual property rights, our competitors may compete directly against us. Our success depends, in part, on our ability to protect our products from competition by establishing, maintaining and enforcing intellectual property rights. We try to protect the products and technology that we consider important to our business by filing PRC patent applications, relying on trade secrets or pharmaceutical regulatory protection or employing a combination of these methods. We do not have any patent protection of commercial significance relating to EPIAO. We have patents and patent applications relating to TPIAO and certain of our other products, product candidates and technologies. For more details, see Business Intellectual Property. However, the process of seeking patent protection in the PRC can be lengthy and expensive, and we cannot assure you that these patent applications, or any patent applications we may make in the future in respect of other products, will result in patents being issued, or that any patents issued in the future will be able to provide us with meaningful protection or commercial advantage. Our patent applications may be challenged, invalidated or circumvented in the future. For more details on the process for applying for and obtaining intellectual property protection in the PRC, see Regulations Patent and trademark protection. In addition to patents, we rely on trade secrets and proprietary know-how to protect our intellectual property. We have entered into confidentiality agreements with many of our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. In addition, it is possible that third parties could independently develop proprietary information and techniques substantially similar to ours or otherwise gain access to our trade secrets. We may become involved in patent litigation against third parties to enforce our patent rights, to invalidate patents held by such third parties, or to defend against such claims. The cost to us of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. We do not maintain insurance to cover intellectual property infringement. Intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, due to, among other reasons, lack of procedural rules for discovery and evidence, low damage awards, and lack of judicial independence. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective and may be hampered by corruption and local protectionism. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. The experience and capabilities of PRC courts in handling intellectual property litigation varies, and outcomes are unpredictable. Further, such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. An adverse determination in any such litigation could materially impair our intellectual property rights and may harm our business, prospects and reputation. We depend on administrative protection and monitoring periods for certain of our products, which afford us less protection than patents. Prior to the 1990s, Chinese pharmaceutical companies were not capable of producing innovative drugs due to financial and technical obstacles. Under China s first patent law enacted in March 1984, drugs were not eligible for patent protection. This law, however, provided patent protection for the manufacturing methods of pharmaceuticals. The Drug Administration Law of 1984 specified that Table of Contents Risk factors Year ended December 31, 2005 pharmaceutical products that had never been manufactured in China were classified as new drugs, and allowed Chinese pharmaceutical companies to produce drugs that are similar in structure and function to foreign drugs so long as the foreign drugs had not been manufactured inside China. To further protect the domestic pharmaceutical industry, in 1999 the SFDA s predecessor, the State Drug Administration, issued the Regulation on New Drug Protection and Related Technology Transfer, or the 1999 Regulations, which provided a six to twelve year administrative protection period for five categories of new drugs. In December 2002, the 1999 Regulations were replaced by the Administrative Measures on the Registration of Pharmaceutical Products, or the 2002 Regulations, which were later revised in February 2005. According to the 2002 Regulations, with a view to protecting public health, the SFDA may provide for administrative monitoring periods of up to five years for new drugs approved to be manufactured, to continually monitor the safety of those new drugs. The key element in determining the availability and duration of the monitoring period is the safety of the new drug. The SFDA will consider, among other things, whether the new drug has been previously launched domestically or overseas, what type of new drug it is and what process and technology are involved in the production of the new drug. For example, for a biochemical product that has never been launched domestically or overseas, a five-year monitoring period will be granted; for a biochemical product that has been launched overseas but not domestically, only a four-year monitoring period will be granted. We have administrative protection for one indication of EPIAO through 2007 under a six-year protection period pursuant to the 1999 Regulations, during which other pharmaceutical companies are prohibited from manufacturing EPO drugs for the same indication. We also have administrative protection for TPIAO through 2010 under a five-year monitoring period pursuant to the 2002 Regulations, during which other pharmaceutical companies are prohibited from manufacturing or importing similar drugs, except those whose applications for clinical trials were approved by the SFDA prior to May 2005, the commencement of TPIAO s monitoring period. For a detailed discussion of the mechanism for administrative protection under the relevant Chinese regulations, please refer to Regulations Administrative protection and monitoring periods for new drugs . The period of administrative protection under these Chinese pharmaceutical regulations is considerably shorter than the exclusivity period afforded by patent protection, which, in the case of invention patents, may last up to 20 years from the national filing date of the patent directed to the product, its use or method of manufacture. Once the monitoring period expires, all third parties will be free to compete with us, unless we can exclude them from the market through patents or other intellectual property rights. In addition, the administrative protection for EPIAO in relation to the indication of anemia associated with chemotherapy in cancer patients with non-myeloid malignancies cannot always prevent off label use of other EPO drugs for this indication. If physicians substitute similar or less expensive drugs for EPIAO, our revenues and financial condition will be adversely affected. In addition, the PRC government has in the past and may, in the future, change the duration of the monitoring period. If this occurs, we may lose the administrative protection for our new products or the protection period may be shortened, and we may lose advantage over our competitors with respect to our new products. If our products infringe the intellectual property rights of third parties, we may incur substantial liabilities, and we may be unable to sell these products. Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Under the PRC Patent Law promulgated by the People s Congress in March 1984 and later revised in September 1992 and August 2000, patent applications are Table of Contents Risk factors maintained in confidence until their publication 18 months from the filing date. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications are filed. China adopts the first-to-file system under which whoever first files a patent application (instead of the one who makes first actual discoveries) will be awarded the patent. By contrast, U.S. patent law endorses the first-to-invent system under which whoever makes the first actual discovery will be awarded the patent. Under the first-to-file system, even after reasonable investigation we may not know with certainty whether we have infringed a third party s patent because such third party may have filed a patent application without our knowledge while we are still developing that product. We are aware of intellectual property rights held by third parties that relate to products or technologies we are developing. For example, we are aware of a patent held by a third party that may relate to our TPIAO product. We believe, as to each claim in this patent, that we either do not infringe the claim of the patent or that the claim is invalid. While the validity of issued patents, patentability of pending patent applications and applicability of any of them to our programs are uncertain, if asserted against us, any related patent rights could adversely affect our ability to commercialize our products. If a third party claims that we infringe its proprietary rights, any of the following may occur: we may become involved in time-consuming and expensive litigation, even if the claim is without merit; we may become liable for substantial damages for past infringement if a court decides that our technology infringes a third party s patent; a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; and we may have to reformulate our product so that it does not infringe patent rights of others, which may not be possible or could be very expensive and time-consuming. Although to date we have not experienced any of the circumstances listed above, if any of these events occurs, our business will suffer and the market price of our ADSs could decline. Failure to implement our growth and expansion strategy could result in deterioration in our results of operations and financial condition. In order to achieve our internal forecasts, we must successfully implement our growth and expansion strategy. To do so, we must: expand our capacity by further process optimization and new facility construction; continue our research and development efforts to introduce new and more advanced products; promote domestic marketing and sales development and growth; expand the number, and enhance the expertise in U.S. GAAP financial reporting, of our finance staff; implement our strategy to bifurcate our sales force in the nephrology and oncology areas; maintain and further improve our manufacturing process and proprietary technologies to manufacture products with high quality and competitive prices; and integrate any new businesses, technologies and products that we acquire by way of in-licensing, acquisitions or investments into our operations. Table of Contents Risk factors If we do not successfully implement this strategy, we may not be able to maintain our growth in revenues and profitability, and the market price for our ADSs will suffer. We have grown steadily since our establishment in 1993. This expansion presented, and our anticipated growth in the future will continue to present, a significant challenge to our management and administrative systems and resources. If we do not adequately manage this challenge, our results of operations and financial condition could suffer. Power shortages, natural disasters, terrorist acts or other calamities could disrupt our production and have a material adverse effect on our business, financial position and results of operations. EPIAO, TPIAO and our legacy products are produced at our manufacturing facility in Shenyang. A significant disruption at that facility, even on a short-term basis, could impair our ability to produce and ship products on a timely basis, which could have a material adverse effect on our business, financial position and results of operations. Our Shenyang manufacturing operations are vulnerable to interruption and damage from natural and other types of disasters, including earthquake, fire, floods, environmental accidents, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously impaired. In addition, the nature of our production and research activities could cause significant delays in our programs and make it difficult for us to recover from a disaster. We do not maintain any insurance other than insurance for some of our properties. Accordingly, unexpected business interruptions resulting from disasters could disrupt our operations and thereby result in substantial costs and diversion of resources. In addition, our production process requires a continuous supply of electricity. We have encountered power shortages twice historically due to restricted power supply to industrial users during summers when the usage of electricity is high and supply is limited or as a result of damage to the electricity supply network. Because the duration of those power shortages was brief, they had no material impact on our operations. Interruptions of electricity supply could result in lengthy production shutdowns, increased costs associated with restarting production and the loss of production in progress. Any major suspension or termination of electricity or other unexpected business interruptions could have a material adverse impact on our business, financial condition and results of operations. We may experience significant period-to-period quarterly and annual fluctuations in our revenues and operating results, which may result in volatility in our stock price. We typically generate higher levels of revenues during the third and fourth quarters of the year, primarily because of the tendency of hospitals to place more orders prior to the year-end holiday season and the fact that more people visit hospitals in the second half of the year, resulting in more prescriptions by physicians during this period. We may in the future experience significant period-to-period fluctuations in our revenues and operating results. Upon the consummation of this offering, it is possible that our revenues and operating results in some quarters may fall below the estimates of securities research analysts, which may cause the value of our ordinary shares and ADSs to decline. Our quarterly and annual operating results are affected by a number of factors, such as: seasonal spending patterns of Chinese consumers, including hospitals, dialysis centers and clinics; changes in pricing policies by us, our competitors or the government, an example of which is the one-time downward adjustment by the government of the price ceiling for all interferon products in China in 1999; Table of Contents Risk factors the timing and market acceptance of new products and product enhancements by us or our competitors; the loss of key sales personnel or distributors; our involvement in litigation; changes in government policies or regulations; and a downturn in general economic conditions in China. While certain of the factors identified above, including seasonal spending patterns, changes in pricing policies, market acceptance of new products and changes in government policies, have in the past caused fluctuations in our quarterly financial results, we have not suffered any material and adverse consequences from these fluctuations in the last three years. However, many of these factors are beyond our control, and you should not rely on our results of operations for prior quarters as an indication of our results in any future period. As our revenues vary significantly from quarter to quarter, our business could be difficult to predict and manage and our quarterly results could fall below investor expectations, which could cause our ADS price to decline. We have previously operated as a private Chinese company and have no experience in complying with U.S. public company requirements. In addition, we only recently began to prepare our financial statements in accordance with U.S. GAAP. Attempting to comply with these requirements will increase our costs and require additional management resources, and we still may fail to comply. As a private PRC company, we have maintained a small finance and accounting staff. In addition, in the past we have only prepared unaudited financial statements in accordance with PRC GAAP for the purpose of tax reporting and determining the level of statutory reserves. Only our CFO has significant prior experience applying U.S. GAAP. While we plan to expand our staff if we become public, we expect to encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals. In the short term, we are providing training for our current staff with respect to U.S. GAAP. Our training may not be sufficient or effective. We will face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. Compliance with the U.S. Sarbanes-Oxley Act of 2002, as well as other rules of the SEC, the Public Company Accounting Oversight Board and The Nasdaq Global Market, will result in a significant initial cost to us as well as an ongoing increase in our legal, audit and financial compliance costs. As a public company, we will be required by Section 404 of the Sarbanes-Oxley Act of 2002 to include a report of management on the company s internal controls over financial reporting that contains our management s assessment of the effectiveness of the company s internal controls and an auditor s attestation report on our internal control over financial reporting in our Annual Report on Form 20-F for the fiscal year ending December 31, 2008. We have begun to implement certain measures to make overall improvements to our financial reporting system, such as rolling out a computerized management information system for inventories to ensure simultaneous recording of inventory movements in both the warehouse and finance department records. Such a system would also allow up-to-date inventory ageing information to be automatically generated on a continuous basis. If we cannot successfully implement these measures in a timely manner, our ability to issue timely and accurate financial reports may be adversely affected. We have only recently begun a formal process to evaluate our internal controls for purposes of Section 404, and we cannot be sure that our internal control over financial reporting will prove to be effective. Nine months ended September 30, 2005 Table of Contents Risk factors If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our ADSs. Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Deficiencies in our internal controls may adversely affect our management s ability to record, process, summarize, and report financial data on a timely basis, and to prevent fraud. As a public company, we will be required by Section 404 of the Sarbanes-Oxley Act of 2002 to include a report of management on our internal control over financial reporting that contains our management s assessment of the effectiveness of the company s internal controls and an auditor s attestation report on our internal control over financial reporting in our annual report on Form 20-F for the fiscal year ending December 31, 2008. We have only recently begun a formal process to evaluate our internal control over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines. Delay in meeting these deadlines or failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations, and result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs, or limit or suspend our continued listing on, or cause us to delist from, The Nasdaq Global Market. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our ADSs. Our business benefits from certain tax and other government incentives. Expiration of, or changes to, these incentives could have a material adverse effect on our operating results. The PRC government has provided various incentives to high technology companies in order to encourage development of the high technology industry and investments by foreigners. Such incentives include reduced tax rates and other measures. For example, as a high technology company operating in an approved economic-technological development area, Shenyang Sunshine Pharmaceutical Company Limited, or Shenyang Sunshine, our main PRC operating subsidiary, is entitled to an enterprise income tax, or EIT, rate of 15%, compared to an EIT rate of 33% applicable to most domestically owned PRC companies. As a foreign-invested advanced technology enterprise certified by the relevant Chinese authorities, Shenyang Sunshine was entitled to a reduced EIT rate of 10% for the year ended December 31, 2005. The 10% EIT rate expired after the taxable year ended December 31, 2005 and Shenyang Sunshine s EIT was 15% for the year ended December 31, 2006. Additionally, certain changes to the PRC s Corporate Income Tax Law are in discussion and could, if passed into law, adversely affect the taxation of Shenyang Sunshine and/or remittances by Shenyang Sunshine to us. To date, the PRC government has not disclosed any details as to the changes in the tax law slated for consideration. However, it is believed that among the possible changes are elimination of tax holidays and other incentives, increases in tax rates and imposition of a dividend withholding tax. Historically, we have benefited from tax holidays and incentives. The extent and timing of any such changes in the PRC s tax laws is uncertain. It is not known whether any transitional or other relief will be granted to companies such as Shenyang Sunshine that have already established operations in China. If adopted, these changes could significantly increase our tax expense. In addition, we have historically received various government grants for our research and development programs. We recorded grant income of RMB2.5 million in 2003, RMB6.4 million in 2004 and RMB3.8 million in 2005. The grants in 2003 and 2004 primarily relate to our research and development efforts Table of Contents Risk factors on EPIAO and TPIAO. Even though we plan to continue to apply for grants and subsidies from the PRC government for our ongoing and future research and development programs, there is no assurance that we will successfully obtain any level of grants and subsidies in future periods. We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or ordinary shares to significant adverse tax consequences. We may be classified as a passive foreign investment company, or a PFIC, for United States federal income tax purposes for the current or any future taxable year. PFIC status is a factual determination made for each taxable year ending December 31, after the close of such year, on the basis of the composition of our income and our active versus passive assets for such year. Under the PFIC rules, we will generally be classified as a PFIC if, in the case of any particular taxable year, 75% or more of our gross income consists of certain types of passive income or 50% or more of the value of our assets consists of passive assets . For this purpose, cash and other liquid assets are generally classified as passive and goodwill and other unbooked intangibles may generally be classified as active. The overall level of our passive assets will be significantly affected by the amount and time-frame within which we disperse the cash raised in this offering, and other liquid assets that we presently hold, for the purpose of the capital expenditures described in this prospectus. In addition, the overall level of our active assets will depend, in great measure, on the valuation of our goodwill and other unbooked intangibles as implied by our market capitalization which may decline. If we were to be or become classified as a PFIC, United States investors in our ADSs or ordinary shares may incur a significantly increased United States income tax liability on gain recognized on the sale or other disposition of our ADSs or ordinary shares and on the receipt of distributions on our ADSs or ordinary shares. See the section entitled Taxation United States Federal Income Tax Considerations PFIC Considerations . We have guaranteed certain loans from banks in China to a shareholder. Should the borrower default on its loans, we would be entirely responsible for this outstanding debt. Given our limited resources, such a default would have a severe adverse impact on our company. In 2006, in connection with our loans from the Industrial and Commercial Bank of China, we were obligated to enter into an arrangement by which we and our then shareholder, China Transport Resources Northeast Co., Ltd. or China Transport, cross guaranteed certain of each other s loans. We provided a guarantee to China Transport in relation to loans in the aggregate principal amount of RMB10.0 million. Should China Transport default on its loans, we would be solely responsible to the lending bank for the outstanding principal amount plus accrued interest. Given our limited resources, its default on this loan and our assumption of its debt would adversely affect our financial condition. RISKS RELATED TO OUR INDUSTRY The pharmaceutical industry in China is highly regulated, and future government regulation may place additional burdens on our business. The pharmaceutical industry in China is subject to extensive government regulation and supervision. The regulatory framework addresses all aspects of operating in the pharmaceutical industry, including approval, production, licensing and certification requirements and procedures, periodic renewal and reassessment processes, registration of new drugs and environmental protection. Violation of applicable laws and regulations may materially adversely affect our business. In order to manufacture Table of Contents Risk factors pharmaceutical products in China, we are required to apply for and obtain a pharmaceutical manufacturing permit from the provincial level food and drug administrative authority. In addition, in order to manufacture and market any drug in China, we are required to apply for and obtain permits and certificates from the SFDA, including the new drug certificate, drug registration certificate (which includes the issuance of a drug approval number) and GMP certificate. We are required to renew the pharmaceutical manufacturing permits, drug registration certificates and GMP certificates permits every five years. If we are unable to obtain or renew such permits or any other permits or licenses required for our operation, we will not be able to engage in the manufacture of our products and our business may be adversely affected. The regulatory framework regarding the pharmaceutical industry in China is subject to change and amendment from time to time. Any such change or amendment may have an adverse effect on our business. Changes to the regulatory framework could materially and adversely impact our business, financial condition and results of operations. For further information regarding government regulation in China, see Regulations. New product development in the pharmaceutical industry is both costly and labor-intensive and has a low rate of successful commercialization. Our success will depend in part on our ability to enhance our existing products and to develop new products. The development process for pharmaceutical products is complex and uncertain, as well as time-consuming and costly. Relatively few research and development programs produce a commercial product. A product candidate that appears promising in the early phases of development may fail to reach the market for a number of reasons, such as: the failure to demonstrate safety and efficacy in preclinical and clinical trials; the failure to obtain approvals for intended use from relevant regulatory bodies, such as the SFDA; our inability to manufacture and commercialize sufficient quantities of the product economically; and proprietary rights, such as patent rights, held by others to our product candidate and their refusal to sell or license such rights to us on reasonable terms, or at all. In addition, product development requires the accurate assessment of market trends. We cannot assure you that: our new product research and development efforts will be successfully and timely completed; our clinical trials on humans for our product candidate will be successful; SFDA or other regulatory bodies will grant necessary regulatory clearances or approvals on a timely basis, or at all; or any product we develop will be commercialized or achieve market acceptance. Delays in any part of the development process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. Even if we successfully commercialize new products, these products may address markets that are currently being served by the off-label use of others of our mature products and inadvertently result in a reduction in the sales volume of our mature product or vice versa. Failure to develop, obtain necessary regulatory clearances or approvals for or successfully commercialize or market potential new products or technologies could have a material adverse effect on our financial condition and results of operations. We will not be able to commercialize our product candidates if our preclinical studies do not produce successful results or our clinical trials do not demonstrate safety and efficacy in humans. Before obtaining regulatory approvals for the manufacturing and sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests and clinical trials to demonstrate the safety Table of Contents Risk factors and efficacy in humans of our product candidates. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including: our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials, or we may abandon projects that we expect to be promising; we might have to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks; regulators may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or safety concerns; the time or cost of our clinical trials may be greater than we currently anticipate; any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable; and our product candidates may produce undesirable side effects or may have other unexpected characteristics. If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing or if the results of these trials or tests are not positive or are only modestly positive, we may: be delayed in obtaining marketing approval for our product candidates; not be able to obtain marketing approval; or obtain approval for indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether planned clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant clinical trial delays also could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates. Rapid changes in the pharmaceutical industry may render our products obsolete. The pharmaceutical industry is characterized by rapid changes in technology, constant enhancement of industrial know-how and frequent emergence of new products. Future technological improvements and continual product developments in the pharmaceutical market may render our existing products obsolete or affect our viability and competitiveness. Therefore, our future success will largely depend on our ability to: improve our existing products; diversify our product portfolio; and develop new and competitively priced products which meet the requirements of the constantly changing market. If we fail to respond to this environment by improving our existing products or developing new products in a timely fashion, or if our new or improved products do not achieve adequate market acceptance, our business and profitability may be materially and adversely affected. Table of Contents Risk factors The pharmaceutical industry is extremely competitive. Our business is subject to competition from other pharmaceutical manufacturers. In China, EPO drugs are offered by established international companies such as Kirin Brewery Company Limited, or Kirin, and F. Hoffmann-La Roche, Ltd., or Roche, and domestic pharmaceutical companies such as Di ao Group Chengdu Diao Jiuhong Pharmaceutical Factory. Competitors for interferon alpha-2 drugs in China include Schering-Plough (Brinny) Co. and Beijing Tri-Prime Genetic Engineering Co., Ltd., and competitors for interleukin-2 in China include Beijing SL Pharmaceutical Co., Ltd. and Beijing Four Rings Biopharmaceutical Co., Ltd. Competitors for Tietai Iron Sucrose Supplement in China include Beijing Novartis Pharmaceutical Co., Ltd and Nanjing Hencer Pharmaceutical Co., Ltd. and competitors for Baolijin in China include Kirin, Hangzhou Jiuyuan Gene Engineering Co., Ltd. and Qilu Pharmaceutical Co., Ltd. Local and overseas pharmaceutical manufacturers engaged in the manufacture and sale of similar products to ours in China may have more capital resources, better research and development capabilities and more experience in manufacturing and marketing their products. Many of our competitors, including large pharmaceutical companies and other generic drug manufacturers, have employed various strategies intended to maximize their market share for previously-patented products. Competition is likely to intensify if: the number of manufacturers or distributors of substitute or similar products increases due to increased market demand or increased prices; competitors drastically reduce prices due to oversupply of products; or competitors develop new products or substitute products having comparable medicinal applications or therapeutic effects that may be used as direct substitutes for our products and such new products or substitute products are more effective with prices comparable to or lower than our products. If any of the above occurs, our profitability may be adversely affected. There have been recent incidents in which patients have experienced severe adverse reactions following the use of pharmaceutical products manufactured in China. There have been recent incidents reported in the Chinese media of a significant number of patients experiencing severe adverse health consequences following their use of pharmaceutical products manufactured by certain pharmaceutical companies in China. A number of patients have become ill and a number of fatalities have been reported. For example, several deaths were caused by drugs sold by the Second Pharmaceutical Factory of Qiqiha r, a PRC drug manufacturer, in May 2006. Concerns over the safety of pharmaceutical products manufactured in China could have an adverse effect on the sale of such products, including products manufactured by us. We have not, to date, experienced any significant quality control or safety problems. If in the future we become involved in incidents of the type described above, such problems could severely and adversely impact our product sales and reputation. Anti-corruption measures taken by the government to correct corruptive practices in the pharmaceutical industry could adversely affect our sales and reputation. The government has recently taken anti-corruption measures to correct corrupt practices. In the pharmaceutical industry, such practices include, among others, acceptance of kickbacks, bribery or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical distributors in connection with the prescription of a certain drug. Substantially all of our sales to our ultimate customers are conducted through third-party distributors. We have no control over our third-party distributors, who may engage in corrupt practices to promote our products. While we maintain strict anti-corruption policies applicable to our internal sales force and third-party distributors, these policies may not be effective. If Liaoning Sunshine or any of our third-party distributors engage in such practices and the government takes enforcement action, our products may be seized and our own practices, and involvement in the distributors practices, investigated. If this occurs, our sales and reputation may be materially and adversely affected. Table of Contents Risk factors In addition, government-sponsored anti-corruption campaigns from time to time could have a chilling effect on our efforts to reach new hospital customers. Our sales representatives primarily rely on hospital visits to better educate physicians on our products and promote our brand awareness. Recently, there have been occasions on which our sales representatives were denied access to hospitals in order to avoid the perception of corruption. If this attitude becomes widespread among our potential customers, our ability to promote our products will be adversely affected. We are subject to environmental regulations and may be exposed to liability and potential costs for environmental compliance. We are subject to PRC laws and regulations concerning the discharge of effluent water and solid waste during our manufacturing processes. We are required to obtain clearances and authorizations from government authorities for the treatment and disposal of such discharge. We may not at all times comply fully with environmental regulations. Any violation of these regulations may result in substantial fines, criminal sanctions, revocations of operating permits, shutdown of our facilities and obligation to take corrective measures. Our cost of complying with current and future environmental protection laws and regulations and our liabilities which may potentially arise from the discharge of effluent water and solid waste may materially adversely affect our business, financial condition and results of operations. The government may take steps towards the adoption of more stringent environmental regulations. Due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. If there is any unanticipated change in the environmental regulations, we may need to incur substantial capital expenditures to install, replace, upgrade or supplement our pollution control equipment or make operational changes to limit any adverse impact or potential adverse impact on the environment in order to comply with new environmental protection laws and regulations. If such costs become prohibitively expensive, we may be forced to cease certain of our business operations. We may be required to defend lawsuits or pay damages for product liability claims. We do not have any liability or business disruption insurance, and a claim against us, or an interruption in our business, could adversely offset our reputation and our financial results. The development and commercialization of pharmaceutical products entails an inherent risk of harm to the patient and, therefore, product liability. Even though there are no punitive damages under the PRC law, if a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with our customers, decreased demand for our products, costly litigation, product recalls, loss of revenue, and the inability to commercialize some products. We currently are not aware of any existing or anticipated product liability claims with respect to our products. Existing PRC laws and regulations do not require us to nor do we maintain liability insurance to cover product liability claims. The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have business liability, or in particular, product liability, or disruption insurance coverage for our operations. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources. When and if we attempt to obtain product liability insurance for clinical trials, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products that we or our collaborators develop. Table of Contents Risk factors Pricing of all of our products are subject to government approval. Changes in government control on prices of our products may limit our profitability or cause us to stop manufacturing certain products. Pursuant to the implementing rules of the Drug Administration Law, we are required to seek pricing approval for all our products from The National Development and Reform Commission of the PRC, or the NDRC, and the price administration bureaus of the relevant provinces of the PRC in which our pharmaceutical products are manufactured. We have in the past been able to successfully obtain pricing-related approvals. In addition, in order to access certain local or provincial-level markets, we enter into government-sponsored competitive bidding processes for EPIAO and our legacy products every year or every other year with a pre-defined price range. The competitive bidding in effect sets price ceilings for our products, thereby limiting our profitability. In some instances, if the price range designated by the provincial government falls below production costs, we may stop manufacturing certain products. China s accession to the WTO may intensify competition in the pharmaceutical industry in China. China acceded to the WTO in December 2001. Following the accession, China lowered tariffs on certain imported pharmaceutical products as part of its obligation under the WTO framework. The reduction or removal of tariffs on imported pharmaceutical products had made such products more competitive with domestic pharmaceutical products. In addition, an increasing number of foreign-invested pharmaceutical manufacturers may establish operations to engage in the manufacture or distribution of pharmaceutical products in China, which would increase the number of suppliers of pharmaceutical products in the market and intensify the competition with domestic manufacturers. If the domestic pharmaceutical manufacturers are unable to distinguish their products from imported products or products produced domestically by foreign-invested pharmaceutical manufacturers, they may lose market share to imported products or products produced domestically by foreign-invested pharmaceutical manufacturers which may be of higher quality and are sold at competitive prices. Furthermore, due to the lack of capital for the research and development of new medicines, most of the domestic pharmaceuticals are imitations of foreign products. Following China s accession to the WTO, many more companies in Europe and the U.S. have applied for patents in the PRC, thereby increasing the likelihood of litigation for Chinese domestic pharmaceutical companies. RISKS RELATED TO DOING BUSINESS IN CHINA Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position. All of our operations are located in China, and substantially all of our sales are made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including: the extent of government involvement; the level of development; the growth rate; the control of foreign exchange; the allocation of resources; an evolving regulatory system; and lack of sufficient transparency in the regulatory process. Table of Contents Risk factors While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures, including potential investments in competing biopharmaceutical companies, may benefit the overall Chinese economy, but may also have a negative effect on us. Although we do not currently expect such measures to directly affect our use of proceeds from this offering, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Further, any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth and the level of healthcare investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency- denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. One recent example is certain measures implemented by the Chinese government in 2006 to restrict foreign investment and speculation in the real estate sector. Although the government policies have in recent years been encouraging of the growth of the healthcare sector, future attempts by the Chinese government to slow the pace of growth of the healthcare sector or the overall Chinese economy could result in decreased capital expenditure by hospitals, which in turn could reduce demand for our products. Moreover, the political relationship between the United States, Europe, or other Asian nations and China is subject to sudden fluctuation and periodic tension. Changes in political conditions in China and changes in the state of foreign relations are difficult to predict and could adversely affect our operations. This could lead to a decline in our profitability. Future changes in laws, regulations or enforcement policies in China could adversely affect our business. Laws, regulations or enforcement policies in China, including those regulating healthcare and the pharmaceutical industry, are evolving and subject to frequent changes. Further, regulatory agencies in China may periodically, and sometimes abruptly, change their enforcement practices. Therefore, prior enforcement activity, or lack of enforcement activity, is not necessarily predictive of future actions. Any enforcement actions against us could have a material and adverse effect on us and the market price of our ADSs. In addition, any litigation or governmental investigation or enforcement proceedings in China may be protracted and may result in substantial cost and diversion of resources and management attention, negative publicity, damage to our reputation and decline in the price of our ADSs. Restrictions on currency exchange may limit our ability to receive and use our revenues effectively. We receive all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of our revenues may be converted into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares. Under China s existing foreign exchange regulations, we are able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with Table of Contents Risk factors certain procedural requirements. However, the PRC government may take measures to restrict access to foreign currencies for current account transactions. Our ability to obtain foreign exchange is subject to significant foreign exchange controls and, in the case of amounts under the capital account, requires the approval of and/or registration with PRC government authorities, including the SAFE. In particular, if Shenyang Sunshine, our wholly-owned PRC subsidiary, borrows foreign currency loans from foreign lenders, it must do so within approved limits that satisfy its approval documentation and PRC debt to equity ratio requirements. Further, such loans must be registered with the SAFE. These limitations could affect the ability of Shenyang Sunshine to obtain capital through offshore debt or equity financing. We face risks related to health epidemics and outbreaks of contagious diseases, including avian influenza and Severe Acute Respiratory Syndrome, or SARS. Our business could be adversely affected by the effects of avian influenza, SARS or other epidemics or outbreaks of contagious diseases. There have been recent reports of outbreaks of a highly pathogenic avian influenza, or avian flu, caused by the H5N1 virus in certain regions of Asia and Europe. In 2005 and 2006, there have been reports on the occurrences of avian flu in various parts of China, including some confirmed human cases. A major outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, a recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. Since all of our operations and substantially all of our customers and suppliers are based in Asia, an outbreak of avian flu, SARS or other contagious diseases in China, other places in Asia or elsewhere, or the perception that such outbreak could occur, and the measures taken by the governments of countries affected, would adversely affect our business, financial condition or results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreaks of avian flu, SARS or any other epidemics. Our revenues are denominated in Renminbi, which is not freely convertible for capital account transactions and may be subject to exchange rate volatility. We require foreign currency to purchase imported equipment and raw materials and pay dividends to our shareholders. However, we generate revenues in Renminbi. Under PRC foreign exchange rules and regulations, payments of current account items, including profit distributions and operation-related expenditures, may be made in foreign currencies without prior approval but are subject to procedural requirements. Strict foreign exchange control continues to apply to capital account transactions. These transactions must be approved by and/or registered with SAFE, and repayment of loan principal, distribution of return on direct capital investment and investments in negotiable instruments are also subject to restrictions. There is no assurance that we will be able to meet all of our foreign currency obligations or to remit profits out of China. Prior to 1994, the Renminbi experienced a significant net devaluation against most major currencies, and there was significant volatility in the market-based exchange rate during certain periods. Since 1994, the Renminbi to U.S. dollar exchange rate has largely stabilized. On July 21, 2005, People s Bank of China, or PBOC, announced that the exchange rate of U.S. dollar to Renminbi would be adjusted from US$1 to RMB8.27 to US$1 to RMB8.11, and it ceased to peg the Renminbi to the U.S. dollar. Instead, the Renminbi will be pegged to a basket of currencies, which components will be adjusted based on changes in market demand and supply under a set of systematic principles. On September 23, 2005, the Chinese government widened the daily trading band for Renminbi against non-US dollar currencies from 1.5% to 3.0% to improve the flexibility of the new foreign exchange system. The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be permitted to enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the Renminbi against the U.S. Table of Contents Risk factors dollar or other currencies, any of which could give rise to uncertainties in our financial condition and results of operations. Any appreciation of Renminbi may subject us to increased competition from imports, and any devaluation of Renminbi may adversely affect the value of our net assets, earnings and declared dividends in foreign currency terms, as well as our ability to service our foreign currency obligations. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, purchasing equipment and raw materials from overseas, or other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. Our operations are subject to the uncertainty associated with the legal system in China which could limit the legal protection available to potential investors. We conduct our business through our operating subsidiaries in China, which are governed by PRC law. China is a civil law jurisdiction based on written codes and statutes. Unlike common law jurisdictions, prior court decisions may be cited as persuasive authority but do not have legally binding force. The PRC government has promulgated laws and regulations in relation to economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view to establishing a comprehensive legal system conducive to investment activities. However, the implementation, interpretation and enforcement of these laws and regulations may involve greater uncertainty compared to those in the common law jurisdictions due to a relatively short legislative history, limited volume of court cases and their non-binding nature. Furthermore, many laws, regulations and legal requirements have only recently been adopted by the central or local government agencies, and their implementation, interpretation and enforcement may involve uncertainty due to the lack of established practice available for reference. Depending on the government agency or how an application or a case is presented to such agency, we may receive less favorable interpretations of law than our competitors. In addition, any litigation in China may be protracted and result in substantial legal costs and diversion of resources and management attention. Similarly, legal uncertainty in China may limit the legal protection available to potential investors. We cannot predict the effect of future legal developments in China, including promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national law. As a result, there is substantial uncertainty as to the legal protection available to potential investors. There may be difficulties in seeking recognition and enforcement of foreign judgments in China. Substantially all of our assets are located in China, and most of our senior management members and directors reside in China. However, China has not entered into treaties or arrangements providing for the recognition and enforcement of judgments made by the courts of the United States or most other jurisdictions. As a result, it may be difficult or impossible for investors to effect service of process or enforce court judgments against our PRC subsidiaries, our assets, senior management members or directors in China. Changes in PRC government policy on foreign investment in China may adversely affect our business and results of operations. As a foreign invested enterprise, Shenyang Sunshine is subject to restrictions on foreign investment imposed by the PRC law from time to time. For instance, under the Foreign Investment Industrial Guidance Catalogue, some industries are categorized as sectors which are encouraged, restricted or prohibited for foreign investment. Table of Contents Risk factors According to the latest version of this Catalogue, which became effective on January 1, 2005, our business does not belong to the prohibited or the restricted category. As this Catalogue is updated every few years, there can be no assurance that the PRC government will not change its policies in a manner that would cause part or all of our businesses to fall within the restricted or prohibited categories. If any of our businesses becomes prohibited or if we cannot obtain approval from relevant approval authorities to engage in businesses which become restricted for foreign investors, we may be forced to sell or restructure our businesses which have become restricted or prohibited for foreign investment. If we are forced to adjust our corporate structure or business line as a result of changes in government policy on foreign investment, our business, financial condition and results of operations may be materially adversely affected. We rely principally on dividends and other distributions on equity paid by our wholly owned subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries and affiliated entities to make payments to us could have a material adverse effect on our ability to conduct our business. We are a holding company, and we rely solely on dividends from our wholly owned subsidiaries in China for our cash requirements, including any debt we may incur. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and each of our subsidiaries may be required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur additional debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our subsidiaries ability to pay dividends and other distributions to us. Any limitation on the ability of our subsidiaries and affiliated entities to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business. PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries and affiliated entities, which could materially and adversely affect our liquidity and our ability to fund and expand our business. In utilizing the proceeds of this offering in the manner described in Use of proceeds, as an offshore holding company of our PRC operating subsidiaries we may make loans to our PRC subsidiaries or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations and approvals. For example, loans by us to Shenyang Sunshine to finance its activities cannot exceed statutory limits and must be approved by the PRC State Administration of Foreign Exchange, or SAFE, or its local counterpart. We may also decide to finance our wholly owned subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce, or MOFCOM, or its local counterpart. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this Table of Contents Risk factors offering and to capitalize our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business. RISKS RELATED TO OUR CORPORATE STRUCTURE Our contractual arrangements with Beijing Sunshine Bio-product Sales Company, or Beijing Sunshine, and Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine, and their respective shareholders may not be as effective in providing control over these entities as direct ownership. Each of Beijing Sunshine and Liaoning Sunshine was established in 2000 to engage in the distribution of pharmaceutical products, primarily those which we manufacture. As part of our corporate reorganization in anticipation of this offering, we transferred our equity ownership in Liaoning Sunshine to Mr. Dan Lou, our chairman, and our equity ownership in Beijing Sunshine to Ms. Dongmei Su, our chief technology officer, as a result of which we no longer have equity ownership interests in Beijing Sunshine or Liaoning Sunshine. We rely on contractual arrangements to maintain control over the business and operations of these two entities. These contractual arrangements may not be as effective in providing control over these entities as direct ownership. For example, we do not have control over the day-to-day operations of either Beijing Sunshine or Liaoning Sunshine, and either Beijing Sunshine or Liaoning Sunshine could fail to take actions required for our business despite their respective contractual obligation to do so. Substantially all of our sales, including sales of our own and our in-licensed products, are conducted through Liaoning Sunshine, which was the direct contracting party with most of our key distributors. If Liaoning Sunshine or its sole shareholder, Mr. Dan Lou, refuse to make payments or otherwise refuse to perform their contractual obligations necessary for us to realize these sales contracts, our financial condition and results of operations will be materially and adversely affected. Beginning in January 2007, we plan to start directly contracting with third-party distributors for the sale of the products we manufacture. If Beijing Sunshine, Liaoning Sunshine or their respective shareholders fail to perform under their agreements with us, we may have to rely on legal remedies under PRC law, which may not be effective. In addition, we cannot assure you that the shareholders of either Beijing Sunshine or Liaoning Sunshine will always act in our best interests. We currently conduct our sales activities through Liaoning Sunshine and Beijing Sunshine by means of contractual arrangements. If the PRC government determines that these contractual arrangements do not comply with applicable regulations, our business could be adversely affected. We conduct our sales activities through contractual arrangements with Liaoning Sunshine and Beijing Sunshine, each of which holds the licenses and approvals, including Pharmaceutical Trading Permits, as described in Regulations Distribution of pharmaceutical products , that are essential for the distribution of our own and in-licensed products. We have contractual arrangements with Liaoning Sunshine, Beijing Sunshine and their respective shareholders that allow us to substantially control these entities. These contracts include business cooperation agreements, which impose certain restrictions on the conduct of the Liaoning Sunshine s and Beijing Sunshine s businesses. For more details, see Our corporate structure Our contractual arrangements with Liaoning Sunshine and Beijing Sunshine. We cannot assure you that we will be able to enforce these contracts. Table of Contents Risk factors Although we believe we comply with current PRC regulations, we cannot assure you that the PRC government would agree that our arrangements with Liaoning Sunshine and Beijing Sunshine comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. If the PRC government determines that we are not in compliance with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or take other regulatory or enforcement actions against us that could be harmful to our business. The principal shareholder of Liaoning Sunshine has potential conflicts of interest with us, which may adversely affect our business. Liaoning Sunshine is 100% owned by Mr. Dan Lou, our chairman. While Mr. Dan Lou has a duty of loyalty and care to us under Cayman Islands law, the potential exists for conflicts of interests between his duties to us and his ownership interests in Liaoning Sunshine. In particular, Mr. Lou may be able to cause our agreements with Liaoning Sunshine to be performed or amended in a manner adverse to us by, among other things, failing to remit payments to us on a timely basis or operating Liaoning Sunshine so as to cause harm to our business. We can provide no assurance that if potential conflicts of interests arise, these conflicts will not result in a significant loss in corporate opportunities for us or a diversion of our resources to Liaoning Sunshine, which may not be in the best interest of our company and our other shareholders. Liaoning Sunshine and Beijing Sunshine were previously engaged in activities without the necessary approvals. This could subject them to fines and other penalties, which could have a material adverse effect on our business. Liaoning Sunshine and Beijing Sunshine were historically engaged in business activities without requisite approvals. For example, in order to distribute pharmaceuticals as a subsidiary or investee of a foreign invested enterprise, Liaoning Sunshine and Beijing Sunshine were required to obtain approval from the Ministry of Foreign Trade and Economic Co-operation, or the MOFTEC, which was the predecessor of MOFCOM. While Liaoning Sunshine and Beijing Sunshine had the proper permits from the SFDA, neither of them obtained this MOFTEC approval. In connection with our reorganization in anticipation of this offering, we have disposed of our respective equity ownerships in Liaoning Sunshine and Beijing Sunshine. Beijing Sunshine and Liaoning Sunshine are no longer required to obtain the MOFCOM approval, as each of them is a domestic Chinese company that is currently operating within its authorized scope of business and in the process of obtaining relevant licenses. However, the relevant PRC authorities have the authority to impose penalties for their past violations. These authorities may revoke business licenses or the permits granted by the SFDA. Due to the discretionary nature of regulatory enforcements in the PRC, we cannot assure you that Liaoning Sunshine or Beijing Sunshine will not be subject to such type of penalties for its past violations, or that such type of penalties will not have a material adverse effect on our business. We must receive the approval of the PRC MOFCOM before we may purchase the equity interests in Liaoning Sunshine or Beijing Sunshine. We may not receive MOFCOM approval for such purchase on a timely basis, or at all. We are party to two purchase agreements, pursuant to which we may acquire 100% of the equity interests in Liaoning Sunshine from Dan Lou, our Chairman and 100% of the equity interest in Beijing Sunshine from Dongmei Su, our chief technology officer, and Shenyang Keweier, a company owned by our employees and former employees. For more details, see Our corporate structure Our contractual Table of Contents Risk factors arrangements with Liaoning Sunshine and Beijing Sunshine Purchase agreements for the acquisition of equity interest in Liaoning Sunshine and Beijing Sunshine. In order to complete the acquisition of Liaoning Sunshine or Beijing Sunshine, we must obtain the approval of the MOFCOM. While we anticipate filing for approval of the acquisition in the near future, we expect that we will not obtain the approval of the MOFCOM for several months, if at all. RISKS RELATED TO THIS OFFERING There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all. Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have applied to have our ADSs included for quotation on The Nasdaq Global Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected. The initial public offering price for our ADSs will be determined by negotiations between us, the selling shareholders and the underwriters and may bear no relationship to the market price for our ADSs after this initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price. The market price for our ADSs may be volatile. The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors including the following: actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results; changes in financial estimates by securities research analysts; announcements of studies and reports relating to the effectiveness or safety of our products or those of our competitors; announcements of technological or competitive developments; any litigation, governmental investigation or enforcement proceedings brought against us by authorities and industry regulators in China or elsewhere; announcements regarding patent litigation or the issuance of patents to us or our competitors; addition or departure of our senior management and key research and development personnel; changes in the economic performance or market valuations of other pharmaceutical or health care companies; economic, regulatory or political developments in China; release or expiration of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and sales of additional ordinary shares or ADSs, or the perception that such sales might occur. Table of Contents Risk factors In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs. Because the initial public offering price is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution. If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. Also, you will experience immediate and substantial dilution of approximately US$8.806 per ADS (assuming no exercise by the underwriters of their over-allotment option to acquire additional ADSs), representing the difference between the purchase price per ADS in this offering (assumed for these purposes to be US$13.00) and our net tangible book value per ADS as of September 30, 2006, after giving effect to this offering. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of stock options. Substantial future sales of our ADSs in the public market, or the perception that such sales might occur, could cause the price of our ADSs to decline. Sales of our ADSs or ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Immediately upon completion of this offering, we will have 150,315,717 ordinary shares outstanding, including 53,900,000 ordinary shares represented by 7,700,000 ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act, except to the extent acquired by persons deemed to be our affiliates. In connection with this offering, we, our shareholders, and our directors and executive officers have agreed not to sell any ordinary shares or ADSs until the expiration of 180 days after the date of this prospectus, subject to certain exceptions. Any or all of these shares may be released without notice prior to expiration of the applicable lock-up period at the discretion of UBS. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market price of our ADSs could decline. Dan Lou, our Chairman, and his son, Dr. Jing Lou, our Chief Executive Officer, control a number of shares sufficient to influence corporate actions. Dan Lou, the Chairman of our Board of Directors, and his son, Dr. Jing Lou, our Chief Executive Officer, together will own or control approximately 11.9% of our outstanding ordinary shares after this offering. The interests of the Lou family may differ from those of our other shareholders, and they may take actions that advance their interests to the detriment of our other shareholders. Acting together, they would have sufficient voting power to influence the outcome of corporate actions submitted to the shareholders for approval and to influence our management and affairs, including the election of our Board of Directors. Chairman Lou is not required to stand for election at any meeting of our shareholders, and therefore serves for an undetermined period of time. In addition, this concentration of ownership may prevent attempts to remove or replace senior management. Our articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs. Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to Table of Contents Risk factors obtain control of our company in a tender offer or similar transaction. These provisions could also serve to entrench our existing board of directors and management. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors issues preferred shares, the market price of our ordinary shares or ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be adversely affected. In addition, our articles of association provide that only a third of our board must stand for re-election at any annual meeting. Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights. Holders of ADSs do not have the same rights as holders of our ordinary shares and ADS holders only have such rights as are specified in the deposit agreement, which generally are more restricted than the rights of holders of ordinary shares. Under the deposit agreement, if the vote is by show of hands, the depositary will vote the deposited securities in accordance with the voting instructions received from a majority of holders of ADSs that provided timely voting instructions. If the vote is by poll, the depositary will vote the deposited securities in accordance with the voting instructions it timely receives from ADS holders. In the event of poll voting, deposited securities for which no instructions are received will not be voted. Under our articles of association, the minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting. You may be subject to limitations on transfers of your ADSs. Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason. Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical to make them available to you. We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and Notes to the Consolidated Financial Statements (Continued) (expressed in RMB and US$) 11 Deferred grant income Deferred grant income in the consolidated balance sheets represent the unamortized amount of the government grant approved by the State Development Planning Committee of the PRC in August 1999, amounting to RMB15,000,000, which was granted for the purchase of plant and equipment costing a total of RMB45,029,000. The grant income is amortized to the consolidated statements of income on a straight-line basis over the weighted average expected useful life of the plant and equipment acquired. Amount to be amortized to the statement of income in the coming year is classified as a current liability and any remaining unamortized amount is classified as a non-current liability. Unamortized deferred grant income as of September 30, 2006 is expected to be amortized as follows: RMB 000 US$ 000 October 1, 2006 to December 31, 2006 212 27 2007 611 77 2008 374 47 2009 374 47 2010 and thereafter 3,152 Table of Contents Risk factors the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings. In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property, in which event you would not receive such distribution. We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law. Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, the rights of minority shareholders to institute actions, and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more developed and judicially interpreted bodies of corporate law than the Cayman Islands. There is uncertainty regarding whether Cayman Islands courts would: recognize or enforce against us or our directors or officers judgments of courts of the United States predicated upon certain civil liability provisions of U.S. securities laws; and impose liability against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws or laws of any state in the U.S. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, directors or major shareholders than they would as public shareholders of a U.S. company. Table of Contents Risk factors Your ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, will be limited because we are incorporated in the Cayman Islands, because we conduct substantially all of our operations in China and because the majority of our directors and officers reside outside of the United States. We are incorporated in the Cayman Islands, and we conduct substantially all of our operations in China through our PRC subsidiaries. Most of our directors and officers reside, and substantially all of the assets of those persons are located, outside the United States. As a result, it may be difficult or impossible for you to bring an action in the United States against us or against these individuals in the event that you believe that your rights have been violated under U.S. securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands or China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see Enforceability of civil liabilities. Table of Contents Forward-looking statements This prospectus contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. These statements involve known and unknown risks, uncertainties and other factors, including those listed under Risk factors , which may cause our actual results, performance or achievements to differ materially from the forward-looking statements that we make. Forward-looking statements typically are identified by words or phrases such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue, is/are likely to or other similar expressions or the negative of these words or expressions. Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including: competition from other domestic and foreign pharmaceutical companies; our ability to enhance existing products and develop, obtain government approvals for, and market future generations of our existing products and other new products; the expected market growth for pharmaceutical products in China; market acceptance of our products; our expectations regarding hospital or patient demand for our products; our ability to expand our production, sales and distribution network and other aspects of our operations; our ability to diversify our product range; with regard to TPIAO and our proprietary product candidates, our ability to effectively protect our intellectual property; our ability to identify and acquire new medical technologies, pharmaceutical products and product candidates; changes in the healthcare industry in China, including changes in the healthcare policies and regulations of the PRC government and changes in the healthcare insurance sector in the PRC; and fluctuations in general economic and business conditions in China. The forward-looking statements in this prospectus represent our expectations and forecasts as of the date of this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus. You should read this prospectus and the documents filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. Table of Contents Use of proceeds We estimate that the net proceeds to us from this offering will be approximately US$81.9 million, or US$86.6 million if the underwriters exercise their over-allotment option in full, assuming a public offering price of US$13.00 per ADS, the midpoint of the initial public offering price range as shown on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering as follows: approximately US$20 million, which we currently anticipate to be sufficient for the construction of a new GMP-certified manufacturing plant with planned capacity to meet increasing market demand for our products and for certification of the new plant by the European Agency for the Evaluation of Medical Products, or EMEA; approximately US$5 million, which we currently anticipate to be sufficient for improvements to our existing facilities, primarily relating to process development and optimization, to achieve EMEA certification and improved production yield, which involves the introduction of new production procedures and modifications to our existing quality control procedures, such as adding virus clearance and testing procedures; approximately US$10 million for conducting clinical trials for our product candidates, of which approximately US$3.4 million is expected to be used to develop our anti-TNF humanized monoclonal antibody product candidate (SSS07), US$1.7 million to develop NuPIAO, US$1.6 million to develop our HPV vaccine (SSS08), US$0.7 million to develop TPIAO for the treatment of ITP, US$0.4 million to develop high dosage EPIAO, US$0.4 million to develop NuLeusin, and approximately US$1.5 million for clinical trials necessary for the EMEA registration of EPIAO. For a detailed description of our product candidates and their clinical trial status, see Business Our product portfolio Our product candidates. With the exception of SSS08 and SSS07, we expect that the proceeds from this offering will be sufficient to bring these product candidates to market. In addition, we expect the portion of proceeds allocated to SSS07 and SSS08 to be sufficient to fund their research and development costs through phase III of clinical trials. The aggregate additional expenses in relation to the development of these two product candidates, currently estimated to be approximately US$3.0 million to US$5.0 million, are expected to be funded by cash flows from operations or through additional placements of our securities in the future; and approximately US$10 million for the expansion and enhancement of our sales and marketing network, including the addition of personnel to our oncology-focused marketing team, further penetration in our existing geographical markets and expansion into new target areas in China. The remainder of the proceeds will be used for in-licensing products, working capital and general corporate purposes. Accordingly, our management will have broad discretion in applying the net proceeds of this offering. Until we apply the net proceeds of this offering to the above purposes, we intend to invest them in short-term, interest bearing, investment-grade obligations. These investments may have a material adverse effect on the US federal income tax consequences of your investment in our ADSs. In particular, it is possible that we may become a passive foreign investment company for United States federal income tax purposes, which could result in negative tax consequences for you. See Risk factors Risks relating to our company We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or ordinary shares to significant adverse tax consequences and Taxation United States Federal Income Tax Considerations PFIC Considerations. Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more ADSs than the number set forth on the cover page of this prospectus. Table of Contents Dividend policy We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and to expand our business. Our ability to pay dividends to our shareholders depends substantially on the payment of dividends to us by Shenyang Sunshine. Shenyang Sunshine may pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its articles of association and the accounting standards and regulations in China. In addition, Shenyang Sunshine, as a wholly foreign owned enterprise, is required to provide for a statutory reserve fund by setting aside at least 10% of its after-tax profits each year until such reserve reaches 50% of its registered capital. Allocations to the statutory reserve can only be used for specific purposes and are not distributable to us in the form of loans, advances or cash dividends. Any distributable profits that are not distributed in a given year are retained and available for distribution in subsequent years. Table of Contents Capitalization The following table sets forth our capitalization as of September 30, 2006: on an actual basis; and as adjusted to reflect our sale of 7,187,817 ADSs in this offering at an assumed offering price of US$13.00, the midpoint of the initial public offering price range as shown on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Please read this information together with: the section of this prospectus entitled Management s discussion and analysis of financial condition and results of operations ; and the consolidated financial statements and related notes included elsewhere in this prospectus. As of September 30, 2006 Actual As adjusted Total shareholders equity(3)(4) 64,093 8,109 711,437 90,010 6,029 5,551 702 3,387 Total capitalization(3)(4) 133,093 16,839 780,437 98,740 (1) Translations of the net proceeds from US dollars have been made of a rate of RMB7.904 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on September 29, 2006, the last business day in September 2006. If the translation of net proceeds to Renminbi would have been made at the January 26, 2007 exchange rate of RMB7.775 to US$1.00, net proceeds in Renminbi would have decreased by approximately RMB10.6 million. (2) Excludes 1,060,000 ordinary shares issuable upon exercise of options granted in October 2006, 15,000 unvested shares granted to an executive of the Company in August 2006 and 10,000,000 ordinary shares reserved for future issuance under our stock option plan. (3) A US$1.00 increase (decrease) in the assumed initial public offering price of US$13.00 per ADS, the midpoint of the initial public offering price range as shown on the cover of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders equity and total capitalization by approximately US$6.7 million, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. In addition, depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more ADSs than the number set forth on the cover page of this prospectus. (4) Our consolidated financial statements as of and for the nine months ended September 30, 2006 have been restated to correct an error in the recognition of share-based compensation expenses. The error resulted in an understatement of our net income previously reported in our financial statements for the nine months ended September 30, 2006 by RMB1,951,000 (US$247,000) and a corresponding overstatement of RMB1,951,000 (US$247,000) in accrued expenses and other payables in our consolidated balance sheet as of September 30, 2006. For more details, please see Note 2 to our consolidated financial statements included elsewhere in this prospectus. Deferred tax assets 6,419 4,841 613 3,517 6,419 4,841 613 3,517 Table of Contents Dilution If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and the net tangible book value per ADS after the offering. Dilution results from the fact that the per share offering price of our ADSs is substantially in excess of the book value per share after the offering. Our net tangible book value as of September 30, 2006 was US$8.1 million, or US$0.081 per ordinary share and US$0.568 per ADS. Net tangible book value per ordinary share represents total tangible assets less total liabilities, divided by the number of ordinary shares outstanding as of September 30, 2006. After giving effect to our sale of 7,187,817 ADSs in this offering at the assumed initial public offering price of US$13.00 per ADS and after deducting the underwriting discounts and commissions and estimated offering expenses, our net tangible book value as of September 30, 2006 would have been US$90.0 million, or US$0.599 per ordinary share and US$4.194 per ADS. This represents an immediate increase in net tangible book value of US$0.518 per ordinary share, or US$3.626 per ADS, to existing shareholders and an immediate dilution of US$1.258 per ordinary share, or US$8.806 per ADS, to investors purchasing ADSs in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per ordinary share US$ 1.857 Net tangible book value per ordinary share as of September 30, 2006 0.081 Increase in net tangible book value per ordinary share attributable to this offering 0.518 Net tangible book value per ordinary share after this offering 0.599 Dilution per ordinary share to new investors in this offering US$ 1.258 Dilution per ADS to new investors in this offering US$ 8.806 If the underwriters exercise their over-allotment option to purchase additional ADSs from us in this offering, our net tangible book value per share will increase to US$0.619 per ordinary share, or US$4.332 per ADS, representing an immediate increase to existing shareholders of US$0.538 per ordinary share, or US$3.764 per ADS, and an immediate dilution of US$1.238 per ordinary share, or US$8.668 per ADS, to new investors. The following table summarizes, as of September 30, 2006, the differences between existing shareholders and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share and the average price per ADS, each paid before deducting the underwriting discounts and commissions and our estimated offering expenses. Shares purchased Total capital contribution Nine months ended September 30, 2006 (US$ 000) 298 154 Actual income tax expense 1,201 226 1,762 223 1,668 3,574 2004 2005 2005 2006 2006 RMB 000 RMB 000 US$ 000 RMB 000 US$ 000 Deposits for property, plant and equipment 93 3,902 494 298 38 Prepayments and other deposits 463 1,114 141 1,895 240 Expenses incurred for the proposed initial public offering of securities of the Company 4,019 508 Other receivables 3,929 1,911 241 3,606 Total 150,316 100.0 % US$ 103,338 100.0 % The discussion and tables above assume no exercise of outstanding stock options. Subsequent to September 30, we granted options to purchase up to 1,060,000 ordinary shares at an exercise price of US$1.60 per share. To the extent that any of these stock options are exercised, there will be further dilution to new investors. Table of Contents Dilution If the underwriters over-allotment option is exercised in full, investors purchasing ADSs in this offering from us will hold 34.7% of the total number of our ordinary shares outstanding after this offering. Each US$1.00 increase (decrease) in the assumed public offering price of US$13.00 per ADS would increase (decrease) our as adjusted net tangible book value by approximately US$6.7 million (changing the dilution in net tangible book value per ADS to investors in this offering), assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same. Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more ADSs than the number set forth on the cover page of this prospectus. Table of Contents Exchange rate information Our business is primarily conducted in China, and all of our revenues and expenses are denominated in Renminbi. However, for the convenience of the readers, periodic reports made to shareholders will include current period amounts translated into U.S. dollars using a current exchange rate. Unless otherwise indicated, all translations from Renminbi to U.S. dollars for financial data have been made at a rate of RMB7.9040 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on September 29, 2006, the last business day in September 2006. The following table sets forth, for the periods indicated, information concerning exchange rates between the Renminbi and the U.S. dollar based on the noon buying rate in the City of New York for cable transfers of Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. The column titled Average in the table below is the average of the noon buying rates on the last business day of each month during the year. Noon buying rate Source: Federal Reserve Bank of New York. The following table sets forth the high and low exchange rates for the periods indicated based on the noon buying rate in the City of New York for cable transfers of Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. Low High July 2006 7.9690 8.0018 August 2006 7.9538 8.0000 September 2006 7.8965 7.9545 October 2006 7.8728 7.9168 November 2006 7.8303 7.8750 December 2006 7.8041 7.8350 January (through January 26) 7.7705 7.8127 Source: Federal Reserve Bank of New York. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated above, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. Table of Contents Selected consolidated financial data The following selected consolidated financial data should be read in conjunction with Management s discussion and analysis of financial condition and results of operations and our consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial data presented below for the years ended December 31, 2003, 2004 and 2005 and the nine months ended September 30, 2005 and 2006, other than the net income per ADS data, are derived from our audited consolidated financial statements included elsewhere in this prospectus, which are prepared in accordance with U.S. GAAP. The selected balance sheet data as of December 31, 2003 is derived from our unaudited balance sheet as of December 31, 2003, which is not included in this prospectus. Results for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the full year. The historical results are not necessarily indicative of results to be expected in any future period. Our consolidated financial statements as of and for the nine months ended September 30, 2006 have been restated to correct an error in the recognition of share-based compensation expenses. The error resulted in an understatement of our net income previously reported in our financial statements for the nine months ended September 30, 2006 by RMB1,951,000 (US$247,000) and a corresponding overstatement of RMB1,951,000 (US$247,000) in accrued expenses and other payables in our consolidated balance sheet as of September 30, 2006. For more details, please see Note 2 to our consolidated financial statements included elsewhere in this prospectus. Selected consolidated financial data as of December 31, 2001 and 2002 and for the years ended December 31, 2001 and 2002 were omitted because the presentation of such data would require us to incur significant expense and devote extraordinary time. Table of Contents Selected consolidated financial data Year ended December 31, Nine months ended September 30, Total other income/(expense), net (2,942 ) Total 72,840 77,248 102,013 12,907 76,130 92,572 11,712 Total other income/(expense), net (2,942 ) Total other income/(expense), net (2,942 ) (RMB in thousands) Short-term bank loans(1) 44,732 44,732 Long-term bank loans(2) 27,566 1,733 25,833 Guarantees provided on bank loans to a shareholder 10,000 10,000 Guarantee provided on bank loans to a third party(3) 40,000 40,000 Capital Commitments 495 Cost of revenues (12,653 ) (15,027 ) (15,497 ) (1,961 ) (12,664 ) (8,779 ) (1,111 ) Net income Net income Net income No. of shares Amount Registered capital Additional paid-in capital Statutory reserves Accumulated losses Total shareholders equity Note RMB RMB RMB RMB RMB RMB Balance as of January 1, 2003 62,974 15,167 850 (61,546 ) 17,445 Net income 510 6,479 7,252 7,488 948 5,796 4,046 Gross profit 60,187 62,221 86,516 10,946 63,466 83,793 10,601 Operating expenses: Research and development (3,073 ) (3,699 ) (3,196 ) (404 ) (2,311 ) (3,754 ) (475 ) Sales, marketing and distribution (37,021 ) (38,762 ) (49,205 ) (6,225 ) (35,133 ) (43,448 ) (5,497 ) General and administrative (15,789 ) (13,600 ) (13,956 ) (1,766 ) (9,378 ) (8,778 ) (1,111 ) Total operating expenses (55,883 ) (56,061 ) (66,357 ) (8,395 ) (46,822 ) (55,980 ) (7,083 ) Operating income 4,304 6,160 20,159 2,551 16,644 27,813 3,518 2004 2005 2005 2006 2006 RMB 000 RMB 000 US$ 000 RMB 000 US$ 000 Accounts receivable 43,490 37,336 4,724 39,338 4,977 Bills receivable 2,244 2,932 370 4,514 Other income/(expense), net Interest expense, net (5,748 ) (5,948 ) (5,407 ) (684 ) (4,164 ) (3,078 ) (389 ) Grant income 2,518 6,442 3,771 477 2,763 2,414 305 Others 288 (850 ) (108 ) (832 ) (183 ) (23 ) 4,723 Income before income tax expense and minority interests 1,362 6,654 17,673 2,236 14,411 26,966 3,411 Income tax expense (1,201 ) (226 ) (1,762 ) (223 ) (1,668 ) (3,574 ) (452 ) 69,000 89,000 11,260 44,000 5,567 Long-term loans Bank of China Co., Ltd (k ) 30,000 Bank of China Co., Ltd (o ) 20,000 2,530 Bank of China Co., Ltd (p ) 5,000 Net income per share, basic and diluted 0.01 0.07 0.16 0.02 0.13 0.23 0.03 Weighted average number of shares outstanding 100,000,998 100,000,998 100,000,998 100,000,998 100,000,998 100,000,998 100,000,998 Net income per ADS, basic and diluted (unaudited) 0.04 0.46 1.12 0.14 0.90 1.64 0.21 Weighted average number of ADSs outstanding (unaudited) 14,285,857 14,285,857 14,285,857 14,285,857 14,285,857 14,285,857 14,285,857 Table of Contents Selected consolidated financial data As of December 31 As of September 30, (1) Net revenues consist of the invoiced value of goods sold, net of value-added taxes, or VAT, discretionary sales returns, trade discounts and allowances. (2) Working capital is calculated as current assets minus current liabilities. Table of Contents Management s discussion and analysis of financial condition and results of operations You should read the following management s discussion and analysis in conjunction with our audited consolidated financial statements for the years ended December 31, 2003, 2004 and 2005 and for the nine months ended September 30, 2005 and 2006, and Selected consolidated financial data , in each case together with the accompanying notes, all included elsewhere in this document. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption Risk factors beginning on page 12 of this document. OVERVIEW We are a leading, fully integrated, profitable biotechnology company focused on researching, developing, manufacturing and marketing biopharmaceutical products primarily in China. Our recombinant, or genetically engineered, protein-based products and product candidates are designed to address large markets with significant unmet medical needs in nephrology, oncology, supportive cancer care, inflammation and infectious diseases. We began operations in 1993. Our principal products are EPIAO ( ) and TPIAO ( ), and our legacy products are Intefen ( ) and Inleusin ( ). Our newest internally developed product, TPIAO, was launched in January 2006. Substantially all of our net revenues and profits have been derived from these four existing products. We conduct our manufacturing and marketing activities through our wholly owned subsidiary, Shenyang Sunshine Pharmaceutical Company Limited, or Shenyang Sunshine. We conduct our distribution and logistics activities through Beijing Sunshine Bio-product Sales Company, or Beijing Sunshine, and Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine. Liaoning Sunshine is a PRC limited liability company that is wholly owned by Dan Lou, our chairman. Beijing Sunshine is a PRC limited liability company that is 55% owned by Shenyang Keweier, a company owned by our employees and former employees, and 45% owned by Dongmei Su, our chief technology officer. Liaoning Sunshine holds the licenses to the Tietai Iron Sucrose Supplement and to Baolijin. Beijing Sunshine and Liaoning Sunshine are variable interest entities whose results are consolidated in our financial statements. For more details, see Financial overview Consolidation of variable interest entities. For the two years ended December 31, 2004 and 2005, EPIAO generated approximately 84.1% and 83.1% of our overall net revenues, respectively. Revenues from EPIAO accounted for 84.9% of our overall net revenues in the nine months ended September 30, 2005, compared to 78.7% for the same period in 2006. The decrease resulted from the launch in early 2006 of our TPIAO, which has rapidly become our second largest revenue contributor. In 2004 and 2005, approximately 13.5% and 8.3% of overall net revenues were generated by sales of our legacy products Inleusin and Intefen. Beginning in 2004, we began to reduce focus on these products due to increased competition and pricing pressure. We in-licensed exclusive distribution rights for a prescription iron sucrose supplement product, Tietai, which we began to market in August 2006. Also, in August 2006, we in-licensed exclusive distribution rights for Baolijin, a recombinant human granulocyte colony-stimulating factor, a protein that stimulates Table of Contents production of white blood cells. We are actively pursuing six product candidates in late-, mid- and early-stage clinical and pre-clinical development, including a high dosage EPIAO and a second-generation EPIAO. We also have development programs for a new indication for our TPIAO to treat ITP, a new version of IL-2 for the treatment of metastatic melanoma, a type of skin cancer, and metastatic renal cell carcinoma, a type of kidney cancer, a HPV vaccine for the prevention of cervical cancer and an anti-TNF monoclonal antibody product candidate for treating rheumatoid arthritis, psoriasis, and potentially other inflammatory diseases. We primarily sell our products in China. We also export a small portion of our products to certain developing countries, consisting of Egypt, Pakistan, Thailand, Brazil, Mexico, and Trinidad and Tobago, where we have been approved to sell these products in compliance with local laws and regulations. RESTATEMENT OF FINANCIAL STATEMENTS Our consolidated financial statements as of and for the nine months ended September 30, 2006 have been restated to correct an error in the previously issued consolidated financial statements related to the recognition of the share-based compensation expenses. The amortization period of share-based compensation expenses was changed to reflect the recognition of the estimated fair value of the share awards over the explicit eighteen-month requisite service period from the grant date on June 1, 2006. The fair value of the share awards was previously amortized over six months from the grant date, based on our original expectation and intent to complete this offering within six months from the grant date. The error resulted in an overstatement of the general and administrative expenses for the nine months ended September 30, 2006 of RMB1,951,000 (US$247,000) and a corresponding understatement of RMB1,951,000 (US$247,000) in accrued expenses and other payables in our consolidated balance sheet as of September 30, 2006, but had no effect on our reported cash flows from operating, investing and financing activities. FINANCING HISTORY Shenyang Sunshine, our predecessor and now our operating subsidiary, was formed in 1993. Since our inception, we have focused our activities on research and product development by funding our research and development projects and business expansion with cash generated from operations, debt financing, equity issuances and various government grants. Our initial capital was contributed by our majority shareholder, Shenyang Keweier Advanced Technology Co., Ltd., or Shenyang Keweier, in form of assets and technology transfer with a small amount of cash funding from our strategic investor, Montgomery Bio-Medicine Inc. in the subsequent few years. In 1995, we began marketing Intefen and initiated the research and development of TPIAO. In 1998, we began marketing EPIAO. From 1997 to 2004, we obtained government grants for a total of approximately RMB15 million and RMB10 million to fund the manufacturing capacity expansion for EPIAO and TPIAO research and development, respectively. We expect that we will be able to fund our growing operations and capital expenditures with our working capital and the proceeds of this offering for the next 24 months. TRENDS AFFECTING OUR RESULTS OF OPERATIONS The following trends have historically affected, and we believe will continue to affect, our results of operations. Continuing pricing pressure The selling prices of some of our products have declined over time due to increased pricing pressure from industry peers and the price control bidding process in China. For example, the average selling prices of our legacy products and lower dosage EPIAO products have declined over time. We have been able to maintain stable overall average selling prices for higher dosage EPIAO products over the past few years. The stable average prices of our high dosage products, combined with steady demand and the launch of Table of Contents Management s discussion and analysis of financial condition and results of operations TPIAO have allowed us to maintain net revenue and net income growth, despite intense pricing pressure. We believe our ability to continue to grow our revenues and remain profitable in the face of downward pricing pressure is dependent on the following factors: Reliance on EPIAO Sales. Throughout the three years ended December 31, 2005, our net revenue growth has been primarily driven by increased sales of EPIAO. During these periods we have established a market leadership position in China of EPIAO sales, with a market share, according to IMS Health data, of 36% in terms of sales revenue in 2005. In January 2006, we launched our new recombinant human thrombopoietin, or TPO, product, which has become our second largest revenue contributor, with net sales revenue of RMB10.2 million, accounting for 11.0% of our overall sales for the nine months ended September 30, 2006. Exclusivity. In some instances, we rely on exclusivity under administrative protection periods to provide us with a competitive advantage. TPIAO for the treatment of chemotherapy-induced thrombocytopenia enjoys exclusivity under an administrative protection period through 2010 and EPIAO for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies enjoys exclusivity under an administrative protection period through 2007. Competitive bidding. In each province where we market our products, we participate in a government-sponsored competitive bidding process every year or every few years, during which we and our competitors submit pricing and other product information to local pricing bureaus. The local pricing bureau will, based on the bidding price, quality and market share of the particular product and the reputation of the bidder, select a limited number of products in each product category, which will be the only products of its category permitted for sale in the relevant province or local district. Product mix. Our strategy is to alter our product mix to respond to pricing pressures by focusing our sales and marketing resources on our more profitable products. For example, as our legacy product became less profitable, our sales and marketing force focused on improving the sales volumes of our higher dosage forms of EPIAO, such as our 4,000 IU/vial and 10,000 IU/vial EPIAO formulations. We also shift our product mix through the introduction of new products. Launched in January 2006, TPIAO was our second largest revenue generator for the nine months ended September 30, 2006. In addition, we began out-sourcing the marketing efforts of our legacy products, Intefen and Inleusin, to distributors in 2005, thereby improving our overall product mix and sales force efficiency. Export sales. In addition to our domestic sales, we also export certain of our products to certain developing countries, consisting of Egypt, Pakistan, Thailand, Brazil, Mexico, and Trinidad and Tobago, where we have been approved to sell these products in compliance with local laws and regulations. We initiated our export business in 2003 to a country in the Middle East through an export company in China. Increasingly in subsequent years, we have worked with local agents in countries in the Middle East, South America and in Southeast Asia. Our export sales primarily consist of sales of EPIAO, Intefen and Inleusin, in the form of raw material in bulk format as concentrated solutions or as finished products. Export sales accounted for 1.2%, 2.2%, 4.9% and 5.0% of our total revenues in 2003, 2004, 2005 and the nine months ended September 30, 2006. While export sales accounted for a small percentage of our net revenues in past periods, we believe, in the long term, growth in export sales may assist us in offsetting pricing pressures in our domestic market. Different sales channel for different products. Our internal sales and marketing force consists of 143 marketing and sales representatives focused on hospitals, clinics and dialysis centers in 18 Chinese provinces and major cities including the municipalities of Beijing and Shanghai and the city of Guangzhou. As pricing pressures drive down the average selling price of a product, we may focus our internal sales force on other, more profitable products. For example, since 2004 we have devoted a Total Product Name 2003 2004 2005 2006 (RMB in thousands) EPIAO 185 531 1,159 1,741 3,616 TPIAO 1,193 1,849 967 Table of Contents Management s discussion and analysis of financial condition and results of operations decreasing amount of resources to the marketing of our two legacy products, Intefen and Inleusin, which had historically been significant contributors to our overall net revenues, as we strategically realigned our internal focus on EPIAO and TPIAO. At the same time, we began outsourcing the sales efforts for the two legacy products to distributors who manage their own sales forces while we reimburse their related costs of selling based on pre-determined percentages of sales and timeliness of collection. For accounting purposes, we account for the net revenues generated from these indirect selling arrangements on a net basis in our statements of income, in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor s Products), or EITF Issue No. 01-9. Accruals for reimbursement of the related selling costs to these distributors, based on pre-determined percentages of sales, are recorded as a reduction to net revenues. Therefore, if we primarily utilize distributors to market a product that is experiencing pricing pressures, the decline in revenues from this product will be exacerbated, even though the effect of using primarily distributors will not have a comparable effect on our net income from that product. Accordingly, the aggregate net revenues from sales of our legacy products were approximately RMB27.1 million in 2003 representing 37.2% of the overall net revenues in 2003; RMB10.4 million in 2004, representing 13.5% of the overall net revenues in 2004; RMB8.4 million in 2005, representing 8.3% of the overall net revenues in 2005. The net revenues of the related sales were RMB6.7 million and RMB4.3 million, representing 8.8% and 4.6%, respectively, of the overall net revenues for the nine months ended September 30, 2005 and 2006. Taxes and incentives Under the current laws of the Cayman Islands, we are not subject to tax on our income or capital gains. In addition, no Cayman Islands withholding tax will be imposed on payments of dividends by us to our shareholders. Under the current PRC laws, Shenyang Sunshine is subject to enterprise income tax, or EIT and value-added tax, or VAT. The PRC government has provided various incentives to high technology companies in order to encourage development of the high technology industry. Such incentives include reduced tax rates and other measures. For example, as a high technology company operating in an approved economic-technological development area, Shenyang Sunshine is entitled to an EIT rate of 15%, compared to an EIT rate of 33% applicable to most domestically owned PRC companies. As a foreign-invested advanced technology enterprise certified by the relevant Chinese authorities, Shenyang Sunshine was entitled to a further reduced EIT rate of 10% for the year ended December 31, 2005. The reduced EIT rate expired after the year ended December 31, 2005 and Shenyang Sunshine s EIT was 15% for the year ended December 31, 2006. See Risk factors Risks related to our company Our business benefits from certain government incentives. Expiration of, or changes to, these incentives could have a material adverse effect on our operating results. VAT Our revenues are recorded net of VAT. VAT is charged based on the selling price of our products at a general rate of 17%. In China, pharmaceutical companies are accustomed to having the market sales data referenced to the gross revenues, inclusive of the VAT. For example, the data quoted by IMS Health throughout this document are quoted on gross revenues. Customer and supplier concentration Sales to our top ten distributors accounted for approximately 44% of our overall net revenues in 2004, 50% of our overall net revenues in 2005 and 53% of our overall net revenues in the nine months ended September 30, 2006. Table of Contents Management s discussion and analysis of financial condition and results of operations Our top five suppliers and the single largest supplier as percentages of our overall cost of revenues were 38.8% and 16.3%, respectively, for the nine months ended September 30, 2006. We primarily source our raw materials from a variety of international suppliers through their local distributors. We do not anticipate any significant fluctuations in price or any significant disruptions in the supply of our raw materials in the near future. We believe that our switching cost for our suppliers is not high because alternative suppliers are readily available. FINANCIAL OVERVIEW Net revenues and collection cycle Net revenues consist of the invoiced value of goods sold, net of VAT, trade discounts and allowances, and, in very rare circumstances, discretionary sales returns. In the PRC, VAT on the invoice amount is collected on behalf of tax authorities in respect of the sales of goods. Revenue is stated net of VAT. VAT collected from customers is set off by VAT paid for purchases, with the net amount recorded as a liability in the consolidated balance sheet until it is paid to the authorities. We sell our products primarily to distributors, who resell them to healthcare providers, including hospitals and dialysis centers. With respect to our principal products, EPIAO and TPIAO, we rely on our own sales force to promote them to the hospitals and other customers. Because of PRC regulations governing the distribution of pharmaceuticals by manufacturers, we direct our customers to purchase our products from designated distributors. We generally sell our products to these distributors at a discount of approximately 8% off the wholesale prices to healthcare providers such as hospitals and dialysis centers. With respect to legacy products, Intefen and Inleusin, we primarily rely on distributors to market, as well as sell, our products with their own sales force. We reimburse the related costs of these distributors sales efforts in the form of a negotiated discount. For accounting purposes, we account for the net revenues generated from these indirect selling arrangements on a net basis in our statements of income, in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor s Products), or EITF Issue No. 01-9. Accruals for reimbursement of the related selling costs to these distributors, based on pre-determined percentages of sales, are recorded as a reduction to net revenues. We generally recognize revenues at the time our products are delivered and the customers take ownership and assume risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed. We are a party to binding purchase agreements with our distributors or with our hospital customers each time we make a sale of our products. Under these purchase agreements, our distributors or hospital customers agree to pay a non-refundable, fixed amount of money per unit of our products over a period of time. Our distributors take ownership of our products when either they themselves or the hospitals designated by them under contracts accept our products. Allowance for doubtful accounts We maintain allowances for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We review the accounts receivable on a periodic basis and make general and specific allowances when there is doubt as to the collectibility of individual balances. In evaluating the collectibility of our customers balances, we consider many factors, including the aging of the receivables, the customers past payment history and current credit-worthiness. We are subject to stringent requirements mandated by scrutiny of the local Chinese tax authorities on write-offs of bad debts. For example, bad debts must be aged over three years and sufficient evidence must be provided to prove customers inability to make payments. As a result, this creates a substantial time lag between the time when our bad debt provision is made and the removal of such doubtful debt from our books. A Table of Contents Management s discussion and analysis of financial condition and results of operations substantial portion of the actual write-offs in both 2003 and 2004 were related to doubtful accounts that arose prior to 2002. Substantially all of the accumulated bad debts from earlier periods have now been written off. In recent years we have increased our collection efforts, thereby reducing our bad debt expense. As a result of the increased collection efforts and reduced incidence of bad debts, we consider that no additional allowance for doubtful accounts is needed for the nine months ended September 30, 2006. There was no additional write-off of bad debts during the period as the criteria for write-offs mandated by the local Chinese tax authorities have not yet been met. Our attempt to better control our credit and collection could limit the pace of our expansion into new hospitals, new distributors and sales to second- and third-tier cities. As of December 31, 2003, 2004 and 2005, and September 30, 2006, there were no material amounts of receivables outstanding for more than one year that were not reserved. Cost of net revenues Our cost of net revenues includes costs of raw materials, packaging, labor costs and manufacturing overhead. Our manufacturing overhead is primarily comprised of factory staff costs, allocated utilities and depreciation of our production facilities. We expect our per unit manufacturing costs will continue to decrease to the extent that our production yields improve. Labor costs are primarily related to the production of our products. We believe the relatively low cost of labor in the PRC provides us with a significant competitive advantage versus international competitors who are not producing products in the PRC. In the event that we commence operations of the planned new cGMP-certified facility, depreciation charges would increase on a per unit basis in early years before the full deployment of our new plant capacity. Operating expenses Our operating expenses include: research and development expenses, sales, marketing and distribution expenses and general and administrative expenses. The key components of our operating expenses are described below. Research and development expenses. Our research and development expenses are related to activities such as preclinical studies and clinical trials and consist primarily of: Direct and allocated salaries and related expenses for personnel; Fees paid to consultants and clinical research organizations in conjunction with their monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials; Direct cost of materials used in research and development; Direct cost of equipment that lacks an alternative future use; Fees paid to independent research organizations in conjunction with preclinical animal studies; Allocated depreciation of research equipment and laboratory facilities; Manufacturing costs of our clinical trial supply quantities for our product candidates; Costs associated with other clinical development such as seminar hosting and process optimization; and Costs for seeking European Agency for the Evaluation of Medicinal Products, or EMEA, approval to market our products under the new regulations for biosimilar products. Table of Contents Management s discussion and analysis of financial condition and results of operations In accordance with U.S. GAAP, we expense both internal and external research and development costs as incurred, other than laboratory equipment with alternative future uses, which we capitalize. Due to the fact that the tax incentive for recording research and development costs in China is minimal, we do not track our internal research and development costs by program in detail and cannot state precisely the costs incurred for each of our research and development programs in the past. However, the following table shows our estimate of the total costs that have been incurred for our two principal products, EPIAO and TPIAO, and others during each of the periods indicated: Year ended December 31, Nine months ended September 30, 3,073 3,699 3,196 3,754 13,722 The table above contains research and development costs attributable to the ongoing clinical trials for expanded indications of our marketed products, as well as preclinical and clinical trials for our product candidates. Sales, marketing and distribution expenses. Our sales, marketing and distribution expenses primarily consist of salaries, employee benefits, bonuses and related expenses for our sales and marketing staff. They also include the direct costs attributable to our sales and marketing activities, such as conference and seminar hosting and attendance, travel, entertainment and advertising expenses. We expect our sales, marketing and distribution expenses to increase in absolute dollar amounts in the future as we continue to expand the portfolio of our products. In future periods, we will seek to maintain a relatively stable or moderate improvement in terms of percentage of the sales, marketing and distribution expenses relative to our overall net revenues. General and administrative expenses. Our general and administrative expenses primarily consist of salaries and employee benefits, including share-based compensation, as well as depreciation charges of office premises and equipment. We expect our general and administrative expenses to increase in absolute dollar amounts in connection with our continued growth. Other income/(expense), net We record our other income net of interest expense and foreign currency exchange losses. Our other income principally comprises interest income, grant income and various non-recurring items. Government grants At various stages during the period from 1997 to 2004, we obtained a total of approximately RMB15 million to fund capacity expansion at our Shenyang manufacturing facility to accommodate production of clinical quantities of EPIAO and RMB10 million to fund our research and development efforts relating to our TPIAO program. We do not expect to receive significant additional government grant income for the near future. Table of Contents Management s discussion and analysis of financial condition and results of operations Balance at end of year/period 15,955 5,586 5,892 745 5,892 5,892 Grants for the acquisition of property, plant and equipment are reflected as deferred income on our consolidated balance sheet when there is reasonable assurance they will be received and the deferred income is amortized to the statement of income over the useful life of the acquired asset. Grants that compensate us for expenses incurred are recognized as other income in our consolidated statements of income upon the later of award of the grant or in the same period in which the related expenses are incurred. Consolidation of variable interest entities Variable interest entities, or VIEs, are those entities in which a company, through contractual and/or other arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entities, and therefore the company is the primary beneficiary of these entities. We have adopted Financial Accounting Standards Board ( FASB ) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, or FIN 46R effective from January 1, 2006. FIN 46R requires certain VIEs to be consolidated by the primary beneficiary of the VIE if equity investors in the VIE do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The results of VIEs are consolidated in a company s financial statements from the date the company became the primary beneficiary of the VIE. The following is a summary of our VIEs: Beijing Sunshine is a domestic limited liability company which was incorporated in 2000 under the PRC laws. Beijing Sunshine is primarily engaged in the distribution of products manufactured by Shenyang Sunshine. Prior to our reorganization in anticipation of this offering, Shenyang Sunshine held 45% equity interest in Beijing Sunshine while Shenyang Sunshine s majority shareholder prior to the reorganization, Shenyang Keweier Advanced Technology Co., Ltd., or Shenyang Keweier, held the remaining 55% equity interest in Beijing Sunshine. The registered capital of Beijing Sunshine is RMB1,010,000. Liaoning Sunshine is a domestic limited liability company incorporated in 2000 under the PRC laws. Liaoning Sunshine is primarily engaged in the distribution of products manufactured by Shenyang Sunshine and in-licensed products. Prior to our reorganization in anticipation of this offering, Shenyang Sunshine held 90% equity interest in Liaoning Sunshine and Shenyang Keweier held the remaining 10% equity interest in Liaoning Sunshine. The registered capital of Liaoning Sunshine is RMB15.0 million. In connection with our corporate reorganization, we transferred our 45% equity interest in Beijing Sunshine to Ms. Dongmei Su, our chief technology officer, in October 2006 and our 90% equity interest in Liaoning Sunshine to Mr. Dan Lou, our chairman, in November 2006. Upon the consummation of these transfers, we also entered into a series of contractual arrangements with Beijing Sunshine and Liaoning Sunshine, through which we bear economic risks with respect to, and derive economic benefits from, their operations. For more details, see Our corporate structure Our contractual arrangements with Liaoning Sunshine and Beijing Sunshine. The total equity investment at risk is not sufficient to permit either Beijing Sunshine or Liaoning Sunshine to finance its activities without additional subordinated financial support provided by Shenyang Sunshine. Shenyang Sunshine finances each of Beijing Sunshine and Liaoning Sunshine in the form of subordinated trade payables arising from the sales of products from Shenyang Sunshine to Beijing Sunshine or Liaoning Sunshine. As variable interests in each of Beijing Sunshine and Liaoning Sunshine are predominately held by Shenyang Sunshine, Shenyang Sunshine is deemed to be the primary beneficiary of each of Beijing Table of Contents Management s discussion and analysis of financial condition and results of operations Sunshine and Liaoning Sunshine under FIN 46R. Accordingly, the financial statements of Beijing Sunshine and Liaoning Sunshine are consolidated in Shenyang Sunshine s financial statements from the respective dates Shenyang Sunshine became involved with each of Beijing Sunshine and Liaoning Sunshine. The transfers of our equity interest in Beijing Sunshine and Liaoning Sunshine did not change our requirement to consolidate Beijing Sunshine and Liaoning Sunshine under FIN 46R. RESULTS OF OPERATIONS The table below sets forth selected results of operations data expressed as a percentage of net revenues, for the periods indicated. Our historical results of operations are not necessarily indicative of the results for any future period. For the year ended December 31, For the nine months ended September 30, Statement of Income Data: 2003 2004 2005 2005 2006 % % % % % Net revenues: EPIAO 61.5 84.1 83.1 84.9 78.7 TPIAO 2.7 1.1 11.0 Intefen 31.3 10.0 6.7 7.0 3.7 Inleusin 5.9 3.5 1.6 1.8 0.9 Export 1.2 2.2 4.9 4.2 5.0 Others 0.1 0.2 1.0 1.0 0.7 Total 100.0 100.0 100.0 100.0 100.0 Cost of revenues (17.4 ) (19.5 ) (15.2 ) (16.6 ) (9.5 ) Gross margin 82.6 80.5 84.8 83.4 90.5 Operating expenses: Research and development (4.2 ) (4.8 ) (3.1 ) (3.0 ) (4.1 ) Sales, marketing and distribution (50.8 ) (50.1 ) (48.2 ) (46.2 ) (46.9 ) General and administrative (21.7 ) (17.6 ) (13.7 ) (12.3 ) (9.5 ) 2003 2004 2005 2005 2005 2006 2006 Note RMB 000 RMB 000 RMB 000 US$ 000 RMB 000 RMB 000 US$ 000 Bank loans guaranteed by China Transport (i) 25,000 25,000 34,000 4,302 34,000 25,000 3,163 Bank loans of China Transport guaranteed by Shenyang Sunshine (i) 39,200 39,200 37,200 4,706 37,200 10,000 1,265 Purchase of motor vehicles (ii) 800 101 Subtotal (76.7 ) (72.5 ) (65.0 ) (61.5 ) (60.5 ) Operating margin 5.9 8.0 19.8 21.9 30.0 8,688 6,450 Other income/(expense), net Interest income 0.1 0.1 0.1 0.1 0.3 Interest expense (8.0 ) (7.8 ) (5.5 ) (5.6 ) (3.6 ) Grant income 3.5 8.3 3.7 3.6 2.6 Others 0.4 (0.8 ) (1.1 ) (0.2 ) Total other income/(expense), net (4.0 ) 0.6 (2.5 ) (3.0 ) (0.9 ) Income before income tax expense and minority interests 1.9 8.6 17.3 18.9 29.1 Income tax (1.7 ) (0.2 ) (1.7 ) (2.2 ) (3.8 ) Income before minority interests 0.2 8.4 15.6 16.7 25.3 Minority interests, net of tax 0.5 0.2 0.1 0.2 Net margin 0.7 8.6 15.7 16.9 25.3 Table of Contents Management s discussion and analysis of financial condition and results of operations Nine months ended September 30, 2005 and 2006 Net revenues. Our net revenues increased by RMB16.4 million, or 21.6%, from RMB76.1 million for the nine months ended September 30, 2005 to RMB92.6 million for the nine months ended September 30, 2006. This increase was primarily attributable to an increase in net revenues of RMB9.3 million from TPIAO, our new product launched in January 2006, which has now become our second largest revenue contributor. In addition to the revenue contribution from TPIAO, net revenues for the nine months ended September 30, 2006 increased due to greater sales of our leading EPIAO products of RMB8.2 million, or 12.7%, to RMB72.8 million. Our export sales also increased by RMB1.5 million, or 46.5%, to RMB4.7 million for the nine months ended September 30, 2006 compared to the prior period in 2005. The rate of our overall revenue growth was slightly lower in the nine months ended September 30, 2006, compared to 2005, primarily because a government sponsored anti-corruption campaign temporarily limited our ability to expand into new hospitals during the nine months ended September 30, 2006. In the long run, we believe government-imposed reforms will be positive for the pharmaceutical industry and our business. Cost of net revenues. Our costs of net revenues were RMB12.7 million and RMB8.8 million for the nine months ended September 30, 2005 and September 30, 2006. The cost reduction of RMB3.9 million, or 30.7%, in the first nine months of 2006 resulted in part from provisions and charges for the first nine months in 2005 such as inventory write-offs and remaining portion of amortization on the intangibles for a total of approximately RMB2.7 million, as compared to the total inventory write-off of RMB1.9 million for the same period in 2006. Another key factor contributing to the cost reduction for the first nine months of 2006 was related to the increased production yield for our EPIAO in 2006. Also, we incurred a higher consumption of raw materials used in a pilot run in the first nine months of 2005 for the purpose of improving the manufacturing process for our EPIAO. Operating expenses. Our total operating expenses were RMB46.8 million and RMB56.0 million for the nine months ended September 30, 2005 and 2006. The increase of RMB9.2 million, or 19.6%, in the first nine months of 2006 was primarily due to increased staff costs and bonuses, inclusive of the share-based compensation of RMB1.0 million, for a total of approximately RMB5.2 million as compared to the prior period. In addition, an increase in related advertising, marketing and promotion costs was primarily related to the launch of our TPIAO product and an increase in sales activities in general. Our administrative costs as a percentage of net revenues have remained stable for the nine months ended September 30, 2006 as compared to the same period of the prior year. Each major category of our operating expenses is further explained below: Sales, marketing and distribution expenses. Sales, marketing and distribution expenses were RMB35.1 million and RMB43.4 million for the nine months ended September 30, 2005 and 2006 respectively. The increase of RMB8.3 million, or 23.7%, was primarily attributable to higher staff costs and bonuses in addition to the increase in related advertising, marketing and promotion costs for our TPIAO and higher sales activities in general. However, the sales, marketing and distribution expenses as a percentage of net revenues remained stable at around 47%, generally in line with our overall revenue growth. General and administrative expenses. Our general and administrative expenses decreased by RMB0.6 million, or 6.4%, from RMB9.4 million for the prior period to RMB8.8 million for the nine months ended September 30, 2006. The decrease was primarily attributed to the reduced need for bad debt provision of RMB0.9 million. As a percentage of net revenues, general and administrative expenses Table of Contents Management s discussion and analysis of financial condition and results of operations 4,485 6,927 decreased from 12.3% for the first nine months in 2005 to 9.5% for the first nine months in 2006. Staff costs and depreciation charges were the two largest expense categories and accounted for over 50% of the general and administrative expenses in both periods. Research and development expenses. Research and development expenses increased by RMB1.4 million, or 62.4%, from RMB2.3 million for the nine months ended September 30, 2005 to RMB3.8 million for the nine months ended September 30, 2006. Approximately half of the research and development expenses for the first nine months in 2006 were related to EPIAO. The remainder relates to the increased efforts for TPIAO s Phase IV clinical tests, a one-time licensing fee for the licensing and co-development of anti-TNF alpha monoclonal antibody therapeutics during the third quarter this year and other pipeline products. Other expense, net. The decrease in net other expense of RMB1.4 million, or 62.1%, from RMB2.2 million for the nine months ended September 30, 2005 to RMB0.8 million for the nine months ended September 30, 2006 was primarily due to lower interest expense resulting from a decrease in outstanding bank loans of RMB20 million during the first nine months of the year which was partially offset by a small decrease in grant income. Income before income tax expense and minority interests. As a result of the foregoing, our income before income tax expense and minority interest increased by RMB12.6 million, or 87.1%, from RMB14.4 million for the nine months ended September 30, 2005 to RMB27.0 million for the nine months ended September 30, 2006 because of the operating leverage previously discussed. Income tax expense. Our income tax expense increased by RMB1.9 million, or 114.3%, from RMB1.7 million for the nine months ended September 30, 2005 to RMB3.6 million for the nine months ended September 30, 2006, reflecting (i) our increased income before income tax expense and minority interests and (ii) the increase in non-deductible share-based compensation expenses. Our effective tax rate was 14.3% for the nine months ended September 30, 2006, compared to 11.6% for the nine months ended September 30, 2005. Net income. As a result of the foregoing, our net income increased by RMB10.5 million or 81.4%, from RMB12.9 million for the nine months ended September 30, 2005 to RMB23.4 million for the nine months ended September 30, 2006. Year ended December 31, 2005 compared to year ended December 31, 2004 Net revenues. Our net revenues increased by RMB24.8 million, or 32.1%, from RMB77.2 million in 2004 to RMB102.0 million in 2005. This increase was primarily attributable to an increase of RMB19.9 million, or 30.6%, in net revenues from EPIAO sales, and to a lesser extent, an increase of RMB4.1 million, or 216%, in our export and other sales in addition to increased net revenues from TPIAO of RMB2.8 million from our pre-launch marketing effort. EPIAO is available in four dosage forms: 2,000 IU/vial, 3,000 IU/vial, 4,000 IU/vial and 10,000 IU/vial. The increase in our EPIAO net revenues was principally attributable to the growth of sales of higher dosage forms. For example, aggregate net revenues from 4,000 IU/vial and 10,000 IU/vial EPIAO increased by approximately 42% from 2004 to 2005. Our revenue growth from sales of the higher dosage forms was partially offset by declines in the average selling prices of our lower-dosage forms of EPIAO. The decline of RMB2.0 million in aggregate net revenues from our legacy products, Intefen and Inleusin, partially offset our overall revenue growth. Since 2004, we focused our marketing efforts on EPIAO using our self-managed sales and marketing network. For Intefen and Inleusin, which increasingly became subject to intense price competition in the Chinese market, we relied in part on distributors. Table of Contents Management s discussion and analysis of financial condition and results of operations Under our arrangements with distributors we charge whole-sale prices and reimburse the distributors for sales, marketing and distribution costs incurred. Our net revenues from products sold under agency arrangements were recorded on a net basis after deducting the reimbursements for selling expenses. As a result, net revenues declined from RMB10.4 million in 2004 to RMB8.4 million in 2005 when the sales of these Intefen and Inleusin products were accounted for on net of selling costs basis. Cost of net revenues. Our costs of net revenues were RMB15.0 million and RMB15.5 million for the years ended December 31, 2004 and 2005. The cost of net revenues as a percentage of net revenues was higher at 19.5% in 2004, as compared to 15.2% in 2005, primarily caused by two factors: (i) one time inventory write-off in the amount of RMB2.7 million in 2004, relating primarily to the obsolescence of Intefen and Inleusin; and (ii) reduced amortization charges on intangibles in 2005 as compared to the prior year. Discounting the impact of these items, our costs of sales would have remained constant at approximately 13% of net revenues in 2004 and 2005. In general, the direct cost portion of our cost of net revenues, including direct materials, direct labor and other direct costs, accounted for approximately half of the total cost of sales, with the remaining in allocated overhead and depreciation charges. Operating expenses. Our total operating expenses were RMB56.1 million and RMB66.4 million for the years ended December 31, 2004 and 2005. The increase of RMB10.3 million, or 18.4%, in 2005 was primarily due to higher sales and marketing costs associated with the overall growth for our EPIAO and the introduction for our TPIAO. Our administrative costs remained stable for both years in absolute dollar terms while represented in terms of the percentage of net revenues decreased from 17.6% in 2004 to 13.7% in 2005. Each major category of our operating expenses is further explained below: Sales, marketing and distribution expenses. Sales, marketing and distribution expenses were RMB38.8 million and RMB49.2 million for the years ended December 31, 2004 and 2005 respectively. The increase of RMB10.4 million, or 26.9%, was primarily attributable to costs of seminars and hosting of conferences, as well as a substantially greater advertising effort for our EPIAO and TPIAO. General and administrative expenses. Our general and administrative expenses were RMB13.6 million in 2004 and RMB14.0 million in 2005. Our administrative costs were relatively stable for both years in absolute dollar terms while representing a decrease of 17.6% in 2004 to 13.7% in 2005 in terms of the percentage of net revenues. Research and development expenses. Research and development expenses were RMB3.7 million in 2004 and RMB3.2 million in 2005. Our research and development expenditures was driven by two major product categories, EPIAO and TPIAO, the latter of which was associated with supporting our clinical development programs, apart from our continued research efforts for other pipeline products. Other income/(expense), net. Our other income/(expense), net decreased by RMB3.0 million, from a net income of RMB0.5 million in 2004 to net loss of RMB2.5 million in 2005. The decrease was primarily due to a decrease of RMB2.7 million, or 41.5%, in grant income, from RMB6.4 million in 2004 to RMB3.8 million in 2005, which was caused by a decline of RMB2.4 million in government subsidies for TPIAO and other pipeline products. The decline in grant income was partially offset by a decrease in net interest expenses of RMB0.5 million, or 9.1%, from RMB5.9 million in 2004 to RMB5.4 million in 2005, due to a decrease in the amount of bank loans outstanding. Income before income tax expense and minority interests. As a result of the foregoing, our income before income tax expense and minority interest increased by RMB11.0 million, or 165.6%, from RMB6.7 million in 2004 to RMB17.7 million in 2005. Table of Contents Management s discussion and analysis of financial condition and results of operations Income tax expense. Our income tax expense increased by RMB1.5 million, or 679.6%, from RMB0.2 million in 2004 to RMB1.8 million in 2005, principally reflecting our increased income before income tax expense and minority interests in 2005 compared to 2004. Because Shenyang Sunshine was qualified as a Hi-Tech Enterprise in Shenyang Economic and Technology Development Zone, our income was taxed at a 15% rate in 2004. For the year ended December 31, 2005, Shenyang Sunshine received further tax relief as a foreign-invested advanced technology enterprise , resulting in an applicable tax rate of 10.0%. Our effective tax rate was 10.0% for the year ended December 31, 2005 and 3.4% for the year ended December 31, 2004. Our effective tax rate in 2004 was much lower than the statutory rate because we had a higher level of non-taxable grant income in 2004. Minority interests, net of tax. Our minority interests decreased from RMB0.2 million in 2004 to RMB0.1 million in 2005. Net income. As a result of the foregoing, our net income increased by RMB9.4 million or 142.9%, from RMB6.6 million in 2004 to RMB16.1 million in 2005. Year ended December 31, 2004 compared to year ended December 31, 2003 Net revenues. Our net revenues increased by RMB4.4 million, or 6.1%, from RMB72.8 million in 2003 to RMB77.2 million in 2004. This increase was primarily attributable to an increase of RMB20.2 million, or 45.0%, in net revenues from EPIAO sales, and to a lesser extent, an increase of RMB0.9 million, or 95.4%, for our export and other category. The increases in our EPIAO sales as well as export sales were substantially offset by the negative impact from the realignment of sales efforts for our two legacy products, Intefen and Inleusin. Cost of net revenues. Our costs of net revenues were RMB12.7 million and RMB15.0 million for the years ended December 31, 2003 and 2004. The cost of net revenues increased by RMB2.4 million or 18.8% in 2004, as compared to that in 2003, primarily reflecting a one-time inventory write-off of RMB2.7 million in 2004 relating to the obsolescence of Intefen and Inleusin. Discounting the impact of the inventory write-off, our cost of net revenues would have remained stable at around 14% of our overall net revenues in 2003 and 2004. Operating expenses. Our total operating expenses were RMB55.9 million and RMB56.1 million for the years ended December 31, 2003 and 2004. The minor increase of RMB0.2 million, or less than 1%, in 2004 was related to two offsetting factors: (i) a decrease in doubtful accounts of approximately RMB1.2 million included in administrative expenses in 2004; and (ii) an increase in sales, marketing and distribution costs resulted from intense clinical research efforts such as hosting seminars and conference required for clinical trials in 2004. Both of our sales, marketing and distribution expenses as well as general and administrative costs as a percentage of our overall sales have marginally decreased by 0.6% and 4.1% respectively in 2004 while our general and administrative costs were lower both in terms of absolute dollars as well as for the percentage of total net sales from 21.7% in 2003 to 17.6% in 2004. Research and development expenses. Our research and development costs increased by RMB0.6 million, or 20.4%, from RMB3.1 million in 2003 to RMB3.7 million in 2004. Other income/(expense), net. Our other income/(expense), net, increased by RMB3.4 million, from a net expense of RMB2.9 million in 2003 to net income of RMB0.5 million in 2004. This increase was primarily attributable to an increase of RMB3.9 million, or 155.8%, from RMB2.5 million in 2003 to Table of Contents Management s discussion and analysis of financial condition and results of operations RMB6.4 million in 2004, in our grant income, principally reflecting increased levels of ad hoc government subsidies we received. Income before income tax expense and minority interests. As a result of the foregoing, our income before income tax expense and minority interest increased by RMB5.3 million, or 388.5%, from RMB1.4 million in 2003 to RMB6.7 million in 2004. Income tax expense. Our tax expense decreased by RMB1.0 million, or 81.2%, from RMB1.2 million in 2003 to RMB0.2 million in 2004. Due to the absorption of salaries and entertainment by Shenyang Sunshine which are non-deductible for Liaoning Sunshine and Beijing Sunshine, we revamped our overall organization structure to become more tax effective, thereby reducing our income tax expenses in 2004. Net income. As a result of the foregoing, our net income increased by RMB6.1 million or 1,196.1%, from RMB0.5 million in 2003 to RMB6.6 million in 2004. LIQUIDITY AND CAPITAL RESOURCES Overview As of September 30, 2006, we had cash and cash equivalents of RMB42.8 million and working capital of RMB39.1 million. For the nine months ended September 30, 2006, our primary sources of funding for both our working capital and our longer-term funding needs have been provided by cash flow from operating activities. Our primary uses of funds during this period have been for the repayment of bank loans for a net amount of RMB20 million using the cash received from a repayment of RMB19.7 million loan to the majority shareholder during the nine-month reporting period. We made purchases of plant and equipment during the nine months ended September 30, 2006 in the amount of RMB2.1 million, a substantial portion of which were related to production equipment. For the years ended December 31, 2004 and 2005, we funded our working capital and our longer-term capital expenditure needs from the cash flow provided by our operating activities. Our primary uses of funds in 2005 have been for the repayment of bank loans for a net amount of RMB10.0 million and prepayment for the lease of land reserved for our new plant at a cost of RMB9.9 million. Our capital expenditures declined significantly in 2004 from the amounts spent in 2003 but increased again in 2005 due to increased spending on equipment purchase, renovation costs for our office in Beijing, and to a lesser extent, a settlement payment in relation to the purchase of our office space in Beijing. As a result of our improved operating cash flow, we were able to increase our net cash and cash equivalents for the years ended December 31, 2004 and 2005 and the nine months ended September 30, 2006, despite our loan repayments and investment in our planned new facility. We had a net working capital deficit, calculated as current liabilities less current assets, in the amount of RMB8.2 million as of December 31, 2005, as compared to net working capital asset of RMB11.9 million as of December 31, 2004. This decrease was mainly due to a reclassification of the remaining principal of a long-term bank loan of RMB30 million, after the repayment of RMB10 million, to short-term bank loan in 2005. Our net working capital increased to RMB39.1 million as of September 30, 2006 from a working capital deficit of RMB8.2 million as of December 31, 2005, of which the increase in working capital of RMB25 million was a result of refinancing short term loans to long term loans. In addition, we continued to generate strong cash flow from our operating activities and a repayment of loan by a shareholder of RMB19.7 million. We expect to continue to generate cash flow from operating activities in the near term. Table of Contents Management s discussion and analysis of financial condition and results of operations The following table summarizes the sources of our cash flows for the periods indicated: For the Year Ended December 31, For the nine months ended September 30, 2003 2004 2005 2005 2005 2006 2006 RMB RMB RMB US$ RMB RMB US$ (RMB and US$ expressed in thousands) Net cash (used in)/provided by operating activities (16,115 ) 7,192 24,839 3,143 14,520 19,419 2,456 Net cash (used in)/provided by investing activities (24,557 ) 2,268 (9,244 ) (1,170 ) (6,790 ) 17,648 2,233 Net cash provided by/(used in) financing activities 34,000 (10,000 ) (1,265 ) (10,000 ) (20,000 ) (2,530 ) Net cash provided by/(used in) operating activities Our net cash used in operating activities was RMB16.1 million in 2003 compared to net cash provided by operating activities of RMB7.2 million in 2004 and RMB24.8 million in 2005. Our net cash provided by operating activities was RMB19.4 million in the nine months ended September 30, 2006 compared to RMB14.5 million in the nine months ended September 30, 2005. The slight increase of RMB4.9 million in cash provided by operating activities from September 30, 2005 to September 30, 2006 reflects an increase in net income of RMB10.5 million and an increase in accured expenses of RMB3.5 million, which was partially offset by increased levels of account receivables, inventories and prepaid expenses and other receivables. The RMB17.6 million improvement in operating cash flow from 2004 to 2005 reflects an increased level of our net income of RMB9.4 million and an improved collection effort for RMB16.3 million, which were partly offset by payment of RMB9.9 million for the land lease prepayment. The lease prepayment was classified as an operating activity in accordance with U.S. GAAP. The increase of RMB23.3 million operating cash flow from 2003 to 2004 reflects (i) an improved net income of RMB6.1 million, (ii) a net increase in operating cash flow of approximately RMB23.5 million due to improved payable and accruals turnover which was partly offset by the increase in accounts receivables by RMB11.7 million and (iii) improved inventory turnover. Net cash provided by/(used in) investing activities Our net cash used in investing activities was RMB24.6 million in 2003 and RMB9.2 million in 2005, compared to net cash provided by investing activities of RMB2.3 million in 2004. Our net cash provided by investing activities was RMB17.6 million in the nine months ended September 30, 2006 compared to net cash used in investing activities of RMB6.8 million in the nine months ended September 30, 2005. The fluctuation was primarily due to a RMB22.0 million loan advanced to shareholder Shenyang Keweier in 2003 which was paid down by RMB2.5 million in 2004, with the remaining balance repaid in the nine months ended September 30, 2006. Also, the increased cash outlay in investing activities in 2005 for an amount of RMB9.2 million was for the final payment and renovation for our office in Beijing and purchase of equipment. The improved level of cash flow from investing activities in the nine months ended September 30, 2006 primarily resulted from repayment of a loan by a shareholder and reduced level of capital spending on property, plant and equipment. Table of Contents Management s discussion and analysis of financial condition and results of operations Our capital expenditure amounted to RMB2.8 million in 2003, RMB0.9 million in 2004, RMB9.2 million in 2005, and RMB2.1 million in the nine months ended September 30, 2006. For more details, see Capital Expenditures below. Net cash provided by/(used in) financing activities Net cash used in financing activities was RMB10 million in the nine months ended September 30, 2005, compared to RMB20 million used in financing activities in the nine months ended September 30, 2006 due to continued efforts of paying down our bank loans. In the year 2003, net cash of RMB33 million was provided by net bank borrowing, of which RMB22.0 million was for the purpose of loan to shareholder. The bank borrowings were subsequently repaid in 2005 for RMB10 million and the nine months ended September 30, 2006 for RMB20 million. We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs, including planned capital expenditure for our new plant and upgrading existing facilities in Shenyang, other working capital needs for investing in research and development and increasing sales and marketing efforts for our new growth areas at least for the next two years. Our indebtedness as of the dates indicated was as follows: As of December 31, As of September 30, 2004 2005 2006 (RMB in thousands) Short-term bank loans 69,000 89,000 44,000 Long-term bank loans 30,000 25,000 Total debt 99,000 89,000 69,000 As of September 30, 2006, we had outstanding bank loans for a total of RMB69 million. These loans were secured by (1) our land lease right and factory building in Shenyang, office premises in Beijing and the land reserved for our new factory covering RMB35.0 million of our bank loans; (2) a corporate guarantee provided by China Transport Resources Northeast Co., Ltd., or China Transport, for the outstanding portion of RMB25.0 million; and (3) a corporate guarantee provided by third party for the remaining RMB9.0 million. We do not currently have access to any unused lines of credit or other committed sources of financing. All of our operations are conducted directly through our wholly foreign-owned subsidiary Shenyang Sunshine. We do not expect to pay dividends in the near future as we plan to use our resources for our growth. However, should we decide to pay dividends, our wholly-owned subsidiary s ability to pay dividends to us is subject to various restrictions, including legal restriction in the PRC, which permits payment of dividends only out of net income determined in accordance with PRC accounting standards and regulations. In addition, under PRC law, our subsidiary is required to set aside 10% of its net income as reserve funds, until such reserves have reached at least 50% of its respective registered capital. These reserves are not distributable as cash dividends to us for use by us to satisfy our obligations, such as debt incurred at the holding company level. Table of Contents Management s discussion and analysis of financial condition and results of operations CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following table sets forth our contractual obligations and commercial commitments as of September 30, 2006: Payment due by period Total less than 1 year 1-3 years 3-5 years after 5 years Total contingent liabilities 149,071 106,244 42,828 28,722 (1) Includes interest payable of RMB732,000. (2) Includes interest payable of RMB2,566,000. (3) The loan underlying this obligation has been repaid by the borrower. (4) Represents purchase obligations for Tietai Iron Sucrose Supplement and Baolijin. For more details, see Business Our product portfolio Our principal products In-licensed products. OFF-BALANCE SHEET ARRANGEMENTS Other than financial guarantees provided to a former shareholder and a third party, we do not have any outstanding derivative financial instruments, interest rate swap transactions, foreign currency forward contracts, or other off-balance sheet arrangements. CAPITAL EXPENDITURES The following sets forth our actual and planned total capital expenditure requirements for the periods indicated. (RMB in thousands) (US$ in thousands) 2003 2,816 356 2004 901 114 2005 9,151 1,158 2006 (Planned) 3,000 380 2007 (Planned) 33,300 4,213 Historically, most of our capital expenditures were incurred for purchases of production and office equipment, research laboratory, upgrade for our plant and office renovation. In the nine months ended September 30, 2006, our capital expenditures of RMB2.1 million related primarily to purchases of office and production equipment for our TPIAO and EPIAO products and, to a lesser extent, purchase of automobiles. The level of our capital expenditure was substantially higher in 2003 and 2005, as compared to 2004. Capital expenditures in 2005 totaled RMB9.2 million, compared to RMB0.9 million in 2004. Approximately half of the increase in 2005 was related to equipment acquired for the production of TPIAO, with the remaining attributable to general office equipment, final payment and renovation cost for our Beijing office and purchases of automobiles. Table of Contents Management s discussion and analysis of financial condition and results of operations Our future capital requirements include, but are not limited to, upgrading our existing facilities for our research and development and production. Although we are not obligated to meet any absolute minimum dollar spending requirements, our future capital requirements will depend on many factors, including the scope and progress made in building out our new plant in the next two years. The major components of our planned capital expenditures for 2006 include further procurement of production equipment such as a new power generator and quality control machineries, in addition to further upgrading our plant facilities. We expect to fund our capital expenditure needs with a combination of cash generated from operating activities and proceeds from the global offering in the foreseeable future periods without much need for debt financing. Therefore, we believe that the anticipated higher depreciation charges could be offset to a certain extent by the expected reduction in interest costs. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our operating results and financial condition are based on our audited financial statements of Shenyang Sunshine, which have been prepared in accordance with U.S. GAAP. Our operating results and financial condition are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. Our management evaluates these estimates on an ongoing basis. Actual results may differ from these estimates as facts, circumstances and conditions change or as a result of different assumptions. Our management considers the following factors in reviewing our financial statements: the selection of critical accounting policies; and the judgments and other uncertainties affecting the application of those critical accounting policies. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 3 to our financial statements included elsewhere in this prospectus. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. Revenue recognition Sales of our pharmaceutical products represent the invoiced value of goods sold, net of VAT, trade discounts and allowances and, in very rare circumstances, discretionary sales returns. Revenues from these sales transactions are generally recognized upon delivery, which is considered to have occurred when the customer has taken risks and awards associated with the ownership of delivered products. For the two legacy products Intefen and Inleusin which we market using third parties sales efforts and reimburse expenses incurred by the agency distributors based on a predetermined percentage of sales and timeliness of collection, we account for revenues from this type of sales channel in accordance with EITF Issue No. 01-9. Under EITF Issue No. 01-9, our cost reimbursement offered to distributors is classified as a reduction in sales revenue. Based on the terms and conditions agreed with the distributors, we accrued and recorded the reimbursements of expenses to the distributors as reduction in revenue, which reduced net sales by RMB493,000 in 2003, RMB2,263,000 in 2004, RMB1,675,000 in 2005 and RMB957,000 in the nine months ended September 30, 2006. Table of Contents Management s discussion and analysis of financial condition and results of operations Research and development costs We expense research and development costs except for equipment that has alternative future uses in accordance with Statement of Financial Accounting Standards ( SFAS ) No. 2 Accounting for Research and Development Costs. We critically identify any research and development activities that could be objectively measured and recognized research and development activities aimed at the discovery of new products, indications, or betterment of processes. We capitalize the costs of materials and equipment that have alternative uses and amortize them over their useful life. Elements of research and development costs may include direct materials, direct labor and overhead allocation including other related personnel engaged in research and development activities. Expenses relating to new products are charged to the statement of income until such time that we obtain the new medicine certificate. The costs of research and development services such as pre-clinical tests outsourced or contract consulting services for upgrading our facilities are also included. The determination of alternative use requires judgment about the application of developed processes and know-how as well as market acceptance of related products. Different judgments regarding alternative uses could result in a change in the timing and amount of costs capitalized as materials and equipment. Share-based compensation expenses Effective from January 1, 2006, we adopted SFAS No. 123 (revised in 2004), Share-Based Payment, or SFAS 123R. Share-based payment transactions within the scope of SFAS 123R include grants of stock options, restricted stock, performance-based awards and stock appreciation rights, as well as purchases under employee share purchase plans. These transactions are viewed generally as non-cash compensation awarded to employees, directors and advisors in lieu of cash compensation. Share-based compensation expenses arose from restricted shares awarded by a principal shareholder in June 2006. For purposes of recording compensation expense, we have treated this grant as if it was made by us. The shares vest upon the earlier of (i) December 1, 2007 or (ii) on the date of our initial public offering. If our initial public offering does not occur by December 1, 2007, the number of vested shares to be granted to each of the grantees will be 156,252. If our initial public offering occurs by December 1, 2007, the number of vested shares to be granted to each of the grantees will be calculated by dividing US$277,778 by the fair value of the initial public offering price per share, and subject to further adjustments based on our market capitalization as of the date of our initial public offering. For more details, see footnote 17 to our consolidated financial statements included elsewhere in this prospectus. In accordance with SFAS 123R, since the stock awards contain vesting and exercisability conditions other than those based on service, performance or market criteria, the awards have been classified as a liability and included in accrued expenses and other payables in our balance sheet as of September 30, 2006. Accordingly the awards were initially recorded at the estimated fair value on June 1, 2006 and would be remeasured at each future financial reporting date until the awards are settled. We have estimated the fair value of the awards at approximately RMB4,391,000 (US$556,000) as of September 30, 2006. We recorded share-based compensation expense of RMB976,000 (US$123,000) in the nine months ended September 30, 2006, based on the estimated value of our share-based compensation amortized over the 18-month requisite service period. On October 15, 2006, the stock awards were modified and settled with Achieve Well granting a total number of 312,504 fully vested ordinary shares to the two individuals. The stock awards ceased to be liability-classified and were reclassified as equity upon settlement. We plan to recognize an additional share-based compensation expense of approximately RMB899,000 in October 2006 based on the difference between the estimated fair value of Table of Contents Management s discussion and analysis of financial condition and results of operations the modified awards as of the settlement date and the cumulative compensation expense recognized through September 30, 2006. The fair value of the modified awards as of the settlement date is estimated based on a sale in October 2006 of our ordinary shares by a former shareholder of our company to third-party investors. In August 2006, we granted 15,000 shares to a senior executive with a one year vesting period. The effect of such award on our financial results is immaterial. Estimated useful lives and impairment of long-lived assets We make estimates of the useful lives of property, plant and equipment and intangibles with finite useful lives, in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. Our total depreciation and amortization expenses in the year ended December 31, 2005 were RMB8.3 million. The useful lives are estimated at the time the assets are acquired and are based on historical experience with similar assets as well as anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods. Long-lived assets, including property, plant and equipment and intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is measured by the asset s discounted cash flows or market value, if readily determinable. There have been no impairment charges recognized for the three years ended December 31, 2005 and the nine months ended September 30, 2006. Allowance for doubtful accounts We evaluate the recoverability of our account receivables based on a combination of factors. We regularly analyze our significant customer accounts, and, when we become aware of a specific customer s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer s operating results or financial position, we record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted. In the event that our trade receivables become uncollectible, we record additional adjustments to receivables to reflect the amounts at net realizable value. The accounting effect of this entry would be a charge to income. We believe that the current charges to income are sufficient to reflect the recoverability of our accounts receivable. Inventories and allowance for obsolescence We state all inventories at the lower of cost or market value, determined using the weighted average cost method. We provide inventory allowances when conditions indicate that the selling price could be less than cost due to physical deterioration, usage, obsolescence and reductions in estimated future demand. We balance the need to maintain strategic inventory levels with the risk of obsolescence due to varying customer demand levels and changing technology, although this rarely happens. Unfavorable changes in market conditions may result in a need for additional inventory reserves that could adversely impact our Table of Contents Management s discussion and analysis of financial condition and results of operations gross margins. Conversely, favorable changes in demand could result in higher gross margins when we sell products. RECENTLY ISSUED ACCOUNTING STANDARDS SFAS No. 123 (revised 2004) In December 2004, FASB issued SFAS No. 123R, Share-Based Payment, which requires companies to measure and recognize compensation expenses for all share-based payments at fair value. This Statement replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board ( APB ) Opinion No. 25, Accounting for Stock Issued to Employees. This Statement is effective for all interim and annual periods beginning after June 15, 2005. In April 2005, the U.S. Securities and Exchange Commission issued a new rule that amended the compliance dates for SFAS No. 123R until the beginning of their first annual period beginning after June 15, 2005. We have adopted this pronouncement effective from January 1, 2006. The adoption of SFAS 123R on January 1, 2006 did not have any impact on the Company s financial position as the Company did not have any share-based compensation arrangements at that time. SFAS No. 151 In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43. This Statement requires amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect that the adoption of this statement would have a material effect on our consolidated financial statements. SFAS No. 153 In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, and amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This Statement amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement will be effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect that the adoption of this Statement would have a material effect on our consolidated financial statements. SFAS No. 154 In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections . SFAS No. 154 replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements . SFAS No. 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. We adopted SFAS No. 154 in 2006 and applied the related guidance in our restatement of the 2006 financial statements as further discussed in Note 2 to the consolidated financial statements. 2004 2005 2005 2006 2006 RMB 000 RMB 000 US$ 000 RMB 000 (restated) US$ 000 (restated) Receipts in advance from customers 109 234 30 44 5 VAT payable 1,956 823 104 3,042 385 Accrued salaries, bonus and welfare expenses 2,833 2,595 328 1,643 208 Other accrued expenses 6,621 7,387 Table of Contents Management s discussion and analysis of financial condition and results of operations FASB Interpretation No. 48 ( FIN 48 ) In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes ( FIN 48 ). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on the recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective in fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption, with the cumulative effect adjustment reported as an adjustment to the opening balance of retained earnings. We do not expect the adoption of FIN 48 will have a material effect on our consolidated financial statements. Securities and Exchange Commission Staff Accounting Bulletin No. 108 ( SAB 108 ) In September 2006, the Securities and Exchange Commission issued SAB 108. This Bulletin prescribes that misstatements in current year financial statements should be quantified based on both the rollover approach, which quantifies a misstatement based on the amount of the error originating in the current year income statement, and the iron curtain approach, which quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year. This Bulletin requires a misstatement to be adjusted in the current year financial statements if the misstatement quantified using either the rollover approach or the iron curtain approach is material. This Bulletin further requires that, if correcting an error in the current year materially misstates the current year s income statement, the prior year financial statements should be corrected. This Bulletin is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company does not expect the adoption of this Bulletin to have a material effect on the Company s consolidated financial statements. INFLATION According to the China Statistical Bureau, China s overall national inflation rate, as represented by the general consumer price index, was approximately 1.2% in 2003, 3.9% in 2004 and 1.8% in 2005. Inflation or deflation has not had a significant impact on our results of operations in recent years. MARKET RISK AND RISK MANAGEMENT Market risk is the risk of loss related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. In the normal course of business, we are routinely subject to a variety of risks, including market risk associated with interest rate movements and currency rate movements on non-U.S. dollar denominated assets and liabilities. Foreign exchange rate risk We conduct our business primarily in Renminbi, which is also our functional and reporting currency. The Renminbi is not a fully convertible currency. Although the Renminbi to United States dollar exchange rate has been relatively stable since 1994, fluctuations in exchange rates may adversely affect the value, translated or converted into United States dollars, of our net assets, earnings and any declared dividends. We are exposed to foreign currency risk primarily as a result of purchases of certain raw materials and equipment from overseas, and export sales. Table of Contents Management s discussion and analysis of financial condition and results of operations Interest rate risk The People s Bank of China has the sole authority in China to establish the official interest rates for Renminbi-denominated loans. Financial institutions in China set their effective interest rates within the range established by the People s Bank of China. Interest rates and payment methods on loans denominated in foreign currencies are set by financial institutions based on interest rate changes in the international financial market, cost of funds, risk levels and other factors. We are subject to market risks due to fluctuations in interest rates on our debt. Increases in interest rates will increase the cost of new borrowing. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of these debt instruments. Table of Contents Our corporate structure CORPORATE HISTORY We commenced business operations in 1993 through Shenyang Sunshine Pharmaceutical Co., Ltd., or Shenyang Sunshine, a limited liability company established in China. In anticipation of this initial public offering, we established a holding company structure through the following series of corporate reorganization transactions: we formed Collected Mind Limited, a British Virgin Islands company, in July 2006; Collected Mind Limited acquired 100% of the equity interests of Shenyang Sunshine, which was reorganized as a wholly foreign owned enterprise, or WFOE, in July 2006; and we incorporated 3SBio Inc., an exempted company in the Cayman Islands, which acquired 100% equity interest in Collected Mind in September 2006. The following diagram illustrates our current corporate structure and jurisdiction of incorporation of each of our affiliated entities: Table of Contents Our corporate structure OUR CONTRACTUAL ARRANGEMENTS WITH LIAONING SUNSHINE AND BEIJING SUNSHINE Historically, we conducted our manufacturing and marketing activities through our wholly-owned subsidiary, Shenyang Sunshine, and our distribution and logistics activities through Beijing Sunshine Bio-product Sales Company, or Beijing Sunshine, and Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine. Prior to our reorganization in anticipation of this offering, Beijing Sunshine and Liaoning Sunshine, as investees of a foreign invested enterprise, engaged in distribution of pharmaceutical products without the requisite MOFCOM approvals. For more details, see Risk factors Risks related to our corporate structure Liaoning Sunshine and Beijing Sunshine were previously engaged in activities without the necessary approvals. This could subject them to fines and other penalties, which could have a material adverse effect on our business. As part of our corporate reorganization, Shenyang Sunshine sold 45% of the equity interest in Beijing Sunshine to Ms. Dongmei Su, our chief technology officer, in October 2006, and 90% of the equity interest in Liaoning Sunshine to Mr. Dan Lou, our chairman, in November 2006. Beijing Sunshine and Liaoning Sunshine are no longer required to obtain the MOFCOM approval, as each of them is a domestic Chinese company that is currently operating within its authorized scope of business and in the process of obtaining relevant licenses. In December 2006 and January 2007, Shenyang Sunshine entered into the following contractual arrangements with Beijing Sunshine and Liaoning Sunshine, respectively, to enable us to maintain control in these two entities: Business cooperation agreements Pursuant to the business cooperation agreement among Shenyang Sunshine, Liaoning Sunshine and us, Shenyang Sunshine provides technology support services and market development and consulting services to Liaoning Sunshine, and, as consideration, receives 70% of Liaoning Sunshine s annual sales revenues as service fees. In addition, Liaoning Sunshine agrees that, without the prior written consent of a majority of our independent directors, it will not increase or decrease its registered capital, declare dividends or make similar payments, make any investment, incur any indebtedness, mortgage or dispose of its material assets, or consolidate or merge with any other entity. Liaoning Sunshine further agrees to distribute only those products that are produced by Shenyang Sunshine, except as otherwise agreed to by a majority of our independent directors. Shenyang Sunshine will be entitled to any intellectual property developed during the term of this contract. Similarly, Beijing Sunshine, Shenyang Sunshine and us entered into a business cooperation agreement on the same terms. Purchase agreements for the acquisition of equity interests in Liaoning Sunshine and Beijing Sunshine Pursuant to the purchase agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou granted Shenyang Sunshine an exclusive right to purchase, to the extent permissible under PRC law, his 100% equity interest in Liaoning Sunshine for a purchase price of RMB15 million, an amount equivalent to the registered capital of Liaoning Sunshine, immediately after Shenyang Sunshine obtains the requisite PRC government approval for it to acquire Liaoning Sunshine. RMB13.5 million of the purchase price pursuant to the purchase agreement was prepaid by Shenyang Sunshine to Mr. Lou shortly after the signing of this agreement in December 2006. The remaining RMB1.5 million will be paid to Dr. Lou at closing. If Shenyang Sunshine fails to obtain the requisite government approval for Shenyang Sunshine to complete the acquisition within ten years, Shenyang Sunshine shall have the right to terminate the agreement and Mr. Dan Lou shall return the prepayment of RMB13.5 million to Shenyang Sunshine. Table of Contents Our corporate structure Similarly, Beijing Sunshine, Shenyang Keweier and Shenyang Sunshine entered into a purchase agreement on the same terms, except that each of Beijing Sunshine and Shenyang Keweier granted Shenyang Sunshine an exclusive right to purchase their respective equity interests in Beijing Sunshine for a purchase price equivalent to their proportionate registered capital in Beijing Sunshine. Voting Agreements Pursuant to the voting agreement among Shenyang Sunshine, Mr. Dan Lou and Liaoning Sunshine, Mr. Dan Lou is required to consult with and follow any lawful instruction of Shenyang Sunshine whenever he exercises his rights as Liaoning Sunshine s shareholder. Pursuant to the voting agreement among Shenyang Sunshine, Ms. Dongmei Su, Shenyang Keweier and Beijing Sunshine, Ms. Dongmei Su and Shenyang Keweier are required to consult with and follow any lawful instruction of Shenyang Sunshine whenever they exercise their rights as Beijing Sunshine s shareholders. Equity Pledge Agreements Pursuant to the equity pledge agreement between Shenyang Sunshine and Mr. Dan Lou, Mr. Dan Lou pledged all of his equity interests in Liaoning Sunshine to Shenyang Sunshine to guarantee his obligations under the purchase agreement and the voting agreement. If Mr. Dan Lou breaches his contractual obligations, Shenyang Sunshine, as pledgee, will be entitled to certain rights, including the right to purchase the pledged equity interests or sell the same to any third party. Mr. Dan Lou agreed not to dispose of the pledged equity interests or take any actions that would prejudice Shenyang Sunshine s interest. Ms. Dongmei Su and Shenyang Keweier entered into a similar agreement with Shenyang Sunshine to pledge their respective equity interests in Beijing Sunshine to Shenyang Sunshine. Table of Contents Business OVERVIEW We are a leading, fully integrated, profitable biotechnology company focused on researching, developing, manufacturing and marketing biopharmaceutical products primarily in China. Our recombinant, or genetically engineered, protein-based products and product candidates are designed to address large markets with significant unmet medical needs in nephrology, oncology, supportive cancer care, inflammation and infectious diseases. Our principal products are EPIAO ( ) and TPIAO ( ), and our legacy products are Intefen ( ) and Inleusin ( ). We began operations in 1993 and we believe we are now one of the leading biopharmaceutical companies in China in terms of growth and profitability. Our net revenues were RMB72.8 million in 2003, RMB77.2 million in 2004 and RMB102.0 million in 2005, representing an increase of 32.1% from 2004 to 2005. Our net income was RMB0.5 million in 2003, RMB6.6 million in 2004 and RMB16.1 million in 2005, representing an increase of 142.9% from 2004 to 2005. For the nine months ended September 30, 2006, our net revenues were RMB92.6 million and our net income was RMB23.4 million, compared to net revenues of RMB76.1 million and net income of RMB12.9 million for the nine months ended September 30, 2005. Our principal marketed products EPIAO ( ) Launched in 1998, EPIAO is an injectable recombinant human erythropoietin, or EPO, that is used to stimulate the production of red blood cells in patients with anemia and to reduce the need for blood transfusions. Anemia is a condition in which insufficient oxygen is delivered to the body s organs and tissues. EPIAO is a protein-based therapeutic comparable in structure and function to Amgen Inc. s Epogen and Kirin Brewery Company Limited s ESPO. According to IMS Health, an independent research firm, revenues from all EPO drug sales in China were estimated at over RMB300 million (US$37.5 million) in 2005, representing a 20% compound annual growth rate from 2003. EPIAO, as tracked by IMS Health, has been ranked as the number one EPO drug since 2002 in terms of both units sold and revenues among the foreign and domestic biopharmaceutical companies marketing EPO drugs in China. We have sold over 6.9 million vials of EPIAO since 1999. EPIAO is approved by the SFDA for three distinct indications: anemia associated with chronic renal failure; red blood cell mobilization, which is the process in which red blood cells are stimulated to proliferate, before, during, and after surgery; and anemia associated with chemotherapy in cancer patients with non-myeloid malignancies, which are cancers that do not originate in the bone marrow or involve myeloid cells, or non-lymphocyte white blood cells found in the bone marrow. We have been granted exclusivity by the SFDA for the manufacturing and marketing of EPIAO for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies under an administrative protection period through September 2007. We plan to initiate in 2008 clinical trials for NuPIAO, our second-generation EPIAO product candidate. NuPIAO is designed to have a longer half-life relative to our first-generation EPIAO. In addition, we are in late-stage clinical trials for a concentrated high dose (36,000 IU/vial) formulation of EPIAO, which is designed to allow for less frequent administration, benefiting both patients and doctors. We expect to apply for marketing approval of high-dose EPIAO in 2007. If approved, we believe it will be the highest dosage formulation available in the Chinese market. Table of Contents Business TPIAO ( ) We launched TPIAO, our newest internally developed protein-based therapeutic product, in January 2006. This product is a recombinant human thrombopoietin, or TPO, indicated for the treatment of chemotherapy-induced thrombocytopenia, a deficiency of platelets. Platelets are disc-shaped cells in the blood that assist in coagulation and the arrest of bleeding by repairing the walls of blood vessels. TPIAO represents the first protein-based therapeutic of its type approved for thrombocytopenia in China. We have a monitoring period for TPIAO through 2010, during which other pharmaceutical companies are prohibited from manufacturing or importing a similar drug, except those whose applications for clinical trials were approved by the relevant Chinese authority prior to May 2005, the commencement of TPIAO s monitoring period. We are aware of at least one other Chinese pharmaceutical manufacturer whose application for clinical trials may have been approved by May 2005 and which may be in clinical trials for a TPO-based therapeutic. For the nine months ended September 30, 2006, our total revenues from TPIAO sales were RMB10.2 million, accounting for 11.0% of our overall revenues for this period. We are also conducting a late-stage clinical trial of TPIAO for the treatment of idiopathic thrombocytopenic purpura, or ITP, an immune system disorder in which the body perceives platelets as foreign and destroys them. Our legacy products In addition to EPIAO and TPIAO, we market two other protein-based therapeutics that had historically been significant contributors to our overall revenues. Due to unfavorable pricing and increased competition, we refocused our sales and marketing efforts in early 2004, and our legacy products are now marketed primarily by distributors. Intefen ( ). Intefen is our recombinant interferon alpha-2a product. Intefen is indicated for the treatment of carcinomas of the lymphatic or hematopoietic system, such as lymphoma and leukemia, and viral infectious diseases, such as hepatitis C. We launched Intefen in the Chinese market in 1995. Inleusin ( ). Inleusin is our recombinant human interleukin-2, or IL-2, product. Inleusin is indicated for the treatment of renal cell carcinoma, the most common form of kidney cancer, metastatic melanoma, a type of skin cancer, and thoratic fluid build-up caused by cancer and tuberculosis. Inleusin is designed to stimulate the immune system in order to fight cancer and infectious diseases. We launched Inleusin in the Chinese market in 1996. Our in-licensed products Tietai Iron Sucrose Supplement ( ). Tietai Iron Sucrose Supplement, an intravenously administered prescription drug that is designed to treat anemia associated with iron deficiency, is indicated for patients with end-stage renal disease requiring iron replacement therapy. We in-licensed five-year exclusive PRC distribution rights for this product from Shenyang Borui Pharmaceutical Company Limited in May 2006. Tietai Iron Sucrose Supplement was launched in China in 2005, and we believe it will be complementary to our EPIAO franchise. Baolijin ( ). Baolijin is our in-licensed recombinant human granulocyte colony-stimulating factor, or G-CSF, product. G-CSF is a protein that stimulates production of white blood cells. For cancer patients undergoing chemotherapy, the ability to produce red blood cells, white blood cells and platelets is severely compromised. Baolijin is indicated for the treatment of neutropenia, a condition associated with chemotherapy and characterized by low levels of neutrophils, a type of white blood cell important for fighting infections. In August 2006, we in-licensed exclusive PRC distribution rights for Baolijin from Table of Contents Business Chengdu Biological Institute for a period of five years. We believe that the addition of Baolijin to our product portfolio will complement the marketing of EPIAO and TPIAO for treatment of cancer patients receiving chemotherapy. Licenses to Tietai Iron Sucrose Supplement and to Baolijin are held by Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine, our variable interest entity. Export sales We currently market our products through distribution agreements with local agents in several developing countries, consisting of Egypt, Pakistan, Thailand, Brazil, Mexico and Trinidad and Tobago. Export sales accounted for 1.2% in 2003, 2.2% in 2004, 4.9% in 2005 and 5.0% in the nine months ended September 30, 2006, of our total net revenues. Our product pipeline We focus our research and development efforts on both novel and validated protein-based therapeutics for the treatment of diseases in the areas of nephrology, oncology, supportive cancer care, inflammation and infectious diseases. Our product pipeline, which we expect will be a key contributor to our future growth, consists of six product candidates in various stages of development. We employ a market-driven approach to our research and development efforts, and our team utilizes the latest molecular biology and biochemical techniques and technologies to develop promising product candidates. Our diversified product pipeline includes a number of next-generation protein-based therapeutics including NuPIAO, our second-generation EPIAO product candidate; NuLeusin, our next-generation Inleusin product candidate; TPIAO for the treatment of ITP; a human papilloma virus, or HPV, vaccine for the prevention of cervical cancer; and an anti-TNF humanized monoclonal antibody product candidate for the treatment of rheumatoid arthritis and other autoimmune diseases. We believe that each of these product candidates, if successfully developed and approved, would address significant market opportunities. We are required to conduct extensive preclinical and clinical trials in order to generate safety and efficacy data to support a filing for approval by the SFDA. According to Kalorama Information, a third-party independent research firm, the total worldwide market for protein-based therapeutics increased from US$25 billion in 2001 to US$51 billion in 2005, and is expected to reach US$87 billion in 2010. Kalorama Information also estimates that, in 2005, sales in the U.S., the largest European markets (including the UK, Germany, France, Italy and Spain) and Japan accounted for 61%, 20% and 7%, respectively, of the worldwide sales of protein-based therapeutics. This implies that 2005 sales of protein-based therapeutic products from the rest of the world, including China, Brazil, India and Russia, accounted for 12% of the worldwide market. We maintain a sales and marketing force in 18 provinces and major cities in China, including the municipalities of Beijing and Shanghai and the city of Guangzhou. Our principal products are marketed by our 143 sales and marketing professionals and sold by our network of approximately 80 distributors to healthcare providers including, based on our internal estimates, approximately 800 hospitals, clinics and dialysis centers. Our internal sales and marketing staff details our principal products to physicians and hospital administrators and, as required by PRC laws, our distributors are engaged to contract with our customers for the sale of our principal products to physicians and hospitals. In addition, our legacy products Intefen and Inleusin are marketed, as well as sold, by distributors. Our sales force in China benefits from over ten years of experience in marketing protein-based therapeutics. As a result of our history as a provider of therapeutics to the Chinese market, we believe our Shenyang Sunshine brand is widely recognized throughout the PRC for quality and reliability. Table of Contents Business We conduct on-site, bulk manufacturing, finishing and packaging activities for EPIAO, TPIAO, Intefen and Inleusin at our 3,000 square meter Shenyang, China facility. We also manufacture our products and product candidates for clinical trials at this facility. Our Shenyang facility was re-certified in 2005 in accordance with Chinese current Good Manufacturing Practices, or cGMP, and our cGMP certificate is valid for five years until 2010. We plan to expand our plant in Shenyang to increase our manufacturing capacity, and further take advantage of our favorable cost structure. OUR COMPETITIVE STRENGTHS We believe that our principal competitive strengths include the following: Leading market share for EPO in China According to IMS Health, our flagship product, EPIAO, accounted for 37% of the Chinese EPO market in terms of sales revenue and 28% in terms of units sold in the six months ended June 30, 2006, with sales primarily generated from our initially approved renal indication. Additionally, EPIAO has ranked number one in the Chinese EPO market in terms of units sold and revenues since 2002. We believe that EPIAO s leading market position is attributable to a high level of quality, efficacy, and reliability. We have more than eight years of post-marketing experience to date with EPIAO and have sold approximately 6.9 million vials from 1999 to September 30, 2006, enabling us to generate a brand that we believe is well-recognized by the medical community. We have been marketing EPO in the oncology and surgical settings in China longer than any other market participant. Diverse portfolio of marketed products and product candidates targeting the nephrology and oncology markets We market a diverse portfolio of internally developed protein-based therapeutics, consisting of EPIAO, TPIAO, Intefen and Inleusin. In addition, we market Tietai Iron Sucrose Supplement and Baolijin, our G-CSF product, both of which we in-license. EPIAO, TPIAO and Baolijin address the oncology market in China and represent a significant commercial opportunity for us. In addition to these marketed products, we have a diversified late-, mid-, and early-stage pipeline of product candidates that include expanded indications and enhanced second generation versions of our existing products, as well as product candidates which address other market opportunities, such as cervical cancer and rheumatoid arthritis. Proven research and development capabilities We have developed and commercialized four protein-based therapeutics in China. As of September 30, 2006 our research and development team consisted of 20 research personnel and medical professionals, seven of whom have extensive experience in the healthcare and biotechnology research fields, including experience working in research institutions and hospitals. We have had a productive working relationship with the SFDA to date, which we feel is important when seeking regulatory approvals for therapeutics in China. Nationwide sales and marketing network Over the years, our sales force and high quality products have allowed us to establish our Shenyang Sunshine brand and enabled us to become one of the leading biotech companies in China. We maintain sales and marketing forces in 18 provinces and major cities in China including the municipalities of Beijing and Shanghai and the city of Guangzhou. Our network of 143 sales and marketing professionals and approximately 80 distributors market our principal products to healthcare providers including, based on our internal estimates, approximately 800 hospitals, clinics and dialysis centers. We rely on the efforts of our sales and marketing professionals to build and strengthen our relationships with healthcare Table of Contents Business providers such as hospitals and rely on our relationships with China s leading pharmaceutical distributors to make sure the product reaches our customers on time. Our sales force has formed strong relationships in our key target markets. We believe we have an established reputation that is synonymous with quality and reliability. High-quality proprietary manufacturing processes with significant cost advantages Since our inception, we have established a base of proprietary manufacturing expertise, trade secrets and know-how for producing recombinant proteins expressed either in E. Coli or mammalian cells, especially for Chinese Hamster Ovary, or CHO, cell-based manufacturing. In September 2001, we were certified as the Model Manufacturing Base for Achievement under the National Advanced Technology Research and Development plan by the Ministry of Science and Technology of the PRC. We believe our Chinese cGMP-certified manufacturing facility as well as our voluntary decision to apply European Pharmacopoeia standards, an authoritative collection of manufacturing standards for medicines, have enabled us to produce high-quality products while our optimized manufacturing processes have allowed us to establish significant cost advantages, enabling us to price our products competitively while maintaining favorable margins. The significantly lower costs of raw materials and wages in China relative to other countries allow us to maintain our cost of operations at a level that we believe gives us a competitive advantage over overseas-based companies. Operational efficiency and a track record of growth and profitability Our low cost base translates into greater operational efficiency and higher profit margins as we increase sales volumes of our products. We have experienced rapid growth in our recent history. In 2004, our gross margin was 80.5% and net profit margin was 8.6%. In 2005, our gross margin was 84.8% and net profit margin was 15.7%. For the nine months ended September 30, 2006, our gross margin was 90.5% and net profit margin was 25.3%. Experienced and market-oriented management team Our management team has extensive experience in China s biopharmaceutical industry and a solid understanding of Chinese and international industry best practices. Certain members of our senior management have in-depth knowledge relating to the regulatory framework in China, as well as the international market, and are experienced in managing fast-growing and entrepreneurial enterprises. The 17 members of our research team have in the aggregate approximately 63 years of service at our company and 121 years of industry experience. The members of our marketing team have in the aggregate approximately 39 years of service at our company and 95 years of industry experience. OUR STRATEGY Our goal is to become the leader in the research, development, manufacture and commercialization of protein-based therapeutics in China and to continue to advance our drugs to international markets. The key elements of our strategy are to: Maximize sales of our lead product, EPIAO, in the Chinese market We plan to continue to utilize our established sales, marketing and distribution platform to maintain our leadership in the EPO nephrology market and to further penetrate the markets for our other approved indications in oncology and surgery, to which we only recently began marketing. These indications currently represent a small portion of our sales, but we believe they could be a strong contributor to our future growth. We believe that our efforts to educate oncologists and surgeons on the applications of EPIAO in these end markets will allow us to grow sales of our flagship product. Table of Contents Business Maximize sales of our other existing products in the nephrology and oncology markets in China We believe that there is significant opportunity to maximize sales of our other approved products, including TPIAO, and our in-licensed products, including Tietai Iron Sucrose Supplement and Baolijin, within our specialized focus on nephrology and oncology. We were the first to market TPO in China, launching TPIAO during the first half of 2006 by utilizing the strengths of the Shenyang Sunshine brand and our existing sales and marketing network. We plan to continue to increase brand awareness and the market penetration of our existing products in China by expanding our marketing efforts and our distribution network, continuing to build relationships with hospitals and physicians and potentially entering into additional in-licensing arrangements. Develop and commercialize candidates in our product pipeline and new products that address unmet medical needs in commercially attractive markets We are developing a diversified portfolio of late-, mid- and early-stage protein-based product candidates. Our pipeline includes novel product candidates in addition to new enhanced versions of our existing products, and expanded indications for our currently marketed products. Our early stage programs are focused on significant commercial opportunities, including rheumatoid arthritis and HPV infection. We have a strong track record of successful product approvals and extensive knowledge of the SFDA approval process. With relatively rapid regulatory approval processes and our low manufacturing costs, we have been able to bring many of our products to market in a more cost-effective manner in China than in the United States or in the European Union. In addition, we intend to continue to evaluate and develop additional product candidates to expand our pipeline where we perceive a significant unmet medical need and attractive commercial potential. Having had four protein-based therapeutics successfully approved to address the nephrology, oncology and surgical markets, we may also expand into other attractive areas such as immunosuppression and metabolism, and the development of additional monoclonal antibodies. Expand our sales and marketing network We believe that there is significant market potential for our products and that our historical product sales represent only a limited penetration of the overall potential market in China. We plan to continue to increase the footprint of our sales and marketing presence in China by selectively expanding into targeted areas such as the Provinces of Hebei, Shanxi and Anhui, and the Municipality of Tianjin and further penetrate leading hospitals both within and outside our existing network to benefit from positive trends in the PRC government s new health insurance policies as well as increased per capita healthcare spending. We also plan to create focused sales forces in the nephrology and oncology areas to increase penetration of our key products in their respective end markets. Continue to expand beyond the Chinese domestic market We intend to continue to develop and expand our manufacturing capabilities in a cost-effective manner to meet growing demand for our products initially in China and gradually abroad. While we believe we currently have the capacity to meet our near-term anticipated production needs, we expect to augment our manufacturing facilities to comply with European current GMP standards in order to meet our anticipated growth and demand from our non-domestic business. Additionally, we intend to use our expertise in protein-based therapeutics to establish processes for the production of monoclonal antibody drugs. We currently market our products through distribution agreements with local agents in several developing countries, consisting of Egypt, Pakistan, Thailand, Brazil, Mexico and Trinidad and Tobago, Table of Contents Business where we have obtained marketing approvals in compliance with local laws. The procedure to obtain such marketing approvals in most of these countries involves, among other things, conducting clinical trials and obtaining the local GMP certification. We plan to seek approval from the European Agency for the Evaluation of Medicinal Products, or EMEA, to market our products under the new regulations for biosimilar products and continue to expand our international presence opportunistically, initially with a focus on the European Union and additional countries where we feel there is sufficient commercial opportunity. We plan to continue to establish relationships with distribution partners in these foreign markets to sell our products. Presently we do not anticipate building a global sales and marketing infrastructure. Acquire or in-license new technologies, products or companies We continuously seek attractive product candidates and innovative technologies to in-license or acquire. We intend to focus on product candidates that would be marketed through our existing sales infrastructure and that represent large potential market opportunities. We believe that by pursuing selective acquisitions of companies or technologies in businesses that complement our own, we will be able to enhance our competitiveness and strengthen our market position. We believe that our relationships with many industry participants and our knowledge of, and experience in, the biotechnology industry in China allow us to better understand industry trends, technological developments and practical applications. We believe that this expertise will assist us in making acquisition decisions and position us to be a more desirable partner to companies whose products we may add to our portfolio. Table of Contents Business OUR PRODUCT PORTFOLIO Our principal products target large markets with significant unmet medical needs in nephrology, oncology, supportive cancer care, inflammation and infectious disease. We are currently focused on expanding the indication for our marketed products, developing next generation, enhanced versions of our marketed products, and bringing novel protein-based therapeutics to market. The table below summarizes our products and product candidates: Product Name Indication (s) Status Upcoming Milestone* Preclinical Phase I Phase II Phase III Marketed EPIAO (EPO) Anemia associated with renal failure or chemotherapy, peri-operative blood cell mobilization NuPIAO (EPO) Initiate clinical trials in 2008 High dosage EPIAO (EPO) Phase III data in 2007 TPIAO (TPO) Thrombocytopenia TPIAO (TPO) ITP Phase III data in 2008 Intefen (Interferon alpha-2a, IFN) Cancer, Viral infectious diseases Inleusin (IL-2) Renal cell carcinoma, Metastatic melanoma, Tuberculosis Nuleusin (IL-2) Renal cell carcinoma, Metastatic melanoma Phase III data in 2007 HPV vaccine (SSS08) Cervical cancer Anti-TNF mAb (SSS07) Rheumatoid arthritis Tietai (Iron Sucrose Supplement) Iron-deficiency associated with anemia Baolijin (G-CSF) Neutropenia * The development and commercialization of our product candidates are subject to numerous risks and uncertainties, as noted in Risk factors. As a result, the actual timing of the indicated milestones could be very different than that indicated in the table. Phases I, II and III described in the table above are comparable to the similar phases of clinical trials involved in obtaining marketing approval from the U.S. Food and Drug Administration. Under the Administrative Measures on the Registration of Pharmaceutical Products promulgated by the SFDA, the three phases refer to: Phase I : Evaluation of safety. Phase II : Evaluation of safety, dosing and efficacy. Table of Contents Business Phase III : Larger scale evaluation of safety and efficacy. Our principal products EPIAO ( ) EPIAO, our flagship product, is an injectable recombinant human EPO that stimulates the production of red blood cells, cells that transport oxygen from the lungs to all cells of the body. EPO is a naturally occurring growth factor that is normally produced in healthy kidneys and regulates production of red blood cells. Adequate amounts of EPO are required to produce a sufficient number of red blood cells. A significant reduction in the number of circulating red blood cells results in anemia, a condition in which insufficient oxygen is delivered to the body s organs and tissues. For example, patients with chronic renal failure suffer from anemia because they do not produce sufficient amounts of EPO. Anemia can also be a side effect of chemotherapy treatments for patients, sometimes forcing patients to discontinue chemotherapy. Kalorama Information estimated the worldwide market for EPO reached approximately US$10.8 billion in 2005. Kalorama estimated that in 2005, sales in the U.S., certain European countries including the UK, Germany, France, Italy and Spain, and Japan accounted for 61%, 20% and 7%, respectively, of the worldwide sales of protein-based therapeutics. According to IMS Health, revenues from all EPO drug sales in China were estimated at over RMB300 million (US$37.5 million) in 2005, representing a 20% compound annual growth rate, or CAGR, from 2003 to 2005. EPIAO is utilized as a replacement protein therapy to restore EPO to normal, or physiological levels, stimulate red blood cell production and relieve the symptoms of anemia, thereby improving the quality of life for patients with renal disease and cancer in addition to reducing the need for continuous blood transfusions. Our EPIAO products are available in four different strengths (2,000 IU/vial, 3,000 IU/vial, 4,000 IU/vial and 10,000 IU/vial) and approved for three distinct medical indications. To date, no other EPO product has been approved in China for all three indications. In 1998, we received approval for the first indication, anemia associated with chronic renal failure; In 2000, we received approval for the use of EPIAO to mobilize red blood cell in patients before, during and after surgery to facilitate a quicker recovery and reduce the need for blood transfusion; and In 2001, we received approval for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies. These patients become anemic as a side effect of chemotherapy and as a general complication associated with cancer. For this indication, on September 6, 2001 we were also granted a six-year exclusivity under an administrative protection period ending in September 2007 during which other pharmaceutical companies are prohibited from importing or marketing a similar product. We were among the first biotechnology companies to introduce a recombinant form of EPO in China. According to IMS Health, our EPIAO was the most widely used recombinant EPO in China in each of the seventeen quarters ending with the second quarter of 2006. EPIAO is on the National Reimbursement List for the treatment of anemia associated with chronic renal failure and for the treatment of anemia associated with chemotheraphy in non-myeloid malignancies in certain provinces and cities such as Hubei Province and Shanghai Municipality. According to IMS Health, our EPIAO has ranked number one in the Chinese EPO product market in terms of units sold and revenues since 2002. In the six months ended June 30, 2006, EPIAO accounted for 37% of the Chinese EPO market in terms of sales revenue and 28% in terms of units sold, with sales primarily generated from our initially approved renal indication. Since 1999, 6.9 million vials of EPIAO have been administered to patients. Table of Contents Business We are in the process of conducting a Phase III clinical trial for our high dose 36,000 IU/vial formulation of our first generation EPIAO, which we expect to be the first of its kind in China. In addition, we plan to initiate in 2007 clinical trials for our second-generation EPIAO. We have designed this product candidate to have a longer half-life versus our first generation EPIAO that is, in this aspect, comparable to Amgen s Aranesp. We plan to file a patent application in China for our second-generation EPIAO. We believe our competitive advantages in marketing our EPIAO lie in the following areas: Focus on quality. We implemented our proprietary process technology and developed quality assurance and quantity control system in compliance with the Chinese GMP standards. Since 2004, we have applied the European Pharmacopoeia (2002 version) standards, which we believe are higher production quality standards than those required for domestic pharmaceutical manufacturers. Broadest applications and specifications. Since 2002, our EPIAO products have been the only EPO products approved for each of the following three indications: anemia associated with chronic renal failure; red blood cell mobilization; and anemia associated with chemotherapy in cancer patients. We also provide our EPIAO products in four dosage forms to meet the needs of our patients and their doctors. We expect to apply for marketing approval of an additional high dosage form in 2007 which we believe, if approved, will be the highest approved dosage formulation of an EPO drug on the Chinese market. Competitive pricing. Our economy of scale, favorable cost structure and experience in manufacturing afford us the opportunity to competitively price EPIAO while still maintaining attractive margins. In order to secure and maintain a large customer base, we have been pricing our EPIAO products at a level less than one-third of their comparables produced overseas. Strong brand awareness. We believe our sustained marketing efforts with medical practitioners and our focus on pre-sale and post-sale services have established EPIAO and Shenyang Sunshine as well-recognized and well-received brands. We have been implementing a focused marketing strategy since launching the product in 1998. As part of this strategy, our sales representatives promote our products to doctors by visiting hospitals to better educate physicians and develop brand awareness. In 2007, we plan to create distinct sales forces in the nephrology and oncology areas to increase penetration in these end markets. Clinical Trials In 1997, we completed a multicenter, randomized clinical trial with EPIAO in 194 end-stage renal disease patients. This trial compared the efficacy of our product to that of Epogen, Amgen s recombinant EPO. The data demonstrated that our product was biologically equivalent to Epogen, as demonstrated by comparable restoration of hematocrit and hemoglobin levels, indicators of red blood cell reemergence. Additionally we did not observe any severe adverse reactions. We obtained approval from a branch of the Ministry of Health, or the MOH, a predecessor of the SFDA, in November 1997 and launched EPIAO in China in August 1998. In 2001, we completed a multicenter, randomized, double blind, placebo-controlled clinical extension trial to evaluate the efficacy of EPIAO in 121 cancer patients with anemia resulting from their chemotherapy regimens. The primary endpoint of this clinical trial was restoration of hemoglobin and hematocrit levels. Patients received either EPIAO or a placebo three times a week for 12 weeks. The results demonstrated that EPIAO was effective in restoring hemoglobin and hematocrit levels in this patient setting. We obtained SFDA approval for this indication in September 2001 and launched EPIAO Table of Contents Business for this indication in December 2002. When we obtained the SFDA approval in September 2001, we were also granted a six-year administrative protection period for this indication of EPIAO. During the protection period, other pharmaceutical companies are prohibited from manufacturing EPO drugs for the same indication or adding the same indication on the label of any existing drugs, pursuant to the Regulations for New Drug Protection and Related Technology Transfer. In 2000 we completed a multicenter, randomized placebo controlled extension trial in 105 patients undergoing major orthopedic surgery to evaluate the efficacy of EPIAO in mobilization of red blood cells in patients undergoing surgery. Typically, these patients require allogeneic blood transfusion, where blood comes from a donor instead of the patient himself, thereby exposing the patients to the risk of contracting blood-borne diseases. The primary endpoint of this clinical trial was also restoration of hemoglobin and hematocrit levels. Compared with placebo-controlled patients, patients who received EPIAO before, during and after the surgery had higher levels of hemoglobin and hematocrit. We received SFDA approval for this indication in 2000 and launched EPIAO for this indication in December 2002. TPIAO ( ) Launched in January 2006, TPIAO is our recombinant human thrombopoietin product, for the treatment of chemotherapy-induced thrombocytopenia, or platelet deficiency, and represents the first such protein-based therapeutic approved and launched for this indication in China. TPO is a hemopoietic, or blood or blood cell-related, growth factor protein found in plasma. TPO naturally stimulates production of megakaryoctyes, cells with a mutilobed nucleus in the bone marrow and liver, thereby releasing mature platelets and raising the circulating platelet count. Patients undergoing blood stem cell transplantation or cancer chemotherapy, or with late-stage liver diseases, or for unknown pathological reasons may suffer from platelet deficiency. We market TPIAO in two strengths: 7,500 IU/vial and 15,000 IU/vial. We began marketing our TPIAO products at the end of 2005 on a trial basis and recorded revenues of RMB2.8 million in 2005 and RMB10.2 million for the nine months ended September 30, 2006. We began our research and development efforts on TPIAO in 1995 as part of the national 863 scientific program. After successful discovery and pre-clinical studies, we initiated clinical trials in 1999. Phase I and Phase II clinical trials were completed in 2001 and 2002, respectively, which indicated TPIAO s safety and efficacy. In 2003, we completed a multicenter, randomized, double-blind placebo self-controlled Phase III trial in 305 patients, 223 of whom were cancer patients receiving chemotherapy and 82 of whom were ITP patients who had failed to respond to any other form of treatment. Patients were treated with TPIAO within six to 24 hours after the first chemotherapy cycle daily for 14 days. The primary endpoints were platelet counts and reduction in the number of transfusions. In this trial, TPIAO treatment resulted in a higher platelet count in approximately 78% of the cancer patients and approximately 85% of the ITP patients. There were 18 cases of mild adverse reactions relating to TPIAO treatment, including transient flu-like symptoms, but patients spontaneously recovered without discontinuing treatment. Although we obtained SFDA approval for TPIAO in May 2005, the SFDA has required us to conduct a Phase IV post-marketing trial on TPIAO as a supportive cancer care product. We expect that the three-arm trial will include approximately 1,000 cancer patients being treated with chemotherapy. The primary endpoint will be time to recovery of platelet count to normal levels. We plan to initiate this trial in the fourth quarter of 2006 and release clinical data for the Phase IV trial in 2009. TPIAO was approved in May 2005 with a monitoring period of five years, which will expire in May 2010. During the monitoring period other pharmaceutical companies are prohibited from manufacturing Table of Contents Business or importing a similar drug except those whose application for clinical trial were approved by the SFDA prior to May 2005, the commencement of TPIAO s monitoring period, pursuant to the PRC Administrative Measures for the Registration of Medicine. Although we believe TPIAO is the only TPO-based therapeutic available in the Chinese market to date, we are aware of another Chinese pharmaceutical company, CP Guojian, which we believe may be conducting clinical trials for a TPO-based therapeutic in China. If CP Guojian obtained the approval for any clinical trials prior to commencement of the monitoring period for TPIAO, CP Guojian may not be prohibited from manufacturing and marketing its TPO product during TPIAO s monitoring period. We have no information on when CP Guojian plans to bring their product to market, nor are we aware of any other company that is developing a similar product. We have two issued patents in relation to TPIAO. We obtained authorization to introduce TPIAO into the Chinese market for treatment of chemotherapy-induced thrombocytopenia in 2005. Legacy products In addition to EPIAO and TPIAO, we market two protein-based therapeutics that have historically been significant contributors to our overall revenues. Due to unfavorable pricing and increased competition, we refocused our sales and marketing efforts since early 2004 and no longer heavily market these products with our own sales force. Intefen ( ). Intefen is our recombinant human interferon alpha-2a product for the treatment of carcinoma of the lymphatic or hematopoietic system, and viral infectious diseases, including adult chronic hepatitis B, acute and chronic hepatitis C, and genital warts. Interferon is a protein that occurs naturally in the body in very small amounts and comes in three main types: alpha, beta and gamma. When exposed to viruses, certain cells produce interferon, which is released into the bloodstream or intercellular fluid to induce healthy cells to produce enzymes and proteins that counter and combat the infection. The anti-cellular or immuno-regulatory functions of IFN can enable interferon products to play a central role against certain tumor and auto-immune diseases. Interferon alpha has been manufactured by pharmaceutical companies for therapeutic use against hairy-cell leukemia, hepatitis C and hepatitis B, as well as for treatment of genital warts and some rare cancers of blood and bone marrow. We obtained SFDA approval to market Intefen in April 1995 and launched the product in December 1995. Our Intefen is available in lyophilized powder and injectable solution. Both the powder and solution come in three strengths: 1 MIU/vial, 3 MIU/vial and 5 MIU/vial. Revenues from our Intefen products were RMB6.8 million in 2005, representing a decrease of 11% over 2004 revenues. Revenues from our Intefen products were RMB3.5 million in the nine months ended September 30, 2006, representing a decrease of 35% over the corresponding period in 2005. In 1994, we completed a multicenter, randomized Phase III clinical trial with Intefen in 127 patients with hepatitis C virus, or HCV. The primary endpoints of the trial were the change in ALT, or Alanine Amino Transferase recovery rates, a measurement of liver function and HCV RNA clearance rates, a measure of the number of viruses present in the patient. The data indicated that Intefen was comparable to Schering Plough s Intron A when measured with these two tests. The observed side effects were flu-like symptoms that were relatively minor and reversed upon discontinuation of the therapy. Inleusin ( ). Inleusin is our recombinant human interleukin-2, or IL-2, product that is structurally and functionally the same to naturally occurring IL-2, a body immune regulator. Inleusin is indicated for treatment of renal cell carcinoma, melanoma, thoratic fluid build-up caused by cancer, and tuberculosis. IL-2 is a natural part of the body s immune response to microbial infection. IL-2 promotes the proliferation and maturation of, among others, T-cells and natural killer cells, both of which are capable Table of Contents Business of destroying cancer cells directly. IL-2 plays a role in the development of white blood cells or lymphocytes, and anti-inflammatory reactions which are part of the regulation of the immune response. We obtained SFDA approval to market Inleusin in the Chinese market in June 1995 and launched the product in March 1996. It was the first interleukin product introduced into the Chinese market. Our Inleusin products come in four strengths: 0.1 MIU/vial, 0.2 MIU/vial, 0.5 MIU/vial and 1 MIU/vial. Revenues from our Inleusin products were RMB1.6 million in 2005, representing a decrease of 41% over 2004 revenues. Revenues from our Inleusin products were RMB0.8 million the nine months ended September 30, 2006, representing a decrease of 40% over the corresponding period in 2005. In 2002, we completed a multicenter, randomized, placebo-controlled extension study in 209 patients with tuberculosis. The primary endpoint was the reduction of severity of infection as measured by thoracic X-Ray imaging the reduction in the number of tuberculosis bacilli, an infectious organism, in a sputum smear. The data demonstrated that Inleusin effectively reduced the severity of tuberculosis in these patients. In-licensed products Tietai Iron Sucrose Supplement ( ). Tietai Iron Sucrose Supplement is a complex of polynuclear iron (III)-hydroxide, a bioavailable form of iron, in a sucrose solution for intravenous use. It is indicated for the treatment of iron deficiency anemia in patients with end-stage renal disease and generally considered to have a superior safety profile compared to other forms of iron supplements. Tietai Iron Sucrose Supplement was launched in China in 2005, and we believe it will be complementary to our EPIAO franchise. In May 2006, we entered into an agency agreement with Shenyang Borui Pharmaceutical Co., Ltd, or Borui, to in-license nationwide exclusive rights in China to market and distribute Tietai Iron Sucrose Supplement from June 1, 2006 to August 31, 2011. Pursuant to this agreement, we purchase Tietai Iron Sucrose Supplement from Borui at a fixed price and are subject to certain minimum purchase requirements, sales and market share targets for every twelve-month period starting from September 2006. As long as we achieve the sales targets during the term of the agreement, we shall have the priority right to renew the agreement upon its expiry and obtain the agency right of any other new product developed by Borui. Our rights under the agreement will be subject to Borui s ability to renew both its business license, which currently expires in 2008, and its license from Chengdu Tiantaishan, Tietai s manufacturer, to distribute Tietai. Baolijin ( ). Baolijin is our recombinant human granulocyte colony-stimulating factor, or G-CSF product. G-CSF is a protein that stimulates production of white blood cells. For cancer patients undergoing chemotherapy, the ability to produce red blood cells, white blood cells and platelets is severely compromised. Baolijin is indicated for the treatment of neutropenia, a condition associated with chemotherapy and characterized by low levels of neutrophils, a type of white blood cell important for fighting infections. The addition of Baolijin to our product portfolio enhances our capability to meet the unmet medical needs in supportive cancer care. According to IMS Health, the annual sales for G-CSF products in China were estimated at RMB900 million in 2005. According to ASInsights Strategic Consulting Report, or ASInsights, the worldwide market for colony stimulating factors was estimated at US$3.6 billion as of December 31, 2005. ASInsights estimates that as of December 2004, the world market for colony stimulating factors (CSFs) was US$3.6 billion with the U.S. representing 67%, Europe representing 15%, Japan representing 11% and the rest of the world representing 7%. Table of Contents Business In August 2006, we entered into an exclusive promotion and distribution agreement with Chengdu Institute of Biological Products, or the CIBP, to in-license nationwide exclusive rights to market and distribute Baolijin in China from August 1, 2006 to December 31, 2011. Pursuant to this agreement, we purchase Baolijin from CIBP at certain established prices and are subject to a minimum volume requirement of 150,000 units from August 1, 2006 to December 31, 2007. For each calendar year thereafter during the term of the agreement, minimum volume requirement increases by 30% incrementally. If we achieve the minimum purchase requirements during the term of the agreement, we shall have the priority right to renew the agreement upon its expiry and obtain the agency right of any other new product developed by CIBP. Our product candidates NuPIAO In 2008, we expect to complete pre-clinical testing for NuPIAO, a second-generation EPIAO that is designed to have a longer half life and is expected to be comparable in structure to Amgen s Aranesp. Aranesp (darbepoietin alpha) is a novel erythropoiesis-stimulating protein with a longer circulating half-life than EPO and is currently the only second-generation EPO product approved by the U.S. Food and Drug Administration. By using molecular biology and recombinant DNA techniques, we synthesized a series of novel erythropoiesis-stimulating proteins and identified NuPIAO through an activity screening assay. Preliminary testing of NuPIAO has demonstrated an enhanced half-life comparable to the half-life of darbepoietin alpha. The effect of extended half-life and increased biologic activity as compared with EPIAO would allow for less frequent administration, which is more convenient for both patient and caregiver. We plan to file a patent application in China for second-generation EPIAO. High-Dose EPIAO In 2007, we plan to complete a clinical trial for our 36,000 IU/vial formulation of EPIAO. This product is designed for rapid restoration of hemoglobin to normal levels among cancer patients. If our clinical trial results are positive, we plan to file an application for SFDA approval of this product in 2007. There currently is no dosage form of this kind on the market. In 2006 we initiated a randomized placebo- controlled clinical trial in 200 cancer patients undergoing chemotherapy. In this trial, 100 patients are administered with a 36,000 IU/vial EPIAO once a week for eight weeks. The control group are administered the 10,000 IU/vial EPIAO once every other day. The primary endpoint is the restoration of hemoglobin levels. TPIAO for the treatment of ITP Idiopathic thrombocytopenic purpura, or ITP, is characterized by thrombocytopenia that results in bruising and bleeding that can be severe. In certain ITP patients, the immune system malfunctions, perceiving the body s platelets as foreign and destroying them, potentially resulting in dangerously low platelet counts. Platelets are disc-shaped cells in blood that assist in the clotting process to stop bleeding. TPIAO is being investigated as a new approach to treat ITP by stimulating the TPO receptor, directly increasing platelet production to outpace platelet destruction by the immune system. We have designed a Phase III clinical trial to study TPIAO for the treatment of ITP. The Phase III trial will be a multicenter, randomized, placebo-controlled study in 120 ITP patients. All patients will be administered Danazol, a synthetic steroid hormone drug routinely used to treat ITP. The treatment group will be administered an additional 1.0 g/kg TPIAO once daily for 14 days. The primary endpoint of this Table of Contents Business trial is the measurement of platelet counts during the 14 day treatment. We expect to release Phase III clinical trial data in 2008. NuLeusin (IL-2) NuLeusin, our second-generation IL-2, is a genetically modified form of IL-2 possessing the same properties as naturally occurring IL-2. It is capable of activating the immune system to recognize and eliminate certain kinds of cancer cells. The genetic modification enabled us to produce a high dosage form of IL-2 that has increased stability, which we believe has superior efficacy and tolerable therapeutic reactions profile. We believe NuLeusin is comparable to Chiron s Proleukin, which received U.S. FDA approval for treatment of metastatic renal cell carcinoma in 1992, and for treatment of metastatic melanoma in 1998. In 2005, we completed an open-label, nonrandomized Phase II trial of Nuleusin in 22 patients with metastatic renal cell carcinoma. Patients were treated subcutaneously with Nuleusin every 12 hours for the first five days and then daily for five weeks. The primary endpoints were whether the patients respond to the treatment in terms of the reduction in size of their tumors after receiving treatment. The data demonstrated that Nuleusin effectively reduced the size of the tumors in these patients. There were no serious adverse events reported in this study. We are currently conducting a multicenter, open-label Phase III clinical study for NuLeusin for the treatment of metastatic melanoma and metastatic renal cell carcinoma. SSS08 (HPV Vaccine) HPV is a common virus that is often passed on through genital contact, typically during sexual contact. At least 50% of sexually active people will get HPV at some time in their lives. About 40 types of HPV can infect the genital areas of men and women. While most strains of HPV cause no symptoms and resolve without treatment, some strains of HPV can cause cervical cancer in women. Worldwide, cervical cancer is the second most common cancer in women; and according to the U.S. Food and Drug Administration, it is estimated to cause, on average, over 470,000 new cases and 233,000 deaths each year. In the majority of developing countries, cervical cancer remains the number one cause of cancer-related deaths among women, with women in developing countries accounting for approximately 85% of both the yearly cases and deaths from cervical cancer worldwide. In 1995, scientists from Merck & Co., Inc. and MedImmune Inc., separately, demonstrated that expression of the papilloma virus major capsid gene L1 alone, or together with the minor capsid protein L2, is sufficient for the generation of virus-like particles, or VLPs. VLPs mimic in some aspects the infection with virions and induce virus-neutralizing antibodies, making them an attractive candidate for developing a prophylactic vaccine against HPV infections. In June 2006, Merck received approval from the U.S. FDA for its vaccine targeting four strains of HPV that cause approximately 70% of cervical cancers and approximately 90 percent of genital warts. Our HPV vaccine candidate also targets VLPs of HPV-16 and HPV-18 and we expect to start the preclinical study in 2007. SSS07 (Rheumatoid arthritis and other autoimmune diseases) SSS07 is our anti-TNF monoclonal antibody product candidate that we plan to develop in collaboration with Epitomics, Inc., a US-based biotechnology company. Tumor necrosis factor a (TNF) is one of the key chemical messengers that help regulate the inflammatory process and plays an important role in the underlying mechanisms of conditions such as rheumatoid arthritis, psoriasis, and many other Table of Contents Business inflammatory disorders. When the body produces too much TNF, it overwhelms the immune system s ability to control inflammation of the joints or of psoriasis-affected skin areas. The TNF inhibitors are molecules that disrupt the TNF function by blocking the binding of TNF to the TNF receptors. Blockage of these receptors can result in a significant reduction in inflammatory activity and reduce symptoms, inhibit the progression of structural damage, and improve physical function in patients with moderate to severe rheumatoid arthritis. SSS07 is a genetically engineered anti-TNF humanized monoclonal antibody designed to bind and deactivate certain TNF molecules. By binding to the native TNF molecule. SSS07 is designed to prevent activating of the inflammation signalling cascade. Several TNF inhibitors have been approved by US FDA, including Enbrel (entanercept), Remicade (infliximab) and Humira (adalimumab). According to Evaluate Pharma, the total worldwide sales for this product category in 2005 were approximately US$8.2 billion, significant majority of which came from US and European markets. We plan to develop our anti-TNF monoclonal antibody product candidate in collaboration with Epitomics, Inc., an US-based biotechnology company that is recognized for its proprietary high-affinity rabbit monoclonal antibody technology. The antibody we selected demonstrated that it is able to neutralize TNF activity in specific assays more effectively than Remicade and Humira, two approved anti-TNF antibodies. In March 2006, we entered into a collaboration agreement with Epitomics Inc. under which we were granted an exclusive, royalty bearing, non-transferable and perpetual license in the field of therapeutic usage in order to develop and conduct clinical trials to obtain SFDA approval for the rabbit anti-TNF alpha monoclonal antibody compounds. Under the agreement, we were also granted the right to manufacture, sell, market and distribute (including distributions by engaging third parties) in China anti-TNF alpha monoclonal antibody therapeutics covered under the intellectual property rights owned by Epitomics. We were required to pay an upfront lump sum fee and a royalty payment equivalent to a certain percentage of the net sales of therapeutic products should they reach market. Under the agreement, we granted Epitomics the right to use all intellectual property generated during the development of the therapeutic product. However, if Epitomics uses this intellectual property for the development of the same therapeutic product outside of China, Epitomics shall pay us a royalty equivalent to a certain percentage of the financial benefit from licenses and product sales. If any new developments or agents are created as a result of the collaboration agreement, we will grant to Epitomics a right of first refusal with regard to the commercialization of such agents. The details of a development program to commercialize the therapeutic products and the mechanism for calculating the royalties will be determined between Epitomics and us at a later date. Table of Contents Business CHINESE PHARMACEUTICAL MARKET OVERVIEW World expenditure on health care According to information from the WHO and national statistics the total expenditure on health care by the WHO s 192 member nations amounted to approximately US$3,536 billion in 2004. In that year, expenditures by the largest (the US) and the top ten nations amounted to approximately US$1,689 billion and US$2,887 billion respectively, accounting for approximately 48% and 82% of total members expenditures respectively. China ranked seventh among the listed nations in terms of expenditures on health care in 2004: (US$ in millions) Per capita total expenditures on health care The following table illustrates the per capita total expenditures on health care of the top four spending countries and Europe in 2004: Per capita total expenditure on health CAGR of per capita total expenditure on health from 1. Average of UK, Germany, Italy, France and Spain. Source: Euromonitor Table of Contents Business Notwithstanding its high total expenditure among WHO member nations, China s per capita expenditure on health care remained low but is growing quickly. According to the data from the WHO, Euromonitor, and China 2005 Statistical Book, the PRC ranked the lowest in terms of per capita expenditure on health care among the top ten spending countries listed above and 107th among all listed nations in 2004. However, in terms of growth rate in per capita expenditure on health care between 2000 and 2004, China ranked the highest among the top ten spending nations listed. Per capita total expenditure on health care in the PRC grew from approximately US$48 in 2000 to approximately US$73 in 2004, representing a CAGR of approximately 11.1%, outpacing the CAGR for per capita GDP in China between 2000 and 2004 of approximately 10.5%. As a percentage of GDP, China s expenditure on health care was also the lowest among the top ten spending countries, amounting to approximately 5.6% in 2003, compared to the second lowest of 7.7% for Spain and the highest of 15.2% for the U.S. in 2003. Pharmaceutical Market in China Expenditure on medicine The pharmaceutical market in China has grown rapidly in recent years. According to Access Asia from trade sources and National Statistics, expenditure on medicine, including western pharmaceuticals and traditional Chinese medicine, or TCM, is expected to reach approximately RMB300 billion, equivalent to approximately US$36.4 billion, by the end of 2005, representing a growth rate of 142.7% since 1998. Expenditure on western pharmaceuticals remains higher than those from TCM due to the higher prices western pharmaceuticals tend to command. For the year ended December 31, 2005, expenditure on western pharmaceuticals are expected to reach RMB179.5 billion, representing 59.6% of total expenditure on medicine. During the same period, expenditure on TCM is expected to reach RMB121.8 billion, representing 40.4% of total expenditure on medicine. The following table sets forth the total expenditure on medicine with a breakdown in western pharmaceuticals and TCM in China from 1998 to 2005: 2000 2001 2002 2003 2004 2005E (RMB in billions) Western pharmaceuticals 91.5 105.5 127.1 152.5 166.2 179.5 TCM 65.5 76.5 86.8 102.2 112.4 121.8 Total 157.0 182.0 213.9 254.7 278.6 301.3 Source: Access Asia Total expenditure on medicine consists of expenditure on prescription drugs and expenditure on OTC drugs. Expenditure on prescription drugs Expenditure on prescription drugs by medical institutions such as hospitals and health clinics remains the dominant source of revenues from sales of medicine. For the year ended December 31, 2005, expenditure on prescription drugs is expected to amount to RMB251.4 billion, representing 83.5% of total expenditure on medicine and a growth rate of 131.3% since 1998. Table of Contents Business The following table sets forth expenditure on prescription drugs with a breakdown in western pharmaceuticals and TCM in China from 1998 to 2005: 2000 2001 2002 2003 2004 2005E Western pharmaceuticals 79,062 90,410 108,330 129,079 139,728 149,791 TCM 56,602 65,629 74,020 86,519 94,457 101,686 Total 135,664 156,039 182,350 215,598 234,185 251,477 Source: Access Asia China s total GDP increased from approximately RMB8,947 billion in 2000 to approximately RMB13,688 billion in 2004. Growth in sales of TCM and western medicines in the PRC outpaced growth in GDP between 2000 and 2004, with aggregate sales increasing at a CAGR of approximately 15.4%, which is higher than the CAGR of approximately 11.2% for GDP over the same period. Sales of western pharmaceuticals and TCM increased from approximately RMB157.0 billion (equivalent to approximately 1.8% of GDP) in 2000 to approximately RMB278.6 billion (equivalent to approximately 2.0% of GDP) in 2004. Over the same period, sales of western pharmaceuticals and TCM grew from approximately RMB91.5 billion to RMB166.2 billion, and from approximately RMB65.5 billion to RMB112.4 billion respectively, representing a CAGR of approximately 16.1% for western pharmaceuticals and 14.5% for TCM. Expenditure structure Government and private expenditure on health care Expenditure on health care generally comes from two main sources; government expenditure, including in the form of government health care services and hospitals, and private health care expenditure, including on medicines in pharmacies and other retail outlets. The following table shows the respective proportions of total expenditure on health care contributed by government and private expenditure in the top ten member nations of the WHO in terms of expenditure on health care in 2003: Countries Government expenditure on health as % of total expenditure Private expenditure on health as % of total expenditure % % (Note 1) (Note 2) US 44.6 55.4 Japan 81.0 19.0 Europe3 77.3 22.7 China 36.2 63.8 Canada 69.9 30.1 Source: WHO (1) Government expenditure on health care is the sum of outlays on health care paid for by taxes, social security contributions and external resources (without double-counting the government transfers to social security and extra-budgetary funds). (2) Private expenditure on health care comprises the outlays of insurers and third-party payers other than social security, mandated employer health care services and other enterprise provided health care services, non-profit institutions and non-governmental organizations financed health care care, private investments in medical care facilities and household out-of-pocket spending. (3) Europe includes Germany, France, UK, Italy, and Spain Table of Contents Business As illustrated in the above table, health care expenditure in China is more dependent on private expenditure than the other top ten spending countries listed, with government expenditure on health care making up only 36.2% of total health care expenditure in China in 2003. According to WHO, the proportion of spending on health care contributed by government in China has declined from 40.9% in 1999 to 38.3% in 2000, which further declined to 35.6% in 2001 but has been increasing slightly to 35.8% in 2002 and 36.2% in 2003. We believe that the high reliance on private expenditure implies that the development of the pharmaceutical industry in China primarily depends on consumption capability and consumer preference. Growth of the Chinese pharmaceutical industry The pharmaceutical industry in the PRC has experienced significant growth in the past few years. The rapid growth of the Chinese pharmaceutical industry is driven by the following factors: Improving standard of living in the PRC. According to the China Statistical Yearbook 2005, from 1998 to 2004, average per capita annual disposable income of China s urban residents increased from approximately RMB5,425 to RMB9,421, representing a CAGR of approximately 9.6%. For rural households, average per capita annual net income increased at a CAGR of approximately 5.2% from approximately RMB2,162 in 1998 to RMB2,936 in 2004. Households in both urban and rural areas of the PRC have been spending an increasing proportion of their household expenditure on medicines and medical services. According to the China Statistical Yearbook 2005, from 1995 to 2004, average spending on medicines and medical services increased from approximately 3.1% to 7.4% of household expenditures, for urban households and from approximately 3.2% to 6.0% of household expenditures for rural households. This illustrates growing health care awareness in China. Population growth and aging of population in PRC. China has the world s largest population, which was officially estimated at 1.3 billion in 2004. In addition, China also has an increasingly large aging population. According to the China Statistical Yearbook 2005, the proportion of population aged 65 or above in the PRC has been on the rise, with members of the population aged 65 or above making up approximately 4.91%, 5.57% and 6.96% of the total population in 1982, 1990 and 2000 respectively. Assuming that the prevailing birth control policies in the PRC will continue, the senior population, as a proportion of total population, is expected to grow. In addition, the life expectancy of the PRC residents has been on the rise. According to the China Statistical Yearbook 2005, the national life expectancy had risen from approximately 68.6 years in 1990 to approximately 71.4 years in 2000. The aging population in the PRC will increase the demand for medicines for treatment of illnesses commonly found among the elderly. Increasing participation in the State Basic Medical Insurance System. Participants of the State Basic Medical Insurance System are entitled to reimbursement from the social medical fund of a proportion of the cost of medicines included in the Insurance Catalogue in accordance with the relevant regulations of the PRC. According to the China Statistical Yearbook 2005, between 2000 and 2004, the urban population in China grew from approximately 36.2% to 41.8% of the total population, increasing the number of persons eligible to participate in the State Basic Medical Insurance System. The number of people joining the State Basic Medical Insurance System in the PRC has been increasing, with approximately 37.9 million people joining the system in 2000 and 124.0 million people joining in 2004, according to the China Statistical Yearbook 2005. We believe that the historic increases in the number of participants in the State Basic Medical Insurance System have contributed to the continued increase in the consumption of medicines in the PRC. This trend is anticipated to continue as the Eleventh Five Year Plan of the PRC projects that the urban population of the PRC will increase from 43% to 47% between 2005 and 2010. Table of Contents Business Increasing government spending on public health care. In recent years, the PRC government has been allocating more resources on public health care, including the consumption of pharmaceutical products for public health care. According to the China Statistical Yearbook 2005, the PRC government budgetary expenditure for public health care had increased from approximately RMB52 billion in 1997 to approximately RMB85 billion in 2004, representing a CAGR of 7.3%. Industry participants Healthcare institutions in the PRC include hospitals, clinics, community healthcare centers, emergency care centers, disease prevention centers, blood centers, women and children healthcare centers, research institutions and other healthcare institutions. According to the China Medical Statistical Yearbook 2005, there are a total of approximately 297,540 healthcare institutions in the PRC as of December 31, 2004, representing an increase of approximately 6,000 from the number in 2003. There are approximately 288,844 registered healthcare institutions in the PRC, among which 134,801 are non-profit healthcare institutions and 152,475 are for-profit healthcare institutions. According to Espicom Business Intelligence, sales to hospitals account for 80% to 85% of the total pharmaceutical sales in China. This number is expected to grow considerably over the coming years. In addition to hospitals, pharmaceutical manufacturers, either state-owned or foreign invested are the other major participants in the Chinese pharmaceutical industry. According to the China Statistical Yearbook 2005, there were 4,397 state-owned and state-controlled enterprises engaged in the manufacture of medicines and 743 foreign-invested enterprises in China as of December 31, 2004. Competition and barriers to entry Competition in the pharmaceutical industry is ameliorated by barriers to entry. A company wishing to enter the industry must comply with the standards and regulations set forth by the government. In the PRC, the SFDA is the authority that monitors and supervises the administration of the pharmaceutical industry, including pharmaceutical products, medical appliances, and equipment. Pharmaceutical manufacturing enterprises need to obtain a Pharmaceutical Manufacturing Permit issued by the relevant pharmaceutical administrative authorities at the provincial level where the enterprise is located. All pharmaceutical products manufactured in the PRC, with the exception of Chinese herbal medicines in soluble form, must bear a registered number approved by the appropriate governmental authorities in the PRC. Furthermore, the PRC government requires compliance with the Good Manufacturing Practice Guidelines, as amended in 1998, or the GMP Guidelines, for the manufacture of pharmaceuticals in China. As the regulatory approval process becomes more stringent, it also increases the barriers to entering the market. For more information, please see Regulations Regulations for Pharmaceutical Industry in China. China s entry into the WTO and the impact on pharmaceutical and biotechnology industry As a result of China s accession to the WTO, the PRC government has agreed to gradually open up various service types of the pharmaceutical industry in China to foreign investors by carrying out the following measures: to protect intellectual rights of pharmaceutical products; to lower the tariff of imported pharmaceutical products; to rescind the administrative restriction on importing large-scale medical equipments on January 1, 2003; Table of Contents Business opening the distribution business of pharmaceutical products to foreign investment beginning on December 11, 2004 and allowing foreign enterprises to carry out pharmaceuticals-related merchandising, storage, transportation, distribution, wholesale, retail and after-sale services in the PRC; and allowing foreign investment in medical treatment services and to allow foreign enterprises to establish joint venture or cooperative hospitals. China s WTO commitments pose the following new challenges to Chinese pharmaceutical companies such as ourselves: Increasing competition from imported biopharmaceutical products. Prior to China s entry into the WTO, the import duty applicable to medicine dosage was 20.0%. The import duty is expected to be gradually lowered to 6.5%, which will adversely affect the competitiveness of domestic biopharmaceutical manufacturers. Increasing competition from foreign-invested enterprises. Many foreign pharmaceutical companies have directly or indirectly entered into the Chinese market. Not only have they obtained approval for registration of their products in the PRC, they have also established production lines in the PRC. Some enterprises have carried out the clinical testing of their newly developed medicines in the PRC. Challenge from the development of new medicines by foreign companies. The pharmaceutical industry, especially the biopharmaceutical industry, requires heavy capital investments. The level of capital investments in the research and development of biopharmaceutical products in China is low compared to the levels in developed countries, thereby slowing down the development process of new medicines. If a foreign competitor successfully registers a patent covering a new pharmaceutical product we are developing, all investment in the early stages of research and development will be lost. Marketing edge of overseas companies. It is extremely time- and money-consuming to explore the market of a new biopharmaceutical. Compared to us, certain biopharmaceutical companies in Europe and the U.S. with a stronger financial position may be in a better position to invest substantially in marketing and product promotion. Unlike us, these companies may still survive the early stages of product development without making a profit for a long time. Disputes on intellectual property rights. Due to the lack of capital for the research and development of new medicines, most of the domestic pharmaceuticals are imitations of foreign products. Since 2001, many more companies in Europe and the U.S. have applied for patents in the PRC than in previous years, thereby increasing the likelihood of litigation for Chinese domestic pharmaceutical companies. The development of biopharmaceutical industry worldwide and in China The discovery of recombinant DNA and monoclonal antibody technologies in the 1970s marked the birth of the biopharmaceutical industry. Biopharmaceuticals are pharmaceuticals inherently biological in nature and manufactured with biotechnology involving the use of live organisms. They are complex macromolecules derived from recombinant DNA technology, cell fusion, or processes involving genetic manipulation. They include recombinant proteins, genetically engineered vaccines, therapeutic monoclonal antibodies and nucleic acid based therapeutics. Unlike orally delivered small molecule drugs that underpin the traditional pharmaceutical industry, biopharmaceuticals are usually administered by subcutaneous, intravenous or intramuscular injection. The application of biotechnology in pharmaceutical science has brought a series of breakthroughs in the development of new drugs. The development and application of biotechnology have contributed and will Table of Contents Business Total 20,208 20,459 19,710 18,791 (1.3 ) All other biologics(1) 35,881 53,143 70,870 86,425 15.8 Total Market Size 56,089 73,602 90,580 105,216 11.1 (1) Include sales of second generation EPO. Source: Datamonitor As shown in the table above, even though the global market size of the major biopharmaceuticals, including epoetin, insulin, interferon beta, growth hormone, CSFs and interferon alpha, is expected to decline from US$20.2 billion in 2004 to US$18.8 billion in 2010, the overall global market size including all other biologics is expected to grow to US$105.2 billion in 2010, from US$56.1 billion in 2004, representing a CAGR of 11.1%. The rapid growth of the biopharmaceutical industry is attributable to: significant developments in biotechnology; a growing number of biopharmaceuticals that are licensed for marketing, the growth of which is much higher than that of traditional pharmaceutical products; the relatively little side effect and well-defined clinical effectiveness of biopharmaceutical products; and the high added value of biopharmaceutical products. The Chinese bio-technology industry has developed very rapidly in the past 20 years as well. There have been many new biotechnological products commercialized through the development of bioprocess Table of Contents Business engineering. These products include medical products (for example, monoclonal antibody, diagnostic kits, drugs and vaccines), bio-pesticides, bio-fertilizers, recombinant DNA products, nutraceuticals and functional food ingredients. According to Datamonitor: Biotechnology in China, the annual sales of bio-pharmaceutical products in China amounted to US$3.2 billion in 2004. Recombinant DNA proteins developed and manufactured in China Recombinant DNA technology has now been applied to the various bioprocesses to enhance productivity and expand the range of biotechnological products. The major impact of recombinant DNA technology is in the pharmaceutical industry, although it has also been applied to the food and agriculture fields. In 1989, the first recombinant DNA protein, recombinant human interferon alpha-1b (rHuIFN a-1b) was developed and marketed in China. According to NDRC s website, 27 protein-based therapeutics have been developed in China with recombinant DNA technology and the estimated annual sales of biopharmaceutical industry is approximately RMB35 billion, for the year ended December 31, 2005. MARKETING, SALES AND DISTRIBUTION We maintain a sales and marketing force in 18 provinces and major cities in China, including the municipalities of Beijing and Shanghai and the city of Guangzhou. Our principal products EPIAO and TPIAO are marketed by our 143 sales and marketing professionals and sold by our network of approximately 80 distributors to healthcare providers including, based on our internal estimates, approximately 800 hospitals, clinics and dialysis centers. Our internal sales and marketing staff details our principal products to physicians and hospital administrators and as required by PRC laws, our distributors are engaged to contract with our customers for the sale of our principal products to physicians and hospitals. In addition, our legacy products Intefen and Inleusin are marketed, as well as sold, by distributors. We select our distributors based on their reputation, market coverage, sales experience and the size of their sales force. We conduct credit assessments of each of our distributors or hospital customers before we enter into a purchase agreement. We do not have an exclusive distribution arrangement with any of our distributors and some of our distributors market competing brands. For every calendar year, we enter into a distribution agreement with each distributor which provides general terms for the distribution arrangement, such as the designated sales area, place and method for delivery, targets for annual sales volume and receivable collection. Under our standard distribution agreement, a distributor cannot sell our products outside the designated geographical area without first obtaining our written consent. The term of a distributor contract is typically for one year, reflecting the prevailing pricing arrangement under the local competitive bidding process. The price under the agreement may be adjusted by a number of factors, such as the outcome of the competitive bidding process, or regulatory changes during the calendar year. Hospitals in China typically purchase medical products on credit and sometimes do not make payment until more than a year after the purchase. By contrast, the average credit terms that we give to our distributors range from 60 days to 180 days, with the majority averaging around 90 days from the date of our delivery, regardless of whether payments from the hospital to the distributors are received. We believe by selling our products through distributors, we achieve an improved collection rate on our accounts receivable and reduce bad debt expense. We have a sales department centered in Beijing. We also have a marketing department located in Shanghai, with nine full-time professionals responsible for product development. In our headquarters in Table of Contents Business Shenyang, we have 17 employees responsible for product distribution, shipment and handling, and the management of account receivables. We have established relationships with many hospital administrators at prominent hospitals and other leading medical institutions, many of whom we believe are advocates for our products. We believe our relationships with these major hospitals and medical institutions raise our profile, enhance awareness of our products in the medical community, medical equipment and supplies industry and among patients, provide us with valuable clinical data to improve our products and keep us abreast of industry trends and developments, all of which in turn helps us market and sell our products. RESEARCH AND DEVELOPMENT As of September 30, 2006, our research and development team consisted of 20 research personnel and medical professionals, which accounted for 6.5% of our employees. Our research and development staff consists of medical and biotechnology professionals, including two PhDs, two MDs and three holders of master s degrees, many of whom have experience in the healthcare and biotechnology research fields, including experience working in research institutions and hospitals and in proceeding through the SFDA drug approval process. We conduct our research and development activities in our facilities in Shenyang. To date, our primary sources of new clinical products have been our internal research and development activities and the licensing of compounds from third parties. We believe by complementing our internal research and development efforts with a disciplined strategy of entering into collaborative relationships, we can build a pipeline of diversified pharmaceuticals to drive sustainable revenue growth. For a detailed description of our product pipeline, see Our product pipeline above. Our R&D expenses for the years ended December 31, 2003, 2004 and 2005 and for the nine months ended September 30, 2006 were RMB3.1 million, RMB3.7 million, RMB3.2 million and RMB3.8 million, respectively. INTELLECTUAL PROPERTY We expect that we will, in the future, rely on patents to protect our proprietary technology. While we currently expect to seek patent protection only in China, we may opportunistically seek patents to protect our innovations in other jurisdictions in the future. In China, patents relating to pharmaceutical inventions are effective for 20 years from the initial date the patent application was filed. We currently own five issued PRC patents relating to: the composition of matter of TPIAO, expiring in 2015; a method of manufacturing TPIAO, expiring in 2020; a method and application thereof relating to our manufacturing processes, expiring in 2021; a formulation of Interferon-alpha that does not relate to our marketed products, expiring in 2022; and a formulation of EPIAO, expiring in 2023. We do not believe our patents relating to EPIAO provide us with a meaningful competitive advantage. We have also filed two pending PRC patent applications relating to a method for producing recombinant Interferon-alpha and manufacturing of interleukin analogues. We do not own any foreign patents or patent applications. In addition, we own 11 registered trademarks relating to EPIAO, TPIAO, Intefen and Inleusin. Table of Contents Business We are aware of intellectual property rights held by third parties that relate to products or technologies we are developing. For example, we are aware of a patent held by a third party that may relate to our TPIAO product. We believe, as to each claim in this patent, that we either do not infringe the claim of the patent or that the claim is invalid. While the validity of issued patents, patentability of pending patent applications and applicability of any of them to our programs are uncertain, if asserted against us, any related patent rights could adversely affect our ability to commercialize our products. We also rely on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in our product areas. We generally require our employees, consultants and advisors to enter into confidentiality agreements. These agreements 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 except under specific circumstances. In the case of our employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. The development of our technology and many of our processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel. Further, as a matter of company policy, all scientific and technical employees have entered into agreements that generally require disclosure and assignment to us of ideas, developments, discoveries and inventions made by them. However, these agreements may not effectively prevent disclosure of our confidential information or provide meaningful protection for our confidential information if there is unauthorized use or disclosure. Despite any measures we take to protect our intellectual property, no assurance can be made that unauthorized parties will not attempt to copy aspects of our products, manufacturing processes or our proprietary technology or to otherwise obtain and use information that we regard as proprietary. The research, development and commercialization of a biopharmaceutical often involve alternative development and optimization routes, which are presented at various stages in the development process. The preferred routes cannot be predicted at the outset of a research and development program because they will depend upon subsequent discoveries and test results. There are numerous third-party patents in our field, and it is possible that to pursue the preferred development route of one or more of our products we will need to obtain a license to a patent, which would decrease the ultimate profitability of the applicable product. If we cannot negotiate a license, we might have to pursue a less desirable development route or terminate the program altogether. PRC patent and trademark laws are discussed in greater detail in Regulations Patent and trademark protection. The protection of intellectual property rights and proprietary information in China may not be as effective as in the United States or other countries. For example, implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective and may be hampered by corruption and local protectionism. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. The experience and capabilities of PRC courts in handling intellectual property litigation varies, and outcomes are unpredictable. Further, such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. To date we have not been involved in any significant intellectual property disputes, or encountered major difficulties in enforcing our intellectual property rights in China. Table of Contents Business MANUFACTURING Our Shenyang-based manufacturing operations consist of bulk manufacturing, and formulation, fill, and finish activities which produce EPIAO, TPIAO, Intefen, Inleusin and other product candidates for both clinical and commercial purposes. We also manufacture our product candidates for clinical trials at this facility. All fill, finish and packaging activities in relation to our domestic sales are conducted at our Shenyang facility. A portion of our exported products are packaged in our Shenyang facility and the rest is shipped overseas in bulk format as concentrated solutions of recombinant human erythropoietin, interferon alpha-2a or interleukin-2 and finished and packaged locally. Our Shenyang facility is re-certified in accordance with Chinese current Good Manufacturing Practices, or cGMP, and our cGMP certificate is valid for five years, until 2010. We specialize in manufacturing protein with mammalian expression systems, although we are capable of manufacturing with bacterial expression systems. Our facilities gives us the capability to manufacture products at up to 105-grams scale using bacterial production systems for our legacy products and up to 270-grams scale using mammalian cell expression systems for EPIAO and TPIAO. We generally produce our products based on quarterly forecasts orders and anticipated additional orders that we are reasonably confident will be obtained. Lead times for raw materials and components vary and depend on the specific supplier and the availability and demand for the raw materials. Raw materials and supplies are generally available from various suppliers in quantities adequate to meet our needs. However, we have single-source suppliers for some components and value-added steps, including EPO Elisa Kit by R&D systems Inc, GIBCO cell culture medium by Invitrogen Inc., Pharmacia chromatography purification medium by GE Healthcare, a division of GE, and Disc, a microcarrier for cell cultures, by New Brunswick Scientific Inc. We have not experienced any disruptions in the supply of these raw materials in the past. Unlike in the United States, we do not need SFDA approval to change suppliers. In the event that any one of these supply arrangements or agreements is terminated or the ability of any one of these suppliers to perform under our agreements were to be materially adversely affected, we believe that we will be able to locate, qualify and enter into an agreement with a new supplier on a timely basis. We maintain long-term relationships with most of our suppliers and place orders from these suppliers from time to time on an as-needed basis. We expect that our existing manufacturing facilities and outside sources will allow us to meet near-term manufacturing needs for our commercial products and other products that are in clinical trials. We have long-term relationships with certain of our sole suppliers and periodically place orders to specify the price, specifications, quantity and time of delivery for raw materials on an as-needed basis. For example, Invitrogen Inc. is our single largest raw material supplier of BPT-6N medium. On December 6, 2004, we entered into a one-time purchase agreement with Invitrogen (GIBCO) Shanghai Representative Office to purchase customer-made BPT-6N media with a 30% down payment and 70% payment upon delivery of the total purchase price. On March 8, 2006, we entered into another one-time purchase agreement with Invitrogen Hong Kong Co., Ltd. to purchase customer-made BPT-6 culture medium with a 30% down payment and 70% payment upon delivery of the total purchase price. Under the March 8, 2006 agreement, we agreed not to resell such product to any third party. Shanghai Weike Biochemical Reagent Co. Ltd., or Weike, is our third largest raw material supplier of fetal calf serum, or FCS. On April 12, 2005, we entered into a one-time purchase agreement to purchase FCS with payment to be made within 30 days upon delivery of each bulk of the products. As part of our overall strategy to increase our manufacturing capacity, we plan to expand our plant in Shenyang and have acquired the land and drafted the plans to execute on this strategy. QUALITY CONTROL AND ASSURANCE We have our own independent quality control system and devote significant attention to quality control for the designing, manufacturing and testing of our products. We have established a quality control Table of Contents Business system in accordance with SFDA regulations. Our four laboratories fully comply with the Chinese GMP Guidelines and are staffed with highly educated and skilled technicians to ensure quality of all batches of product release. European Pharmacopoeia 2002 version on quality control has been implemented by us since 2004. Our quality assurance team is also responsible for ensuring that we are in compliance with all applicable regulations, standards and internal policies. Our senior management team is actively involved in setting quality policies and managing internal and external quality performance. CERTIFICATES AND PERMITS Our pharmaceutical manufacturing enterprise permit was issued by Liaoning Food and Drug Administration, or Liaoning FDA, on January 1, 2006 and will expire on December 31, 2010. Liaoning Sunshine s pharmaceutical distribution enterprise permit was issued by Liaoning FDA on January 1, 2005 and will expire on December 31, 2009. Our cGMP certificate in relation to TPIAO was issued by the SFDA on July 29, 2005 and will expire on July 28, 2010. Our cGMP certificate in relation to EPIAO and our legacy products was issued by the SFDA on April 14, 2005 and will expire on April 14, 2010. COMPETITION The market for protein therapeutics is competitive and rapidly evolving on a global basis. Increased competition has resulted in industry-wide price reductions or reduced margins. In particular, we face competition from domestic and foreign pharmaceutical companies in each of our potential product areas. Certain of these companies have substantially greater capital resources, research and development staff, facilities and experience at conducting clinical trials and obtaining regulatory approvals, and greater experience and expertise in developing and commercializing products. In China, our EPIAO competes primarily with Kirin s ESPO, Roche s Recormon and Yi Pei by Di ao Group Chengdu Diao Jiuhong Pharmaceutical Factory. Competitors for interleukin-2 in China include Beijing SL Pharmaceutical Co., Ltd. and Beijing Four Rings Biopharmaceutical Co., Ltd. Competitors for Tietai Iron Sucrose Supplement in China include Beijing Novartis Pharmaceutical Co., Ltd. and Nanjing Hencer Pharmaceutical Co., Ltd. and competitors for Baolijin in China include Kirin, Hangzhou Jiuyuan Gene Engineering Co., Ltd. and Qilu Pharmaceutical Co., Ltd. We believe that competition and leadership in our industry are based on managerial and technological superiority, and the ability to identify and exploit commercially viable products. Other factors affecting our competitive position include time to market, patent position, product efficacy, safety, convenience, reliability, availability and pricing. We believe we are well positioned to compete in the fast-developing Chinese protein-based market with our strong Shenyang Sunshine brand, diverse product portfolio, proven R&D capabilities, established sales and marketing network and favorable cost structure. FACILITIES Our state-of-art manufacturing facilities are located in Shenyang Economy & Technology Development Zone, where we own three buildings with an aggregate of approximately 3,000 square meters of office, research and development and manufacturing spaces, including cleanrooms of approximately 1,600 square meters. Our facilities in Shenyang consist of three separate divisions capable of producing bulk products, including bacterial expressed proteins and manufacturing expressed proteins, and formulating final products. Our manufacturing facilities are equipped with state-of-art and top-line branded equipment, such as bioreactors, centrifuges, chromatography systems and lyophilizers. We own all of our manufacturing facilities in Shenyang. We believe that our existing facilities are adequate to meet our current and foreseeable future requirements. We also plan to build new manufacturing facilities in Shenyang. Table of Contents Business From time to time, we also employ independent contractors to support our marketing and sales and clinical support and research. We plan to hire additional employees for marketing and sales, customer service and manufacturing and assembly as we grow our business. None of our employees is represented by a labor union and we consider our relationship with our employees to be good. In accordance with applicable regulations in the PRC, we participate in a pension contribution plan, a medical insurance plan, an unemployment insurance plan and a personal injury insurance plan for our employees. We have made adequate provisions in accordance with applicable regulations, which require us to contribute amounts equal to 11.0%, 14.4%, 17.7% and 16.8%, respectively, of our employees aggregate base salaries to these statutory plans for the years ended December 31, 2003, 2004 and 2005 and for the nine months ended September 30, 2006. Also, in accordance with PRC regulations, we contribute amounts equal to 2.2%, 2.9%, 3.8% and 3.6% of our employees aggregate base salaries towards a housing fund, a supplemental medical insurance fund and a maternity fund, respectively, for the years ended December 31, 2003, 2004 and 2005 and for the nine months ended September 30, 2006. Table of Contents (1) Member of the audit committee. Dan Lou is our co-founder and chairman. Mr. Lou established Shenyang Sunshine in 1993 and served as president and chief engineer until 2003. From 1961 to 1993, Mr. Lou served several positions in Shenhou Institute of Military Medicine, including assistant military doctor, military doctor, deputy director and director of Department of Microbiology and Immunology. Currently Mr. Lou also serves as an executive director at China Medicinal Biotech Association. Mr. Lou graduated from the Third Military Medical University in 1955. Dr. Jing Lou is our co-founder, chief executive officer and director. He has served as the chief executive officer of Shenyang Sunshine since 2000. He joined Shenyang Sunshine as director of research and development in 1995. Prior to joining us, Dr. Lou founded Lifegen, Inc., a Maryland Corporation and an investee company of Shenyang Sunshine, to optimize the manufacturing processes for EPIAO and TPIAO in the U.S. Dr. Lou completed his post-doctoral study at the U.S. National Institutes of Health in 1995. He received his Ph.D. in Molecular and Cell Biology in 1993 from Fordham University, where he researched interferon signal transduction of gene regulation, and received his medical doctor degree in 1985 from Shanghai 2nd Military Medical University. Table of Contents Management Liping Xu is one of our directors. Ms. Xu has served as the executive director of Shenyang Sunshine from 1993 to 2002. Prior to joining Shenyang Sunshine, she worked at Shenhou Institute of Military Medicine. Ms. Xu is a senior engineer. She graduated from Shenyang Pharmaceutical University with a master s degree in microbiology and pharmacology in 1996. Bin Huang is our vice president of human resources and a director. Mr. Huang has served as vice president in charge of human resources and legal matters since joining Shenyang Sunshine in 1993. Before that he acted as office manager for Shenyang Army Medical Research Center from 1976 to 1993. He received his MBA from Qinghua University in 2002 and a bachelor s degree in engineering from the Northeast University in 1987. Lawrence S. Wizel has served as a director since September 2006. He was a partner at Deloitte & Touche LLP from 1980 to June 2006. He also served as deputy professional practice director and northeast region China service group leader of Deloitte & Touche LLP from 2002 to 2006. He has extensive experience serving a diverse client base of both publicly-held and private companies and has also assisted numerous Chinese companies with their US filings with the Securities and Exchange Commission. He is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. He also serves as the Chairman of Board of Trustees of Helen Keller Services for the Blind. He received his bachelor s degree in science from Michigan State University. Guanjin Hu has served as one of our directors since August 2006. He has also served as the President of Huaxi Securities Co. Ltd. since 2004. Prior to joining us he served as the Chairman and President of Guoxin Securities Co. Ltd. from 1996 to 2004. Currently Mr. Hu is a vice-chairman of the Securities Association of China and a director member of the Investment Bank Committee of the Securities Association of China. Mr. Hu possesses twelve years of experience in the securities industry in China. He received his bachelor s degree in economics from Hangzhou University in 1982. Moujia Qi has served as one of our directors since August 2006. He has also served as the Chairman of the China Starch Industry Association for the past five years. He was the deputy director and chief engineer of Huabei Pharmaceutical Factory and has held several management positions in various state-owned companies in the pharmaceutical industry. He has also served as the deputy director and chief director of Administration, before he retired in 1994. Clara Mak has been our principal financial and accounting officer since June 2006. From April 1998 to December 2004, Ms. Mak was an investment fund manager for Suez Asia Holdings (Hong Kong) Ltd., a leading private equity firm in Asia. Before that, she worked as a financial auditor with Arthur Andersen LLP and Deloitte & Touche LLP in Toronto, Canada and PricewaterhouseCoopers LLP in Hong Kong. Prior to joining the Company, she served as senior financial advisor for a Nasdaq listed company. Ms. Mak is a qualified chartered accountant in Canada and a certified public accountant in the U.S. She received her MBA from the University of Toronto in 1994. Dr. Yingfei Wei, our chief scientific officer and vice president for Business Development, joined us in August 2006. She has over fifteen years of research and development experience in the biotechnology and pharmaceutical sectors. Before joining us, she was the co-founder, president and chief executive officer of Elixirin Corporation from 2004 to 2005, responsible for overseeing contract research, manufacturing, regulatory approvals and marketing of anti-aging products in the U.S. and China. Before that, she was director of biotechnology research at Bayer HealthCare Global from 1998 to 2004 and group leader at the discovery research department of Human Genome Sciences Inc. from 1993 to 1998. Dr. Wei is Table of Contents Management named inventor for 37 patents and has authored several publications, primarily in the areas of protein and antibody drug discovery and genomics. Dr. Wei was a postdoctoral fellow at Harvard University s School of Public Health in 1993. She received her Ph.D. in biochemistry from the University of California in 1990 and a bachelor s degree in biochemistry from Beijing University in 1983. Dongmei Su is our chief technology officer responsible for research and development and manufacturing process engineering. She is the named co-inventor for four of our patents. Ms. Su joined Shenyang Sunshine in 1993 where she served as director of research and development and manufacturing since 1997. She received her bachelor s degree in biochemical engineering from Jilin University in 1992, and her master s degree in microbiology and pharmacology from Shenyang Pharmaceutical University in 2001. Yongfu Chen, our controller, has served as the chief accounting officer of Shenyang Sunshine since he joined us in 2003. Before then, he served as the chief financial officer of Shenyang Northern Transportation Engineering Co. Ltd. in 2002 and as the auditing manager of Shenyang Beitai Group Co. Ltd. from 1999 to 2001. Mr. Chen has over twenty years of accounting experience. He received his bachelor s degree in industrial accounting from Liaoning University in 1983. Ke Li, our corporate secretary, is responsible for all corporate and government regulatory matters. Mr. Li has served as the corporate secretary of Shenyang Sunshine since 1996. He joined us in 1993 and held various administrative positions at Shenyang Sunshine before he was appointed corporate secretary. Mr. Li received his MBA from Liaoning University in 2001 and his bachelor s degree in engineering from Jilin University in 1988. EMPLOYMENT AGREEMENTS We have entered into employment agreements with all of our executive officers and employees. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate his or her employment for cause at any time, without notice or remuneration, for certain acts of the employee, including but not limited to a conviction or plea of guilty to a felony or to an act of fraud, misappropriation or embezzlement, negligence or dishonest act to the detriment of the company, or misconduct of the employee and failure to perform his or her agreed-to duties after a reasonable opportunity to cure the failure. Furthermore, we may terminate the employment without cause at any time, in which case we will pay the employee a compensation equal to one month of his or her salary for each year of his or her service for our company. An executive officer may terminate the employment at any time upon one month, written notice. Each executive officer has agreed to hold, both during and subsequent to the term of the employment agreement, our confidential information in strict confidence and not to disclose such information to anyone except our other employees who have a need to know such information in connection with our business. The executive officers have also agreed to assign to us all rights, titles and interests to or in any inventions that they may conceive or develop during the period of employment, including any copyrights, patents, mark work rights, trade secrets or other intellectual property rights pertaining to such inventions. Specifically, each executive officer has agreed not to, while employed by us and for a period of three years following the termination or expiration of the employment agreement, (i) approach our clients, customers or contacts or other persons or entities introduced to the executive officer for the purposes of doing business with such persons or entities, and will not interfere with the business relationship between us and such persons and/or entities; (ii) assume employment with or provide services as a director or otherwise for any of our competitors, or engage, whether as principal, partner, licensor or otherwise, in any business which is in direct or indirect competition with our business; or Table of Contents Management (iii) seek directly or indirectly, to solicit the services of any of our employees employed by us at or after the date of the executive officer s termination, or in the year preceding such termination. BOARD OF DIRECTORS Our board of directors currently consists of seven members, including Mr. Lawrence S. Wizel, Mr. Huanjin Hu, and Mr. Moujia Qi, all of whom are independent directors within the meaning of Rule 4200(a)(15) of the Nasdaq Marketplace Rules, as amended from time to time. Mr. Dan Lou, our chairman, is the father of Dr. Jing Lou, our chief executive officer. Our audit committee of the board of directors, consisting of Mr. Lawrence S. Wizel, Mr. Huanjin Hu and Mr. Moujia Qi, was established on October 7, 2006. Since there are no specific requirements under Cayman Islands law on the composition of our audit committee, our practice was established by our board of directors by reference to similarly situated issuers. Our practice is in line with Rule 4350(d) of the Nasdaq Marketplace Rules that requires the audit committees of U.S. companies to have a minimum of three independent directors. All members of our audit committee satisfy the independence requirements of each of the Nasdaq Marketplace Rules and 10A(m)(3)(B)(i) of the Exchange Act. The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the appointment, compensation and oversight of the work of our independent auditors. Mr. Wizel is the Chairman of the audit committee. We do not have a compensation committee or nominations committee, nor is independent director involvement required in the selection of director nominees or in the determination of executive compensation. This home country practice of ours differs from Rule 4350(c) of the Nasdaq Marketplace Rules regarding independent directors involvement in these areas, because there are no specific requirements under Cayman Islands law on the establishment of compensation committees or nominations committees, and neither are there any requirements on independent directors involvement in the selection of director nominees nor in the determination of executive compensation. DUTIES OF DIRECTORS Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended from time to time. The functions and powers of our board of directors include, among others: convening shareholders annual general meetings and reporting its work to shareholders at such meetings; declaring dividends and distributions; appointing officers and determining the term of office of officers; exercising the borrowing powers of our company and mortgaging the property of our company; and approving the transfer of shares of our company, including the registering of such shares in our share register. Table of Contents Management TERMS OF DIRECTORS AND EXECUTIVE OFFICERS Our articles of association provide for a staggered board of directors. At each annual general meeting of our shareholders, one third of our directors (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) are required to stand for reelection. The Chairman shall not be required to stand for reelection at any annual meeting, and will serve for an indefinite term. In addition, the Chairman will not be taken into account in determining the number of directors who must stand for reelection in each year. The particular directors that must stand for reelection at each annual general meeting is determined according to a rotation. Should a director choose not to offer himself or herself for reelection at an annual meeting, the number of directors who must stand for reelection at that meeting is reduced accordingly. Directors who have been longest in office since their last re-election or appointment shall stand for reelection at the annual meeting, provided that, in the case of directors who were last elected on the same day, which director must stand for reelection shall (unless they otherwise agree among themselves) be determined by lot. Any director appointed to fill a vacancy shall serve only until the next annual meeting, and shall not be taken into account in determining which particular directors or the number of directors who are stand for reelection at such annual meeting. Our executive officers are appointed by and serve at the discretion of our board of directors. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers receive compensation in the form of annual salaries and bonuses. While we do not have a specific bonus plan setting the calculation of our annual bonuses, each director and executive officer is entitled to receive an annual discretionary bonus based upon his or her performance of such amount as shall be determined by the board of directors. In 2005, the aggregate cash compensation we paid to our executive officers, including all the directors, was approximately US$220,399. If we terminate an employment agreement with an executive officer without cause, we are required to pay compensation equal to one month of his or her salary for each year of his or her service to our company. STOCK OPTION PLAN We adopted our 2006 stock incentive plan on September 5, 2006, which provides for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units, each of which we referred to as awards. The 2006 stock incentive plan is administered by the board of directors. The purpose of the plan is to provide additional incentive to those officers, employees, directors, consultants and other service providers whose contributions are essential to the growth and success of our business, in order to strengthen the commitment of such persons to us and motivate such persons to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in our long-term growth and profitability. We are authorized under the 2006 stock incentive plan to issue direct awards, to sell shares or grant options to purchase shares for up to cumulatively 10% of the issued shares outstanding from time to time. The 2006 stock incentive plan provides for the grant to our employees, directors, and consultants or any other participants that the board of directors shall decide in good faith. The board of directors has Table of Contents Management complete discretion to select the grantees and to establish the terms and conditions of the grants, subject to the provisions of the 2006 stock incentive plan. Plan Administration. Our 2006 stock incentive plan is administered by our board of directors or a committee or subcommittee appointed by our board of directors. In each case, our board of directors or the committee will determine the provisions and terms and conditions of each award grant, including, but not limited to, the exercise price for the options, vesting schedule, form of payment of exercise price and other applicable terms. Award Agreement. Awards to be granted under our 2006 stock incentive plan are evidenced by an award agreement that sets forth the terms and conditions for each award grant, which include, among other things, the vesting schedule, exercise price, type of option and expiration date of each award grant. Eligibility. We may grant awards to an officer, director, employee, consultant, advisor or another service provider of our company or any of our parent or subsidiaries, provided that directors of our company or any of our parent or subsidiary who are not also employees of our company or any of our parent or subsidiaries, and consultants or advisors to our company or any of our parent or subsidiaries may not be granted incentive stock options. Option Term. The term of each option to be granted under the 2006 stock incentive plan may not exceed five years from the date of grant. Exercise Price. In the case of non-qualified stock options, the per share exercise price of shares purchasable under an option shall be determined by the plan administrator in his or her sole discretion at the time of grant. In the case of incentive stock options, the per share exercise price of shares purchasable under an option shall not be less than 100% of the fair market value per share at the time of grant. However, if we grant an incentive stock option to an employee, who at the time of that grant owns shares representing more than 10% of the voting power of all classes of our share capital, the exercise price cannot be less than 110% of the fair market value of our ordinary shares on the date of that grant. Amendment and Termination. Our board of directors may at any time amend, alter or discontinue the plan, provided that no amendment, alteration or discontinuation shall be made that would impair the rights of a participant under any award theretofore granted without such participant s consent. Unless terminated earlier, our 2006 stock incentive plan shall continue in effect for a term of five years from the effective date of the plan. Table of Contents Management The following table summarizes, as of the date of this prospectus, options that we granted to several of our directors and executive officers and to other individuals as a group under our 2006 stock incentive plan: Name Number of shares to be issued upon exercise of options Per share exercise price (US$) Grant date Date of Expiration Dr. Jing Lou 185,400 1.60 October 1, 2006 October 1, 2009 Bin Huang 30,000 1.60 October 1, 2006 October 1, 2009 Lawrence S. Wizel 15,000 1.60 October 1, 2006 October 1, 2009 Guanjin Hu 15,000 1.60 October 1, 2006 October 1, 2009 Moujia Qi 15,000 1.60 October 1, 2006 October 1, 2009 Clara Mak * 1.60 October 1, 2006 October 1, 2009 Dr. Yingfei Wei * 1.60 October 1, 2006 October 1, 2009 Yongfu Chen * 1.60 October 1, 2006 October 1, 2009 Dongmei Su 50,000 1.60 October 1, 2006 October 1, 2009 Ke Li 30,000 1.60 October 1, 2006 October 1, 2009 Other individuals as a group 531,000 1.60 October 1, 2006 October 1, 2009 Table of Contents Related party transactions Corporate guarantees In 2006, we entered into an arrangement by which we and one of our shareholders, China Transport, cross guaranteed certain of each other s loans. As of September 30, 2006, China Transport had outstanding loans in the aggregate principal amount of RMB10 million (US$1.3 million) guaranteed by us. These arrangements were a result of the long established cross guaranteed banking relationship with China Transport in which China Transport also provided guarantees for our bank loans. In anticipation of this offering, we managed to reduce a significant portion of the cross guaranteed loan for China Transport by RMB27 million compared to the amount as of December 31, 2005. The ultimate beneficiary of China Transport is committed to using the proceeds from selling his 0.94% pre-IPO equity interest at the initial public offering for repaying loans in the aggregate principal amount of RMB10 million to the bank, which will become due in February 2007. We believe that it is probable that China Transport will be able to make all scheduled payments in relation to these loans and that the estimated fair value of our stand-by commitment is not material. Therefore, no liability representing the estimated fair value of these financial guarantees has been recorded in our consolidated balance sheet. In addition, we owed LifeGen, Inc., an investee company founded by our CEO, Dr. Jing Lou, research and development expenses in the amount of RMB1.8 million (US$0.2 million) as of December 31, 2005. The balance was settled during the nine months ended September 30, 2006. We no longer have any outstanding payment obligations toward LifeGen, Inc. Disposal of interest in Beijing Sunshine and Liaoning Sunshine In October 2006, in connection with our corporate reorganization, we transferred our 45% equity interest in Beijing Sunshine to Ms. Dongmei Su, our chief technology officer, for a cash consideration of RMB454,500, representing 45% of the initial registered capital of Beijing Sunshine. In November 2006, in connection with our corporate reorganization, we transferred our 90% equity interest in Liaoning Sunshine to Mr. Dan Lou, our chairman, for a payment of RMB13,500,000 from Mr. Lou, representing 90% of the initial registered capital of Liaoning Sunshine. In December 2006, we paid RMB13,500,000 to Mr. Lou as prepayment of the purchase price to buy back Mr. Lou s equity interest in Liaoning Sunshine. For more details on these contractual arrangements, see Our corporate structure Contractual arrangements with Liaoning Sunshine and Beijing Sunshine. Share-based compensation On October 15, 2006, Achieve Well granted an aggregate number of 312,504 ordinary shares to a director and a senior executive as compensation for their on-going services rendered to us. For more details, see Critical accounting policies and estimates Share-based compensation expenses and footnote 17 to our consolidated financial statements included elsewhere in this prospectus. On October 1, 2006, we granted options to purchase our ordinary shares to our executive officers and directors, is described in Management Stock Option Plan. Miscellaneous In 2005, we paid RMB800,000 (US$101,000) for the purchase of motor vehicles from Shenyang Keweier, a shareholder. Table of Contents Principal and selling shareholders The following table sets forth information with respect to beneficial ownership of our ordinary shares as of the date hereof and as adjusted to reflect the sale of ADSs offered by us in this offering, by: each of our executive officers and directors; each person known by us to beneficially own 5% or more of our ordinary shares; and each other selling shareholder who will participate in this offering. Shares beneficially owned prior to offering(1)(2) Shares being sold in this offering (assuming no exercise of the over-allotment option) Shares beneficially owned after this offering (assuming no exercise of the over-allotment option) Shares being sold in this offering (assuming full exercise of the over- allotment option)(1)(2) Shares beneficially owned after this offering (assuming full exercise of the over-allotment option) Name Number % Number % Number % Number % Number % Directors and executive officers: Dan Lou(3) 13,070,053 13.07 13,070,053 8.70 1,322,627 0.86 11,747,426 7.68 Dr. Jing Lou(4) 4,856,252 4.86 4,856,252 3.23 4,856,252 3.17 Liping Xu(5) 9,588,301 9.59 9,588,301 6.38 3,674,452 2.40 5,913,849 3.86 Clara Mak * * * * * * Dr. Yingfei Wei * * * * * * Yongfu Chen * * * * * * Lawrence S. Wizel * * * * * * Guanjin Hu * * * * * * Moujia Qi * * * * * * Bin Huang(6) 1,770,860 1.77 1,770,860 1.18 177,086 0.12 1,593,774 1.04 Dongmei Su(7) 1,053,742 1.05 1,053,742 0.70 105,371 0.07 948,371 0.62 Ke Li(8) * * * * * * * * Principal and Selling Shareholders: Achieve Well International Limited(9) 29,035,123 29.03 1,145,291 0.76 27,889,832 18.55 1,769,362 1.16 26,120,470 17.07 Happyview Finance Limited(10) 16,024,392 16.02 999,999 0.67 15,024,393 10.00 15,024,393 9.82 Lan s Holdings Limited(11) 12,232,215 12.23 499,996 0.33 11,732,219 7.81 11,732,219 7.67 Pacven Walden Ventures VI, LP(12) 10,353,142 10.35 10,353,142 6.89 10,353,142 6.77 Starry Investments Limited(13) 9,400,001 9.40 939,995 0.63 8,460,006 5.63 8,460,006 5.53 W&W International Investments Limited(14) 7,732,074 7.73 7,732,074 5.14 7,732,074 5.05 Witty Mind International Limited(15) 6,000,000 6.00 6,000,000 3.99 599,998 0.39 5,400,002 3.53 Precious Winwin Limited(16) 3,000,000 3.00 3,000,000 2.00 2,999,997 1.96 * * * Beneficially owns less than 1% of our outstanding ordinary shares. (1) Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, and includes voting or investment power with respect to the ordinary shares. (2) The number of our ordinary shares outstanding in calculating the percentage for each listed person is based on 100,000,998 ordinary shares outstanding as of the date hereof, 150,315,717 ordinary shares outstanding after completion of this offering (assuming no exercise of the over-allotment option) and 153,031,360 ordinary shares outstanding after the completion of this offering (assuming full exercise of the over-allotment option). Table of Contents Principal and selling shareholders (3) Mr. Dan Lou, our chairman, beneficially owns 7,070,053 ordinary shares, which are held in trust on his behalf by Achieve Well International Limited. In addition, he holds 6,000,000 ordinary shares indirectly through his wholly-owned company, Witty Mind International Limited. (4) In addition, Dr. Jing Lou, our chief executive officer, beneficially owns 4,856,252 ordinary shares, which are held in trust on his behalf by Achieve Well International Limited and which number of ordinary shares includes 156,252 ordinary shares granted to Dr. Jing Lou as share-based compensation. (5) Ms. Liping Xu, our director and vice president, beneficially owns 6,588,301 ordinary shares, which are held in trust on her behalf by Achieve Well International Limited. In addition, she holds 3,000,000 ordinary shares indirectly through her wholly-owned company, Precious Winwin Limited. (6) Mr. Bin Huang, our director and vice president of human resources, beneficially owns 1,770,860 ordinary shares, which are held in trust on his behalf by Achieve Well International Limited. (7) Ms. Dongmei Su, our chief technology officer, beneficially owns 1,053,742 ordinary shares, which are held in trust on her behalf by Achieve Well International Limited. (8) Mr. Ke Li, our corporate secretary, beneficially owns 898,205 ordinary shares, which are held in trust on his behalf by Achieve Well International Limited. (9) Achieve Well International Limited is a British Virgin Islands international business company for investment purpose with its business address at No.3 A1, Road 10, Shenyang Economy & Technology Development Zone, Shenyang, P.R. China. Achieve Well International Limited is beneficially owned by Mr. Dan Lou (approximately 24.3%), Ms. Liping Xu (approximately 22.7%), Mr. Jing Lou (approximately 16.7%), Mr. Bin Huang (approximately 6.1%), Ms. Dongmei Su (approximately 3.6%), Mr. Ke Li (approximately 3.1%), Ms. Clara Mak and certain other individuals. Each beneficial owner of Achieve Well International Limited has the voting rights with respect to the securities beneficially owned by him or her. (10) Happyview Finance Limited is a British Virgin Islands international business company solely owned by Mr. Ou Su, who has both investment and voting authority with respect to the voting securities of such company. Its business address is at Room 608, Block Q, Hui Yuan Gong Yu, Ya Yun Cun, Chaoyang District, Beijing, P.R. China and Mr. Ou Su is its sole director. (11) Lan s Holdings Limited is a British Virgin Islands international business company owned by Mr. Xiaobing Liu (49%) and Ms. Ying Luan (51%), who each have both investment and voting authority with respect to the voting securities held by him or her. Its business address is at Room 22B, No.969 Beijing Road West, Jianan District, Shanghai, P.R. China. (12) Pacven Walden Ventures VI, LP is a Cayman Islands limited partnership of which the beneficial owner is Pacven Walden Management VI Co., Ltd. Its business address is at 2806A Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. It acquired 10,353,142 shares from Fullcity International Limited, a former shareholder of our company and the predecessor of which is Montgomery Bio-Medicine Inc., on October 10, 2006. (13) Starry Investments Limited is a Samoan international business company solely owned by Ms. Lili Liu, who has both investment and voting authority with respect to the voting securities of such company. Its business address is at 4 Zhong Xing Street, Heping District, Shenyang, Liaoning, P.R. China and Ms. Lili Liu is its sole director. (14) W&W International Investments Limited is a British Virgin Islands international business company solely owned by Ms. Lisha Zhang, who has both investment and voting authority with respect to the voting securities of such company. Its business address is at 9B1 Hexiang Yuan, No.12, Hexiang West Road, Kaiyuan District, Xiamen, P.R. China and Ms. Lisha Zhang is its sole director. (15) Witty Mind International Limited is a British Virgin Islands international business company solely owned by Mr. Dan Lou, who has both investment and voting authority with respect to the voting securities of such company. Its business address is at No.3 A1, Road 10, Shenyang Economy & Technology Development Zone, Shenyang, P.R. China. Table of Contents Principal and selling shareholders (16) Excludes 4,463,392 shares sold to Remose Enterprises Limited, a British Virgin Islands company organized for investment purpose in November 2006. Precious Winwin Limited is a British Virgin Islands international business company solely owned by Ms. Liping Xu, who has both investment and voting authority with respect to the voting securities of such company. Its business address is at No.3 A1, Road 10, Shenyang Economy & Technology Development Zone, Shenyang, P.R. China. Remose Enterprises Limited is a British Virgin Islands international business company solely owned by Mr. Xuechuan Xu for investment purpose. Its business address is 3301, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong and Mr. Xuechuan Xu is its sole director. The selling shareholders named above acquired their ordinary shares (or preferred shares which will be converted into ordinary shares prior to or concurrently with the completion of this offering) in offerings which were exempt from registration under the Securities Act because they were made in either private placements or offshore sales to non-U.S. persons. The discussions and table above do not reflect (i) the 1,060,000 ordinary shares underlying options granted to several of our directors, officers and employees on October 1, 2006, none of which will vest within 60 days from the date of this prospectus; or (ii) the 15,000 ordinary shares granted to a senior executive in August 2006 with a one-year vesting period. As of the date of this prospectus, none of our outstanding ordinary shares are held of record by any person in the United States. None of our shareholders has informed us that it is affiliated with a registered broker-dealer, or is in the business of underwriting securities. None of our existing shareholders has different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. Table of Contents Regulations The pharmaceutical industry is heavily regulated in the PRC. This section summarizes the principal PRC regulations relating to our business. REGULATIONS FOR PHARMACEUTICAL INDUSTRY IN CHINA Regulatory authorities In the PRC, the State Food and Drug Administration, or the SFDA, is the authority that monitors and supervises the administration of pharmaceutical products and medical appliances and equipment as well as food, health food and cosmetics. The SFDA s predecessor, the State Drug Administration, or the SDA, was established on August 19, 1998 as an organization under the State Council to assume the responsibilities previously handled by the Ministry of Health of the PRC, or the MOH, the State Pharmaceutical Administration Bureau of the PRC and the State Administration of Traditional Chinese Medicine of the PRC. The SFDA was founded in March 2003 to replace the SDA. The primary responsibilities of the SFDA include: monitoring and supervising the administration of pharmaceutical products, medical appliances and equipment as well as food, health food and cosmetics in the PRC; formulating administrative rules and policies concerning the supervision and administration of food, health food, cosmetics and the pharmaceutical industry; evaluating, registering and approving of new drugs, generic drugs, imported drugs and traditional Chinese medicine, or TCM; approving and issuing permits for the manufacture and export/import of pharmaceutical products and medical appliances and equipment and approving the establishment of enterprises to be engaged in the manufacture and distribution of pharmaceutical products; and examining and evaluating the safety of food, health food and cosmetics and handling significant accidents involving these products. The MOH is an authority at the ministerial level under the State Council and is primarily responsible for national public health. Following the establishment of the SFDA in 2003, the MOH was put in charge of the overall administration of the national health in the PRC excluding the pharmaceutical industry. The MOH performs a variety of tasks in relation to the health industry such as establishing social medical institutes and producing professional codes of ethics for public medical personnel. The MOH is also responsible for overseas affairs, such as dealings with overseas companies and governments. Drug administration laws and regulations The PRC Drug Administration Law as promulgated by the Standing Committee of the National People s Congress in 1984 and the Implementing Measures of the PRC Drug Administration Law as promulgated by the MOH in 1989 have laid down the legal framework for the establishment of pharmaceutical manufacturing enterprises, pharmaceutical trading enterprises and for the administration of pharmaceutical products including the development and manufacturing of new drugs and medicinal preparations by medical institutions. The PRC Drug Administration Law also regulates the packaging, trademarks and the advertisements of pharmaceutical products in the PRC. Certain revisions to the PRC Drug Administration Law took effect on December 1, 2001. They were formulated to strengthen the supervision and administration of pharmaceutical products, and to ensure Table of Contents Regulations the quality of pharmaceutical products and the safety of pharmaceutical products for human use. The revised PRC Drug Administration Law applies to entities and individuals engaged in the development, production, trade, application, supervision and administration of pharmaceutical products. It regulates and prescribes a framework for the administration of pharmaceutical manufacturers, pharmaceutical trading companies, medicinal preparations of medical institutions and the development, research, manufacturing, distribution, packaging, pricing and advertisements of pharmaceutical products. The PRC Drug Administration Implementation Regulations promulgated by the State Council took effect on September 15, 2002 to provide detailed implementation regulations for the revised PRC Drug Administration Law. Examination and approval of new medicines In October 2002, the SFDA announced the Administrative Measures on the Registration of Pharmaceutical Products, which were later revised on February 28, 2005. Under the current applicable regulations, new medicines generally refer to those medicines that have not yet been marketed in the PRC. In addition, certain marketed medicines may also be treated as new medicines if the type or application method of such medicines has been changed or new therapeutic functions have been added to such medicines. According to the Administrative Measures on the Registration of Pharmaceutical Products, the approval of new medicines requires the following steps: Upon completion of the pre-clinical research of the new medicine, application for registration of the new medicine shall be submitted to the drug regulatory authorities at the provincial level for review. After completion of its review the drug regulatory authorities at the provincial level shall submit their opinion and report to the SFDA for review; if all the requirements are complied with, the SFDA will issue a notice of acceptance of application and proceed with its assessment on whether or not to grant the approval for conducting the clinical research on the new medicine; after obtaining the SFDA s approval for conducting the clinical research, the applicant may proceed with the relevant clinical research (which is generally conducted in three phases for a new medicine under the Medicine Registration Measures) at institutions with appropriate qualification: - Phase I refers to the preliminary clinical trial for clinical pharmacology and body safety. It is conducted to observe the human body tolerance for new medicine and pharmacokinetics, so as to provide a basis for determining the prescription plan. - Phase II refers to the stage of preliminary evolution of clinical effectiveness. The purpose is to preliminarily evaluate the clinical effectiveness and safety of the medicine used on patients with targeted indication, as well as to provide a basis for determining the Phase III clinical trial research plan and the volume under the prescription plan. - Phase III is a clinical trial stage to verify the clinical effectiveness. The purpose is to test and determine the clinical effectiveness and safety of the medicine used on patients with targeted indication, to evaluate the benefits and risks thereof, and, eventually, to provide sufficient basis for review of the medicine registration application. after completion of the relevant clinical research, the applicant shall submit its clinical research report together with the relevant supporting documents to the drug regulatory authorities at the provincial level and shall provide raw materials of the standard products to the PRC National Institute for the Control of Pharmaceutical and Biological Products; Table of Contents Regulations the drug regulatory authorities at the provincial level shall then review the relevant documents, conduct site inspections and sample examinations and thereafter submit their opinion, inspection report and other application materials to the SFDA for review; the PRC National Institute for the Control of Pharmaceutical and Biological Products will arrange for the examination of the sample new drug supplied by the relevant medicine examination institutes and will then issue the examination result report to the SFDA; and if all the regulatory requirements are satisfied, the SFDA will grant a new drug certificate and a pharmaceutical approval number (assuming the applicant has a valid Pharmaceutical Manufacturing Permit and the requisite production conditions for the new medicine have been met). Permits and licenses for manufacturing and registration of drugs Production License. To manufacture pharmaceutical products in the PRC, a pharmaceutical manufacturing enterprise must first obtain a Pharmaceutical Manufacturing Permit issued by the relevant pharmaceutical administrative authorities at the provincial level where the enterprise is located. Among other things, such a permit must set forth the permit number, the name, legal representative and registered address of the enterprise, the site and scope of production, issuing institution, date of issuance and effective period. Each Pharmaceutical Manufacturing Permit issued to a pharmaceutical manufacturing enterprise is effective for a period of five years. Any enterprise holding a Pharmaceutical Manufacturing Permit is subject to review by the relevant regulatory authorities on an annual basis. The enterprise is required to apply for renewal of such permit within six months prior to its expiry and will be subject to reassessment by the issuing authorities in accordance with then prevailing legal and regulatory requirements for the purposes of such renewal. Business Licenses. In addition to a Pharmaceutical Manufacturing permit, the manufacturing enterprise must also obtain a business license from the administrative bureau of industry and commerce at the local level after it has obtained the requisite Pharmaceutical Manufacturing Permit. The name, legal representative and registered address of the enterprise specified in the business license must be identical to that set forth in the Pharmaceutical Manufacturing Permit. Registration of Pharmaceutical Products. All pharmaceutical products that are produced in the PRC must bear a registered number issued by the SFDA in the PRC, with the exception of Chinese herbs and Chinese herbal medicines in soluble form. The medicine manufacturing enterprises must obtain the medicine registration number before manufacturing any medicine. GMP Certificates. The World Health Organization encourages the adoption of good manufacturing practice, or GMP, standards in pharmaceutical production in order to minimize the risks involved in any pharmaceutical production that cannot be eliminated through testing the final products. The Guidelines on Good Manufacturing Practices, as amended in 1998, or the Guidelines, took effect on August 1, 1999 and set the basic standards for the manufacture of pharmaceuticals. These Guidelines cover issues such as the production facilities, the qualification of the staff at the management level, production plant and facilities, documentation, material packaging and labeling, inspection, production management, sales and return of products and customers complaints. On October 23, 2003, the SFDA issued the Notice on the Overall Implementation and Supervision of Accreditation of Good Manufacturing Practice Certificates for Pharmaceuticals, which required all pharmaceutical manufacturers to apply for the GMP certificates by June 30, 2004. Those enterprises that failed to obtain Table of Contents Regulations the GMP certificates by December 31, 2004 would have their Pharmaceutical Manufacturing Permit revoked by the drug administrative authorities at the provincial level. The GMP certificate is valid for a term of five years and application for renewal must be submitted six months prior to its expiration date. Administrative protection and monitoring periods for new drugs In April 1999, the SFDA promulgated the Regulations for New Drug Protection and Related Technology Transfer, or the 1999 Regulations, which provided a six to twelve year administrative protection period for different categories of new drugs. During the protection period of a new drug manufactured by a specific pharmaceutical company, other enterprises or individuals are prohibited from manufacturing a similar drug or expanding the label of any existing drug to include the same indication. In December 2002, the 1999 Regulations were replaced by the Administrative Measures on the Registration of Pharmaceutical Products, or the 2002 Regulations, which were later revised in February 2005. However, according to an official notice of the SFDA, administrative protection periods granted prior to September 2002 pursuant to the 1999 Regulations will stay valid until their respective expiration dates. According to the 2002 Regulations, with a view to protecting public health, the SFDA may provide for administrative monitoring periods of up to five years for new drugs approved to be manufactured, to continually monitor the safety of those new drugs. The key element in determining the availability and duration of the monitoring period is the safety of the new drug. The SFDA will consider, among other things, whether the new drug has been previously launched domestically or overseas, what type of new drug it is and what process and technology are involved in the production of the new drug. For example, for a biochemical product that has never been launched domestically or overseas, a five-year monitoring period will be granted; for a biochemical product that has been launched overseas but not domestically, only a four-year monitoring period will be granted. During the monitoring period of a new drug, the SFDA will not approve any other enterprise s application to manufacture or import a similar new drug. The only exception is that the SFDA will continue to handle any application if, prior to the commencement of the monitoring period, the SFDA has already approved the applicant s clinical trial for a similar new drug. If such application conforms to the relevant provisions, the SFDA may approve such applicant to manufacture or import the similar new drug during the remainder of the monitoring period. Any applicant who is not satisfied with the SFDA s decision can appeal within ten days of its receipt of the SFDA s decision. If the applicant is dissatisfied with the result of the appeal, it may apply for an administrative review with a special committee consisting of senior officials of the SFDA or file an administrative lawsuit with a people s court in China. Distribution of pharmaceutical products According to the PRC Drug Administration Law and its implementing regulations and the Administrative Measures on Oversight of Distribution of Pharmaceutical Products, a manufacturer of pharmaceutical products in the PRC can only engage in the trading of the pharmaceutical products that the manufacturer has produced itself. In addition, such manufacturer can only sell its products to: wholesalers and distributors holding Pharmaceutical Trading Permits; other holders of Pharmaceutical Manufacturing Permits; or medical practitioners holding Medical Practice Permits. Table of Contents Regulations A pharmaceutical manufacturer in the PRC is prohibited from selling its products to end-users, or individuals or entities other than holders of Pharmaceutical Trading Permits, the Pharmaceutical Manufacturing Permits or the Medical Practice Permits. The granting of a Pharmaceutical Trading Permit to wholesalers shall be subject to approval of the provincial level FDA, while the granting of a retailer permit shall be subject to the approval of the FDA above the county level. Unless otherwise expressly approved, no pharmaceutical wholesaler may engage in the retail of pharmaceutical products, and neither may pharmaceutical retailers engage in wholesale. A pharmaceutical distributor shall satisfy the following requirements: Personnel with pharmaceutical expertise as qualified according to law; Business site, facilities, warehousing and sanitary environment compatible to the distributed pharmaceutical products; Quality management system and personnel compatible to the distributed pharmaceutical products; and Rules and regulations to ensure the quality of the distributed pharmaceutical products. Operations of pharmaceutical distributors shall be conducted in accordance with the Pharmaceutical Operation Quality Management Rules and shall be granted a certificate under such rules by the SFDA. Pharmaceutical distributors must keep true and complete records of any pharmaceutical products purchased, distributed or sold with the generic name of such products, specification, approval code, term, manufacturer, purchasing or selling party, price and date of purchase or sale. A pharmaceutical distributor must keep such record at least until one year after the expiry date of such products and in any case, such record must be kept for no less than three years. Penalties may be imposed for any violation of record-keeping. Pharmaceutical distributors can only distribute pharmaceutical products obtained to those with a Pharmaceutical Manufacturing Permit and a Pharmaceutical Trading Permit. Price control The administration of price control of pharmaceutical products is vested in the national and provincial price administration authorities. Depending on the categories of pharmaceutical products in question, the prices of pharmaceutical products listed in the State Basic Medical Insurance Drug Catalogue, drugs with patents and other drugs whose production or trading may constitute monopolies are subject to the control of the National Development and Reform Commission of the PRC, or the NDRC, and the relevant provincial or local price administration authorities. In respect of pharmaceutical products manufactured in the PRC, the national price administration authority from time to time publishes price control lists setting out the names of pharmaceutical products and their respective price ceilings. The provincial price administration authorities also publish price control lists in respect of the pharmaceutical products which are manufactured within their respective areas. The main purpose of the price control policy is to set an upper limit to the prices of pharmaceutical products to prevent excessive increases in the prices of such products. Pursuant to the Measures for Medicine Pricing by the Government, the price ceiling is determined mainly by reference to the quality of the product, whether the products are newly developed products, and the status of implementing the GMP Guidelines by the manufacturer of the relevant product. Table of Contents Regulations The prices of pharmaceutical products included in the price control lists are subject to adjustment upon approval by the price administration authorities from time to time. Pharmaceutical enterprises in the PRC are required to submit cost related information such as raw material prices regularly to the relevant authorities, so that the authorities could take into account the prevailing market conditions when setting the prices. The price administration authorities may approve adjustments to the price of pharmaceutical products upon the pharmaceutical manufacturer s request if material changes in the cost structure in producing the pharmaceutical products or significant changes in demand for these pharmaceutical products are recognized. Product liability In addition to the strict new drug approval process, certain PRC laws have been promulgated to protect the rights of consumers and to strengthen the control of medical products in the PRC. Under current PRC law, manufacturers and vendors of defective products in the PRC may incur liability for loss and injury caused by such products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated on April 12, 1986, a defective product which causes property damage or physical injury to any person may subject the manufacturer or vendor of such product to civil liability for such damage or injury. On February 22, 1993 the Product Quality Law of the PRC, or the Product Quality Law, was promulgated to supplement the PRC Civil Law aiming to protect the legitimate rights and interests of the end-users and consumers and to strengthen the supervision and control of the quality of products. The Product Quality Law was revised by the Ninth National People s Congress on July 8, 2000. Pursuant to the Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability and have their business licenses revoked. On October 31, 1993, the PRC Law on the Protection of the Rights and Interests of Consumers, or the Consumers Protection Law, was promulgated which provides further protection to the legal rights and interests of consumers in connection with the purchase or use of goods and services. At present, all business operations must observe and comply with the Consumers Protection Law when they provide their goods and/or consumer services. Health insurance system According to the State Council Decision On the Establishment of the Basic Medical Insurance System of Staff in Cities and Town promulgated by the State Council in December 1998, the Ministry of Labor and Social Security assumed the responsibilities for the reform of the social medical insurance system. As part of the reform of the state basic medical insurance system for employees in the urban areas, the Ministry of Labor and Social Security, the MOH, the SDFA and various other governmental departments jointly issued the State Basic Medical Insurance Drug Catalogue with a view to enhancing the management of the use of drugs under the medical insurance system. The drugs listed in the catalogue are covered by the medical insurance system. The labor and social security authorities at the provincial level may, subject to ratification by the Ministry of Labor and Social Security, make amendments to the list of category B drugs in the catalogue to a small extent to suit local needs. Patent and trademark protection PRC Patent Law The PRC first allowed patents for the protection of proprietary rights, as set forth in the China Patent Law, in 1985. Pharmaceutical inventions were not patentable under the China Patent Law until 1994. Table of Contents Regulations Patents relating to pharmaceutical inventions are effective for 20 years from the initial date the patent application was filed. Patent prosecution The Chinese patent prosecution system is different from the U.S. system in a number of ways. The Chinese patent system, like most countries other than the United States, adopts the principle of first to file. This means that, where more than one person files a patent application for the same invention, a patent will be granted to the person who first filed the application. The United States uses a principle of first to discover to determine the granting of patents. In addition, the PRC requires absolute novelty in order for an invention to be patentable. Pursuant to this requirement, any prior written or oral publication, demonstration or use before filing the patent application prevents an invention from being patented in the PRC. Conversely, inventors in the United States have a one year grace period after publication of the invention in which they may file a patent. Patents issued in the PRC are not enforceable in Hong Kong, Taiwan or Macau, which each have independent patent systems. Patents are filed at the State Intellectual Property Office, or SIPO, in Beijing. Patent enforcement A patent holder who believes the patent is being infringed may either file a civil legal suit or file an administrative complaint with a provincial or municipal office of SIPO. A PRC court may issue a preliminary injunction upon the patent holder s or an interested party s request before instituting any legal proceedings or during the proceedings. Damages for infringement are calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be determined in the range of from one to three times of the license fee under a contractual license. If damages cannot still be determined, statutory damages from RMB5,000 to 500,000 may be requested. As in other jurisdictions, with one notable exception, the patent holder in the PRC has the burden of proving that the patent is being infringed. However, if a the holder of a manufacturing process patent alleges infringement of such patent, the alleged infringing party has the burden of proving that there has been no infringement. Compulsory license Under the Patent Law, where a person possesses the means to utilize a patented technology, but such person cannot obtain a license from the patent holder on reasonable terms and in a reasonable period of time, SIPO is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. We do not believe a compulsory license has yet been granted by the SIPO. International patent treaties The PRC is also a signatory to all major intellectual property conventions, including Paris Convention for the Protection of Industrial Property, Madrid Agreement on the International Registration of Marks and Madrid Protocol, Patent Cooperation Treaty, Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure and the Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPs. Although patent rights are national rights, there is also a large degree of international co-operation under the Patent Cooperation Treaty, or the PCT, to which China is a signatory. Under the PCT, applicants in one country can seek patent protection for an invention simultaneously in a number of other member countries by filing a single international patent application. The fact that a patent application is pending Table of Contents Regulations is no guarantee that a patent will be granted, and even if granted, the scope of a patent may not be as broad as the subject of the initial application. Trademarks The PRC Trademark Law was promulgated in 1982, followed by the PRC Trademark Implementing Regulations in 1988, and was amended on October 27, 2001. As noted above, the PRC is a signatory to the Madrid Agreement and the Madrid Protocol. These agreements provide a mechanism whereby an international registration produces the same effects as an application for registration of the mark made in each of the countries designated by the applicant. The PRC Trademark Office is responsible for the registration and administration of trademarks throughout the country. Like patents, the PRC has adopted a first-to-file principle with respect to trademarks. PRC law provides that the following acts constitute infringement of the exclusive right to use a registered trademark: use of a trademark that is identical with or similar to a registered trademark in respect of the same or similar commodities without the authorization of the trademark registrant; sale of commodities infringing upon the exclusive right to use the trademark; counterfeiting or making, without authorization, representations of a registered trademark of another person, or sale of such representations of a registered trademark as were counterfeited, or made without authorization; changing a registered trademark and putting commodities on which the changed registered trademark is used into the market without the consent of the trademark registrant; and otherwise infringing upon the exclusive right of another person to use a registered trademark. In the PRC, a trademark owner who believes the trademark is being infringed has three options: The trademark owner can provide his trademark registration certificate and other relevant evidence to the State or local Administration for Industry and Commerce (the AIC ) which can, at its discretion, launch an investigation. The AIC may take such actions as: order the infringer to immediately cease the infringing behavior, seize and destroy the representations of the trademark in question and impose a fine. If the trademark owner is dissatisfied with the SAIC s decision, he may apply to have the decision reconsidered. The trademark owner may institute civil proceedings directly with the court. Civil redress for trademark infringement includes: injunctions; requiring the infringer to take steps to mitigate the damage (i.e., print notices in newspapers); and damages (i.e. compensation for the economic loss and injury to reputation as a result of trademark infringement suffered by the trademark holder). The amount of compensation is calculated according to either the gains acquired by the infringer from the infringement during the infringement, or the loss suffered by the trademark owner, including Table of Contents Regulations expenses incurred by the trademark holder to deter such infringement. If it is difficult to determine the gains acquired by the infringer from the infringement, or the loss suffered by the trademark owner, the court may elect to award compensation of not more than RMB500,000. If the case is so serious as to constitute a crime, the trademark owner may lodge a complaint with the relevant public security organ. Other national and provincial level laws and regulations We are subject to changing regulations under many other laws and regulations administered by governmental authorities at the national, provincial and municipal levels, some of which are or may become applicable to our business. Our hospital customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships with us. For example, regulations control the confidentiality of patients medical information and the circumstances under which patient medical information may be released for inclusion in our databases, or released by us to third parties. These laws and regulations governing both the disclosure and the use of confidential patient medical information may become more restrictive in the future. We also comply with numerous additional state and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection and fire hazard control. We believe that we are currently in compliance with these laws and regulations; however, we may be required to incur significant costs to comply with these laws and regulations in the future. Unanticipated changes in existing regulatory requirements or adoption of new requirements could therefore have a material adverse effect on our business, results of operations and financial condition. REGULATION OF FOREIGN CURRENCY EXCHANGE AND DIVIDEND DISTRIBUTION Foreign currency exchange Foreign currency exchange regulation in China is primarily governed by the following rules: the Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. Under the Exchange Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE. Under the Administration Rules, foreign-invested enterprises in China, such as Shenyang Sunshine, may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the SAFE and other relevant government authorities. Table of Contents Regulations Dividend distribution The principal regulations governing distribution of dividends paid by wholly foreign owned enterprises include: the Wholly Foreign Owned Enterprise Law (1986), as amended; and the Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended. Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to set aside certain amounts out of their accumulated profits each year, if any, to fund certain reserve funds, bonus and welfare funds. These funds are not distributable as cash dividends. Regulation of foreign exchange in certain onshore and offshore transactions On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice No. 75, which became effective as of November 1, 2005. Pursuant to Notice No.75, prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident who is an ultimate controller, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch. 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 the injection of equity interests or assets of an onshore enterprise to the offshore company, or the completion of any overseas fundraising by such offshore company. 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 involving a change in the capital of the offshore company, such as (a) an increase or decrease in its capital, (b) a transfer or swap of shares, (c) a merger or division, (d) a long-term equity or debt investment or (e) the provision of a guarantee to third parties. Under Notice No. 75, 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. Regulation on overseas listings On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or the MOFCOM, and the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. The New M&A Rule, among other things, purports to require an offshore special purpose vehicle, or SPV, formed for the purpose of listing the SPV s securities on an offshore securities exchange and controlled directly or indirectly by PRC companies or individuals, to obtain the approval of the CSRC prior to such offshore listing and trading. On September 21, 2006 the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, substantial uncertainty remains regarding the scope and applicability of the New M&A Rule to overseas listings of offshore SPVs. Table of Contents Regulations Our PRC counsel, Jingtian & Gongcheng, has advised us that, based on its understanding of the current PRC laws, regulations and rules, it is not necessary for us to obtain the CSRC s approval for this offering because we obtained approval from the Shenyang Branch of MOFCOM for the acquisition of Shenyang Sunshine, our wholly owned subsidiary in the PRC, before September 8, 2006, the effective date of the new regulation. A copy of Jingtian & Gongcheng s legal opinion regarding this new PRC regulation is filed as an exhibit to our registration statement on Form F-1. COMPANY LAW On October 27, 2005, the Standing Committee of the National People s Congress adopted amendments to the PRC Company Law, which substantially overhauled the PRC company law system and removed a number of legal restrictions and hurdles on the management and operations of limited liability companies and companies limited by shares. It is expected that the WFOE Law and its implementation rules will be amended accordingly in order to align the WFOE Law with the amendments to the PRC Company Law. Shenyang Sunshine is governed by both the PRC Company Law and the WFOE Law and its implementation rules. We believe that Shenyang Sunshine will be able to benefit from a more flexible and business-friendly company law regime under the new PRC Company Law. For example, the amended PRC Company Law eliminates a restriction which limited the amount of equity investments a company could make to a maximum of 50% of such company s net assets. With the removal of this restriction, Shenyang Sunshine may have increased flexibility in making equity investments or planning potential acquisitions. In addition, the amended PRC Company Law now permits the establishment of single-shareholder limited liability companies. As a result, Shenyang Sunshine may acquire 100% of the equity interest in a PRC limited liability company and become the sole shareholder of such limited liability company. Table of Contents Description of share capital We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association and the Companies Law (2004 Revision) of the Cayman Islands, which is referred to below as the Companies Law. A Cayman Islands exempted company is a company that conducts its business outside of the Cayman Islands, is exempted from certain requirements of the Companies Law, including the filing of an annual return of its shareholders with the Registrar of Companies, does not have to make its register of shareholders open to inspection and may obtain an undertaking against the imposition of any future taxation. The liability of each shareholder of our company is limited to the amount paid up on the shares held by such shareholder. As of the date hereof, our authorized share capital consists of 500,000,000 ordinary shares, par value of US$0.0001 each. The following are summaries of material terms and provisions of our memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares. This summary is not complete, and you should read the forms of our memorandum and articles of association, which will be filed as exhibits to our registration statement on Form F-1. For information on how to obtain copies of our memorandum and articles of association, see Where you can find more information. The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders rights in respect of the ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holder of such ADSs. MEETINGS Subject to our articles of association, an annual general meeting and any extraordinary general meeting will be called by not less than ten days notice in writing. Notice of every general meeting will be given to all of our shareholders. A meeting may be called by shorter notice if it is so agreed (1) in the case of a meeting called as an annual general meeting by all of our shareholders (or their proxies) entitled to attend and vote at the meeting; or (2) in the case of any other meeting, by a majority in number of our shareholders having a right to attend and vote at the meeting, being a majority together holding not less than 95.0% in nominal value of the ordinary shares giving that right. No business other than the appointment of a chairman of the meeting may be transacted at any general meeting unless a quorum is present at the commencement of business. However, the absence of a quorum will not preclude the appointment of a chairman of the meeting. If present, the chairman of our board of directors shall be the chairman presiding at any shareholders meetings. Two of our shareholders present in person or by proxy or corporate representative representing not less than one third in nominal value of our total issued voting shares shall be a quorum. A corporation being a shareholder shall be deemed for the purpose of our articles of association to be present in person if represented by its duly authorized representative. Such duly authorized representative shall be entitled to Table of Contents Description of share capital exercise the same powers on behalf of the corporation which he or she represents as that corporation could exercise if it were our individual shareholder. The quorum for a separate general meeting of the holders of a separate class of shares is described in Variation of rights attaching to shares below. VOTING RIGHTS ATTACHING TO THE SHARES Subject to any rights or restrictions attached to any shares, at any general meeting on a show of hands every shareholder who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy shall have one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a corporation, by its duly appointed representative) or by proxy shall have one vote for each share which such shareholder is the holder. Voting at any meeting of the shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman or at least three shareholders present in person or by proxy or a shareholder present in person or by proxy holding at least 10.0% of the total voting rights of the shares giving a right to attend and vote at the meeting. Any ordinary resolution to be passed by our shareholders requires the affirmative vote of a simple majority of the votes cast at a meeting of our shareholders, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast at a meeting of our shareholders. Holders of our ordinary shares may by ordinary resolution, among other things, elect directors and make alterations of capital. See Alteration of capital. A special resolution is required for matters such as a change of name. See Variation of rights attaching to shares. No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as our shareholder at the applicable record date for that meeting. If a recognized clearing house (or its nominee(s)) is our shareholder, it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting or at any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision is entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee(s)) as if such person was the registered holder of our shares held by that clearing house (or its nominee(s)) including the right to vote individually on a show of hands. While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of our directors, unlike the requirement under the Delaware General Corporation Law where cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation, it is not a concept that is accepted as a common practice in the Cayman Islands, and we have made no provisions in our memorandum and articles of association to allow cumulative voting for such elections. PROTECTION OF MINORITY SHAREHOLDERS The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one-fifth of our shares in issue, appoint an inspector to examine our affairs and report thereon in a manner as the Grand Court shall direct. Any shareholder may petition the Grand Court of the Cayman Islands which may make a winding up order, if the court is of the opinion that it is just and equitable that we should be wound up. Table of Contents Description of share capital Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our memorandum and articles of association. The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative actions in our name to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (3) an irregularity in the passing of a resolution which requires a qualified (or special) majority. PRE-EMPTION RIGHTS There are no pre-emption rights applicable to the issuance of new shares under either Cayman Islands law or our memorandum and articles of association. LIQUIDATION RIGHTS Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares, if we shall be wound up the liquidator may, with the sanction of a special resolution and any other sanction required by the Companies Law, divide among our shareholders in kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for that purpose, value any assets as the liquidator deems fair and determine how the division shall be carried out as between our shareholders or different classes of shareholders. The liquidator may, with the like sanction, vest any part of such assets in trustees upon such trusts for the benefit of our shareholders as the liquidator, with the like sanction, shall think fit, but so that no contributory shall be compelled to accept any shares or other property upon which there is a liability. If we shall be wound up, and the assets available for distribution among our shareholders as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by our shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. And if winding up the assets available for distribution among our shareholders shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed amongst our shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively. VARIATION OF RIGHTS ATTACHING TO SHARES Except with respect to share capital (as described below) and the location of the registered office, alterations to our memorandum and articles of association or to our name may only be made by special resolution of no less than two-thirds of votes cast at a meeting of our shareholders. Subject to the Companies Law, all or any of the special rights attached to any class, unless otherwise provided for by the terms of issue of the shares of that class, may be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our articles of association relating to general meetings shall apply mutatis mutandis to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting shall be a person or persons together holding, or represented by proxy, on the date of the relevant meeting not less than one-third in nominal value of the issued shares of that class. Table of Contents Description of share capital Every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll. The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. ALTERATION OF CAPITAL We may from time to time by ordinary resolution: increase our share capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe; consolidate and divide all or any of our share capital into shares of larger amount than our existing shares; without prejudice to powers given to our board of directors regarding issuing of shares, divide our shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares attach thereto respectively any preferential, deferred, qualified or special rights, privileges, conditions or such restrictions which in the absence of any such determination by us in general meeting, as our directors may determine; subdivide our shares or any of them into shares of smaller amount than that fixed by our memorandum of association and may by such resolution determine that, as between the holders of the shares resulting from such sub-division, one or more of the shares may have any such preferred, deferred or other rights or be subject to any such restrictions as compared with the other or others as we have power to attach to unissued or new shares; and cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled. We may, by special resolution, subject to any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemption reserve fund in any manner authorized by law. TRANSFER OF SHARES Subject to any applicable restrictions set forth in our articles of association, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our directors may approve. Our board of directors may, in its absolute discretion, decline to register any transfer of any share without assigning any reasons therefor. If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year. Table of Contents Description of share capital SHARE REPURCHASE We are empowered by the Companies Law and our articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law, our memorandum and articles of association and to any applicable requirements imposed from time to time by the SEC, The Nasdaq Global Market, or by any recognized stock exchange on which our securities are listed. DIVIDENDS Subject to the Companies Law and our articles of association, our board may declare dividends in any currency, but no dividends shall exceed the amount recommended by our board of directors. Dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is no longer needed. Dividends may also be declared and paid out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law. Unless and to the extent that the rights attached to any shares or the terms of issue thereof otherwise provide, with respect to any shares not fully paid throughout the period in respect of which the dividend is paid, all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid. For these purposes no amount paid up on a share in advance of calls shall be treated as paid up on the share. Our board of directors may from time to time pay to our shareholders such interim dividends as appear to the directors to be justified by our profits. Our directors may also pay dividends semi-annually or at other intervals to be selected by them at a fixed rate if they are of the opinion that the profits available for distribution justify the payment. The board may also declare and pay special dividends as they think fit. Our board of directors may retain any dividends or other monies payable on or in respect of a share upon which we have a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists. Our board of directors may also deduct from any dividend or other monies payable to any shareholder all sums of money, if any, presently payable by him or her to us on account of calls, installments or otherwise. No unpaid distribution shall bear interest against us. Whenever our board of directors or we, in general meeting, have resolved that a dividend is to be paid or declared on our share capital, the board of directors may further resolve: (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up on the basis that the shares so allotted are to be of the same class as the class already held by the allottee, provided that those of our shareholders entitled thereto will be entitled to elect to receive such dividend, or part thereof, in cash in lieu of such allotment; or (b) that those of our shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as our board of directors may think fit on the basis that the shares so allotted are to be of the same class as the class already held by the allottee. We may, upon the recommendation of our board of directors by ordinary resolution, resolve in respect of any one particular dividend that notwithstanding the foregoing, a dividend may be satisfied wholly in the form of an allotment of shares credited as fully paid without offering any right to our shareholders to elect to receive such dividend in cash in lieu of such allotment. Table of Contents Description of share capital Any dividend, interest or other sum payable in cash to a holder of shares may be paid by check or draft sent through the post addressed to the registered address of our shareholder entitled, or in the case of joint holders, to the registered address of the person whose name stands first in our register of shareholders in respect of the joint holding to such person and to such address as the holder or joint holders may in writing direct. Every check or draft so sent shall be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on our register of shareholders in respect of such shares, and shall be sent at his or their risk and the payment of any such check or warrant by the bank on which it is drawn shall operate as a good discharge to us in respect of the dividend and/or bonus represented thereby, notwithstanding that it may subsequently appear that the same has been stolen or that any endorsement there on has been forged. Any dividend unclaimed for six years from the date of declaration of such dividend may be forfeited by the board of directors and shall revert to us. Our board of directors may, with the sanction of the shareholders in general meeting, direct that any dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe securities of any other company, and where any difficulty arises in regard to such distribution our directors may settle it as they think expedient, and in particular may disregard fractional entitlements, round the same up or down or provide that the same shall accrue to our benefit, and may fix the value for distribution of such specific assets and may determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to our board of directors. Untraceable Shareholders We are entitled to sell any shares of a shareholder who is untraceable, provided that: all checks or warrants, not being less than three in number, for any sums payable in cash to the holder of such shares have remained uncashed for a period of 12 years; we have not during that time or before the expiry of the three-month period referred to in the last bullet under this section received any indication of the whereabouts or existence of the shareholder or person entitled to such shares by death, bankruptcy or operation of law; and upon expiration of the 12-year period, we have caused an advertisement to be published in newspapers, giving notice of its intention to sell these shares, and a period of three months or such shorter period has elapsed since such advertisement. The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds. BOARD OF DIRECTORS Our board of directors currently consists of seven members. Our articles of association provide that the board of directors shall consist of not less than two directors, and there shall be no maximum number of directors unless otherwise determined from time to time by the Shareholders in a general meeting. Our articles of association provide for a staggered board of directors. At each annual general meeting of our shareholders, one-third of our directors (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) are required to stand for reelection. The Chairman shall not be required to stand for reelection at any annual meeting, and will serve for an indefinite term. In addition, Table of Contents Description of share capital the Chairman will not be taken into account in determining the number of directors who must stand for reelection in each year. The particular directors that must stand for reelection at each annual general meeting is determined according to a rotation. Should a director choose not to offer himself or herself for reelection at an annual meeting, the number of directors who must stand for reelection at that meeting is reduced accordingly. Directors who have been longest in office since their last re-election or appointment shall stand for reelection at the annual meeting, provided that, in the case of directors who were last elected on the same day, which director must stand for reelection shall (unless they otherwise agree among themselves) be determined by lot. Any director appointed to fill a vacancy shall serve only until the next annual meeting, and shall not be taken into account in determining which particular directors or the number of directors who are stand for reelection at such annual meeting. Our shareholders may by ordinary resolution at any time remove any director before the expiration of his period of office notwithstanding anything in our articles of association or in any agreement between us and such director, and may by ordinary resolution elect another person in his stead. Subject to our articles of association, the directors will have power at any time and from time to time to appoint any person to be a director, either as an addition to the existing directors or to fill a casual vacancy. There are no share ownership qualifications for directors. Meetings of our board of directors may be convened at any time deemed necessary by the members of our board of directors. A meeting of our board of directors will be competent to make lawful and binding decisions if any two members of our board of directors are present or represented. At any meeting of our directors, each director, be it by his or her presence or by his or her alternate, is entitled to one vote. A director may vote in respect of any contract or arrangement with us in which he is directly or indirectly interested, provided, such director must declare the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice stating that, by reason of the facts specified in the notice, he is to be regarded as interested in any contracts of a specified description which we may subsequently make. Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the members of our board of directors present or represented at the meeting. In the case of a tie, the chairman of the meeting shall have a second or deciding vote. Our board of directors may also pass resolutions without a meeting by unanimous written consent. The remuneration to be paid to the directors shall be such remuneration as the directors shall determine. Under our articles of association, the directors shall also be entitled to be paid their traveling, hotel and other expenses reasonably incurred by them in, attending meetings of the directors, or any committee of the directors, or general meetings of the company, or otherwise in connection with the discharge of his duties as director. ISSUANCE OF ADDITIONAL ORDINARY SHARES OR PREFERRED SHARES Our articles of association authorize our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares. Table of Contents Description of share capital Our articles of association authorize our board of directors from time to time to issue one or more classes or series of ordinary or preferred shares and to determine the terms and rights of that class or series to the extent permitted by the Companies Law, including, among other things: the designation of such class or series; the number of shares of such class or series; the dividend rights, conversion rights and voting rights; and the rights and terms of redemption and liquidation preferences. Our board of directors may issue such class or series of preferred shares without action by our shareholders to the extent authorized but unissued. Accordingly, the issuance of preferred shares may adversely affect the rights of the holders of the ordinary shares. In addition, the issuance of preferred shares may be used as an anti-takeover device without further action on the part of the shareholders. We have no immediate plans to issue any preferred shares. Issuance of preferred shares may dilute the voting power of holders of ordinary shares. Subject to applicable regulatory requirements, our board of directors may issue additional ordinary shares without action by our shareholders to the extent of available authorized but unissued shares. The issuance of additional ordinary shares may be used as an anti-takeover device without further action on the part of the shareholders. Such issuance may dilute the voting power of existing holders of ordinary shares. EXEMPTED COMPANY STATUS The Companies Law distinguishes between ordinary resident companies and exempted companies, and we are an exempted company with limited liability under the Companies Law. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The responsibilities of an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below: an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; an exempted company s register of members is not open to inspection; an exempted company does not have to hold an annual general meeting; an exempted company may issue no par value, negotiable or bearer shares; an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; an exempted company may register as a limited duration company; and an exempted company may register as a segregated portfolio company. DIFFERENCES IN CORPORATE LAW The Companies Law is modeled after similar laws in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the Companies Law differs from laws applicable to U.S. Table of Contents Description of share capital corporations and their shareholders. Set forth below is a summary of the significant provisions of the Companies Law applicable to us. Duties of directors Under Cayman Islands law, at common law, members of a board of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements: a duty to act in good faith in the best interests of the company; a duty not to personally profit from opportunities that arise from the office of director; a duty to avoid conflicts of interest; and a duty to exercise powers for the purpose for which such powers were intended. In general, the Companies Law imposes various duties on officers of a company with respect to certain matters of management and administration of the company. The Companies Law contains provisions, which impose default fines on persons who fail to satisfy those requirements. However, in many circumstances, an individual is only liable if he knowingly is guilty of the default or knowingly and willfully authorizes or permits the default. Voting rights and quorum requirements Under Cayman Islands law, the voting rights of shareholders are regulated by the company s articles of association and, in certain circumstances, the Companies Law. The articles of association will govern matters such as quorum for the transaction of business, rights of shares and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Under Cayman Islands law, certain matters must be approved by a special resolution which is defined as two-thirds of the votes cast by shareholders present at a meeting and entitled to vote; otherwise, unless the articles of association otherwise provide, the majority is usually a simple majority of votes cast. Mergers and similar arrangements Cayman Islands law does not provide for mergers as that expression is understood under United States corporate law. However, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in-person or by proxy at a meeting, or meetings convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that: the company is not proposing to act illegally or ultra vires and the statutory provisions as to majority vote have been complied with; the shareholders have been fairly represented at the meeting in question; the arrangement is one that a businessman would reasonably approve; and the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law or that would amount to a fraud on the minority. Table of Contents Description of share capital When a takeover offer is made and accepted by holders of 90.0% of the shares within four months, the offerer may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands but is unlikely to succeed unless there is evidence of fraud, bad faith or collusion. If the arrangement and reconstruction are thus approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares. Shareholder suits We are not aware of any reported class action or derivative action having been brought in a Cayman Islands court. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which: a company is acting or proposing to act illegally or beyond the scope of its authority; the act complained of, although not beyond the scope of its authority, could be effected duly if authorized by more than a simple majority vote which has not been obtained; and those who control the company are perpetrating a fraud on the minority. Under the Delaware General Corporation Law, a stockholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation. Delaware law expressly authorizes stockholder derivative suits on the condition that the stockholder either held the stock at the time of the transaction of which the stockholder complains, or acquired the stock thereafter by operation of law and continues to hold it throughout the duration of the suit. An individual may also commence a class action suit on behalf of himself and other similarly situated stockholders where the requirements for maintaining a class action under Delaware law have been met. A plaintiff instituting a derivative suit is required to serve a demand on the corporation before bringing suit, unless such demand would be futile. Interested directors Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve. Under our memorandum and articles of association, subject to any separate requirement for audit committee approval under the applicable rules of The Nasdaq Stock Market, Inc. or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in any contract or arrangement in which he is interested, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting. Indemnification Cayman Islands law does not limit the extent to which a company s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for the indemnification of our directors, auditors and other officers against all losses or liabilities incurred or sustained by him or her as a director, auditor or other officer of our company in defending any Table of Contents Description of share capital proceedings, whether civil or criminal, in which judgment is given in his or her favor, or in which he or she is acquitted provided that this indemnity shall not extend to any matter in respect of any fraud or dishonesty which may attach to any of said persons. Shareholder proposals The Companies Law does not provide shareholders any right to bring business before a meeting or requisition a general meeting. Approval of corporate matters by written consent The Companies Law allows a special resolution to be passed in writing if signed by all the shareholders and authorized by the articles of association. Calling of special shareholders meetings The Companies Law does not have provisions governing the proceedings of shareholders meetings which are usually provided in the articles of association. Staggered board of directors The Companies Law does not contain statutory provisions that require staggered board arrangements for a Cayman Islands company. Such provisions, however, may validly be provided for in the articles of association, and we have provided for a staggered board of directors in our articles of association. Pursuant to such provision, one-third of the current members of our board are required to stand for a re-election each year. Issuance of preferred stock The Companies Law allows shares to be, issued with preferred, deferred or other special rights, whether in regard to dividends, voting, return of share capital or otherwise. Our articles of association provide that the directors may allot, issue, grant options over or otherwise dispose of shares (including fractions of a share) with or without preferred, deferred or other special rights or restrictions, in one or more series, whether with regard to dividend rights, dividend rates, conversion rights, voting rights, rights and terms of redemption and liquidation preferences or otherwise and to such persons, at such times and on such other terms as they think proper. Anti-takeover provisions The Companies Law does not prevent companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred stock, removal of directors only for cause and provisions that restrict the rights of shareholders to call meetings and submit shareholder proposals. Our articles of association contain the following provisions which may be regarded as defensive measures: (i) a staggered board of directors and (ii) directors may in their absolute discretion decline to register any transfer of shares without assigning any reason. Table of Contents Shares eligible for future sale Prior to this offering, there has been no public market for the ADSs, and while application has been made for the ADSs to be quoted on The Nasdaq Global Market, we cannot assure you that a regular trading market will develop for the ADSs. There is no market for our ordinary shares and it is not presently expected that the ordinary shares will be listed on any exchange or that an active trading market in our ordinary shares will develop in the foreseeable future. Sales of substantial amounts of our ADSs in the public market could adversely affect prevailing market prices of our ADSs. Upon completion of this offering, we will have 7,700,000 outstanding ADSs, representing approximately 35.9% of our ordinary shares (assuming no exercise of the over-allotment option). All of the ADSs sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for any ADSs that are purchased by any affiliates of our company as that term is defined in Rule 144 under the Securities Act. The remaining ordinary shares held by existing shareholders and any ADSs held by our affiliates are restricted securities as that term is defined in Rule 144. Restricted securities may not be sold publicly unless they are registered under the Securities Act or sold pursuant to Rule 144 or another exemption from registration. LOCK-UP AGREEMENTS Each of our officers, directors and shareholders has entered into the lock-up agreements described in Underwriting. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this offering, a person who has beneficially owned restricted securities , as that term is used by U.S. securities law, for at least one year would be entitled to sell in the United States, within any three-month period, a number of shares that is not more than the greater of: 1% of the number of our ordinary shares then outstanding, in the form of ADSs or otherwise, which will equal approximately 1,503,157 ordinary shares immediately after this offering; or the average weekly reported trading volume of the ADSs representing our ordinary shares on The Nasdaq Global Market during the four calendar weeks before a notice of the sale on Form 144 is filed with the SEC by such person. Sales under Rule 144 must be made through unsolicited brokers transactions. They are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us. In addition, under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the ordinary shares proposed to be sold for at least two years from the later of the date these shares were acquired from us or from our affiliate, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares in the United States immediately following this offering without complying with the manner-of-sale, public information, volume limitation or notice provisions of Rule 144. Rule 144 does not relieve the shareholders named above of their obligations under the lock-up agreements to which they are a party, such that the lock-up restrictions would continue to apply during the 90-day lock-up period regardless of Rule 144. Upon expiration of the lock-up period, the ordinary shares held by these shareholders may be sold in the public markets (in the form of ADSs) or otherwise, subject to any applicable securities laws restrictions, including those of Rule 144. Table of Contents Shares eligible for future sale Rule 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, directors or consultants who hold options to purchase our ordinary shares before the effective date of the registration statement of which this prospectus is a part may rely on the resale provisions of Rule 701. Under Rule 701, these persons who are not our affiliates may generally sell their eligible securities, commencing 90 days after the effective date of the registration statement in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period and volume limitations contained in Rule 144. Table of Contents Description of American Depositary Receipts AMERICAN DEPOSITARY RECEIPTS JPMorgan Chase Bank, N.A., as depositary, will issue the ADSs which you will be entitled to receive in this offering. Each ADS will represent an ownership interest in seven shares which we will deposit with the custodian, as agent of the depositary, under the deposit agreement among ourselves, the depositary and you as an ADR holder. In the future, each ADS will also represent any securities, cash or other property deposited with the depositary but which they have not distributed directly to you. Unless specifically requested by you, all ADSs will be issued on the books of our depositary in book-entry form and periodic statements will be mailed to you which reflect your ownership interest in such ADSs. In our description, references to American depositary receipts, or ADRs, shall include the statements you will receive which reflect your ownership of ADSs. The depositary s office is located at Four New York Plaza, New York, NY 10004. You may hold ADSs either directly or indirectly through your broker or other financial institution. If you hold ADSs directly, by having an ADS registered in your name on the books of the depositary, you are an ADR holder. This description assumes you hold your ADSs directly. If you hold the ADSs through your broker or financial institution nominee, you must rely on the procedures of such broker or financial institution to assert the rights of an ADR holder described in this section. You should consult with your broker or financial institution to find out what those procedures are. Because the depositary s nominee will actually be the registered owner of the shares, you must rely on it to exercise the rights of a shareholder on your behalf. The obligations of the depositary and its agents are set forth in the deposit agreement. The deposit agreement and the ADSs are governed by New York law. The following is a summary of the material terms of the deposit agreement. Because it is a summary, it does not contain all the information that may be important to you. For more complete information, you should read the entire deposit agreement and the form of ADR which contains the terms of your ADSs. A copy of the deposit agreement is filed as an exhibit to the registration statement of which this prospectus forms a part. You may also obtain a copy of the deposit agreement at the SEC s Public Reference Room which is located at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. SHARE DIVIDENDS AND OTHER DISTRIBUTIONS How will I receive dividends and other distributions on the shares underlying my ADSs? We may make various types of distributions with respect to our securities. The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after converting any cash received into U.S. dollars and, in all cases, making any necessary deductions provided for in the deposit agreement. You will receive these distributions in proportion to the number of underlying securities that your ADSs represent. Except as stated below, to the extent the depositary is legally permitted it will deliver such distributions to ADR holders in proportion to their interests in the following manner: Cash. The depositary will distribute any U.S. dollars available to it resulting from a cash dividend or other cash distribution or the net proceeds of sales of any other distribution or portion thereof (to Table of Contents Description of American Depositary Receipts the extent applicable), on an averaged or other practicable basis, subject to (i) appropriate adjustments for taxes withheld, (ii) such distribution being impermissible or impracticable with respect to certain registered holders, and (iii) deduction of the depositary s expenses in (1) converting any foreign currency to U.S. dollars to the extent that it determines that such conversion may be made on a reasonable basis, (2) transferring foreign currency or U.S. dollars to the United States by such means as the depositary may determine to the extent that it determines that such transfer may be made on a reasonable basis, (3) obtaining any approval or license of any governmental authority required for such conversion or transfer, which is obtainable at a reasonable cost and within a reasonable time and (4) making any sale by public or private means in any commercially reasonable manner. If exchange rates fluctuate during a time when the depositary cannot convert a foreign currency, you may lose some or all of the value of the distribution. Shares. In the case of a distribution in shares, the depositary will issue additional ADRs to evidence the number of ADSs representing such shares. Only whole ADSs will be issued. Any shares which would result in fractional ADSs will be sold and the net proceeds will be distributed in the same manner as cash to the ADR holders entitled thereto. Rights to receive additional shares. In the case of a distribution of rights to subscribe for additional shares or the other rights, if we provide satisfactory evidence that the depositary may lawfully distribute such rights, the depositary will distribute warrants or other instruments representing such rights. However, if we do not furnish such evidence, the depositary may: sell such rights if practicable and distribute the net proceeds as cash; or if it is not practicable to sell such rights, do nothing and allow such rights to lapse, in which case ADR holders will receive nothing. We have no obligation to file a registration statement under the Securities Act in order to make any rights available to ADR holders. Other Distributions. In the case of a distribution of securities or property other than those described above, the depositary may either (i) distribute such securities or property in any manner it deems equitable and practicable or (ii) to the extent the depositary deems distribution of such securities or property not to be equitable and practicable, sell such securities or property and distribute any net proceeds in the same way it distributes cash. If the depositary determined that any distribution described above is not practicable with respect to any specific ADR holder, the depositary may choose any practicable method of distribution for such ADR holder, including the distribution of foreign currency, securities or property, or it may retain such items, without paying interest on or investing them, on behalf of the ADR holder as deposited securities, in which case the ADSs will also represent the retained items. Any U.S. dollars will be distributed by checks drawn on a bank in the United States for whole dollars and cents. Fractional cents will be withheld without liability for interest thereon and dealt with by the Depositary in accordance with its then current practices. The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders. There can be no assurances that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, nor that any such transactions can be completed within a specified time period. Table of Contents Description of American Depositary Receipts DEPOSIT, WITHDRAWAL AND CANCELLATION How does the depositary issue ADRs? The depositary will issue ADRs evidencing ADSs if you or your broker deposit shares or evidence of rights to receive shares with the custodian. In the case of the ADSs to be issued under this prospectus, we will arrange with the underwriters named herein to deposit such shares. Shares deposited in the future with the custodian must be accompanied by certain documentation, including instruments showing that such shares have been properly transferred or endorsed to the person on whose behalf the deposit is being made. The custodian will hold all deposited shares (including those being deposited by or on our behalf of in connection with the offering to which this prospectus relates) for the account of the depositary. ADR holders thus have no direct ownership interest in the shares and only have such rights as are contained in the deposit agreement. The custodian will also hold any additional securities, property and cash received on or in substitution for the deposited shares. The deposited shares and any such additional items are referred to as deposited securities. Upon each deposit of shares, receipt of related documentation and compliance with the other provisions of the deposit agreement, including the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue an ADR or ADRs in the name or upon the order of the person entitled thereto evidencing the number of ADSs to which such person is entitled. All of the ADSs issued will, unless specifically requested to the contrary, be part of the depositary s direct registration system, and a registered holder will receive periodic statements from the depositary which will show the number of ADSs registered in such holder s name. An ADR holder can request that the ADSs not be held through the depositary s direct registration system and that a certificated ADR be issued. How do ADR holders cancel an ADS and obtain deposited securities? When you turn in your ADRs at the depositary s office, or when you provide proper instructions and documentation in the case of direct registration ADSs, the depositary will, upon payment of certain applicable fees, charges and taxes, deliver the underlying shares at the custodian s office or effect delivery by such other means as the depositary deems practicable, including transfer to an account of an accredited financial institution on your behalf. At your risk, expense and request, the depositary may deliver deposited securities at such other place as you may request. The depositary may only restrict the withdrawal of deposited securities in connection with: temporary delays caused by closing our transfer books or those of the depositary or the deposit of shares in connection with voting at a shareholders meeting, or the payment of dividends; the payment of fees, taxes and similar charges; or compliance with any U.S. or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of deposited securities. This right of withdrawal may not be limited by any other provision of the deposit agreement. Table of Contents Description of American Depositary Receipts RECORD DATES The depositary may fix record dates for the determination of the ADR holders who will be entitled (or obligated, as the case may be): to receive a dividend, distribution or rights; to give instructions for the exercise of voting rights at a meeting of holders of ordinary shares or other deposited securities; for the determination of the registered holders who shall be responsible for the fee assessed by the depositary for administration of the ADR program and for any expenses as provided for in the ADR; and to receive any notice or to act in respect of other matters, all subject to the provisions of the deposit agreement. VOTING RIGHTS How do I vote? If you are an ADR holder and the depositary asks you to provide it with voting instructions, you may instruct the depositary how to exercise the voting rights for the shares which underlie your ADSs. After receiving voting materials from us, the depositary will notify the ADR holders of any shareholder meeting or solicitation of consents or proxies. This notice will state such information as its contained in the voting materials and describe how you may instruct the depositary to exercise the voting rights for the shares which underlie your ADSs and will include instructions for giving a discretionary proxy to a person designated by us. For instructions to be valid, the depositary must receive them in the manner and on or before the date specified. The depositary will try, as far as is practical, subject to the provisions of and governing the underlying shares or other deposited securities, to vote or to have its agents vote the shares or other deposited securities as you instruct. The depositary will only vote or attempt to vote as you instruct. The depositary will not itself exercise any voting discretion. Furthermore, neither the depositary nor its agents are responsible for any failure to carry out any voting instructions, for the manner in which any vote is cast or for the effect of any vote. There is no guarantee that you will receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. REPORTS AND OTHER COMMUNICATIONS Will I be able to view our reports? The depositary will make available for inspection by ADR holders any written communications from us which are both received by the custodian or its nominee as a holder of deposited securities and made generally available to the holders of deposited securities. We will furnish these communications in English when so required by any rules or regulations of the SEC. Additionally, if we make any written communications generally available to holders of our shares, including the depositary or the custodian, and we request the depositary to provide them to ADR holders, the depositary will mail copies of them, or, at its option, English translations or summaries of them to ADR holders. Table of Contents Description of American Depositary Receipts FEES AND EXPENSES What fees and expenses will I be responsible for paying? ADR holders will be charged a fee for each issuance of ADSs, including issuances resulting from distributions of shares, rights and other property, and for each surrender of ADSs in exchange for deposited securities. The fee in each case is $5.00 for each 100 ADSs (or any portion thereof) issued or surrendered. The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADRs), whichever is applicable: to the extent not prohibited by the rules of any stock exchange or interdealer quotation system upon which the ADSs are traded, a fee of $1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs; a fee of US$0.02 or less per ADS (or portion thereof) for any cash distribution made pursuant to the deposit agreement; a fee of US$0.03 per ADS (or portion thereof) per calendar year for services performed by the depositary in administering our ADR program (which fee shall be assessed against holders of ADRs as of the record date set by the depositary not more than once each calendar year and shall be payable in the manner described in the next succeeding provision); any other charge payable by any of the depositary, any of the depositary s agents, including, without limitation, the custodian, or the agents of the depositary s agents in connection with the servicing of our shares or other deposited securities (which charge shall be assessed against registered holders of our ADRs as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such registered holders or by deducting such charge from one or more cash dividends or other cash distributions); a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto; stock transfer or other taxes and other governmental charges; cable, telex and facsimile transmission and delivery charges incurred at your request; transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars; and such fees and expenses as are incurred by the depositary (including without limitation expenses incurred in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the depositary s or its custodian s compliance with applicable law, rule or regulation. Table of Contents Description of American Depositary Receipts We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The fees described above may be amended from time to time. The depositary has agreed to reimburse us for certain expenses we incur that are related to the establishment and maintenance of our ADR program, including investor relations expenses and certain of our current and ongoing U.S. legal and accounting expenses related to the ADR program and our reporting obligations under the Securities Exchange Act of 1934, as amended. The overall amount available to us is a sum based on a reasonable estimate of certain costs incurred in establishing and maintaining the ADR program, although certain amounts designated to cover specific costs may fluctuate based upon the number of new ADSs created during a given year. The depositary collects ADS issuance and cancellation fees directly from investors depositing ordinary shares or surrendering ADSs, as the case may be, or from intermediaries acting on their behalf. Distribution fees are collected by deducting such fees from the amount to be distributed to holders of ADRs or by selling a sufficient portion of the distributable property to pay such fees. Once each calendar year, the depositary will collect its fee for depositary services by deducting from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee related services to any holders until the fees owing by such holders have been paid. PAYMENT OF TAXES ADR holders must pay any tax or other governmental charge payable by the custodian or the depositary on any ADS or ADR, deposited security or distribution. If an ADR holder owes any tax or other governmental charge, the depositary may (i) deduct the amount thereof from any cash distributions, or (ii) sell deposited securities and deduct the amount owing from the net proceeds of such sale. In either case the ADR holder remains liable for any shortfall. Additionally, if any tax or governmental charge is unpaid, the depositary may also refuse to effect any registration, registration of transfer, split-up or combination of deposited securities or withdrawal of deposited securities (except under limited circumstances mandated by securities regulations). If any tax or governmental charge is required to be withheld on any non-cash distribution, the depositary may sell the distributed property or securities to pay such taxes and distribute any remaining net proceeds to the ADR holders entitled thereto. By holding an ADR or an interest therein, you will be agreeing to indemnify us, the depositary, its custodian and any of our or their respective directors, employees, agents and affiliates against, and hold each of them harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding at source or other tax benefit obtained in respect of, or arising out of, your ADSs. RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS If we take certain actions that affect the deposited securities, including (i) any change in par value, split-up, consolidation, cancellation or other reclassification of deposited securities or (ii) any recapitalization, reorganization, merger, consolidation, liquidation, receivership, bankruptcy or sale of all or substantially all of our assets, then the depositary may choose to: amend the form of ADR; distribute additional or amended ADRs; Table of Contents Description of American Depositary Receipts distribute cash, securities or other property it has received in connection with such actions; sell any securities or property received and distribute the proceeds as cash; or do nothing. If the depositary chooses to do nothing, any of the cash, securities or other property it receives will constitute part of the deposited securities and each ADS will then represent a proportionate interest in such property. AMENDMENT AND TERMINATION How may the deposit agreement be amended? We may agree with the depositary to amend the deposit agreement and the ADRs without your consent for any reason. ADR holders must be given at least 30 days notice of any amendment that imposes or increases any fees or charges (other than stock transfer or other taxes and other governmental charges, transfer or registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or that otherwise prejudices any substantial existing right of ADR holders. If an ADR holder continues to hold an ADR or ADRs after being so notified, such ADR holder is deemed to to consent and agree to such amendment. Notwithstanding the foregoing, if any governmental body or regulatory body should adopt new laws, rules or regulations which would require amendment or supplement of the deposit agreement or the form of ADR to ensure compliance therewith, we and the depositary may amend or supplement the deposit agreement and the ADR at any time in accordance with such changed laws, rules or regulations, which amendment or supplement may take effect before a notice is given or you otherwise receive notice. No amendment, however, will impair your right to surrender your ADSs and receive the underlying securities. How may the deposit agreement be terminated? The depositary may terminate the deposit agreement by giving the ADR holders at least 30 days prior written notice, and it must do so at our request. The deposit agreement will be terminated on the removal of the depositary for any reason. After termination, the depositary s only responsibility will be (i) to deliver deposited securities to ADR holders who surrender their ADRs, and (ii) to hold or sell distributions received on deposited securities. As soon as practicable after the expiration of six months from the termination date, the depositary will sell the deposited securities which remain and hold the net proceeds of such sales, without liability for interest, in trust for the ADR holders who have not yet surrendered their ADRs. After making such sale, the depositary shall have no obligations except to account for such proceeds and other cash. The depositary will not be required to invest such proceeds or pay interest on them. LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS Limits on our obligations and the obligations of the depositary; limits on liability to ADR holders and holders of ADSs Prior to the issue, registration, registration of transfer, split-up, combination, or cancellation of any ADRs, or the delivery of any distribution in respect thereof, the depositary and its custodian may require you to pay, provide or deliver: payment with respect thereto of (i) any stock transfer or other tax or other governmental charge, (ii) any stock transfer or registration fees in effect for the registration of transfers of shares or other Table of Contents Description of American Depositary Receipts deposited securities upon any applicable register and (iii) any applicable fees and expenses described in the ADR; the production of proof satisfactory to it of (i) the identity of any signatory and genuineness of any signature and (ii) such other information, including without limitation, information as to citizenship, residence, exchange control approval, beneficial ownership of any securities, payment of applicable taxes or governmental charges, or legal or beneficial ownership and the nature of such interest, information relating to the registration of the shares on the books maintained by or on our behalf for the transfer and registration of shares, compliance with applicable law, regulations, provisions of or governing deposited securities and terms of the deposit agreement and the ADR, as it may deem necessary or proper; and compliance with such regulations as the depositary may establish consistent with the deposit agreement. The deposit agreement expressly limits the obligations and liability of the depositary, ourselves and our respective agents. Neither we nor the depositary nor any such agent will be liable if: present or future law, rule, regulation, fiat, order or decree of the United States, the People s Republic of China, the Cayman Islands or any other country, or of any governmental or regulatory authority or securities exchange or market or automated quotation system, the provisions of or governing any deposited securities, any present or future provision of our charter, any act of God, war, terrorism or other circumstance beyond its control shall prevent, delay or subject to any civil or criminal penalty any act which the deposit agreement or the ADRs provides shall be done or performed by it or them (including, without limitation, voting); it exercises or fails to exercise discretion under the deposit agreement or the ADR; it performs its obligations without gross negligence or bad faith; it takes any action or refrains from taking any action in reliance upon the advice of or information from legal counsel, accountants, any person presenting shares for deposit, any registered holder of ADRs, or any other person believed by it to be competent to give such advice or information; or it relies upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. Neither the depositary nor its agents have any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs. We and our agents shall only be obligated to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs, which in our opinion may involve us in expense or liability, if indemnity satisfactory to us against all expense (including fees and disbursements of counsel) and liability is furnished as often as may be required. The depositary and its agents may fully respond to any and all demands or requests for information maintained by or on its behalf in connection with the deposit agreement, any registered holder or holders of ADRs, any ADSs or otherwise to the extent such information is requested or required by or pursuant to any lawful authority, including without limitation laws, rules, regulations, administrative or judicial process, banking, securities or other regulators. The depositary will not be responsible for failing to carry out instructions to vote the deposited securities or for the manner in which the deposited securities are voted or the effect of the vote. In no event shall the depositary or any of its agents be liable for any indirect, special, punitive or consequential damages. The depositary may own and deal in deposited securities and in ADSs. Table of Contents Description of American Depositary Receipts DISCLOSURE OF INTEREST IN ADSs To the extent that the provisions of or governing any deposited securities may require disclosure of or impose limits on beneficial or other ownership of deposited securities, other shares and other securities and may provide for blocking transfer, voting or other rights to enforce such disclosure or limits, you agree to comply with all such disclosure requirements and ownership limitations and to comply with any reasonable instructions we may provide in respect thereof. We reserve the right to request you to deliver your ADRs for cancellation and withdrawal of the deposited securities so as to permit us to deal with you directly as a holder of deposited securities and, by holding an ADR or an interest therein, you will be agreeing to comply with such instructions. REQUIREMENTS FOR DEPOSITARY ACTIONS We, the depositary or the custodian may refuse to issue, register or transfer an ADR or ADRs; effect a split-up or combination of ADRs; deliver distributions on any such ADRs; or permit the withdrawal of deposited securities (unless the deposit agreement provides otherwise), until the following conditions have been met: the holder has paid all taxes, governmental charges, and fees and expenses as required in the deposit agreement; the holder has provided the depositary with any information it may deem necessary or proper, including, without limitation, proof of identity and the genuineness of any signature; and the holder has complied with such regulations as the depositary may establish under the deposit agreement. The depositary may also suspend the issuance of ADSs, the deposit of shares, the registration, transfer, split-up or combination of ADRs, or the withdrawal of deposited securities (unless the deposit agreement provides otherwise), if the register for ADRs or any deposited securities is closed or the depositary decides it is advisable to do so. BOOKS OF DEPOSITARY The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADRs, which register shall include the depositary s direct registration system. You may inspect such records at such office during regular business hours, but solely for the purpose of communicating with other holders in the interest of business matters relating to the deposit agreement. Such register may be closed from time to time, when deemed expedient by the depositary. The depositary will maintain facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. These facilities may be closed from time to time, to the extent not prohibited by law. PRE-RELEASE OF ADSs The depositary may issue ADSs prior to the deposit with the custodian of shares (or rights to receive shares). This is called a pre-release of the ADS. A pre-release is closed out as soon as the underlying shares (or rights to receive shares from us or from any registrar, transfer agent or other entity recording Table of Contents Description of American Depositary Receipts share ownership or transactions) are delivered to the depositary. The depositary may pre-release ADSs only if: the depositary has received collateral for the full market value of the pre-released ADSs (marked to market daily); and each recipient of pre-released ADSs agrees in writing that he or she: owns the underlying shares; assigns all rights in such shares to the depositary; holds such shares for the account of the depositary; and will deliver such shares to the custodian as soon as practicable, and promptly if the depositary so demands. In general, the number of pre-released ADSs will not evidence more than 30% of all ADSs outstanding at any given time (excluding those evidenced by pre-released ADSs). However, the depositary may change or disregard such limit from time to time as it deems appropriate. The depositary may retain for its own account any earnings on collateral for pre-released ADSs and its charges for issuance thereof. APPOINTMENT In the deposit agreement, each holder and each person holding an interest in ADSs, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms and conditions of the deposit agreement shall be deemed for all purposes to (a) be a party to and bound by the terms of the deposit agreement and the applicable ADR(s), and (b) appoint the depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in the deposit agreement and the applicable ADR(s), to adopt any and all procedures necessary to comply with applicable law and to take such action as the depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of the deposit agreement and the applicable ADR(s), the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof. Table of Contents Taxation The following summary of the material Cayman Islands and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares. It does not address the United States federal estate and gift tax consequences of such investment nor does it address the tax consequences under United States state or local laws or the laws of any non-United States jurisdiction (other than the Cayman Islands). CAYMAN ISLANDS TAXATION The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands. UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of the material United States federal income tax considerations relating to the acquisition, ownership, and disposition of ADSs or ordinary shares by U.S. Holders (as defined below) that will hold their ADSs or ordinary shares as capital assets (generally, property held for investment) under the United States Internal Revenue Code (the Code ). This summary is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, and does not deal with the tax consequences to investors subject to special tax rules (for example, financial institutions, insurance companies, broker-dealers, partnerships and their partners, and tax-exempt organizations (including private foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that will hold ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or investors that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any non-United States, state, or local tax considerations. Investors are urged to consult their tax advisors regarding the United States federal, state, local, and non-United States income and other tax considerations of an investment in our ADSs or shares. General For purposes of this summary, a U.S. Holder is a beneficial owner of ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation for United States federal income tax purposes, created in, or organized under the law of, the United States or any State or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a United States person under the Code. Table of Contents Taxation If a partnership is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. For United States federal income tax purposes, U.S. Holders of ADSs will be treated as the beneficial owners of the underlying shares represented by the ADSs. Threshold PFIC Classification Matters. A non-United States corporation, such as the company, will be treated as a passive foreign investment company (a PFIC ), for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of passive income or 50% or more of its assets (based on an average of the quarterly values during a taxable year) are classified as passive assets. The determination of whether we are, or will become, classified as a PFIC is a fact intensive determination that is made annually based on the composition and amounts of income that we earn and the composition and valuation of our assets, all of which are subject to change. For this purpose, cash is categorized as a passive asset and the company s unbooked intangibles are taken into account. Based on our current income and assets and taking into consideration this offering, it is uncertain whether we will be classified as a PFIC for United States federal income tax purposes for our current taxable year ending December 31, 2007, a determination that can only be made after the close of the taxable year, or future taxable years. The overall level of our passive assets will be significantly affected by the amount and time-frame within which we disperse the cash raised in this offering, and other liquid assets that we presently hold, for the purpose of the capital expenditures described in this prospectus or other projects. In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our anticipated market capitalization following the close of this offering. Among other matters, if our market capitalization is less than anticipated or subsequently declines, we may be or become classified as a PFIC for the current or one or more future taxable years. Further, while we believe our valuation approach is reasonable, it is possible that the Internal Revenue Service may challenge the valuation of our goodwill and other unbooked intangibles, which may result in the company being or becoming classified as a PFIC for the current or one or more future taxable years. If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. Because PFIC status is a fact intensive determination made on an annual basis, no assurance can be given that we are not or will not become classified as a PFIC and will depend upon, in great measure, the timing of our capital expenditures and the value of our unbooked intangibles. The discussion below under Dividends and Sale or Other Disposition of ADSs or Ordinary Shares is written on the basis that we will not be classified as a PFIC for United States federal income tax purposes. The discussion further below under PFIC Considerations summarizes the PFIC rules that would be applicable to an investment in our ADSs or ordinary shares if we were to be or become classified as a PFIC. Dividends Any cash distributions paid on ADSs or ordinary shares out of our earnings and profits, as determined under United States federal income tax principles, will be includible in the gross income of a U.S. Holder as dividend income. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be treated as a dividend for United States federal income tax purposes. For taxable years beginning before January 1, 2011, a non-corporate recipient of dividend income generally will be subject to tax on dividend income Table of Contents Taxation from a qualified foreign corporation at a maximum United States federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. A non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. There is currently no tax treaty in effect between the United States and the Cayman Islands. We have applied to list the ADSs on The Nasdaq Global Market. Provided the listing is approved, the ADSs are expected to be readily tradable on The Nasdaq Global Market, an established securities market in the United States. Cash distributions in excess of our earnings and profits will be treated as a tax-free return of capital to the extent of the U.S. Holder s adjusted tax basis in its ADSs or ordinary shares, and thereafter as gain from the sale or exchange of a capital asset. The amount of any cash distribution paid in Renminbi should equal the United States dollar value of the Renminbi on the date of the distribution, regardless of whether the Renminbi is actually converted into United States dollars at that time. Gain or loss, if any, recognized on a subsequent sale, conversion, or other disposition of Renminbi generally will be United States source ordinary income or loss. Dividends received on the ADSs or ordinary shares will not be eligible for the dividends received deduction allowed to corporations. Dividends generally will be treated as income from foreign sources for United States foreign tax credit purposes. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or shares. A U.S. Holder who does not elect to claim a foreign tax credit for such withholding taxes, may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes. Sale or Other Disposition of ADSs or Ordinary Shares A U.S. Holder generally will recognize capital gain or loss upon the sale or other taxable disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder s adjusted tax basis in such ADSs or ordinary shares. Any such capital gain or loss will be long-term (and for non-corporate U.S. Holders may be eligible for reduced tax rates) if the ADSs or ordinary shares have been held for more than one year prior to disposition and generally will be United States source gain or loss for United States foreign tax credit purposes. The deductibility of a capital loss may be subject to limitations. PFIC Considerations If we are or were to become classified as a PFIC for any taxable year, and unless you make a mark-to-market election (as described below), you would be subject to special rules with respect to (i) any gain realized on the sale or other disposition of ADSs or ordinary shares, and (ii) any excess distribution made by us on ADSs or ordinary shares (generally, any distributions paid to you in respect of ADSs or ordinary shares during a single taxable year that are greater than 125% of the average annual distributions received by you during the three preceding taxable years or, if shorter, your holding period for such ADSs or ordinary shares). Table of Contents Taxation Under the PFIC rules: the gain or excess distribution would be allocated ratably over your holding period for ADSs or ordinary shares; the amount allocated to the taxable year in which the gain or excess distribution was realized, and any taxable year prior to the first taxable year that you held ADSs or ordinary shares in which we are classified as a PFIC (a pre-PFIC year ), would be taxable as ordinary income; and the amount allocated to each prior year, other than the current year and any pre-PFIC year, would be subject to tax at the highest tax rate in effect for that year, and an interest charge generally applicable to underpayments of tax would be imposed on the resulting tax for each such year for the period it had been deferred. As an alternative to the foregoing rules, a holder of marketable stock in a PFIC may make a mark-to-market election, provided that the shares are regularly traded on a qualified exchange, such as the Nasdaq Global Market. While the company anticipates that the ADSs will qualify as being regularly traded on the Nasdaq Global Market, and there has been no prior trading of the ADSs on the Nasdaq Global Market, no assurances may be given that the ADSs will qualify as being regularly traded on such exchange. If you make a valid mark-to-market election, you will generally (i) include as ordinary income for each taxable year the excess, if any, of the fair market value of your ADSs as determined at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of your ADSs over the fair market value of such ADSs as determined at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election. Your adjusted tax basis in your ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. The qualified electing fund election which serves as a further alternative to the foregoing rules is not available. If you own ADSs or ordinary shares during any year that we are classified as a PFIC, you must file an annual Internal Revenue Service Form 8621 that describes the distributions received on ADSs or ordinary shares and the gain realized on the disposition of ADSs or ordinary shares. You are urged to consult your tax advisor concerning the United States federal income tax consequences of acquiring, holding, and disposing of ADSs or ordinary shares if we are or become classified as a PFIC, including the possibility of making a mark-to-market election. Table of Contents Enforceability of civil liabilities We are incorporated in the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of the following benefits: political and economic stability; an effective judicial system; a favorable tax system; the absence of exchange control or currency restrictions; and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include: the Cayman Islands has a less developed body of securities laws as compared to that of the United States and these securities laws provide significantly less protection to investors; and the Cayman Islands companies may not have standing to sue before the federal courts of the United States. Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders be arbitrated. Almost all of our assets are located in China. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States. We have appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States. Conyers Dill & Pearman, our counsel as to the laws of the Cayman Islands, and Jingtian & Gongcheng, our counsel as to Chinese law, have advised us respectively that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would, respectively,: recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. Conyers Dill & Pearman has further advised us that the courts of the Cayman Islands would recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the U.S. under which a sum of money is payable, other than a sum payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty and would give a judgment based thereon provided that: such courts had proper jurisdiction over the parties subject to such judgment; Table of Contents Enforceability of civil liabilities such courts did not contravene the rules of natural justice of the Cayman Islands; such judgment was not obtained by fraud; the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and there is due compliance with the correct procedures under the laws of the Cayman Islands. Jingtian & Gongcheng has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedure Law. Under the PRC Civil Procedure Law, courts in China may recognize and enforce foreign judgments pursuant to treaties between China and the country where the judgment is rendered or based on reciprocity arrangements for the recognition and enforcement of foreign judgments between jurisdictions. If there are neither treaties nor reciprocity arrangements between China and a foreign jurisdiction where a judgment is rendered, according to the PRC Civil Procedure Law, matters relating to the recognition and enforcement of a foreign judgment in China may be resolved through diplomatic channels. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States or the Cayman Islands. As a result, it is generally difficult to recognize and enforce in China a judgment rendered by a court in either of these two jurisdictions. Table of Contents Underwriting We are offering the ADSs described in this prospectus through the underwriters named below. UBS AG, CIBC World Markets Corp. and Pacific Growth Equities, LLC are the representatives of the underwriters. UBS AG, 52/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, is the sole book-running manager of this offering. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase the number of ADSs listed next to its name in the following table: Underwriters Number of ADSs UBS AG CIBC World Markets Corp. Pacific Growth Equities, LLC Total 7,700,000 The underwriting agreement provides that the underwriters must buy all of the ADSs if they buy any of them. However, the underwriters are not required to take or pay for the ADSs covered by the underwriters over-allotment option described below. Our ADSs are offered subject to a number of conditions, including: receipt and acceptance of our ADSs by the underwriters; and the underwriters right to reject orders in whole or in part. In connection with this offering, the underwriters may distribute prospectuses electronically. Over-allotment option We and certain of the selling shareholders have granted the underwriters an option to buy up to 1,155,000 additional ADSs. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional ADSs approximately in proportion to the amounts specified in the table above. We will not receive any of the proceeds from the sale of our ADSs by the selling shareholders. Commissions and discounts ADSs sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any ADSs sold by the underwriters to securities dealers may be sold at a discount of up to $ per ADS from the public offering price. Any of these securities dealers may resell any ADSs purchased from the underwriters to other brokers or dealers at a discount of up to $ per ADS from the public offering price. If all the ADSs are not sold at the public offering price, the underwriters may change the public offering price and the other selling terms. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the ADSs at the prices and upon the terms stated therein and, as a result, will thereafter bear any risk associated with changing the offering price to the public or other selling terms. UBS AG is expected to make offers and sales in the United States through its U.S. registered broker-dealer affiliate, UBS Securities LLC. Sales of shares made Table of Contents Underwriting outside of the United States may be made by affiliates of the underwriters. The underwriters have informed us that they do not expect to sell more than ADSs to accounts over which such underwriters exercise discretionary authority. The underwriting discounts and commissions represent 7% of the total amount of the offering. The following table shows the per ADS and total underwriting discounts and commissions we will pay to the underwriters, assuming both no exercise and full exercise of the underwriters option to purchase up to an additional 1,155,000 ADSs: Paid by us Paid by the selling shareholders No exercise Full exercise No exercise Full exercise Per ADS $ $ $ $ Total $ $ $ $ We estimate that the total expenses of this offering payable by us, not including the underwriting discounts and commissions, will be approximately $5,000,000. No sales of similar securities We, our officers, directors and shareholders have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of UBS AG, subject to limited exceptions, offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or hedge, any of our ordinary shares, in the form of ADSs or otherwise, or any securities convertible into or exercisable or exchangeable for our ordinary shares, in the form of ADSs or otherwise. These restrictions will be in effect until the expiration of 180 days after the date of this prospectus. At any time and without public notice, UBS AG may in its sole discretion release all or some of the securities from these lock-up agreements. If: during the period that begins on the date that is 15 calendar days plus three business days before the last day of the 180-day lock-up period and ends on the last day of the 180-day lock-up period, we issue an earnings release; or material news or a material event relating to us occurs; or prior to the expiration of the 180-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day lock-up period, then the 180-day lock-up period will be extended until the expiration of the date that is 15 calendar days plus three business days after the date on which the issuance of the earnings release or the material news or material event occurs. Indemnification and contribution We and certain selling shareholders have agreed to indemnify the underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to payments the underwriters and their controlling persons may be required to make in respect of those liabilities. Table of Contents Underwriting Nasdaq Global Market quotation Our ADSs have been approved for quotation on The Nasdaq Global Market, subject to notice of official issuance, under the symbol SSRX. Price stabilization, short positions, penalty bids In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our ADSs, including: stabilizing transactions; short sales; purchases to cover positions created by short sales; imposition of penalty bids; and syndicate-covering transactions. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our ADSs while this offering is in progress. These transactions may also include making short sales of our ADSs, which involve the sale by the underwriters of a greater number of ADSs than they are required to purchase in this offering. Short sales may be covered short sales, which are short positions in an amount not greater than the underwriters over-allotment option referred to above, or may be naked short sales, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing ADSs in the open market. In making this determination, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market compared to the price at which they may purchase ADSs through the over-allotment option. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market after pricing that could adversely affect investors who purchased in this offering. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased ADSs sold by or for the account of that underwriter in stabilizing or short covering transactions. As a result of these activities, the price of our ADSs may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on The Nasdaq Global Market, in the over-the-counter market or otherwise. Determination of offering price Prior to this offering, there was no public market for our ADSs. The initial public offering price will be determined by negotiation by us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include: the information set forth in this prospectus and otherwise available to representatives; Table of Contents Underwriting our history and prospects, and the history of and prospects for the industry in which we compete; our past and present financial performance and an assessment of our management; our prospects for future earnings and the present state of our development; the general condition of the securities markets at the time of this offering; the recent market prices of, and demand for, publicly traded equity securities of generally comparable companies; and other factors deemed relevant by the underwriters and us. Affiliations Certain of the underwriters and their affiliates have provided and may from time to time in the future engage in transactions with us and provide certain commercial banking, financial advisory and investment banking services for us for which they receive customary fees. We have granted UBS Securities LLC, an affiliate of UBS AG, a right of first refusal to participate in potential future transactions and have agreed to reimburse UBS Securities LLC for certain expenses related to this offering. In accordance with the NASD s Conduct Rules, the right of first refusal will be deemed 1% of underwriting compensation, and up to an estimated maximum of $850,000 of reimbursable expenses which may be paid to UBS Securities LLC, will be deemed underwriting compensation in connection with this offering. It is currently estimated that UBS Securities LLC s reimbursable expenses will be approximately $350,000. Table of Contents Notice to investors No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of the ADSs, or the possession, circulation or distribution of this prospectus or any other material relating to us or the ADSs in any jurisdiction where action for that purpose is required. Accordingly, the ADSs may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in connection with the ADSs may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. EUROPEAN ECONOMIC AREA With respect to each Member State of the European Economic Area which has implemented Prospectus Directive 2003/71/EC, including any applicable implementing measures, from and including the date on which the Prospectus Directive is implemented in that Member State, the offering of ADSs to the public is only being made: to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an offer of ADSs to the public in relation to any ADSs in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the ADSs to be offered so as to enable an investor to decide to purchase or subscribe for the ADSs, as the same may be varied in that member state by any measure implementing the Prospectus Directive in that member state and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state. UNITED KINGDOM Our ADSs may not be offered or sold and will not be offered or sold to any persons in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses and in compliance with all applicable provisions of the Financial Services and Markets Act 2000 (FSMA) with respect to anything done in relation to our ADSs in, from or otherwise involving the United Kingdom. In addition, each underwriter will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of our ADSs in circumstances in which Section 21(1) of the FSMA does not apply to us. Without limitation to the other restrictions referred to herein, this prospectus is directed only at (1) persons outside the United Kingdom, (2) persons having professional experience in matters relating to investments who fall within the definition of investment professionals in Article 19(5) of the FSMA (Financial Promotion) Order 2005; or (3) high net worth bodies corporate, Table of Contents Notice to investors unincorporated associations and partnerships and trustees of high value trusts as described in Article 49(2) of the FSMA (Financial Promotion) Order 2005. Without limitation to the other restrictions referred to herein, any investment or investment activity to which this prospectus relates is available only to, and will be engaged in only with, such persons, and persons within the United Kingdom who receive this communication (other than persons who fall within (2) or (3) above) should not rely or act upon this communication. ITALY The offering of our ADSs has not been cleared by the Italian Securities Exchange Commission (Commissione Nazionale per le Societ e la Borsa, the CONSOB ) pursuant to Italian securities legislation and, accordingly, shares of our ADSs may not and will not be offered, sold or delivered, nor may or will copies of this prospectus supplement and the accompanying prospectus or any other documents relating to our ADSs or the offering be distributed in Italy other than to professional investors (operatori qualificati), as defined in Article 31, paragraph 2 of CONSOB Regulation No. 11522 of July 1, 1998, as amended ( Regulation No. 11522 ). Any offer, sale or delivery of our ADSs or distribution of copies of this prospectus supplement and the accompanying prospectus or any other document relating to our ADSs or the offering in Italy may and will be effected in accordance with all Italian securities, tax, exchange control and other applicable laws and regulations, and, in particular, will be: (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Legislative Decree No. 385 of September 1, 1993, as amended (the Italian Banking Law ), Legislative Decree No. 58 of February 24, 1998, as amended, Regulation No. 11522, and any other applicable laws and regulations; (ii) in compliance with Article 129 of the Italian Banking Law and the implementing guidelines of the Bank of Italy; and (iii) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy. Any investor purchasing our ADSs in the offering is solely responsible for ensuring that any offer or resale of ADSs it purchased in the offering occurs in compliance with applicable laws and regulations. This prospectus supplement and the accompanying prospectus and the information contained herein are intended only for the use of its recipient and are not to be distributed to any third party resident or located in Italy for any reason. No person resident or located in Italy other than the original recipients of this document may rely on it or its content. In addition to the above (which shall continue to apply to the extent not inconsistent with the implementing measures of the Prospective Directive in Italy), after the implementation of the Prospectus Directive in Italy, the restrictions, warranties and representations set out under the heading European Economic Area above shall apply to Italy. THE NETHERLANDS The underwriters have not offered, distributed, sold, transferred or delivered, and will not offer, distribute, sell, transfer or deliver, any ADSs, directly or indirectly, in the Netherlands, as part of their initial distribution or at any time thereafter, to any person other than individuals who or legal entities which trade or invest in securities in the conduct of their profession or business within the meaning of article 2 of the Exemption Regulation issued under the Securities Transactions Supervision Act 1995 Table of Contents Notice to investors ( Vrijstellingsregeling Wet toezicht Effectenverkeer 1995 ), which includes banks, brokers, pension funds, insurance companies, securities institutions, investment institutions and other institutional investors, including, among others, treasuries of large enterprises, who or which regularly trade or invest in securities in a professional capacity. SWITZERLAND Our ADSs may be offered in Switzerland only on the basis of a non-public offering. This prospectus does not constitute an issuance prospectus according to articles 652a or 1156 of the Swiss Federal Code of Obligations or a listing prospectus according to article 32 of the Listing Rules of the Swiss exchange. Our ADSs may not be offered or distributed on a professional basis in or from Switzerland and neither this prospectus nor any other offering material relating to our ADSs may be publicly issued in connection with any such offer or distribution. Our ADSs have not been and will not be approved by any Swiss regulatory authority. In particular, our ADSs are not and will not be registered with or supervised by the Swiss Federal Banking Commission, and investors may not claim protection under the Swiss Investment Fund Act. HONG KONG The underwriters (i) have not offered or sold, and will not offer or sell, in Hong Kong, by means of any document, any ADSs other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Chapter 32) of Hong Kong, and (ii) except as permitted under the securities laws of Hong Kong, have not issued, and will not issue, in Hong Kong any document, invitation or advertisement relating to the ADSs other than with respect to ADSs which are intended to be disposed of to persons outside Hong Kong or only to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. JAPAN The ADSs have not been and will not be registered under the Securities and Exchange Law of Japan and may not be offered or sold, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan) or to, or for the account or benefit of, any person for reoffering or resale, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan, except (i) pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Securities and Exchange Law of Japan and (ii) in compliance with any other relevant laws and regulations of Japan. SINGAPORE This prospectus has not been registered as a prospectus or information memorandum with the Monetary Authority of Singapore. Accordingly, no advertisement may be made offering or calling attention to an offer or intended offer of the ADSs to the public in Singapore. The underwriters will not offer or sell ADSs, and will not make ADSs the subject of an invitation for subscription or purchase, and will not circulate or distribute this prospectus or any other document or material in connection with the offer or Table of Contents Notice to investors sale, or invitation for subscription or purchase, of ADSs, whether directly or indirectly, to the public or any member of the public in Singapore other than: to an institutional investor or other person specified in Section 274 of the Securities and Futures Act 2001 of Singapore, or the Securities and Futures Act, to a sophisticated investor, and in accordance with the conditions, specified in Section 275 of the Securities and Futures Act, or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act. PEOPLE S REPUBLIC OF CHINA The underwriters have not circulated and will not circulate or distribute this prospectus in the PRC and the underwriters have not offered or sold, and will not offer or sell to any person for re-offering or resale, directly or indirectly, any ADSs to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purposes of this paragraph, PRC does not include Hong Kong, Macau and Taiwan. CAYMAN ISLANDS This prospectus does not constitute an invitation or offer to the public in the Cayman Islands of the ADSs, whether by way of sale or subscription. The underwriters have not offered or sold, and will not offer or sell, directly or indirectly, any ADSs in the Cayman Islands. Table of Contents Expenses relating to this offering The following table sets forth the main estimated expenses in connection with this offering, other than the underwriting discounts and commissions, which we will be required to pay: U.S. Securities and Exchange Commission registration fee US$ 13,265 National Association of Securities Dealers filing fee 12,897 Nasdaq listing fee 150,000 Legal fees and expenses 2,000,000 Accounting fees and expenses 850,000 Other professional fees 710,000 Printing fees 300,000 Roadshow expenses 450,000 Other fees and expenses 513,838 Total US$ 5,000,000 All amounts are estimated, except the U.S. Securities and Exchange Commission registration fee, the Nasdaq listing fee and the NASD filing fee. Table of Contents Legal matters The validity of the ADSs and certain other legal matters with respect to U.S. federal and New York law will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Hong Kong. Dewey Ballantine LLP, New York, New York is U.S. counsel for the underwriters in connection with this offering. The validity of our ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Conyers Dill & Pearman. Legal matters as to Chinese law will be passed upon for us by Jingtian & Gongcheng, Beijing, China and for the underwriters by the Commerce and Finance Law Offices, Beijing, China. Skadden, Arps, Slate, Meagher & Flom LLP may rely upon Conyers Dill & Pearman, with respect to matters governed by the Cayman Islands law and upon Jingtian & Gongcheng, Beijing, China with respect to matters governed by PRC law. Dewey Ballantine LLP may rely upon Conyers Dill & Pearman, with respect to matters governed by Cayman Islands and upon Commerce and Finance Law Offices, Beijing, China with respect to matters governed by PRC law.
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diff --git a/parsed_sections/legal_matters/2007/CIK0001384360_simcere_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001384360_simcere_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6188bec530cbd1e5d6cb420c76f7b7e9d8dca0d7
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001384360_simcere_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to the United States federal and New York law in connection with this offering will be passed upon for us by Simpson Thacher & Bartlett LLP. Certain legal matters as to the United States federal and New York law in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Walkers. Legal matters as to PRC law will be passed upon for us by Jingtian & Gongcheng and for the underwriters by Haiwen & Partners. Simpson Thacher & Bartlett LLP may rely upon Walkers with respect to matters governed by Cayman Islands law and Jingtian & Gongcheng with respect to matters governed by PRC law. Shearman & Sterling LLP may rely upon Haiwen & Partners with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001385424_ldk-solar_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001385424_ldk-solar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1f6b1cdc0ce9bf8c5fe8acb2bc2fbb83c35a0f29
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001385424_ldk-solar_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters with respect to U.S. federal and New York law will be passed upon for us by Sidley Austin LLP. Certain legal matters with respect to U.S. federal and New York law in connection with this offering will be passed upon for the underwriters by Cleary Gottlieb Steen Hamilton LLP. The validity of the ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Conyers, Dill Pearman, our counsel as to Cayman Islands law. Legal matters as to PRC law will be passed upon for us by Grandall Legal Group and for the underwriters by King Wood. Sidley Austin LLP may rely upon Conyers, Dill Pearman with respect to matters governed by Cayman Islands law and upon Grandall Legal Group with respect to matters governed by PRC law.
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diff --git a/parsed_sections/legal_matters/2007/CIK0001385544_horsehead_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001385544_horsehead_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d8642675712549ee9b9cd6b080a603fb8f414d0d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001385544_horsehead_legal_matters.txt
@@ -0,0 +1 @@
+various legal matters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001385830_neurogesx_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001385830_neurogesx_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..dc83ee8a18ae246645a0833a49784d3648b291ae
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001385830_neurogesx_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Davis Polk & Wardwell, Menlo Park, California, is representing the underwriters. Certain members of, and investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich & Rosati own an interest representing less than 1% of the shares our common stock.
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diff --git a/parsed_sections/legal_matters/2007/CIK0001386198_memsic-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001386198_memsic-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..802a35171f4bb819f80a12999221b135e326d0d4
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001386198_memsic-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters relating to U.S. federal law will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP. The validity of the common stock we are offering will be passed upon for the underwriters by Sullivan & Cromwell LLP. Certain legal matters as to PRC law will be passed upon for us by Commerce & Finance Law Offices and for the underwriters by Global Law Office.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001386608_tongjitang_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001386608_tongjitang_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..75a3ff6ffe2269081368fc05abd1029590064b19
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001386608_tongjitang_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to the United States federal and New York law in connection with this offering will be passed upon for us by Latham & Watkins LLP. Certain legal matters as to the United States federal and New York law in connection with this offering will be passed upon for the underwriters by Cleary Gottlieb Steen & Hamilton LLP. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. Legal matters as to PRC law will be passed upon for us by Global Law Office and for the underwriters by Jun He Law Offices. Latham & Watkins LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law and Global Law Office with respect to matters governed by PRC law. Cleary Gottlieb Steen & Hamilton LLP may rely upon Jun He Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001386787_victory_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001386787_victory_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..890bb2dcfe1f0b02a5c7bde52939c7a83dd9668d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001386787_victory_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. In connection with this offering, Akin Gump Strauss Hauer & Feld LLP, New York, New York, is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001388133_shoretel_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001388133_shoretel_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..806b03106e6dc494ce93a227ec1d83ea17295c59
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001388133_shoretel_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Fenwick West LLP, Mountain View, California. Wilson Sonsini Goodrich Rosati, P. C., Palo Alto, California, is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001388356_kbl_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001388356_kbl_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..94bdc524459aaec2733eed9158ebb0311a3b45ea
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001388356_kbl_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. Sidley Austin LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001388374_si-mei-te_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001388374_si-mei-te_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c36017004f7df648475298a02f76dc7e04f90a2b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001388374_si-mei-te_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. We have paid Graubard Miller a retainer of $25,000 for such services. Graubard Miller has agreed that the balance of the legal fees that we will owe to it for these services will be paid by us only upon the successful consummation of this offering. Legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. Loeb & Loeb LLP, New York, New York, is acting as counsel for the underwriter in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001388430_cai_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001388430_cai_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..05743e4eea6ff448c1d876c9658d0ce858649ef3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001388430_cai_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the sale of the shares of common stock offered hereby will be passed upon for us by Perkins Coie LLP, Menlo Park, California. The underwriters have been represented by Davis Polk & Wardwell, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001388775_sirtris_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001388775_sirtris_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7a55a2360ee592096c6efdbf3283201116dd242a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001388775_sirtris_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters Ropes & Gray LLP, Boston, Massachusetts, will pass upon the validity of the common stock offered by this prospectus for us. Davis Polk & Wardwell, New York, New York will pass upon certain legal matters in connection with this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001389305_rsc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001389305_rsc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ae46ebcbb8a639ca0e3dd04757b287eb4c98ec75
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001389305_rsc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered in this offering will be passed upon for us by Debevoise Plimpton LLP, New York, New York. Cahill Gordon Reindel llp, New York, New York, advised the underwriters in connection with the offering of the common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001389476_xinhua_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001389476_xinhua_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1434d7e8234119c7d14c0e506e86c6f4291d4de2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001389476_xinhua_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the ADSs and certain other legal matters in connection with this offering will be passed upon for us by Latham Watkins LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk Wardwell. The validity of the common shares represented by the ADSs offered in this offering will be passed upon for us by Conyers Dill Pearman. Legal matters as to PRC law will be passed upon for us by Commerce Finance Law Offices and for the underwriters by Jingtian Gongcheng Associates. Latham Watkins LLP may rely upon Conyers Dill Pearman with respect to matters governed by Cayman Islands law and Commerce Finance Law Offices with respect to matters governed by PRC law. Davis Polk Wardwell may rely upon Conyers Dill Pearman with respect to matters governed by Cayman Islands law and Jingtian Gongcheng Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001389771_inter_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001389771_inter_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8242b71c29984a7f8ca774cb0b6edec0905cee2e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001389771_inter_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by DLA Piper US LLP, New York, New York. Morrison Foerster LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001390281_endoceutic_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001390281_endoceutic_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..92417b412afe6f846b68b0ad1176cda8161cc1cb
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001390281_endoceutic_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon on our behalf by Fasken Martineau DuMoulin LLP, Canadian counsel to the Company, and Eaton & Van Winkle LLP, US counsel to the Company. By our engagement with Eaton & Van Winkle LLP, in return for the law firm s agreement to defer the collection of hourly fees incurred in representing us in this offering, we have agreed to pay the law firm, in addition to fees for its professional services based upon its standard hourly rates, an additional fee, in the form of a premium, equal to one percent of the proceeds raised in this offering. Davies Ward Phillips & Vineberg LLP is Canadian counsel and Dewey Ballantine LLP is US counsel to the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001390332_stone-tan_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001390332_stone-tan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c47a7a221d0e1091f72dfb61d9fd26696c771490
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001390332_stone-tan_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Loeb & Loeb LLP, New York, New York. DLA Piper US LLP is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001390449_arcade_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001390449_arcade_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0e826a64dbf936bb9c3f0b7f1e8962c860b41ff2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001390449_arcade_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Loeb & Loeb LLP, New York, New York. Kramer Levin Naftalis & Frankel LLP is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001390707_seanergy_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001390707_seanergy_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e250f3681bfe847227056f30d121d5f4d9ce1f2a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001390707_seanergy_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents France. The units offered by this prospectus may not be offered or sold, directly or indirectly, to the public in France. This prospectus has not been or will not be submitted to the clearance procedure of the Autorite des Marches Financiers, or the AMF, and may not be released or distributed to the public in France. Investors in France may only purchase the units offered by this prospectus for their own account and in accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Monetaire et Financier and decree no. 98-880 dated October 1, 1998, provided they are qualified investors within the meaning of said decree. Each French investor must represent in writing that it is a qualified investor within the meaning of the aforesaid decree. Any resale, directly or indirectly, to the public of the units offered by this prospectus may be effected only in compliance with the above mentioned regulations. Les actions offertes par ce document d information ne peuvent pas etre, directement ou indirectement, offertes ou vendues au public en France. Ce document d information n a pas ete ou ne sera pas soumis au visa de 1 Autorite des Marches Financiers et ne peut etre diffuse ou distribue au public en France. Les investisseurs en France ne peuvent acheter les actions offertes par ce document d information que pour leur compte propre et conformement aux articles L. 411-1, L. 441-2 et L. 412-1 du Code Monetaire et Financier et du decret no. 98-880 du 1 octobre 1998, sous reserve qu ils soient des investisseurs qualifies au sens du decret susvise. Chaque investisseur doit declarer par ecrit qu il est un investisseur qualifie au sens du decret susvise. Toute revente, directe ou indirecte, des actions offertes par ce document d information au public ne peut etre effectuee que conformement a la reglementation susmentionnee. Switzerland. This prospectus may only be used by those persons to whom it has been directly handed out by the offeror or its designated distributors in connection with the offer described therein. The units are only offered to those persons and/or entities directly solicited by the offeror or its designated distributors, and are not offered to the public in Switzerland. This prospectus constitutes neither a public offer in Switzerland nor an issue prospectus in accordance with the respective Swiss legislation, in particular but not limited to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be used in connection with any other offer, whether private or public and shall in particular not be distributed to the public in Switzerland. United Kingdom. In the United Kingdom, the units offered by this prospectus are directed to and will only be available for purchase to a person who is an exempt person as referred to at (c) below and who warrants, represents and agrees that: (a) it has not offered or sold, will not offer or sell, any units offered by this prospectus to any person in the United Kingdom except in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of section 85 of the Financial Services and Markets Act 2000 (as amended) ( FSMA ); (b) it has complied and will comply with all applicable provisions of FSMA and the regulations made thereunder in respect of anything done by it in relation to the units offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) it is a person who falls within the exemptions to Section 21 of FSMA as set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ( the Order ), being either an investment professional as described under Article 19 or any body corporate (which itself has or a group undertaking has a called up share capital or net assets of not less than 500,000 (if more than 20 members) or otherwise 5 million) or an unincorporated association or partnership (with net assets of not less than 5 million) or is a trustee of a high value trust or any person acting in the capacity of director, officer or employee of such entities as defined under Article 49(2)(a) to (d) of the Order, or to whom the invitation or inducement may otherwise lawfully be communicated or cause to be communicated. The investment activity to which this document relates will only be available to and engaged in only with exempt persons referred to above. Persons who are not investment professionals and do not have professional experience in matters relating to investments or are not an exempt person as described above, should not review nor rely or act upon this document and should return this document immediately. It should be noted that this document is not a prospectus in the United Kingdom as defined in the Prospectus Regulations 2005 and has not been approved by the Financial Services Authority or any competent authority in the United Kingdom. Israel. The units offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The units may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the units or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the units being offered. Any resale, directly or indirectly, to the public of the units offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations. Table of Contents Sweden. Neither this prospectus nor the units offered hereunder have been registered with or approved by the Swedish Financial Supervisory Authority under the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will such registration or approval be sought. Accordingly, this prospectus may not be made available nor may the units offered hereunder be marketed or offered for sale in Sweden other than in circumstances which are deemed not to be an offer to the public in Sweden under the Financial Instruments Trading Act. This prospectus may not be distributed to the public in Sweden and a Swedish recipient of the prospectus may not in any way forward the prospectus to the public in Sweden. Norway. This prospectus has not been produced in accordance with the prospectus requirements laid down in the Norwegian Securities Trading Act 1997, as amended. This prospectus has not been approved or disapproved by, or registered with, either the Oslo Stock Exchange or the Norwegian Registry of Business Enterprises. This prospectus may not, either directly or indirectly be distributed to Norwegian potential investors. Denmark. This prospectus has not been prepared in the context of a public offering of securities in Denmark within the meaning of the Danish Securities Trading Act No. 171 of 17 Mark 2005, as amended from time to time, or any Executive Orders issued on the basis thereof and has not been and will not be filed with or approved by the Danish Financial Supervisory Authority or any other public authority in Denmark. The offering of units will only be made to persons pursuant to one or more of the exemptions set out in Executive Order No 306 or 28 April 2005 on Prospectuses for Securities Admitted for Listing or Trade on a Regulated Market and on the First Public Offer of Securities exceeding EUR 2,500,000 or Executive Order No 307 of 28 April 2005 on Prospectuses for the First Public Offer of Certain Securities between EUR 100,000 and EUR 2,500,000, as applicable. Other Terms We have granted the representative the right to have its designee present at all meetings of our board of directors for a period of two years from the consummation of this offering. The designee will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. The representative has not named a designee as of the consummation of this offering. During such two-year period, we have further agreed to hold board meetings at least once every quarter and to notify the representative of any proposed acquisitions, mergers, reorganizations or other similar transactions. The representative has not named a designee as of the consummation of this offering. Although we are not under any contractual obligation to engage any of the underwriters to provide any services for us after this offering, and have no present intent to do so, any of the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after this offering, we may pay such underwriter fair and reasonable fees that would be determined at that time in an arm s length negotiations. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in this respect. LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Reeder Simpson, P.C., Piraeus, Greece. Ellenoff Grossman Schole LLP, New York, New York, has acted as counsel for the underwriters in this offering. Loeb Loeb LLP, as special United States counsel, has provided an opinion relating to the tax disclosure under the caption Taxation United States Federal Income Taxation.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001391127_edgio-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001391127_edgio-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..da9811ef4b774f40c479ab1804982f1bc679c66c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001391127_edgio-inc_legal_matters.txt
@@ -0,0 +1 @@
+legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher Bartlett LLP, Palo Alto, California. Certain members of, and investment partnerships comprised of members of, and persons associated with, Wilson Sonsini Goodrich Rosati own an aggregate of 22,540 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001391390_boise-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001391390_boise-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..51ec43210ff0f570545d1abcb1cd0542efec0925
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001391390_boise-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. Cleary Gottlieb Steen Hamilton LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001391672_starent_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001391672_starent_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0fa9d4c1de7b38dc860e677302d5ae9eee0082cd
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001391672_starent_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. Attorneys at Wilmer Cutler Pickering Hale and Dorr LLP beneficially own an aggregate of 98,359 shares of our common stock. The underwriters are represented by Wilson Sonsini Goodrich & Rosati, Professional Corporation, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001391718_nagao_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001391718_nagao_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..38e3890e2ca4423f638eaaa967af027c546be134
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001391718_nagao_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters are being passed upon for us by Loeb & Loeb LLP. Graubard Miller, New York, New York is acting as counsel for the underwriters in this offering. Legal matters as to Cayman Islands law will passed upon for us by Conyers Dill & Pearman. Loeb & Loeb LLP may rely upon Conyers Dill & Pearman with respect to matters governed by Cayman Islands law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001392179_bway_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001392179_bway_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d548d1a4e2aa23f78609bb434deb499b0767c33a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001392179_bway_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered in this offering will be passed upon for us by Debevoise & Plimpton LLP, New York, New York and for the underwriters by Sullivan & Cromwell LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001393718_sp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001393718_sp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..20c3b68188c9fb617e3d55aa673a0d1dd096e3fa
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001393718_sp_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the securities offered by this prospectus will be passed upon by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York, New York. In connection with this offering, Davis Polk & Wardwell, New York, New York is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001393816_alternativ_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001393816_alternativ_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c10613dc8028f7afb2ded639b553d96937e2fc16
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001393816_alternativ_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Akin Gump Strauss Hauer & Feld LLP, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. In connection with this offering, Davis Polk & Wardwell, New York, New York is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001394029_yingli_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001394029_yingli_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..53932ac65b35cc48be7c0ba4df07543d36e9efe7
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001394029_yingli_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and the notes and certain other legal matters as to the United States federal law and New York State law in connection with this offering will be passed upon for us by Simpson Thacher Bartlett LLP. The underwriters are being represented by Sullivan Cromwell LLP with respect to legal matters of United States federal securities and New York State law. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Conyers Dill Pearman. Legal matters as to PRC law will be passed upon for us by Fangda Partners and for the underwriters by Commerce Finance Law Office. Simpson Thacher Bartlett LLP may rely upon Conyers Dill Pearman with respect to matters governed by Cayman Islands law and Fangda Partners with respect to matters governed by PRC law. Sullivan Cromwell LLP may rely upon Commerce Finance Law Office with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001394168_sungard_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001394168_sungard_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001394168_sungard_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001394169_sungard_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001394169_sungard_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001394169_sungard_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001394175_automated_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001394175_automated_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cdef158b0df18d5e2d57d7e3ad14f9b899153e3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001394175_automated_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity and enforceability of the notes and the related guarantees have been passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. In rendering its opinion, Simpson Thacher & Bartlett LLP relied upon the opinion of Sheppard, Mullin, Richter & Hampton LLP as to all matters governed by the laws of the State of California, the opinion of Blank Rome LLP as to all matters governed by the laws of the State of Florida and the Commonwealth of Pennsylvania, the opinion of Ropes & Gray LLP as to all matters governed by the laws of the Commonwealth of Massachusetts and the opinion of Snell & Wilmer L.L.P. as to all matters governed by the laws of the State of Utah. An investment vehicle comprised of several partners of Simpson Thacher & Bartlett LLP, members of their families, related persons and others own interests representing less than 1% of the capital commitments of funds affiliated with three of the Sponsors, Blackstone, KKR and Silver Lake. Some partners of Ropes & Gray LLP are members in RGIP LLC, which is an investor in certain investment funds affiliated with certain of the Sponsors and often a co-investor with such funds. RGIP LLC owns, directly and indirectly, shares of the capital stock of our Equity-Issuing Parent Companies representing less than 1% of the outstanding shares of stock of each such company.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001394409_merrion_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001394409_merrion_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a2335618c60fdfe8bc39699a113d6521a2413c46
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001394409_merrion_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and ordinary shares offered hereby will be passed upon for us by Hutchison Law Group PLLC, Raleigh, North Carolina. Hutchison Law Group may rely upon BCM Hanby Wallace, Dublin, Ireland, with respect to certain matters governed by Irish law. Certain legal matters relating to the offering will be passed upon for the underwriters by Greenberg Traurig, LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001395000_nanodynami_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001395000_nanodynami_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2ae7dcae147115f41e5eece00ca5dead271a1223
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001395000_nanodynami_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered in this prospectus is being passed upon for us by Loeb Loeb LLP, New York, New York. Jones Day will pass upon certain legal matters for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001395943_limco_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001395943_limco_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6e48e34f52fb25256de4a78070097e5017e78b15
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001395943_limco_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered by this prospectus and other legal matters concerning this offering will be passed upon for us by Carter Ledyard & Milburn LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Kramer Levin Naftalis & Frankel LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001396247_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001396247_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4efeb2943a4a9e66a7d32ace90cc9a7c31f7255e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001396247_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to the United States federal law and New York law in connection with this offering will be passed upon for us by Latham & Watkins LLP. Certain legal matters as to the United States federal law and New York law in connection with this offering will be passed upon for the underwriters by O Melveny & Myers LLP. The validity of the ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Conyers Dill & Pearman. Legal matters as to PRC law will be passed upon for us by King & Wood and for the underwriters by Junhe Law Offices. Latham & Watkins LLP may rely upon Conyers Dill & Pearman with respect to matters governed by Cayman Islands law, and King & Wood with respect to matters governed by PRC law. O Melveny & Myers LLP may rely upon Conyers Dill & Pearman with respect to matters governed by Cayman Islands law, and Junhe Law Offices with respect to matters governed by PRC law. Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001396278_starlims_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001396278_starlims_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..44fa5eb658ceec2372f17b85f370c80791dd0070
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001396278_starlims_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ordinary shares being offered by this prospectus and other legal matters concerning this offering relating to Israeli law will be passed upon for us by Lahav, Litvak-Abadi & Co. Certain legal matters in connection with this offering relating to United States law will be passed upon for us by Carter Ledyard & Milburn LLP. Certain legal matters concerning this offering relating to United States law will be passed upon for the underwriters by Greenberg Traurig LLP. Certain legal matters concerning this offering relating to Israeli law will be passed upon for the underwriters by Herzog, Fox & Neeman.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001396279_hhgregg_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001396279_hhgregg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..23d6e697e0f9ca00a4f30e1c7f0b070fd871a790
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001396279_hhgregg_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the common stock offered hereby will be passed upon for us and the selling stockholders by Bingham McCutchen LLP, New York, New York. Certain legal matters with respect to this offering will be passed upon for the underwriters by Shearman & Sterling LLP, New York, New York. Certain partners and employees of Bingham McCutchen LLP are limited partners in a partnership that is a limited partner of the Freeman Spogli investment fund that owns equity interests of us.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001396647_galls-an_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001396647_galls-an_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ad5116e9d7d968e8602805dcb9c51d2c58418ad5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001396647_galls-an_legal_matters.txt
@@ -0,0 +1,2744 @@
+Legal matters 
+ The validity of the notes and related guarantees offered hereby have been passed upon by
+Simpson Thacher & Bartlett LLP, New York, New York. 
+ 
+Experts 
+ The consolidated financial statements and schedule of ARAMARK Corporation as of September 30, 2005
+and September 29, 2006, and for each of the three years in the period ended September 29, 2006, have been included herein in this prospectus and Registration Statement in reliance upon the report of KPMG LLP, independent registered public accounting
+firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. That report on the consolidated financial statements refers to accounting changes as a result of the adoption of Statement of Financial
+Accounting Standard No. 123(R), Share-Based Payment, and Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards
+No. 143, Accounting for Asset Retirement Obligations. 
+ 
+Available information 
+ We have filed with the SEC a registration statement on Form S-1 under the Securities
+Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and
+the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete, and, where such contract or other document is an exhibit to the
+registration statement, each such statement is qualified by the provisions in such exhibit to which reference is hereby made. We file reports and other information with the SEC. The registration statement, historical information about ARAMARK
+Corporation and other information can be inspected and copied at the Public Reference Room of the SEC located at Room 1580, 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of any portion of the
+registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed
+electronically by means of the SEC s home page on the Internet (http://www.sec.gov). 
+ 
+
+ 182 
+
+Table of Contents
+
+ 
+ARAMARK Corporation and subsidiaries 
+ 
+Index to financial statements and schedule 
+ 
+
+ Audited Financial Statements (Predecessor)
+
+ 
+
+ 
+Consolidated balance sheets as of September 30, 2005 and September 29, 2006
+
+ 
+F-3
+
+ 
+Consolidated statements of income for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-4
+
+ 
+Consolidated statements of cash flows for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-5
+
+ 
+Consolidated statements of shareholders equity for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-6
+
+ 
+Notes to consolidated financial statements
+
+ 
+F-7
+
+ 
+Schedule II Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-42
+
+ Interim Financial Statements (Unaudited)
+
+ 
+
+ 
+Condensed consolidated balance sheets as of March 30, 2007 (Successor) and September 29, 2006 (Predecessor) 
+
+ 
+F-43
+
+ 
+Condensed consolidated statements of operations for the period from January 27, 2007 through March 30, 2007 (Successor), the period from December 30, 2006 through January 26, 2007 (Predecessor) and the three months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-44
+
+ 
+Condensed consolidated statements of operations for the period from January 27, 2007 through March 30, 2007 (Successor), the period from September 30, 2006 through January 26, 2007 (Predecessor) and the six months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-45
+
+ 
+Condensed consolidated statements of cash flows for the period from January 27, 2007 through March 30, 2007 (Successor), the period from September 30, 2006 through January 26, 2007 (Predecessor) and the six months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-46
+
+ 
+Condensed consolidated statements of shareholders equity for the period from September 30, 2006 through January 26, 2007 (Predecessor) and the period from January 27, 2007 through March 30, 2007 (Successor)
+
+ 
+F-47
+
+ 
+Notes to consolidated financial statements
+
+ 
+F-48
+
+ 
+
+ F-1 
+
+Table of Contents
+
+ Report of independent registered public accounting firm 
+ The Board of Directors and Shareholders 
+ ARAMARK Corporation: 
+ We have audited the accompanying consolidated balance sheets of ARAMARK Corporation and subsidiaries as of September 30, 2005 and September 29,
+2006, and the related consolidated statements of income, cash flows and shareholders equity for each of the years in the three-year period ended September 29, 2006. In connection with our audits of the consolidated financial statements,
+we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company s management. Our responsibility is to
+express an opinion on these consolidated financial statements and financial statement schedule based on our audits. 
+ We conducted our
+audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
+material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
+management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+ In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ARAMARK Corporation and subsidiaries as of September 30, 2005 and
+September 29, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended September 29, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
+the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 
+ As discussed in Note 11 to the consolidated financial statements, effective October 1, 2005, the Company adopted the provisions of Statement of
+Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, applying the modified prospective method. Also, as discussed in Note 7 to the consolidated financial statements, effective September 29, 2006, the Company
+adopted the provisions of Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards No. 143, Accounting for
+Asset Retirement Obligations. 
+ /s/ KPMG LLP
+ Philadelphia, Pennsylvania 
+ November 20, 2006, except as to Note 16, 
+ which is as of June 6, 2007 
+ 
+
+ F-2 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated balance sheets 
+ September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands,
+except share amounts)
+ 
+
+ Assets
+
+ 
+
+ 
+
+ Current Assets:
+
+ 
+
+ 
+
+ Cash and cash equivalents
+
+ 
+$
+56,066
+ 
+ 
+$
+47,679
+ 
+
+ Receivables (less allowances: 2005 $42,645; 2006 $37,222)
+
+ 
+ 
+808,531
+ 
+ 
+ 
+870,909
+ 
+
+ Inventories
+
+ 
+ 
+485,834
+ 
+ 
+ 
+494,176
+ 
+
+ Prepayments and other current assets
+
+ 
+ 
+92,796
+ 
+ 
+ 
+114,080
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current assets
+
+ 
+ 
+1,443,227
+ 
+ 
+ 
+1,526,844
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Property and Equipment, at cost:
+
+ 
+
+ 
+
+ Land, buildings and improvements
+
+ 
+ 
+727,817
+ 
+ 
+ 
+757,761
+ 
+
+ Service equipment and fixtures
+
+ 
+ 
+1,948,882
+ 
+ 
+ 
+2,017,209
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+2,676,699
+ 
+ 
+ 
+2,774,970
+ 
+
+ Less-Accumulated depreciation
+
+ 
+ 
+(1,465,245
+)
+ 
+ 
+(1,578,140
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+1,211,454
+ 
+ 
+ 
+1,196,830
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Goodwill
+
+ 
+ 
+1,682,749
+ 
+ 
+ 
+1,747,094
+ 
+
+ Other Intangible Assets
+
+ 
+ 
+274,584
+ 
+ 
+ 
+297,986
+ 
+
+ Other Assets
+
+ 
+ 
+545,086
+ 
+ 
+ 
+494,563
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+$
+5,157,100
+ 
+ 
+$
+5,263,317
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Liabilities and shareholders equity
+
+ 
+
+ 
+
+ Current Liabilities:
+
+ 
+
+ 
+
+ Current maturities of long-term borrowings
+
+ 
+$
+46,363
+ 
+ 
+$
+40,203
+ 
+
+ Accounts payable
+
+ 
+ 
+585,014
+ 
+ 
+ 
+642,778
+ 
+
+ Accrued payroll and related expenses
+
+ 
+ 
+320,494
+ 
+ 
+ 
+346,770
+ 
+
+ Other accrued expenses and current liabilities
+
+ 
+ 
+566,809
+ 
+ 
+ 
+556,945
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current liabilities
+
+ 
+ 
+1,518,680
+ 
+ 
+ 
+1,586,696
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Long-term borrowings
+
+ 
+ 
+1,840,885
+ 
+ 
+ 
+1,803,291
+ 
+
+ Less-current portion
+
+ 
+ 
+(46,363
+)
+ 
+ 
+(40,203
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total long-term borrowings
+
+ 
+ 
+1,794,522
+ 
+ 
+ 
+1,763,088
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Deferred Income Taxes and Other Noncurrent Liabilities
+
+ 
+ 
+518,434
+ 
+ 
+ 
+391,941
+ 
+
+ Shareholders Equity:
+
+ 
+
+ 
+
+ Class A common stock (par value $.01; authorized: 600,000,000 shares; issued: 2005 80,306,913 shares; 2006 75,129,722 shares;
+outstanding: 2005 61,577,474 shares; 2006 56,245,418 shares)
+
+ 
+ 
+803
+ 
+ 
+ 
+751
+ 
+
+ Class B common stock (par value $.01; authorized: 1,000,000,000 shares; issued: 2005 147,462,062 shares; 2006 156,170,782 shares;
+outstanding: 2005 119,278,523 shares; 2006 123,882,195 shares)
+
+ 
+ 
+1,475
+ 
+ 
+ 
+1,562
+ 
+
+ Capital surplus
+
+ 
+ 
+1,108,251
+ 
+ 
+ 
+1,210,300
+ 
+
+ Earnings retained for use in the business
+
+ 
+ 
+1,328,174
+ 
+ 
+ 
+1,538,760
+ 
+
+ Accumulated other comprehensive income
+
+ 
+ 
+11,307
+ 
+ 
+ 
+12,524
+ 
+
+ Treasury stock (shares held in treasury: 2005 46,912,978 shares; 2006 51,172,891 shares)
+
+ 
+ 
+(1,124,546
+)
+ 
+ 
+(1,242,305
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+
+ 
+ 
+1,325,464
+ 
+ 
+ 
+1,521,592
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+$
+5,157,100
+ 
+ 
+$
+5,263,317
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-3 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated statements of income 
+ For the fiscal years ended October 1, 2004,
+September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2004
+ 
+2005
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands, except per share amounts)
+ 
+
+ Sales
+
+ 
+$
+10,192,240
+ 
+$
+10,963,360
+ 
+$
+11,621,173
+ 
+
+ Costs and Expenses:
+
+ 
+
+ 
+
+ 
+
+ Cost of services provided
+
+ 
+ 
+9,222,269
+ 
+ 
+9,921,742
+ 
+ 
+10,537,383
+ 
+
+ Depreciation and amortization
+
+ 
+ 
+297,993
+ 
+ 
+320,118
+ 
+ 
+339,337
+ 
+
+ Selling and general corporate expense
+
+ 
+ 
+134,400
+ 
+ 
+141,328
+ 
+ 
+178,922
+ 
+
+ Goodwill impairment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+35,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+9,654,662
+ 
+ 
+10,383,188
+ 
+ 
+11,090,642
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Operating income
+
+ 
+ 
+537,578
+ 
+ 
+580,172
+ 
+ 
+530,531
+ 
+
+ Interest and Other Financing Costs, net
+
+ 
+ 
+122,362
+ 
+ 
+126,999
+ 
+ 
+139,945
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income from continuing operations before income taxes and cumulative effect of change in accounting principle
+
+ 
+ 
+415,216
+ 
+ 
+453,173
+ 
+ 
+390,586
+ 
+
+ Provision for Income Taxes
+
+ 
+ 
+152,112
+ 
+ 
+164,698
+ 
+ 
+129,230
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income from Continuing Operations Before Cumulative Effect of Change in Accounting Principle
+
+ 
+ 
+263,104
+ 
+ 
+288,475
+ 
+ 
+261,356
+ 
+
+ Income from Discontinued Operations, net (Note 3)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,093
+ 
+
+ Cumulative Effect of Change in Accounting Principle, net (Note 7)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,351
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net Income
+
+ 
+$
+263,104
+ 
+$
+288,475
+ 
+$
+261,098
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Earnings Per Share-Basic:
+
+ 
+
+ 
+
+ 
+
+ Income from continuing operations before cumulative effect of change in accounting principle
+
+ 
+$
+1.39
+ 
+$
+1.55
+ 
+$
+1.43
+ 
+
+ Net income
+
+ 
+$
+1.39
+ 
+$
+1.55
+ 
+$
+1.42
+ 
+
+ Earnings Per Share-Diluted:
+
+ 
+
+ 
+
+ 
+
+ Income from continuing operations before cumulative effect of change in accounting principle
+
+ 
+$
+1.36
+ 
+$
+1.53
+ 
+$
+1.41
+ 
+
+ Net income
+
+ 
+$
+1.36
+ 
+$
+1.53
+ 
+$
+1.41
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-4 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated statements of cash flows 
+ For the fiscal years ended October 1, 2004,
+September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2004
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ Cash flows from operating activities:
+
+ 
+
+ 
+
+ 
+
+ Net income
+
+ 
+$
+263,104
+ 
+ 
+$
+288,475
+ 
+ 
+$
+261,098
+ 
+
+ Less: Income from discontinued operations, net
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,093
+)
+
+ Adjustments to reconcile net income to net cash provided by operating activities:
+
+ 
+
+ 
+
+ 
+
+ Depreciation and amortization
+
+ 
+ 
+297,993
+ 
+ 
+ 
+320,118
+ 
+ 
+ 
+339,337
+ 
+
+ Income taxes deferred
+
+ 
+ 
+32,749
+ 
+ 
+ 
+(4,073
+)
+ 
+ 
+(53,722
+)
+
+ Cumulative effect of change in accounting principle, net
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,351
+ 
+
+ Goodwill impairment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+35,000
+ 
+
+ Changes in noncash working capital:
+
+ 
+
+ 
+
+ 
+
+ Receivables
+
+ 
+ 
+(41,881
+)
+ 
+ 
+(61,179
+)
+ 
+ 
+(31,846
+)
+
+ Inventories
+
+ 
+ 
+(30,739
+)
+ 
+ 
+(6,501
+)
+ 
+ 
+(9,200
+)
+
+ Prepayments
+
+ 
+ 
+16,665
+ 
+ 
+ 
+1,019
+ 
+ 
+ 
+(7,992
+)
+
+ Accounts payable
+
+ 
+ 
+(14,129
+)
+ 
+ 
+16,341
+ 
+ 
+ 
+29,494
+ 
+
+ Accrued expenses
+
+ 
+ 
+27,016
+ 
+ 
+ 
+57,706
+ 
+ 
+ 
+27,533
+ 
+
+ Net proceeds from sale of receivables
+
+ 
+ 
+ 
+ 
+ 
+ 
+32,800
+ 
+ 
+ 
+ 
+ 
+
+ Changes in other noncurrent liabilities
+
+ 
+ 
+(3,820
+)
+ 
+ 
+(914
+)
+ 
+ 
+1,580
+ 
+
+ Changes in other assets
+
+ 
+ 
+(23,747
+)
+ 
+ 
+(33,785
+)
+ 
+ 
+(28,947
+)
+
+ Other operating activities
+
+ 
+ 
+(5,645
+)
+ 
+ 
+1,773
+ 
+ 
+ 
+23,204
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by operating activities
+
+ 
+ 
+517,566
+ 
+ 
+ 
+611,780
+ 
+ 
+ 
+585,797
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash flows from investing activities:
+
+ 
+
+ 
+
+ 
+
+ Purchases of property and equipment and client contract investments
+
+ 
+ 
+(308,763
+)
+ 
+ 
+(315,560
+)
+ 
+ 
+(319,854
+)
+
+ Disposals of property and equipment
+
+ 
+ 
+20,503
+ 
+ 
+ 
+21,581
+ 
+ 
+ 
+49,120
+ 
+
+ Proceeds from sales and divestitures
+
+ 
+ 
+8,500
+ 
+ 
+ 
+11,518
+ 
+ 
+ 
+ 
+ 
+
+ Acquisition of certain businesses:
+
+ 
+
+ 
+
+ 
+
+ Working capital other than cash acquired
+
+ 
+ 
+(24,302
+)
+ 
+ 
+4,558
+ 
+ 
+ 
+8,927
+ 
+
+ Property and equipment
+
+ 
+ 
+(15,800
+)
+ 
+ 
+(4,854
+)
+ 
+ 
+(4,118
+)
+
+ Additions to goodwill, other intangible assets and other assets, net
+
+ 
+ 
+(116,877
+)
+ 
+ 
+(120,008
+)
+ 
+ 
+(144,103
+)
+
+ Other investing activities
+
+ 
+ 
+(2,701
+)
+ 
+ 
+36,870
+ 
+ 
+ 
+13,511
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used in investing activities
+
+ 
+ 
+(439,440
+)
+ 
+ 
+(365,895
+)
+ 
+ 
+(396,517
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash flows from financing activities:
+
+ 
+
+ 
+
+ 
+
+ Proceeds from additional long-term borrowings
+
+ 
+ 
+441,091
+ 
+ 
+ 
+361,382
+ 
+ 
+ 
+323,623
+ 
+
+ Payment of long-term borrowings
+
+ 
+ 
+(343,349
+)
+ 
+ 
+(393,629
+)
+ 
+ 
+(404,410
+)
+
+ Proceeds from issuance of common stock
+
+ 
+ 
+39,748
+ 
+ 
+ 
+35,748
+ 
+ 
+ 
+45,251
+ 
+
+ Repurchase of common stock
+
+ 
+ 
+(184,062
+)
+ 
+ 
+(187,551
+)
+ 
+ 
+(113,460
+)
+
+ Payment of dividends
+
+ 
+ 
+(37,213
+)
+ 
+ 
+(40,321
+)
+ 
+ 
+(50,512
+)
+
+ Other financing activities
+
+ 
+ 
+6,503
+ 
+ 
+ 
+(10,767
+)
+ 
+ 
+1,841
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used in financing activities
+
+ 
+ 
+(77,282
+)
+ 
+ 
+(235,138
+)
+ 
+ 
+(197,667
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Increase (Decrease) in cash and cash equivalents
+
+ 
+ 
+844
+ 
+ 
+ 
+10,747
+ 
+ 
+ 
+(8,387
+)
+
+ Cash and cash equivalents, beginning of year
+
+ 
+ 
+44,475
+ 
+ 
+ 
+45,319
+ 
+ 
+ 
+56,066
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash and cash equivalents, end of year
+
+ 
+$
+45,319
+ 
+ 
+$
+56,066
+ 
+ 
+$
+47,679
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-5 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries
+ 
+Consolidated statements of shareholders equity 
+ For the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Class A
+Common
+Stock
+ 
+ 
+Class B
+Common
+Stock
+ 
+Capital
+Surplus
+ 
+Earnings
+Retained
+for Use in
+the
+Business
+ 
+ 
+Treasury
+Stock
+ 
+ 
+Accumulated
+Other
+Comprehensive
+Income (Loss)
+ 
+ 
+Total
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ Balance, October 3, 2003
+
+ 
+$
+1,044
+ 
+ 
+$
+1,116
+ 
+$
+910,562
+ 
+$
+854,129
+ 
+ 
+$
+(731,819
+)
+ 
+$
+3,940
+ 
+ 
+$
+1,038,972
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+263,104
+ 
+ 
+
+ 
+
+ 
+ 
+263,104
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(7,537
+)
+ 
+ 
+(7,537
+)
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+2,828
+ 
+ 
+ 
+2,828
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(3,375
+)
+ 
+ 
+(3,375
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+255,020
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(204,312
+)
+ 
+
+ 
+ 
+(204,312
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(37,213
+)
+ 
+
+ 
+
+ 
+ 
+(37,213
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(209
+)
+ 
+ 
+209
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+58
+ 
+ 
+ 
+5
+ 
+ 
+97,125
+ 
+
+ 
+
+ 
+
+ 
+ 
+97,188
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, October 1, 2004
+
+ 
+$
+893
+ 
+ 
+$
+1,330
+ 
+$
+1,007,687
+ 
+$
+1,080,020
+ 
+ 
+$
+(936,131
+)
+ 
+$
+(4,144
+)
+ 
+$
+1,149,655
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+288,475
+ 
+ 
+
+ 
+
+ 
+ 
+288,475
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+5,707
+ 
+ 
+ 
+5,707
+ 
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+8,712
+ 
+ 
+ 
+8,712
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+1,032
+ 
+ 
+ 
+1,032
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+303,926
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(188,415
+)
+ 
+
+ 
+ 
+(188,415
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(40,321
+)
+ 
+
+ 
+
+ 
+ 
+(40,321
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(137
+)
+ 
+ 
+137
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+47
+ 
+ 
+ 
+8
+ 
+ 
+100,564
+ 
+
+ 
+
+ 
+
+ 
+ 
+100,619
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 30, 2005
+
+ 
+$
+803
+ 
+ 
+$
+1,475
+ 
+$
+1,108,251
+ 
+$
+1,328,174
+ 
+ 
+$
+(1,124,546
+)
+ 
+$
+11,307
+ 
+ 
+$
+1,325,464
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+261,098
+ 
+ 
+
+ 
+
+ 
+ 
+261,098
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(8,762
+)
+ 
+ 
+(8,762
+)
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+3,886
+ 
+ 
+ 
+3,886
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+6,093
+ 
+ 
+ 
+6,093
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+262,315
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(117,759
+)
+ 
+
+ 
+ 
+(117,759
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(50,512
+)
+ 
+
+ 
+
+ 
+ 
+(50,512
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(81
+)
+ 
+ 
+81
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+29
+ 
+ 
+ 
+6
+ 
+ 
+102,049
+ 
+
+ 
+
+ 
+
+ 
+ 
+102,084
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 29, 2006
+
+ 
+$
+751
+ 
+ 
+$
+1,562
+ 
+$
+1,210,300
+ 
+$
+1,538,760
+ 
+ 
+$
+(1,242,305
+)
+ 
+$
+12,524
+ 
+ 
+$
+1,521,592
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-6 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ Notes to consolidated financial statements 
+ 
+ 
+Note 1.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001396649_seamlesswe_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001396649_seamlesswe_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ad5116e9d7d968e8602805dcb9c51d2c58418ad5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001396649_seamlesswe_legal_matters.txt
@@ -0,0 +1,2744 @@
+Legal matters 
+ The validity of the notes and related guarantees offered hereby have been passed upon by
+Simpson Thacher & Bartlett LLP, New York, New York. 
+ 
+Experts 
+ The consolidated financial statements and schedule of ARAMARK Corporation as of September 30, 2005
+and September 29, 2006, and for each of the three years in the period ended September 29, 2006, have been included herein in this prospectus and Registration Statement in reliance upon the report of KPMG LLP, independent registered public accounting
+firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. That report on the consolidated financial statements refers to accounting changes as a result of the adoption of Statement of Financial
+Accounting Standard No. 123(R), Share-Based Payment, and Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards
+No. 143, Accounting for Asset Retirement Obligations. 
+ 
+Available information 
+ We have filed with the SEC a registration statement on Form S-1 under the Securities
+Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and
+the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete, and, where such contract or other document is an exhibit to the
+registration statement, each such statement is qualified by the provisions in such exhibit to which reference is hereby made. We file reports and other information with the SEC. The registration statement, historical information about ARAMARK
+Corporation and other information can be inspected and copied at the Public Reference Room of the SEC located at Room 1580, 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of any portion of the
+registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed
+electronically by means of the SEC s home page on the Internet (http://www.sec.gov). 
+ 
+
+ 182 
+
+Table of Contents
+
+ 
+ARAMARK Corporation and subsidiaries 
+ 
+Index to financial statements and schedule 
+ 
+
+ Audited Financial Statements (Predecessor)
+
+ 
+
+ 
+Consolidated balance sheets as of September 30, 2005 and September 29, 2006
+
+ 
+F-3
+
+ 
+Consolidated statements of income for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-4
+
+ 
+Consolidated statements of cash flows for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-5
+
+ 
+Consolidated statements of shareholders equity for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-6
+
+ 
+Notes to consolidated financial statements
+
+ 
+F-7
+
+ 
+Schedule II Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-42
+
+ Interim Financial Statements (Unaudited)
+
+ 
+
+ 
+Condensed consolidated balance sheets as of March 30, 2007 (Successor) and September 29, 2006 (Predecessor) 
+
+ 
+F-43
+
+ 
+Condensed consolidated statements of operations for the period from January 27, 2007 through March 30, 2007 (Successor), the period from December 30, 2006 through January 26, 2007 (Predecessor) and the three months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-44
+
+ 
+Condensed consolidated statements of operations for the period from January 27, 2007 through March 30, 2007 (Successor), the period from September 30, 2006 through January 26, 2007 (Predecessor) and the six months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-45
+
+ 
+Condensed consolidated statements of cash flows for the period from January 27, 2007 through March 30, 2007 (Successor), the period from September 30, 2006 through January 26, 2007 (Predecessor) and the six months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-46
+
+ 
+Condensed consolidated statements of shareholders equity for the period from September 30, 2006 through January 26, 2007 (Predecessor) and the period from January 27, 2007 through March 30, 2007 (Successor)
+
+ 
+F-47
+
+ 
+Notes to consolidated financial statements
+
+ 
+F-48
+
+ 
+
+ F-1 
+
+Table of Contents
+
+ Report of independent registered public accounting firm 
+ The Board of Directors and Shareholders 
+ ARAMARK Corporation: 
+ We have audited the accompanying consolidated balance sheets of ARAMARK Corporation and subsidiaries as of September 30, 2005 and September 29,
+2006, and the related consolidated statements of income, cash flows and shareholders equity for each of the years in the three-year period ended September 29, 2006. In connection with our audits of the consolidated financial statements,
+we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company s management. Our responsibility is to
+express an opinion on these consolidated financial statements and financial statement schedule based on our audits. 
+ We conducted our
+audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
+material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
+management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+ In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ARAMARK Corporation and subsidiaries as of September 30, 2005 and
+September 29, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended September 29, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
+the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 
+ As discussed in Note 11 to the consolidated financial statements, effective October 1, 2005, the Company adopted the provisions of Statement of
+Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, applying the modified prospective method. Also, as discussed in Note 7 to the consolidated financial statements, effective September 29, 2006, the Company
+adopted the provisions of Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards No. 143, Accounting for
+Asset Retirement Obligations. 
+ /s/ KPMG LLP
+ Philadelphia, Pennsylvania 
+ November 20, 2006, except as to Note 16, 
+ which is as of June 6, 2007 
+ 
+
+ F-2 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated balance sheets 
+ September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands,
+except share amounts)
+ 
+
+ Assets
+
+ 
+
+ 
+
+ Current Assets:
+
+ 
+
+ 
+
+ Cash and cash equivalents
+
+ 
+$
+56,066
+ 
+ 
+$
+47,679
+ 
+
+ Receivables (less allowances: 2005 $42,645; 2006 $37,222)
+
+ 
+ 
+808,531
+ 
+ 
+ 
+870,909
+ 
+
+ Inventories
+
+ 
+ 
+485,834
+ 
+ 
+ 
+494,176
+ 
+
+ Prepayments and other current assets
+
+ 
+ 
+92,796
+ 
+ 
+ 
+114,080
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current assets
+
+ 
+ 
+1,443,227
+ 
+ 
+ 
+1,526,844
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Property and Equipment, at cost:
+
+ 
+
+ 
+
+ Land, buildings and improvements
+
+ 
+ 
+727,817
+ 
+ 
+ 
+757,761
+ 
+
+ Service equipment and fixtures
+
+ 
+ 
+1,948,882
+ 
+ 
+ 
+2,017,209
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+2,676,699
+ 
+ 
+ 
+2,774,970
+ 
+
+ Less-Accumulated depreciation
+
+ 
+ 
+(1,465,245
+)
+ 
+ 
+(1,578,140
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+1,211,454
+ 
+ 
+ 
+1,196,830
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Goodwill
+
+ 
+ 
+1,682,749
+ 
+ 
+ 
+1,747,094
+ 
+
+ Other Intangible Assets
+
+ 
+ 
+274,584
+ 
+ 
+ 
+297,986
+ 
+
+ Other Assets
+
+ 
+ 
+545,086
+ 
+ 
+ 
+494,563
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+$
+5,157,100
+ 
+ 
+$
+5,263,317
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Liabilities and shareholders equity
+
+ 
+
+ 
+
+ Current Liabilities:
+
+ 
+
+ 
+
+ Current maturities of long-term borrowings
+
+ 
+$
+46,363
+ 
+ 
+$
+40,203
+ 
+
+ Accounts payable
+
+ 
+ 
+585,014
+ 
+ 
+ 
+642,778
+ 
+
+ Accrued payroll and related expenses
+
+ 
+ 
+320,494
+ 
+ 
+ 
+346,770
+ 
+
+ Other accrued expenses and current liabilities
+
+ 
+ 
+566,809
+ 
+ 
+ 
+556,945
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current liabilities
+
+ 
+ 
+1,518,680
+ 
+ 
+ 
+1,586,696
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Long-term borrowings
+
+ 
+ 
+1,840,885
+ 
+ 
+ 
+1,803,291
+ 
+
+ Less-current portion
+
+ 
+ 
+(46,363
+)
+ 
+ 
+(40,203
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total long-term borrowings
+
+ 
+ 
+1,794,522
+ 
+ 
+ 
+1,763,088
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Deferred Income Taxes and Other Noncurrent Liabilities
+
+ 
+ 
+518,434
+ 
+ 
+ 
+391,941
+ 
+
+ Shareholders Equity:
+
+ 
+
+ 
+
+ Class A common stock (par value $.01; authorized: 600,000,000 shares; issued: 2005 80,306,913 shares; 2006 75,129,722 shares;
+outstanding: 2005 61,577,474 shares; 2006 56,245,418 shares)
+
+ 
+ 
+803
+ 
+ 
+ 
+751
+ 
+
+ Class B common stock (par value $.01; authorized: 1,000,000,000 shares; issued: 2005 147,462,062 shares; 2006 156,170,782 shares;
+outstanding: 2005 119,278,523 shares; 2006 123,882,195 shares)
+
+ 
+ 
+1,475
+ 
+ 
+ 
+1,562
+ 
+
+ Capital surplus
+
+ 
+ 
+1,108,251
+ 
+ 
+ 
+1,210,300
+ 
+
+ Earnings retained for use in the business
+
+ 
+ 
+1,328,174
+ 
+ 
+ 
+1,538,760
+ 
+
+ Accumulated other comprehensive income
+
+ 
+ 
+11,307
+ 
+ 
+ 
+12,524
+ 
+
+ Treasury stock (shares held in treasury: 2005 46,912,978 shares; 2006 51,172,891 shares)
+
+ 
+ 
+(1,124,546
+)
+ 
+ 
+(1,242,305
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+
+ 
+ 
+1,325,464
+ 
+ 
+ 
+1,521,592
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+$
+5,157,100
+ 
+ 
+$
+5,263,317
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-3 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated statements of income 
+ For the fiscal years ended October 1, 2004,
+September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2004
+ 
+2005
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands, except per share amounts)
+ 
+
+ Sales
+
+ 
+$
+10,192,240
+ 
+$
+10,963,360
+ 
+$
+11,621,173
+ 
+
+ Costs and Expenses:
+
+ 
+
+ 
+
+ 
+
+ Cost of services provided
+
+ 
+ 
+9,222,269
+ 
+ 
+9,921,742
+ 
+ 
+10,537,383
+ 
+
+ Depreciation and amortization
+
+ 
+ 
+297,993
+ 
+ 
+320,118
+ 
+ 
+339,337
+ 
+
+ Selling and general corporate expense
+
+ 
+ 
+134,400
+ 
+ 
+141,328
+ 
+ 
+178,922
+ 
+
+ Goodwill impairment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+35,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+9,654,662
+ 
+ 
+10,383,188
+ 
+ 
+11,090,642
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Operating income
+
+ 
+ 
+537,578
+ 
+ 
+580,172
+ 
+ 
+530,531
+ 
+
+ Interest and Other Financing Costs, net
+
+ 
+ 
+122,362
+ 
+ 
+126,999
+ 
+ 
+139,945
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income from continuing operations before income taxes and cumulative effect of change in accounting principle
+
+ 
+ 
+415,216
+ 
+ 
+453,173
+ 
+ 
+390,586
+ 
+
+ Provision for Income Taxes
+
+ 
+ 
+152,112
+ 
+ 
+164,698
+ 
+ 
+129,230
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income from Continuing Operations Before Cumulative Effect of Change in Accounting Principle
+
+ 
+ 
+263,104
+ 
+ 
+288,475
+ 
+ 
+261,356
+ 
+
+ Income from Discontinued Operations, net (Note 3)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,093
+ 
+
+ Cumulative Effect of Change in Accounting Principle, net (Note 7)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,351
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net Income
+
+ 
+$
+263,104
+ 
+$
+288,475
+ 
+$
+261,098
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Earnings Per Share-Basic:
+
+ 
+
+ 
+
+ 
+
+ Income from continuing operations before cumulative effect of change in accounting principle
+
+ 
+$
+1.39
+ 
+$
+1.55
+ 
+$
+1.43
+ 
+
+ Net income
+
+ 
+$
+1.39
+ 
+$
+1.55
+ 
+$
+1.42
+ 
+
+ Earnings Per Share-Diluted:
+
+ 
+
+ 
+
+ 
+
+ Income from continuing operations before cumulative effect of change in accounting principle
+
+ 
+$
+1.36
+ 
+$
+1.53
+ 
+$
+1.41
+ 
+
+ Net income
+
+ 
+$
+1.36
+ 
+$
+1.53
+ 
+$
+1.41
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-4 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated statements of cash flows 
+ For the fiscal years ended October 1, 2004,
+September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2004
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ Cash flows from operating activities:
+
+ 
+
+ 
+
+ 
+
+ Net income
+
+ 
+$
+263,104
+ 
+ 
+$
+288,475
+ 
+ 
+$
+261,098
+ 
+
+ Less: Income from discontinued operations, net
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,093
+)
+
+ Adjustments to reconcile net income to net cash provided by operating activities:
+
+ 
+
+ 
+
+ 
+
+ Depreciation and amortization
+
+ 
+ 
+297,993
+ 
+ 
+ 
+320,118
+ 
+ 
+ 
+339,337
+ 
+
+ Income taxes deferred
+
+ 
+ 
+32,749
+ 
+ 
+ 
+(4,073
+)
+ 
+ 
+(53,722
+)
+
+ Cumulative effect of change in accounting principle, net
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,351
+ 
+
+ Goodwill impairment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+35,000
+ 
+
+ Changes in noncash working capital:
+
+ 
+
+ 
+
+ 
+
+ Receivables
+
+ 
+ 
+(41,881
+)
+ 
+ 
+(61,179
+)
+ 
+ 
+(31,846
+)
+
+ Inventories
+
+ 
+ 
+(30,739
+)
+ 
+ 
+(6,501
+)
+ 
+ 
+(9,200
+)
+
+ Prepayments
+
+ 
+ 
+16,665
+ 
+ 
+ 
+1,019
+ 
+ 
+ 
+(7,992
+)
+
+ Accounts payable
+
+ 
+ 
+(14,129
+)
+ 
+ 
+16,341
+ 
+ 
+ 
+29,494
+ 
+
+ Accrued expenses
+
+ 
+ 
+27,016
+ 
+ 
+ 
+57,706
+ 
+ 
+ 
+27,533
+ 
+
+ Net proceeds from sale of receivables
+
+ 
+ 
+ 
+ 
+ 
+ 
+32,800
+ 
+ 
+ 
+ 
+ 
+
+ Changes in other noncurrent liabilities
+
+ 
+ 
+(3,820
+)
+ 
+ 
+(914
+)
+ 
+ 
+1,580
+ 
+
+ Changes in other assets
+
+ 
+ 
+(23,747
+)
+ 
+ 
+(33,785
+)
+ 
+ 
+(28,947
+)
+
+ Other operating activities
+
+ 
+ 
+(5,645
+)
+ 
+ 
+1,773
+ 
+ 
+ 
+23,204
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by operating activities
+
+ 
+ 
+517,566
+ 
+ 
+ 
+611,780
+ 
+ 
+ 
+585,797
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash flows from investing activities:
+
+ 
+
+ 
+
+ 
+
+ Purchases of property and equipment and client contract investments
+
+ 
+ 
+(308,763
+)
+ 
+ 
+(315,560
+)
+ 
+ 
+(319,854
+)
+
+ Disposals of property and equipment
+
+ 
+ 
+20,503
+ 
+ 
+ 
+21,581
+ 
+ 
+ 
+49,120
+ 
+
+ Proceeds from sales and divestitures
+
+ 
+ 
+8,500
+ 
+ 
+ 
+11,518
+ 
+ 
+ 
+ 
+ 
+
+ Acquisition of certain businesses:
+
+ 
+
+ 
+
+ 
+
+ Working capital other than cash acquired
+
+ 
+ 
+(24,302
+)
+ 
+ 
+4,558
+ 
+ 
+ 
+8,927
+ 
+
+ Property and equipment
+
+ 
+ 
+(15,800
+)
+ 
+ 
+(4,854
+)
+ 
+ 
+(4,118
+)
+
+ Additions to goodwill, other intangible assets and other assets, net
+
+ 
+ 
+(116,877
+)
+ 
+ 
+(120,008
+)
+ 
+ 
+(144,103
+)
+
+ Other investing activities
+
+ 
+ 
+(2,701
+)
+ 
+ 
+36,870
+ 
+ 
+ 
+13,511
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used in investing activities
+
+ 
+ 
+(439,440
+)
+ 
+ 
+(365,895
+)
+ 
+ 
+(396,517
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash flows from financing activities:
+
+ 
+
+ 
+
+ 
+
+ Proceeds from additional long-term borrowings
+
+ 
+ 
+441,091
+ 
+ 
+ 
+361,382
+ 
+ 
+ 
+323,623
+ 
+
+ Payment of long-term borrowings
+
+ 
+ 
+(343,349
+)
+ 
+ 
+(393,629
+)
+ 
+ 
+(404,410
+)
+
+ Proceeds from issuance of common stock
+
+ 
+ 
+39,748
+ 
+ 
+ 
+35,748
+ 
+ 
+ 
+45,251
+ 
+
+ Repurchase of common stock
+
+ 
+ 
+(184,062
+)
+ 
+ 
+(187,551
+)
+ 
+ 
+(113,460
+)
+
+ Payment of dividends
+
+ 
+ 
+(37,213
+)
+ 
+ 
+(40,321
+)
+ 
+ 
+(50,512
+)
+
+ Other financing activities
+
+ 
+ 
+6,503
+ 
+ 
+ 
+(10,767
+)
+ 
+ 
+1,841
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used in financing activities
+
+ 
+ 
+(77,282
+)
+ 
+ 
+(235,138
+)
+ 
+ 
+(197,667
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Increase (Decrease) in cash and cash equivalents
+
+ 
+ 
+844
+ 
+ 
+ 
+10,747
+ 
+ 
+ 
+(8,387
+)
+
+ Cash and cash equivalents, beginning of year
+
+ 
+ 
+44,475
+ 
+ 
+ 
+45,319
+ 
+ 
+ 
+56,066
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash and cash equivalents, end of year
+
+ 
+$
+45,319
+ 
+ 
+$
+56,066
+ 
+ 
+$
+47,679
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-5 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries
+ 
+Consolidated statements of shareholders equity 
+ For the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Class A
+Common
+Stock
+ 
+ 
+Class B
+Common
+Stock
+ 
+Capital
+Surplus
+ 
+Earnings
+Retained
+for Use in
+the
+Business
+ 
+ 
+Treasury
+Stock
+ 
+ 
+Accumulated
+Other
+Comprehensive
+Income (Loss)
+ 
+ 
+Total
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ Balance, October 3, 2003
+
+ 
+$
+1,044
+ 
+ 
+$
+1,116
+ 
+$
+910,562
+ 
+$
+854,129
+ 
+ 
+$
+(731,819
+)
+ 
+$
+3,940
+ 
+ 
+$
+1,038,972
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+263,104
+ 
+ 
+
+ 
+
+ 
+ 
+263,104
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(7,537
+)
+ 
+ 
+(7,537
+)
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+2,828
+ 
+ 
+ 
+2,828
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(3,375
+)
+ 
+ 
+(3,375
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+255,020
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(204,312
+)
+ 
+
+ 
+ 
+(204,312
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(37,213
+)
+ 
+
+ 
+
+ 
+ 
+(37,213
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(209
+)
+ 
+ 
+209
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+58
+ 
+ 
+ 
+5
+ 
+ 
+97,125
+ 
+
+ 
+
+ 
+
+ 
+ 
+97,188
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, October 1, 2004
+
+ 
+$
+893
+ 
+ 
+$
+1,330
+ 
+$
+1,007,687
+ 
+$
+1,080,020
+ 
+ 
+$
+(936,131
+)
+ 
+$
+(4,144
+)
+ 
+$
+1,149,655
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+288,475
+ 
+ 
+
+ 
+
+ 
+ 
+288,475
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+5,707
+ 
+ 
+ 
+5,707
+ 
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+8,712
+ 
+ 
+ 
+8,712
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+1,032
+ 
+ 
+ 
+1,032
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+303,926
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(188,415
+)
+ 
+
+ 
+ 
+(188,415
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(40,321
+)
+ 
+
+ 
+
+ 
+ 
+(40,321
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(137
+)
+ 
+ 
+137
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+47
+ 
+ 
+ 
+8
+ 
+ 
+100,564
+ 
+
+ 
+
+ 
+
+ 
+ 
+100,619
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 30, 2005
+
+ 
+$
+803
+ 
+ 
+$
+1,475
+ 
+$
+1,108,251
+ 
+$
+1,328,174
+ 
+ 
+$
+(1,124,546
+)
+ 
+$
+11,307
+ 
+ 
+$
+1,325,464
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+261,098
+ 
+ 
+
+ 
+
+ 
+ 
+261,098
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(8,762
+)
+ 
+ 
+(8,762
+)
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+3,886
+ 
+ 
+ 
+3,886
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+6,093
+ 
+ 
+ 
+6,093
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+262,315
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(117,759
+)
+ 
+
+ 
+ 
+(117,759
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(50,512
+)
+ 
+
+ 
+
+ 
+ 
+(50,512
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(81
+)
+ 
+ 
+81
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+29
+ 
+ 
+ 
+6
+ 
+ 
+102,049
+ 
+
+ 
+
+ 
+
+ 
+ 
+102,084
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 29, 2006
+
+ 
+$
+751
+ 
+ 
+$
+1,562
+ 
+$
+1,210,300
+ 
+$
+1,538,760
+ 
+ 
+$
+(1,242,305
+)
+ 
+$
+12,524
+ 
+ 
+$
+1,521,592
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-6 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ Notes to consolidated financial statements 
+ 
+ 
+Note 1.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001396650_menu_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001396650_menu_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ad5116e9d7d968e8602805dcb9c51d2c58418ad5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001396650_menu_legal_matters.txt
@@ -0,0 +1,2744 @@
+Legal matters 
+ The validity of the notes and related guarantees offered hereby have been passed upon by
+Simpson Thacher & Bartlett LLP, New York, New York. 
+ 
+Experts 
+ The consolidated financial statements and schedule of ARAMARK Corporation as of September 30, 2005
+and September 29, 2006, and for each of the three years in the period ended September 29, 2006, have been included herein in this prospectus and Registration Statement in reliance upon the report of KPMG LLP, independent registered public accounting
+firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. That report on the consolidated financial statements refers to accounting changes as a result of the adoption of Statement of Financial
+Accounting Standard No. 123(R), Share-Based Payment, and Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards
+No. 143, Accounting for Asset Retirement Obligations. 
+ 
+Available information 
+ We have filed with the SEC a registration statement on Form S-1 under the Securities
+Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and
+the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete, and, where such contract or other document is an exhibit to the
+registration statement, each such statement is qualified by the provisions in such exhibit to which reference is hereby made. We file reports and other information with the SEC. The registration statement, historical information about ARAMARK
+Corporation and other information can be inspected and copied at the Public Reference Room of the SEC located at Room 1580, 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of any portion of the
+registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed
+electronically by means of the SEC s home page on the Internet (http://www.sec.gov). 
+ 
+
+ 182 
+
+Table of Contents
+
+ 
+ARAMARK Corporation and subsidiaries 
+ 
+Index to financial statements and schedule 
+ 
+
+ Audited Financial Statements (Predecessor)
+
+ 
+
+ 
+Consolidated balance sheets as of September 30, 2005 and September 29, 2006
+
+ 
+F-3
+
+ 
+Consolidated statements of income for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-4
+
+ 
+Consolidated statements of cash flows for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-5
+
+ 
+Consolidated statements of shareholders equity for the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-6
+
+ 
+Notes to consolidated financial statements
+
+ 
+F-7
+
+ 
+Schedule II Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended October 1, 2004, September 30, 2005 and September 29, 2006
+
+ 
+
+ F-42
+
+ Interim Financial Statements (Unaudited)
+
+ 
+
+ 
+Condensed consolidated balance sheets as of March 30, 2007 (Successor) and September 29, 2006 (Predecessor) 
+
+ 
+F-43
+
+ 
+Condensed consolidated statements of operations for the period from January 27, 2007 through March 30, 2007 (Successor), the period from December 30, 2006 through January 26, 2007 (Predecessor) and the three months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-44
+
+ 
+Condensed consolidated statements of operations for the period from January 27, 2007 through March 30, 2007 (Successor), the period from September 30, 2006 through January 26, 2007 (Predecessor) and the six months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-45
+
+ 
+Condensed consolidated statements of cash flows for the period from January 27, 2007 through March 30, 2007 (Successor), the period from September 30, 2006 through January 26, 2007 (Predecessor) and the six months ended March
+31, 2006 (Predecessor) 
+
+ 
+F-46
+
+ 
+Condensed consolidated statements of shareholders equity for the period from September 30, 2006 through January 26, 2007 (Predecessor) and the period from January 27, 2007 through March 30, 2007 (Successor)
+
+ 
+F-47
+
+ 
+Notes to consolidated financial statements
+
+ 
+F-48
+
+ 
+
+ F-1 
+
+Table of Contents
+
+ Report of independent registered public accounting firm 
+ The Board of Directors and Shareholders 
+ ARAMARK Corporation: 
+ We have audited the accompanying consolidated balance sheets of ARAMARK Corporation and subsidiaries as of September 30, 2005 and September 29,
+2006, and the related consolidated statements of income, cash flows and shareholders equity for each of the years in the three-year period ended September 29, 2006. In connection with our audits of the consolidated financial statements,
+we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company s management. Our responsibility is to
+express an opinion on these consolidated financial statements and financial statement schedule based on our audits. 
+ We conducted our
+audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
+material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
+management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
+ In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ARAMARK Corporation and subsidiaries as of September 30, 2005 and
+September 29, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended September 29, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
+the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 
+ As discussed in Note 11 to the consolidated financial statements, effective October 1, 2005, the Company adopted the provisions of Statement of
+Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, applying the modified prospective method. Also, as discussed in Note 7 to the consolidated financial statements, effective September 29, 2006, the Company
+adopted the provisions of Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards No. 143, Accounting for
+Asset Retirement Obligations. 
+ /s/ KPMG LLP
+ Philadelphia, Pennsylvania 
+ November 20, 2006, except as to Note 16, 
+ which is as of June 6, 2007 
+ 
+
+ F-2 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated balance sheets 
+ September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands,
+except share amounts)
+ 
+
+ Assets
+
+ 
+
+ 
+
+ Current Assets:
+
+ 
+
+ 
+
+ Cash and cash equivalents
+
+ 
+$
+56,066
+ 
+ 
+$
+47,679
+ 
+
+ Receivables (less allowances: 2005 $42,645; 2006 $37,222)
+
+ 
+ 
+808,531
+ 
+ 
+ 
+870,909
+ 
+
+ Inventories
+
+ 
+ 
+485,834
+ 
+ 
+ 
+494,176
+ 
+
+ Prepayments and other current assets
+
+ 
+ 
+92,796
+ 
+ 
+ 
+114,080
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current assets
+
+ 
+ 
+1,443,227
+ 
+ 
+ 
+1,526,844
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Property and Equipment, at cost:
+
+ 
+
+ 
+
+ Land, buildings and improvements
+
+ 
+ 
+727,817
+ 
+ 
+ 
+757,761
+ 
+
+ Service equipment and fixtures
+
+ 
+ 
+1,948,882
+ 
+ 
+ 
+2,017,209
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+2,676,699
+ 
+ 
+ 
+2,774,970
+ 
+
+ Less-Accumulated depreciation
+
+ 
+ 
+(1,465,245
+)
+ 
+ 
+(1,578,140
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+1,211,454
+ 
+ 
+ 
+1,196,830
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Goodwill
+
+ 
+ 
+1,682,749
+ 
+ 
+ 
+1,747,094
+ 
+
+ Other Intangible Assets
+
+ 
+ 
+274,584
+ 
+ 
+ 
+297,986
+ 
+
+ Other Assets
+
+ 
+ 
+545,086
+ 
+ 
+ 
+494,563
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+$
+5,157,100
+ 
+ 
+$
+5,263,317
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Liabilities and shareholders equity
+
+ 
+
+ 
+
+ Current Liabilities:
+
+ 
+
+ 
+
+ Current maturities of long-term borrowings
+
+ 
+$
+46,363
+ 
+ 
+$
+40,203
+ 
+
+ Accounts payable
+
+ 
+ 
+585,014
+ 
+ 
+ 
+642,778
+ 
+
+ Accrued payroll and related expenses
+
+ 
+ 
+320,494
+ 
+ 
+ 
+346,770
+ 
+
+ Other accrued expenses and current liabilities
+
+ 
+ 
+566,809
+ 
+ 
+ 
+556,945
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current liabilities
+
+ 
+ 
+1,518,680
+ 
+ 
+ 
+1,586,696
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Long-term borrowings
+
+ 
+ 
+1,840,885
+ 
+ 
+ 
+1,803,291
+ 
+
+ Less-current portion
+
+ 
+ 
+(46,363
+)
+ 
+ 
+(40,203
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total long-term borrowings
+
+ 
+ 
+1,794,522
+ 
+ 
+ 
+1,763,088
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Deferred Income Taxes and Other Noncurrent Liabilities
+
+ 
+ 
+518,434
+ 
+ 
+ 
+391,941
+ 
+
+ Shareholders Equity:
+
+ 
+
+ 
+
+ Class A common stock (par value $.01; authorized: 600,000,000 shares; issued: 2005 80,306,913 shares; 2006 75,129,722 shares;
+outstanding: 2005 61,577,474 shares; 2006 56,245,418 shares)
+
+ 
+ 
+803
+ 
+ 
+ 
+751
+ 
+
+ Class B common stock (par value $.01; authorized: 1,000,000,000 shares; issued: 2005 147,462,062 shares; 2006 156,170,782 shares;
+outstanding: 2005 119,278,523 shares; 2006 123,882,195 shares)
+
+ 
+ 
+1,475
+ 
+ 
+ 
+1,562
+ 
+
+ Capital surplus
+
+ 
+ 
+1,108,251
+ 
+ 
+ 
+1,210,300
+ 
+
+ Earnings retained for use in the business
+
+ 
+ 
+1,328,174
+ 
+ 
+ 
+1,538,760
+ 
+
+ Accumulated other comprehensive income
+
+ 
+ 
+11,307
+ 
+ 
+ 
+12,524
+ 
+
+ Treasury stock (shares held in treasury: 2005 46,912,978 shares; 2006 51,172,891 shares)
+
+ 
+ 
+(1,124,546
+)
+ 
+ 
+(1,242,305
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+
+ 
+ 
+1,325,464
+ 
+ 
+ 
+1,521,592
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+$
+5,157,100
+ 
+ 
+$
+5,263,317
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-3 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated statements of income 
+ For the fiscal years ended October 1, 2004,
+September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2004
+ 
+2005
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands, except per share amounts)
+ 
+
+ Sales
+
+ 
+$
+10,192,240
+ 
+$
+10,963,360
+ 
+$
+11,621,173
+ 
+
+ Costs and Expenses:
+
+ 
+
+ 
+
+ 
+
+ Cost of services provided
+
+ 
+ 
+9,222,269
+ 
+ 
+9,921,742
+ 
+ 
+10,537,383
+ 
+
+ Depreciation and amortization
+
+ 
+ 
+297,993
+ 
+ 
+320,118
+ 
+ 
+339,337
+ 
+
+ Selling and general corporate expense
+
+ 
+ 
+134,400
+ 
+ 
+141,328
+ 
+ 
+178,922
+ 
+
+ Goodwill impairment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+35,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+9,654,662
+ 
+ 
+10,383,188
+ 
+ 
+11,090,642
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Operating income
+
+ 
+ 
+537,578
+ 
+ 
+580,172
+ 
+ 
+530,531
+ 
+
+ Interest and Other Financing Costs, net
+
+ 
+ 
+122,362
+ 
+ 
+126,999
+ 
+ 
+139,945
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income from continuing operations before income taxes and cumulative effect of change in accounting principle
+
+ 
+ 
+415,216
+ 
+ 
+453,173
+ 
+ 
+390,586
+ 
+
+ Provision for Income Taxes
+
+ 
+ 
+152,112
+ 
+ 
+164,698
+ 
+ 
+129,230
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income from Continuing Operations Before Cumulative Effect of Change in Accounting Principle
+
+ 
+ 
+263,104
+ 
+ 
+288,475
+ 
+ 
+261,356
+ 
+
+ Income from Discontinued Operations, net (Note 3)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,093
+ 
+
+ Cumulative Effect of Change in Accounting Principle, net (Note 7)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,351
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net Income
+
+ 
+$
+263,104
+ 
+$
+288,475
+ 
+$
+261,098
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Earnings Per Share-Basic:
+
+ 
+
+ 
+
+ 
+
+ Income from continuing operations before cumulative effect of change in accounting principle
+
+ 
+$
+1.39
+ 
+$
+1.55
+ 
+$
+1.43
+ 
+
+ Net income
+
+ 
+$
+1.39
+ 
+$
+1.55
+ 
+$
+1.42
+ 
+
+ Earnings Per Share-Diluted:
+
+ 
+
+ 
+
+ 
+
+ Income from continuing operations before cumulative effect of change in accounting principle
+
+ 
+$
+1.36
+ 
+$
+1.53
+ 
+$
+1.41
+ 
+
+ Net income
+
+ 
+$
+1.36
+ 
+$
+1.53
+ 
+$
+1.41
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-4 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ 
+Consolidated statements of cash flows 
+ For the fiscal years ended October 1, 2004,
+September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Fiscal
+ 
+
+ 
+ 
+2004
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ Cash flows from operating activities:
+
+ 
+
+ 
+
+ 
+
+ Net income
+
+ 
+$
+263,104
+ 
+ 
+$
+288,475
+ 
+ 
+$
+261,098
+ 
+
+ Less: Income from discontinued operations, net
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,093
+)
+
+ Adjustments to reconcile net income to net cash provided by operating activities:
+
+ 
+
+ 
+
+ 
+
+ Depreciation and amortization
+
+ 
+ 
+297,993
+ 
+ 
+ 
+320,118
+ 
+ 
+ 
+339,337
+ 
+
+ Income taxes deferred
+
+ 
+ 
+32,749
+ 
+ 
+ 
+(4,073
+)
+ 
+ 
+(53,722
+)
+
+ Cumulative effect of change in accounting principle, net
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,351
+ 
+
+ Goodwill impairment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+35,000
+ 
+
+ Changes in noncash working capital:
+
+ 
+
+ 
+
+ 
+
+ Receivables
+
+ 
+ 
+(41,881
+)
+ 
+ 
+(61,179
+)
+ 
+ 
+(31,846
+)
+
+ Inventories
+
+ 
+ 
+(30,739
+)
+ 
+ 
+(6,501
+)
+ 
+ 
+(9,200
+)
+
+ Prepayments
+
+ 
+ 
+16,665
+ 
+ 
+ 
+1,019
+ 
+ 
+ 
+(7,992
+)
+
+ Accounts payable
+
+ 
+ 
+(14,129
+)
+ 
+ 
+16,341
+ 
+ 
+ 
+29,494
+ 
+
+ Accrued expenses
+
+ 
+ 
+27,016
+ 
+ 
+ 
+57,706
+ 
+ 
+ 
+27,533
+ 
+
+ Net proceeds from sale of receivables
+
+ 
+ 
+ 
+ 
+ 
+ 
+32,800
+ 
+ 
+ 
+ 
+ 
+
+ Changes in other noncurrent liabilities
+
+ 
+ 
+(3,820
+)
+ 
+ 
+(914
+)
+ 
+ 
+1,580
+ 
+
+ Changes in other assets
+
+ 
+ 
+(23,747
+)
+ 
+ 
+(33,785
+)
+ 
+ 
+(28,947
+)
+
+ Other operating activities
+
+ 
+ 
+(5,645
+)
+ 
+ 
+1,773
+ 
+ 
+ 
+23,204
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by operating activities
+
+ 
+ 
+517,566
+ 
+ 
+ 
+611,780
+ 
+ 
+ 
+585,797
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash flows from investing activities:
+
+ 
+
+ 
+
+ 
+
+ Purchases of property and equipment and client contract investments
+
+ 
+ 
+(308,763
+)
+ 
+ 
+(315,560
+)
+ 
+ 
+(319,854
+)
+
+ Disposals of property and equipment
+
+ 
+ 
+20,503
+ 
+ 
+ 
+21,581
+ 
+ 
+ 
+49,120
+ 
+
+ Proceeds from sales and divestitures
+
+ 
+ 
+8,500
+ 
+ 
+ 
+11,518
+ 
+ 
+ 
+ 
+ 
+
+ Acquisition of certain businesses:
+
+ 
+
+ 
+
+ 
+
+ Working capital other than cash acquired
+
+ 
+ 
+(24,302
+)
+ 
+ 
+4,558
+ 
+ 
+ 
+8,927
+ 
+
+ Property and equipment
+
+ 
+ 
+(15,800
+)
+ 
+ 
+(4,854
+)
+ 
+ 
+(4,118
+)
+
+ Additions to goodwill, other intangible assets and other assets, net
+
+ 
+ 
+(116,877
+)
+ 
+ 
+(120,008
+)
+ 
+ 
+(144,103
+)
+
+ Other investing activities
+
+ 
+ 
+(2,701
+)
+ 
+ 
+36,870
+ 
+ 
+ 
+13,511
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used in investing activities
+
+ 
+ 
+(439,440
+)
+ 
+ 
+(365,895
+)
+ 
+ 
+(396,517
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash flows from financing activities:
+
+ 
+
+ 
+
+ 
+
+ Proceeds from additional long-term borrowings
+
+ 
+ 
+441,091
+ 
+ 
+ 
+361,382
+ 
+ 
+ 
+323,623
+ 
+
+ Payment of long-term borrowings
+
+ 
+ 
+(343,349
+)
+ 
+ 
+(393,629
+)
+ 
+ 
+(404,410
+)
+
+ Proceeds from issuance of common stock
+
+ 
+ 
+39,748
+ 
+ 
+ 
+35,748
+ 
+ 
+ 
+45,251
+ 
+
+ Repurchase of common stock
+
+ 
+ 
+(184,062
+)
+ 
+ 
+(187,551
+)
+ 
+ 
+(113,460
+)
+
+ Payment of dividends
+
+ 
+ 
+(37,213
+)
+ 
+ 
+(40,321
+)
+ 
+ 
+(50,512
+)
+
+ Other financing activities
+
+ 
+ 
+6,503
+ 
+ 
+ 
+(10,767
+)
+ 
+ 
+1,841
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash used in financing activities
+
+ 
+ 
+(77,282
+)
+ 
+ 
+(235,138
+)
+ 
+ 
+(197,667
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Increase (Decrease) in cash and cash equivalents
+
+ 
+ 
+844
+ 
+ 
+ 
+10,747
+ 
+ 
+ 
+(8,387
+)
+
+ Cash and cash equivalents, beginning of year
+
+ 
+ 
+44,475
+ 
+ 
+ 
+45,319
+ 
+ 
+ 
+56,066
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash and cash equivalents, end of year
+
+ 
+$
+45,319
+ 
+ 
+$
+56,066
+ 
+ 
+$
+47,679
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-5 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries
+ 
+Consolidated statements of shareholders equity 
+ For the fiscal years ended October 1, 2004, September 30, 2005 and September 29, 2006 
+ 
+
+ 
+ 
+Class A
+Common
+Stock
+ 
+ 
+Class B
+Common
+Stock
+ 
+Capital
+Surplus
+ 
+Earnings
+Retained
+for Use in
+the
+Business
+ 
+ 
+Treasury
+Stock
+ 
+ 
+Accumulated
+Other
+Comprehensive
+Income (Loss)
+ 
+ 
+Total
+ 
+
+ 
+ 
+(dollars in thousands)
+ 
+
+ Balance, October 3, 2003
+
+ 
+$
+1,044
+ 
+ 
+$
+1,116
+ 
+$
+910,562
+ 
+$
+854,129
+ 
+ 
+$
+(731,819
+)
+ 
+$
+3,940
+ 
+ 
+$
+1,038,972
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+263,104
+ 
+ 
+
+ 
+
+ 
+ 
+263,104
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(7,537
+)
+ 
+ 
+(7,537
+)
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+2,828
+ 
+ 
+ 
+2,828
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(3,375
+)
+ 
+ 
+(3,375
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+255,020
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(204,312
+)
+ 
+
+ 
+ 
+(204,312
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(37,213
+)
+ 
+
+ 
+
+ 
+ 
+(37,213
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(209
+)
+ 
+ 
+209
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+58
+ 
+ 
+ 
+5
+ 
+ 
+97,125
+ 
+
+ 
+
+ 
+
+ 
+ 
+97,188
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, October 1, 2004
+
+ 
+$
+893
+ 
+ 
+$
+1,330
+ 
+$
+1,007,687
+ 
+$
+1,080,020
+ 
+ 
+$
+(936,131
+)
+ 
+$
+(4,144
+)
+ 
+$
+1,149,655
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+288,475
+ 
+ 
+
+ 
+
+ 
+ 
+288,475
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+5,707
+ 
+ 
+ 
+5,707
+ 
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+8,712
+ 
+ 
+ 
+8,712
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+1,032
+ 
+ 
+ 
+1,032
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+303,926
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(188,415
+)
+ 
+
+ 
+ 
+(188,415
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(40,321
+)
+ 
+
+ 
+
+ 
+ 
+(40,321
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(137
+)
+ 
+ 
+137
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+47
+ 
+ 
+ 
+8
+ 
+ 
+100,564
+ 
+
+ 
+
+ 
+
+ 
+ 
+100,619
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 30, 2005
+
+ 
+$
+803
+ 
+ 
+$
+1,475
+ 
+$
+1,108,251
+ 
+$
+1,328,174
+ 
+ 
+$
+(1,124,546
+)
+ 
+$
+11,307
+ 
+ 
+$
+1,325,464
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net income
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+261,098
+ 
+ 
+
+ 
+
+ 
+ 
+261,098
+ 
+
+ Minimum pension liability adjustment (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(8,762
+)
+ 
+ 
+(8,762
+)
+
+ Foreign currency translation adjustments (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+3,886
+ 
+ 
+ 
+3,886
+ 
+
+ Change in fair value of cash flow hedges (net of tax)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+6,093
+ 
+ 
+ 
+6,093
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Total comprehensive income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+262,315
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Purchases of common stock for the treasury
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(117,759
+)
+ 
+
+ 
+ 
+(117,759
+)
+
+ Payment of dividends
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(50,512
+)
+ 
+
+ 
+
+ 
+ 
+(50,512
+)
+
+ Conversion of Class A to Class B
+
+ 
+ 
+(81
+)
+ 
+ 
+81
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Issuance of common stock
+
+ 
+ 
+29
+ 
+ 
+ 
+6
+ 
+ 
+102,049
+ 
+
+ 
+
+ 
+
+ 
+ 
+102,084
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance, September 29, 2006
+
+ 
+$
+751
+ 
+ 
+$
+1,562
+ 
+$
+1,210,300
+ 
+$
+1,538,760
+ 
+ 
+$
+(1,242,305
+)
+ 
+$
+12,524
+ 
+ 
+$
+1,521,592
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of these consolidated financial statements.
+
+ 
+
+ F-6 
+
+Table of Contents
+
+ ARAMARK Corporation and subsidiaries 
+ Notes to consolidated financial statements 
+ 
+ 
+Note 1.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001396890_ncop_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001396890_ncop_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..026ee4d4fb224cf883fbadf3b0138bfaa7c0406a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001396890_ncop_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The enforceability of the notes and the related guarantees offered by this prospectus have been passed upon for us by Blank Rome LLP, Philadelphia, Pennsylvania. In rendering its opinion, Blank Rome LLP relied upon the opinion of Kilpatrick Stockton LLP as to all matters governed by the laws of the State of Georgia and the opinion of The Stewart Law Firm as to all matters governed by the laws of the State of Nevada.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001397087_ccs_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001397087_ccs_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3e27c186b011b8516880a89c53c80323e163f440
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001397087_ccs_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock being offered in this offering will be passed upon for us by Willkie Farr Gallagher LLP, New York, New York. Weil, Gotshal Manges LLP, New York, New York, advised the underwriters in connection with the offering of the common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001397197_cross_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001397197_cross_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a2b0030b76e5baef47e9ba96ddf321e1aef1a6a0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001397197_cross_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Hogan & Hartson L.L.P., Washington, D.C. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001398090_power_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001398090_power_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..98d030d3f0b7fbc17e3630793d6b13f75adb84fd
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001398090_power_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the shares offered in this prospectus and certain other legal matters will be passed upon for us and certain of the selling stockholders by Foley Hoag LLP, Boston, Massachusetts. The underwriters are represented by Jones Day, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001398161_targanta_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001398161_targanta_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..45414469411a09a540e8ed1ba823f6a4b19ea2bf
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001398161_targanta_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Choate, Hall & Stewart LLP, Boston, Massachusetts, has passed upon the validity of the shares of common stock offered hereby. Dewey & LeBoeuf LLP, New York, New York, is counsel for the underwriters in connection with this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001398480_nnn_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001398480_nnn_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..721e680278f479b6a8a092c1cb3f45c3cd374b4a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001398480_nnn_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares offered hereby will be passed upon for us by Latham Watkins LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001398603_madison_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001398603_madison_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..465a2d588ad27bee972cf5afba011c7ef9c254d1
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001398603_madison_legal_matters.txt
@@ -0,0 +1 @@
+legal matters with respect to the issuance of the securities offered hereby were passed upon by Mintz & Fraade, P.C. PLAN OF DISTRIBUTION We are registering a total of 210,000 shares of our common stock that are being offered by the selling stockholders. As used in this prospectus, "selling stockholders" includes the pledgees, donees, transferees or others who may later hold the selling stockholders' interests in the common stock. We will pay the costs and fees of registering the common shares, but the selling stockholders will pay any brokerage commissions, discounts or other expenses relating to the sale of the common stock. We will not receive the proceeds from the sale of the shares by the selling stockholders. The selling stockholders and any of their pledgees, assignees and successors- in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions. Such sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares: 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; Broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; A combination of any such methods of sale; and Any other method permitted pursuant to applicable law. The selling stockholders may also sell shares pursuant to Rule 144 under the Securities Act, if available, rather than pursuant to this prospectus. Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock or warrants owned by them and, if they default in the performance of their secured obligations, the pledges, or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act, amending the list of selling stockholders to include the pledgee, transferee, or other successors in interest as selling stockholders pursuant to this prospectus. EXPERTS The financial statements for Madison Venture Capital Group, Inc. as of and for the period ended December 31, 2006 included in this prospectus have been audited by Bernstein & Pinchuk, LLP, independent registered public accounting firm, to the extent and for the periods set forth in their reports appearing elsewhere herein and are included in reliance upon such reports given upon the authority of that firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1/A under the Securities Act in connection with the offering of the common stock by the selling stockholders. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement. Some information is omitted and you should refer to the registration statement and the exhibits thereto. With respect to references made in this prospectus to any contract, agreement or other document of ours, such references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contracts, agreements or other documents. You may review a copy of the registration statement, including exhibits, at the SEC's public reference room at 100 F. Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. We will in the future be filing annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information on file at the public reference rooms. You can also request copies of these documents, for a copying fee, by writing to the SEC. ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND OUR ARTICLES OF INCORPORATION AND BYLAWS We are subject to Section 203 of the Delaware General Corporation Law (the GCL ). Subject to certain exceptions, this Section of the GCL regulates corporate takeovers and prohibits a Delaware corporation from engaging in any business combination with any interested shareholder for three years following the date which the shareholder became an interested shareholder. Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested shareholder. An interested shareholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested shareholder status, did own 15% or more of a corporation's outstanding voting securities. We expect the existence of this provision to have an anti-takeover effect with respect to transactions which our board of directors does not approve in advance. We also anticipate that Section 203 may discourage takeover attempts that might result in a premium over the market price for the shares of common stock held by stockholders. Provisions of our Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us by means of a tender offer, a proxy contest or otherwise. Such provisions may also make the removal of incumbent officers and directors more difficult. Such provisions are intended to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. Such provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. Such provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in control. PART II INFORMATION NOT REQURIED PURSUANT TO THE PROSPECTUS ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses including attorneys' fees, judgments, fines and amounts paid in settlement in connection with various actions, suits or proceedings, whether civil, criminal, administrative or investigative other than an action by or in the right of the corporation, a derivative action, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses including attorneys' fees incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there may be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification which may be granted by a corporation's certificate of incorporation, bylaws, agreement, a vote of stockholders or disinterested directors or otherwise. Our Certificate of Incorporation provides that we will indemnify and hold harmless, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, each person that such section grants us the power to indemnify. The Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for: any breach of the director's duty of loyalty to the corporation or its stockholders; acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; payments of unlawful dividends or unlawful stock repurchases or redemptions; or any transaction from which the director derived an improper personal benefit. Our Certificate of Incorporation provides that, to the fullest extent permitted by applicable law, none of our directors will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this provision will be prospective only and will not adversely affect any limitation, right or protection of a director of our company existing at the time of such repeal or modification. II-1 ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION We will pay all costs and expenses in connection with this offering, including but not limited to all expenses related to the costs of preparing, reproducing or printing this registration statement, legal expenses, and other expenses incurred in qualifying or registering the offering for sale under state laws as may be necessary, as well as the fees and expenses of our attorneys and accountants. It is anticipated that the total of all costs and expenses in connection with this offering will be approximately $4,000.00 This includes: Attorney fees $ 0.00 CPA fees $ 3,07500 SEC filing fee .64 Filing Service $ 909.00 Total $ 3,984.64 ITEM 26: EXHIBITS SCHEDULE The following exhibits are filed with this prospectus: Exhibit Description 3.1 Articles of Incorporation 3.2 By-Laws 5.1 Opinion of Mintz & Fraade, P.C. 23.1 Consent of Bernstein & Pinchuk LLP (included in Exhibit 5.1) ITEM 27: UNDERTAKING 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 to: (a) include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (b) reflect in the prospectus any facts or events which, individually or, together, represent a fundamental change in the information in the registration statement. Notwithstanding the forgoing, 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 the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and II-2 (c) include
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001398632_highlands_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001398632_highlands_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1be3f9993f18cc8c8fa8448bdce9a5ff245a6050
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001398632_highlands_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. In connection with this offering, Bingham McCutchen LLP, New York, New York, is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001398649_golub_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001398649_golub_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fc4b46b8f90c28087466db253576a0e8623450bb
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001398649_golub_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed upon for us by Dechert LLP, Washington, DC. Certain legal matters in connection with this offering will be passed upon for the underwriters by Clifford Chance US LLP, New York, NY.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001399067_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001399067_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d243711f39dc7d0cbcb1683058d1640cd4599f0b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001399067_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Morrison Cohen LLP, New York, New York, is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. Kramer Levin Naftalis Frankel LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001400400_demandtec_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001400400_demandtec_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c51395bb948783851d2a59d5a880dd16e6ec3109
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001400400_demandtec_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock being offered hereby will be passed upon for the company by Gunderson Dettmer Stough Villeneuve Franklin Hachigian, LLP, Menlo Park, California, and Fenwick West LLP, Mountain View, California, will act as counsel for the underwriters. As of the date of this prospectus, certain partners and employees of Gunderson Dettmer Stough Villeneuve Franklin Hachigian, LLP beneficially owned an aggregate of 103,719 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001401573_beacon_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001401573_beacon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7f4e0852f293a03c505393cb13cdab6316184d7f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001401573_beacon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to Beacon Federal Bancorp, Inc. and Beacon Federal, will issue to Beacon Federal Bancorp, Inc. its opinion regarding the legality of the common stock and the federal income tax consequences of the conversion. Certain legal matters will be passed upon for Keefe, Bruyette and Woods, Inc. by Nelson Mullins Riley & Scarborough LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001401698_global_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001401698_global_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9e7ff27a7b68dc5f3afef1a12150253cf46339c3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001401698_global_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the shares of common stock offered hereby will be passed upon for us by Thompson Hine LLP, Cincinnati, Ohio, our Ohio counsel. Certain other related legal matters in connection with this offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis, Minnesota, and for the underwriters by Pillsbury Winthrop Shaw Pittman LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001401923_map_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001401923_map_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3b35c11a434632b7d6478118a632f01c4ed1833a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001401923_map_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered by this prospectus will be passed upon for us by Latham & Watkins LLP, Menlo Park, California. Latham & Watkins LLP and certain attorneys and investment funds affiliated with the firm collectively own less than 0.1% of the shares of our common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Heller Ehrman LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001402175_hicks_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001402175_hicks_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2d98f7b03fb0d45adee6586e11b1e7051a50f34d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001402175_hicks_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Akin Gump Strauss Hauer & Feld LLP, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. In connection with this offering Bingham McCutchen LLP, New York, New York is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001402225_ideation_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001402225_ideation_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e45fdef7746a801b5769d5b60be8e282d839686c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001402225_ideation_legal_matters.txt
@@ -0,0 +1,1508 @@
+LEGAL
+ MATTERS
+
+ 
+
+ The validity of the securities offered in this prospectus is
+ being passed upon for us by Akerman Senterfitt, Miami, Florida.
+ Mintz Levin Cohn Ferris Glovesky Popeo, P.C.,
+ New York, New York, is acting as counsel for the underwriter in
+ this offering.
+
+ 
+
+ 89
+
+Table of Contents
+
+ 
+
+ EXPERTS
+
+ 
+
+ The financial statements included in this prospectus and in the
+ registration statement have been audited by Rothstein,
+ Kass Company, P.C., independent registered
+ public accounting firm, as of September 30, 2007 and for
+ the period from June 1, 2007 (date of inception) through
+ September 30, 2007 as set forth in their report appearing
+ elsewhere in this prospectus and in the registration statement.
+ The financial statements are included in reliance upon their
+ report given upon the authority of Rothstein, Kass 
+ Company, P.C. as experts in auditing and accounting.
+
+ 
+
+ WHERE
+ YOU CAN FIND ADDITIONAL INFORMATION
+
+ 
+
+ We have filed with the SEC a registration statement on
+ Form S-1,
+ which includes exhibits, schedules and amendments, under the
+ Securities Act, with respect to this offering of our securities.
+ Although this prospectus, which forms a part of the registration
+ statement, contains all material information included in the
+ registration statement, parts of the registration statement have
+ been omitted as permitted by rules and regulations of the SEC.
+ We refer you to the registration statement and its exhibits for
+ further information about us, our securities and this offering.
+ The registration statement and its exhibits, as well as our
+ other reports filed with the SEC, can be inspected and copied at
+ the SEC s public reference room at 100 F Street,
+ N.E., Washington, D.C. 20549. The public may obtain
+ information about the operation of the public reference room by
+ calling the SEC at
+ 1-800-SEC-0330.
+ In addition, the SEC maintains a web site at
+ http://www.sec.gov
+ which contains the
+ Form S-1
+ and other reports, proxy and information statements and
+ information regarding issuers that file electronically with the
+ SEC.
+
+ 
+
+ 90
+
+Table of Contents
+
+ IDEATION
+ ACQUISITION CORP.
+
+ (a development stage company)
+
+ 
+
+ 
+
+ INDEX TO FINANCIAL STATEMENTS
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ Report of Independent Registered Public
+ Accounting Firm
+
+ 
+
+ F-2
+
+ Balance Sheet as of September 30, 2007
+
+ 
+
+ F-3
+
+ Statement of Operations for the period from
+ June 1, 2007 (date of inception) to September 30,
+ 2007
+
+ 
+
+ F-4
+
+ Statement of Stockholders Equity for the
+ period from June 1, 2007 (date of inception) to
+ September 30, 2007
+
+ 
+
+ F-5
+
+ Statement of Cash Flows for the period from
+ June 1, 2007 (date of inception) to September 30,
+ 2007
+
+ 
+
+ F-6
+
+ Notes to Financial Statements
+
+ 
+
+ F-7
+
+ 
+
+ F-1
+
+Table of Contents
+
+ 
+
+ REPORT
+ OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+
+ 
+
+ To the Board of Directors and Stockholders of
+
+ Ideation Acquisition Corp.
+
+ 
+
+ We have audited the accompanying balance sheet of Ideation
+ Acquisition Corp. (a corporation in the development stage) (the
+ Company ) as of September 30, 2007, and the
+ related statements of operations, changes in stockholders 
+ equity, and cash flows for the period from June 1, 2007
+ (Inception) to September 30, 2007. These financial
+ statements are the responsibility of the Company s
+ management. Our responsibility is to express an opinion on these
+ financial statements based on our audit.
+
+ 
+
+ We conducted our audit in accordance with the standards of the
+ Public Company Accounting Oversight Board (United States). Those
+ standards require that we plan and perform the audit to obtain
+ reasonable assurance about whether the financial statements are
+ free of material misstatement. The Company is not required to
+ have, nor were we engaged to perform, an audit of its internal
+ control over financial reporting. Our audit included
+ consideration of internal control over financial reporting as a
+ basis for designing audit procedures that are appropriate in the
+ circumstances, but not for the purpose of expressing an opinion
+ on the effectiveness of the Company s internal control over
+ financial reporting. Accordingly, we express no such opinion. An
+ audit also includes examining, on a test basis, evidence
+ supporting the amounts and disclosures in the financial
+ statements, assessing the accounting principles used and
+ significant estimates made by management, as well as evaluating
+ the overall financial statement presentation. We believe that
+ our audit provides a reasonable basis for our opinion.
+
+ 
+
+ In our opinion, the financial statements referred to above
+ present fairly, in all material respects, the financial position
+ of Ideation Acquisition Corp. (a corporation in the development
+ stage) as of September 30, 2007 and the results of its
+ operations and its cash flows for the period June 1, 2007
+ (Inception) to September 30, 2007, in conformity with
+ accounting principles generally accepted in the United States of
+ America.
+
+ 
+
+ /s/ Rothstein,
+ Kass Company, P.C.
+
+ Roseland, New Jersey
+
+ October 30, 2007
+
+ 
+
+ F-2
+
+Table of Contents
+
+ IDEATION
+ ACQUISITION CORP.
+
+ (a corporation in the development stage)
+
+ 
+
+ 
+
+ Balance Sheet
+
+ September 30, 2007
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ Assets
+
+ Current assets, cash
+
+ 
+
+ $
+
+ 181,820
+
+ 
+
+ Other assets, deferred offering costs
+
+ 
+
+ 
+
+ 295,455
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total assets
+
+ 
+
+ $
+
+ 477,275
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Liabilities and Stockholders Equity
+
+ Current liabilities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accrued expenses
+
+ 
+
+ $
+
+ 257,365
+
+ 
+
+ Notes payable to stockholders
+
+ 
+
+ 
+
+ 200,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total current liabilities
+
+ 
+
+ 
+
+ 457,365
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Commitments and contingencies
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Stockholders equity:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Preferred Stock, $0.0001 par value, 1,000,000 shares
+ authorized; none issued and outstanding
+
+ 
+
+ 
+
+ 0
+
+ 
+
+ Common Stock, $0.0001 par value, 50,000,000 shares
+ authorized; 2,500,000 shares issued and outstanding
+
+ 
+
+ 
+
+ 250
+
+ 
+
+ Additional paid-in capital
+
+ 
+
+ 
+
+ 24,750
+
+ 
+
+ Deficit accumulated during the development stage
+
+ 
+
+ 
+
+ (5,090
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total stockholders equity
+
+ 
+
+ 
+
+ 19,910
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total liabilities and stockholders equity
+
+ 
+
+ $
+
+ 477,275
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (See accompanying notes to financial statements)
+
+ 
+
+ F-3
+
+Table of Contents
+
+ IDEATION
+ ACQUISITION CORP.
+
+ (a corporation in the development stage)
+
+ 
+
+ 
+
+ Statement of Operations
+
+ For the period from June 1, 2007 (Inception) to
+ September 30, 2007
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ Formation and operating costs
+
+ 
+
+ $
+
+ 5,090
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+
+ 
+
+ $
+
+ 5,090
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Weighted average common shares outstanding basic and
+ diluted
+
+ 
+
+ 
+
+ 2,381,609
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic and diluted net loss per common share
+
+ 
+
+ $
+
+ (0.00
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (See accompanying notes to financial statements)
+
+ 
+
+ F-4
+
+Table of Contents
+
+ IDEATION
+ ACQUISITION CORP.
+
+ (a corporation in the development stage)
+
+ 
+
+ 
+
+ 
+
+ Statement of Stockholders Equity
+
+ For the period from June 1, 2007 (Inception) to
+ September 30, 2007
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Deficit
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accumulated
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Additional
+
+ 
+
+ 
+
+ 
+
+ During the
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Common Stock
+
+ 
+
+ 
+
+ Paid-In
+
+ 
+
+ 
+
+ 
+
+ Development
+
+ 
+
+ 
+
+ 
+
+ Stockholders 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shares
+
+ 
+
+ 
+
+ Amount
+
+ 
+
+ 
+
+ Capital
+
+ 
+
+ 
+
+ Stage
+
+ 
+
+ 
+
+ Equity
+
+ 
+
+ 
+
+ Common shares issued to founders
+
+ 
+
+ 
+
+ 2,500,000
+
+ 
+
+ 
+
+ $
+
+ 250
+
+ 
+
+ 
+
+ $
+
+ 24,750
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 25,000
+
+ 
+
+ Net loss
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (5,090
+
+ )
+
+ 
+
+ 
+
+ (5,090
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Balance at September 30, 2007
+
+ 
+
+ 
+
+ 2,500,000
+
+ 
+
+ 
+
+ $
+
+ 250
+
+ 
+
+ 
+
+ $
+
+ 24,750
+
+ 
+
+ 
+
+ $
+
+ (5,090
+
+ )
+
+ 
+
+ $
+
+ 19,910
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (See accompanying notes to financial statements)
+
+ 
+
+ F-5
+
+Table of Contents
+
+ IDEATION
+ ACQUISITION CORP.
+
+ (a corporation in the development stage)
+
+ 
+
+ 
+
+ Statement of Cash Flows
+
+ For the period from June 1, 2007 (Inception) to
+ September 30, 2007
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ Cash flows from operating activities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+
+ 
+
+ $
+
+ (5,090
+
+ )
+
+ Adjustments to reconcile net loss to net cash from operating
+ activities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Increase in cash attributable to change in accrued expenses
+
+ 
+
+ 
+
+ 7,365
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash provided by operating activities
+
+ 
+
+ 
+
+ 2,275
+
+ 
+
+ Cash flows from financing activities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Proceeds from notes payable to stockholders
+
+ 
+
+ 
+
+ 200,000
+
+ 
+
+ Common shares issued to founders
+
+ 
+
+ 
+
+ 25,000
+
+ 
+
+ Deferred offering costs
+
+ 
+
+ 
+
+ (45,455
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash provided by financing activities
+
+ 
+
+ 
+
+ 179,545
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net increase in cash
+
+ 
+
+ 
+
+ 181,820
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash beginning of period
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash end of period
+
+ 
+
+ $
+
+ 181,820
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Supplemental disclosures of non-cash financing activities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accrued and deferred offering costs
+
+ 
+
+ $
+
+ 250,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (See accompanying notes to financial statements)
+
+ 
+
+ F-6
+
+Table of Contents
+
+ IDEATION
+ ACQUISITION CORP.
+
+ (a corporation in the development stage)
+
+ 
+
+ 
+
+ NOTES TO FINANCIAL STATEMENTS
+
+ 
+
+ 
+ 
+
+ 
+ Note 1
+
+ 
+ Organization
+ and Nature of Business Operations
+
+ 
+
+ Ideation Acquisition Corp. (a corporation in the development
+ stage) (the Company ) was incorporated in Delaware on
+ June 1, 2007. The Company was formed to acquire through a
+ merger, stock exchange, asset acquisition or similar business
+ combination a currently unidentified business or businesses. The
+ Company is considered to be in the development stage as defined
+ in Statement of Financial Accounting Standards (SFAS)
+ No. 7, Accounting and Reporting By Development Stage
+ Enterprises, and is subject to the risks associated with
+ activities of development stage companies.
+
+ 
+
+ At September 30, 2007, the Company had not commenced any
+ operations. All activity through September 30, 2007 relates
+ to the Company s formation and the proposed public offering
+ described below. Following such offering, the Company will not
+ generate any operating revenues until after completion of its
+ initial business combination, at the earliest. The Company will
+ generate non-operating income in the form of interest income on
+ cash and cash equivalents after such offering. The Company has
+ selected December 31 as its fiscal year end.
+
+ 
+
+ The Company s management has broad discretion with respect
+ to the specific application of the net proceeds of a Proposed
+ Offering of Units (as defined in Note 3) ( Proposed
+ Offering ), although substantially all of the net proceeds
+ of the Proposed Offering are intended to be generally applied
+ toward consummating a business combination with (or acquisition
+ of) a Target Business ( Business Combination ). As
+ used herein, Target Business shall mean one or more
+ businesses that at the time of the Company s initial
+ Business Combination has a fair market value of at least 80% of
+ the Company s net assets (all of the Company s assets,
+ including the funds then held in the trust account, less the
+ Company s liabilities (excluding deferred underwriting
+ discounts and commissions of approximately $2.4 million, or
+ approximately $2.8 million if the over-allotment option is
+ exercised in full, described below)). Furthermore, there is no
+ assurance that the Company will be able to successfully effect a
+ Business Combination.
+
+ 
+
+ The Company s efforts in identifying a prospective Target
+ Business will not be limited to particular companies; however it
+ expects to focus on businesses in the digital media sector,
+ which encompasses companies that emphasize the use of digital
+ technology to create, distribute or service others that create
+ or distribute content for various platforms including online,
+ mobile, satellite, television, cable, radio, print, film, video
+ games and software.
+
+ 
+
+ Upon closing of the Proposed Offering, approximately 98% of the
+ gross proceeds of the Proposed Offering will be placed in a
+ trust account and invested in United States government
+ securities within the meaning of Section 2(a)(16) of
+ the Investment Company Act of 1940, as amended ( Investment
+ Company Act ), having a maturity of 180 days or less,
+ or in money market funds selected by the Company meeting certain
+ conditions under
+ Rule 2a-7
+ promulgated under the Investment Company Act, until the earlier
+ of (i) the consummation of the Company s first
+ Business Combination or (ii) the liquidation of the
+ Company. The proceeds in the trust account will include
+ $2.4 million of the gross proceeds representing deferred
+ underwriting discounts and commissions that will be released to
+ the underwriters on completion of a Business Combination. The
+ remaining proceeds outside of the trust account may be used to
+ pay for business, legal and accounting due diligence on
+ prospective acquisitions and continuing general and
+ administrative expenses.
+
+ 
+
+ The Company will seek stockholder approval before it will effect
+ any Business Combination, even if the Business Combination would
+ not ordinarily require stockholder approval under applicable
+ state law. In connection with the stockholder vote required to
+ approve any Business Combination, all of the Company s
+ existing stockholders ( Initial Stockholders ) have
+ agreed to vote the shares of common stock owned by them
+ immediately before this offering in accordance with the majority
+ of the shares of common stock voted by the Public Stockholders.
+ Public Stockholders is defined as the holders of
+ common stock sold as part of the Units in the Proposed Offering
+ or in the aftermarket. The Company will proceed with a Business
+ Combination only
+
+ 
+
+ F-7
+
+Table of Contents
+
+ 
+
+ IDEATION
+ ACQUISITION CORP.
+
+ (a corporation in the development stage)
+
+ 
+
+ NOTES TO FINANCIAL
+ STATEMENTS (Continued)
+
+ 
+
+ if a majority of the shares of common stock voted by the Public
+ Stockholders are voted in favor of the Business Combination and
+ Public Stockholders owning less than 30% of the shares sold in
+ the Public Offering exercise their conversion rights. If a
+ majority of the shares of common stock voted by the Public
+ Stockholders are not voted in favor of a proposed initial
+ Business Combination but 24 months has not yet passed since
+ closing of the Proposed Offering the Company may combine with
+ another Target Business meeting the fair market value criterion
+ described above.
+
+ 
+
+ Public Stockholders voting against a Business Combination will
+ be entitled to convert their stock into a pro rata share of the
+ total amount on deposit in the trust account, before payment of
+ underwriting discounts and commissions and including any
+ interest earned on their portion of the trust account net of
+ income taxes payable thereon, and net of any interest income of
+ up to $1.8 million on the balance of the trust account
+ previously released to the Company, if a Business Combination is
+ approved and completed.
+
+ 
+
+ The Company s Certificate of Incorporation will be amended
+ prior to the Proposed Offering to provide that the Company will
+ continue in existence only until 24 months from the
+ effective date. If the Company has not completed a Business
+ Combination by such date, its corporate existence will cease
+ except for the purposes of winding up its affairs and it will
+ liquidate. In the event of liquidation, it is likely that the
+ per share value of the residual assets remaining available for
+ distribution (including trust account assets) will be less than
+ the initial public offering price per share in the Proposed
+ Offering (assuming no value is attributed to the Warrants
+ contained in the Units to be offered in the Proposed Offering
+ discussed in Note 3).
+
+ 
+
+ 
+ 
+
+ 
+ Note 2
+
+ 
+ Summary
+ of Significant Accounting Policies
+
+ 
+
+ Basis
+ of presentation
+
+ 
+
+ The financial statements of the Company are presented in
+ U.S. dollars in conformity with accounting principles
+ generally accepted in the United States of America
+ (U.S. GAAP).
+
+ 
+
+ Development
+ Stage Company
+
+ 
+
+ The Company complies with the reporting requirements of
+ SFAS No. 7, Accounting and Reporting by
+ Development Stage Enterprises. 
+
+ 
+
+ Concentration
+ of Credit Risk
+
+ 
+
+ Financial instruments that potentially subject the Company to a
+ significant concentration of credit risk consist primarily of
+ cash. The Company may maintain deposits in federally insured
+ financial institutions in excess of federally insured limits.
+ However, management believes the Company is not exposed to
+ significant credit risk due to the financial position of the
+ depository institutions in which those deposits are held.
+
+ 
+
+ Fair
+ Value of Financial Instruments
+
+ 
+
+ The fair values of the Company s assets and liabilities
+ that qualify as financial instruments under
+ SFAS No. 107, Disclosures about Fair Value of
+ Financial Instrument, approximate their carrying amounts
+ presented in the accompanying balance sheet.
+
+ 
+
+ Deferred
+ Offering Costs
+
+ 
+
+ The Company complies with the requirements of the SEC Staff
+ Accounting Bulletin ( SAB ) Topic 5A 
+ Expenses of Offering. Deferred offering costs
+ consist principally of legal fees incurred through the balance
+ sheet date that are related to the Proposed Offering and that
+ will be charged to capital upon the receipt of the proposed
+ public offering proceeds or expensed if
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001402902_cosan-ltd_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001402902_cosan-ltd_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fbc63550ae32fda836b3dd3ee54dd69c6fd19759
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001402902_cosan-ltd_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the class A common shares being offered in the global offering and certain other matters of Bermuda law will be passed upon for us by Appleby, Hamilton, Bermuda. Certain matters of United States law will be passed upon for us by Davis Polk & Wardwell, New York, New York and for the international underwriters by Simpson Thacher & Bartlett LLP, New York, New York. Certain matters of Brazilian law will be passed upon for us by Souza, Cescon Avedissian, Barrieu e Flesch Advogados, S o Paulo, Brazil and for the international underwriters by Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga, S o Paulo, Brazil.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001403256_sculptor_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001403256_sculptor_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..67dcc738c99ed39736ea9e41f7d63adfe4f86bb6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001403256_sculptor_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. The validity of the Class A shares will be passed upon for the underwriters by Sullivan & Cromwell LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001403849_perfect_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001403849_perfect_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f5e7c4798515e9a752cec4d9157ddef0aee19d25
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001403849_perfect_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters in connection with this offering will be passed upon for us by Latham & Watkins LLP. Certain legal matters with respect to the United States federal and New York law in connection with this offering will be passed upon for the underwriters by Cleary Gottlieb Steen & Hamilton LLP. The validity of the ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Maples and Calder. Legal matters as to PRC law will be passed upon for us by King & Wood and for the underwriters by Commerce & Finance Law Offices. Latham & Watkins LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law and King & Wood with respect to matters governed by PRC law. Table of Contents PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of our ordinary shares, assuming conversion of all of our preferred shares into ordinary shares, as of the date of this prospectus, by: each of our directors and executive officers; each person known to us to own beneficially more than 5.0% of our ordinary shares; and each selling shareholder. Ordinary shares Beneficially Owned Prior to This Offering Ordinary shares Being Sold in This Offering(1) Shares Beneficially Owned After This Offering (1) Number (2) % (3) Number % Number(2) %(4) Directors and Executive Officers: Michael Yufeng Chi(1)(5) 72,666,870 31.02 % 72,666,870 26.02 Ge Song Daniel Dong Yang(6) 1,142,858 0.49 % 1,142,858 0.41 Di He(7). 6,928,570 2.96 % 6,928,570 2.48 All Directors and Executive Officers as a Group 80,738,298 34.47 % 80,738,298 28.91 Principal and Selling Shareholders: SB Asia Investment Fund II L.P.(1)(8) 84,000,003 35.85 % 84,000,003 30.08 Perfect Human Holding Company Limited(1)(9) 72,666,870 31.02 % 72,666,870 26.02 Prosperous World Company Limited(10) 51,837,070 22.13 % 13,000,000 22.03 38,837,070 13.91 eTech Venture Inc(11) 9,873,210 4.21 % 500,000 0.85 9,373,210 3.36 Sharon Wei(12) 2,000,000 0.85 % 500,000 0.85 1,500,000 0.54 Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404048_brand_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404048_brand_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0f19c8b4ebd9f6f8f7c330209062d6720170d1ef
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404048_brand_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the securities offered in this prospectus are being passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York. DLA Piper LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404176_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404176_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404176_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404179_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404179_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404179_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404180_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404180_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404180_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404182_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404182_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404182_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404183_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404183_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404183_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404185_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404185_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404185_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404187_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404187_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404187_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404189_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404189_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404189_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404191_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404191_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404191_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001404193_brookshire_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001404193_brookshire_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d5cd5763e3684783b830dc479193caac0104956
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001404193_brookshire_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Crowell Moring LLP, 153 E. 53rd Street, 31st Floor, New York, New York 10022-4611, has advised the Trust and the Managing Owner on legal matters in connection with the offering of the Units. Certain legal matters relating to Delaware law have been passed upon for the Trust and the Managing Owner by Richards, Layton Finger, P.A., One Rodney Square, 920 N. King Street, Wilmington, Delaware 19801. The statements under the heading MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Crowell Moring LLP. The statements under the heading CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS have been reviewed by Cassels Brock Blackwell LLP. If you are considering the purchase of a Unit, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of a Unit, as well as any consequences to you arising under the laws of any other taxing jurisdiction (including state and local tax consequences within and outside the United States). INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM SF Partnership, LLP has been appointed by the Trust and the Managing Owner as the Trust s independent registered public accounting firm. ADDITIONAL INFORMATION The Trust has filed with the SEC in Washington, D.C. a registration statement covering all Units of all Funds on Form S-1, as amended, or the Registration Statement, with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits attached to the Registration Statement (e.g., the Selling Agent Agreement). A copy of the Registration Statement has also been provided to the National Futures Association, Chicago, Illinois. The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries. Reference is made to the Registration Statement, including the exhibits attached thereto, for further information with respect to the Trust and each Fund s securities. You may read and copy the Registration Statement and the exhibits to the registration statement at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Registration Statement is also available on the SEC s website at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. EXPERTS The statement of financial condition of the Trust as of December 31, 2006 included in this Prospectus has been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. The balance sheets of the Managing Owner as of December 31, 2006 and 2005, and the related statements of operations, member s equity (deficit) and cash flows for the year ended December 31, 2006 and the period from October 18, 2005 (date of inception) to December 31, 2005 included in this Prospectus have been audited by SF Partnership, LLP, independent chartered accountants, as set forth in their report. Those financial statements are included in reliance upon those reports, given upon their authority as experts in accounting and auditing. Table of Contents PREVENTION OF MONEY LAUNDERING AND PRIVACY POLICY OF THE MANAGING OWNER Prevention of Money Laundering. The Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act ), signed into law on and effective as of October 26, 2001, requires that financial institutions establish and maintain compliance programs to guard against money laundering activities. The USA PATRIOT Act requires the Secretary of the U.S. Treasury ( Treasury ) to prescribe regulations in connection with anti-money laundering policies of financial institutions. The Financial Crimes Enforcement Network ( FinCEN ), an agency of the Treasury, has announced that it is likely that such regulations would subject pooled investment vehicles such as the Trust to enact anti-money laundering policies. It is possible that there could be promulgated legislation or regulations that would require the Managing Owner or other service providers to the Trust or the Funds, in connection with the establishment of anti-money laundering procedures, to share information with governmental authorities with respect to Limited Owners of the Funds. Such legislation and/or regulations could require the Managing Owner to implement additional restrictions on the transfer of Units in a Fund. The Managing Owner reserves the right to request such information as necessary to verify the identity of a Limited Owner and the source of the payment of subscription monies, or as is necessary to comply with any customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission. In the event of delay or failure by the applicant to produce any information required for verification purposes, an application for or transfer of Units and the subscription monies relating thereto may be refused. Privacy Policy. The Managing Owner will collect non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the Funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you decide to close your account(s) or become an inactive customer, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information. [Remainder of page left blank intentionally.] Table of Contents BROOKSHIREtm RAW MATERIALS (U.S.) TRUST The date of this Part II is Sept , 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be incurred in connection with the offering are as follows: Description Amount Securities and Exchange Commission filing fee $ 53,500.00 NASD filing fee $ 50,500 Printing * Legal fees and expenses * Accounting fees * Blue Sky registration fees and expenses * Miscellaneous * Total Item 14. Indemnification of Managers and Officers. Reference is made to Section 4.06 of Article IV at pages 31 to 33 of the Registrant s Amended and Restated Declaration of Trust and Trust Agreement filed as an exhibit to this Registration Statement, which provides for indemnification of the Managing Owner and Affiliates of the Managing Owner under certain circumstances. Item 15. Recent Sales of Unregistered Securities. (a) Securities Sold. The Trust has had no prior sales. The Managing Owner, as discussed on pages 52 through 53 has also marketed interests in the Private Fund. The Private Fund commenced trading in September, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents (unless otherwise indicated) are filed herewith and made a part of this Registration Statement: 1 .1 Placement Agent Agreement among the Registrant, Brookshiretm Raw Materials Management, LLC and Oakbrook Investment Brokers, Inc.** 4 .1 Declaration of Trust and Amended and Restated Trust Agreement of the Registrant 4 .2 Form of Subscription Agreement** 4 .4 Custodian Agreement 4 .5 License Agreement** 5 .1 Opinion of Richards, Layton Finger, P.A. as to legality and inter-series liability** 8 .1 Opinion of Crowell Moring LLP as to U.S. income tax matters** 8 .2 Opinion of Cassels Brock Blackwell LLP as to Canadian income tax matters** 23 .1 Consent of Independent Registered Public Accounting Firm regarding Trust 23 .2 Consent of Independent Registered Public Accounting Firm regarding Managing Owner 23 .3 Consent of Richards, Layton Finger, P.A. 23 .4 Consent of Crowell Moring LLP 23 .5 Consent of Cassels Brock Blackwell LLP * To be filed by amendment ** As previously filed II-1 Table of Contents (b) The following financial statements are included in the Prospectus: 1. Brookshiretm Raw Materials (U.S.) Trust (i) Unaudited Statement of Financial Condition as of June 30, 2007 (ii) Notes to Unaudited Statements of Financial Condition (iii) Unaudited Statement of Financial Condition as of March 31, 2007 (iv) Notes to Unaudited Statements of Financial Condition.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405037_united_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405037_united_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..990650c30ed66b34d84868ebf7baf0ed8907c5bd
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405037_united_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Ellenoff Grossman & Schole LLP, New York, New York is passing on the validity of the securities offered in this prospectus. Such firm has acted as counsel to Maxim Group LLC in the past, and expects to do so again in the future. Lowenstein Sandler PC, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405049_united_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405049_united_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b8cda669d13527e61151558dedb82a210daa9230
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405049_united_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to United Financial-Maryland, United Mutual Holding Company and United Bank, will issue to United Financial-Maryland its opinion regarding the legality of the common stock, the federal income tax consequences of the conversion. Certain legal matters will be passed upon for Keefe, Bruyette & Woods, Inc. by Lord Bissell & Brook LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405073_approach_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405073_approach_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7b346c936bcbfd5734e03e0f5e53d14cbe0c1b1a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405073_approach_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of our shares of common stock offered by this prospectus will be passed upon for us by Thompson Knight LLP, Dallas, Texas. Legal matters in connection with this offering will be passed upon for the underwriters by Cahill Gordon Reindel LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405082_triplecrow_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405082_triplecrow_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0eb936ae1c2927979071d893eda9aabdfeecd8ae
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405082_triplecrow_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents complete our initial business combination, and the purchasers of the sponsors warrants have agreed, subject to certain exceptions, not to sell or otherwise transfer any of the sponsors warrants until we complete our initial business combination. We have been advised by the staff of the Financial Industry Regulatory Authority that NASD Rule 2720 may apply to this offering because an acquisition in the financial services industry could include the acquisition of a broker-dealer. In this regard, we have an audit committee, a public director as defined by such rule, and the underwriters have represented that no sale of securities in this offering will be executed by a FINRA member in a discretionary account without the prior written approval of the client. Notice to Prospective Investors in the European Economic Area In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a relevant member state ), with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state (the relevant implementation date ), an offer of our units described in this prospectus may not be made to the public in that relevant member state prior to the publication of a prospectus in relation to our units that has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in that relevant member state, all in accordance with the Prospectus Directive, except that, with effect from and including the relevant implementation date, an offer of our units may be made to the public in that relevant member state at any time: to any legal entity that is authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive. Each purchaser of our units described in this prospectus located within a relevant member state will be deemed to have represented, acknowledged and agreed that it is a qualified investor within the meaning of Article 2(1)(e) of the Prospectus Directive. For the purpose of this provision, the expression an offer of units to the public in relation to any units in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the units to be offered so as to enable an investor to decide to purchase or subscribe for the units as the expression may be varied in that relevant member state by any measure implementing the Prospectus Directive in that relevant member state, and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state. We have not authorized and do not authorize the making of any offer of units through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the units as contemplated in this prospectus. Accordingly, no purchaser of the units, other than the underwriters, is authorized to make any further offer of the units on behalf of the sellers or the underwriters. Notice to Prospective Investors in the United Kingdom This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive ( Qualified Investors ) that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ) or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being Table of Contents referred to as relevant persons ). This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant persons should not act or rely on this document or any of its contents. Notice to Prospective Investors in France Neither this prospectus nor any other offering material relating to the units described in this prospectus has been submitted to the clearance procedures of the Autorit des March s Financiers or by the competent authority of another member state of the European Economic Area and notified to the Autorit des March s Financiers. The units have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus nor any other offering material relating to the units has been or will be released, issued, distributed or caused to be released, issued or distributed to the public in France or used in connection with any offer for subscription or sale of the units to the public in France. Such offers, sales and distributions will be made in France only to qualified investors (investisseurs qualifi s) and/or to a restricted circle of investors (cercle restreint d investisseurs), in each case investing for their own account, all as defined in, and in accordance with, Article L.411-2, D.411-1, D.411-2, D.734- 1, D.744-1, D.754- 1 and D.764- 1 of the French Code mon taire et financier or to investment services providers authorized to engage in portfolio management on behalf of third parties; or in a transaction that, in accordance with article L.411-2-II-1 -or-2 -or 3 of the French Code mon taire et financier and article 211-2 of the General Regulations (R glement G n ral) of the Autorit des March s Financiers, does not constitute a public offer (appel public l pargne). The units may be resold directly or indirectly, only in compliance with Articles L.41 1-1, L.41 1-2, L.412-1 and L.621-8 through L.621-8-3 of the French Code mon taire et financier. Prior to this offering, there has been no public market for our securities. Consequently, the initial public offering price for the units was determined by negotiations among us and the underwriters. The determination of our per unit offering price was more arbitrary than would typically be the case if we were an operating company. Among the factors considered in determining initial public offering price were the history and prospectus of companies whose principal business is the acquisition of other companies, prior offerings of those companies, our management, our capital structure, currently prevailing market conditions in equity securities markets, and current market valuations of publicly traded companies considered comparable to us. We cannot assure you that the prices at which the units will trade in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our units, common stock or warrants will develop and continue after this offering. We anticipate that the units will be listed on the American Stock Exchange under the symbol TCW.U and, once the common stock and warrants begin separate trading, our common stock and warrants will be listed on the American Stock Exchange under the symbols TCW and TCW.WS, respectively. The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase additional units. Paid by Triplecrown Acquisition Corp. No Exercise Full Exercise Per unit $ 0.70 $ 0.70 Total $ 28,000,000 $ 32,200,000 Table of Contents The amounts paid by us in the table above include $14.0 million in deferred underwriting discounts and commissions (or $16.1 million if the over-allotment option is exercised in full), an amount equal to 3.5% of the gross proceeds of this offering, which will be placed in trust until our completion of an initial business combination as described in this prospectus. If we consummate our initial business combination, the deferred underwriting discounts and commissions will be released to the underwriters out of the balance held in the trust account. If we do not complete our initial business combination and the trustee must distribute the balance of the trust account, the underwriters have agreed that (i) on our liquidation they will forfeit any rights or claims to their deferred underwriting discounts and commissions, including any accrued interest thereon, then in the trust account, and (ii) that the deferred underwriters discounts and commissions will be distributed on a pro rata basis, together with any accrued interest thereon and net of income taxes payable on such interest, to the public stockholders. In connection with the offering, Citigroup Global Markets Inc. on behalf of the underwriters, may purchase and sell units in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of units in excess of the number of units to be purchased by the underwriters in the offering, which creates a syndicate short position. Covered short sales are sales of units made in an amount up to the number of units represented by the underwriters over-allotment option. In determining the source of units to close out the covered syndicate short position, the underwriters will consider, among other things, the price of units available for purchase in the open market as compared to the price at which they may purchase units through the over-allotment option. Transactions to close out the covered syndicate short position involve either purchases of the units in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make naked short sales of units in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing units in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the units in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of units in the open market while the offering is in progress. The underwriters may also impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Citigroup Global Markets Inc. repurchases units originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases. Any of these activities may have the effect of preventing or retarding a decline in the market price of the units. They may also cause the price of the units to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the American Stock Exchange or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time. We estimate that our portion of the total expenses of this offering payable by us will be $700,000, exclusive of underwriting discounts and commissions. The underwriters may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business. A prospectus in electronic format may be made available by one or more of the underwriters on a website maintained by one or more of the underwriters. Citigroup Global Markets Inc. may agree to allocate a number of units to underwriters for sale to their online brokerage account holders. Citigroup Global Markets Inc. will allocate units to underwriters that may make Internet distributions on the same basis as other allocations. In addition, units may be sold by the underwriters to securities dealers who resell units to online brokerage account holders. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments the underwriters may be required to make because of any of those liabilities. Table of Contents Although we are not under any contractual obligation to engage any of the underwriters to provide any services for us after this offering, and have no present intent to do so, any of the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after this offering, we may pay such underwriter fair and reasonable fees that would be determined at that time in an arm s length negotiation; provided that no agreement will be entered into with any of the underwriters and no fees for such services will be paid to any of the underwriters prior to the date which is 90 days after the date of this prospectus, unless the Financial Industry Regulatory Authority determines that such payment would not be deemed underwriters compensation in connection with this offering. LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. In connection with this offering, Akin Gump Strauss Hauer & Feld LLP, New York, New York, is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405287_stream_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405287_stream_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c700fef0667e82b1d209b003e6118a5c5668ce3f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405287_stream_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts, is passing on the validity of the securities offered in this prospectus. Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405419_gulfstream_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405419_gulfstream_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..26f67d373cf27a24fe0f4a35755c6c9f1966eff6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405419_gulfstream_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Bryan Cave LLP. Bryan Cave LLP has in the past performed legal services for Taglich Brothers, Inc. and may do so again in the future. Baker McKenzie LLP will pass on certain matters for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405503_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405503_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bd17dba7664252883c5752dac4961cc032ffd54e
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405503_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs under New York law will be passed upon for us by Sullivan & Cromwell LLP. Certain legal matters as to PRC law will be passed upon for us by King & Wood. The validity of the ordinary shares represented by the ADSs offered in this offering and certain legal matters as to Cayman Islands law will be passed upon for us by Conyers Dill & Pearman. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP with respect to matters of New York law and by Commerce and Finance Law Offices with respect to matters of PRC law. Sullivan & Cromwell LLP may rely upon King & Wood and Conyers Dill & Pearman with respect to matters governed by PRC law and Cayman Islands law, respectively. Shearman & Sterling LLP may rely upon Commerce and Finance Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001405682_renewable_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001405682_renewable_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7b43ec2fba0dbc62b7d7f98c0db1484087dc96d3
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001405682_renewable_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP, San Francisco, California. Selected legal matters relating to the offering will be passed upon for the underwriters by Sidley Austin LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001406391_enterprise_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001406391_enterprise_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..27633c8adfc772b4dd115d1b8c64e8982b4a1688
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001406391_enterprise_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Akerman Senterfitt, Miami, Florida, is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. Clifford Chance US LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001406953_syngence_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001406953_syngence_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0ae28d0690b5e53a92386609a55d1e9597cb2175
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001406953_syngence_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Stoel Rives LLP. The underwriters have been represented by Tonkon Torp LLP, Portland, Oregon.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001406982_capitol_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001406982_capitol_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ff5229992e726275a0ad768967d36cbbc1abab77
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001406982_capitol_legal_matters.txt
@@ -0,0 +1 @@
+legal matters by counsel and to other conditions. The underwriters are obligated to purchase all of the units (other than those covered by the underwriters over-allotment option described below) if they purchase any of the units. The underwriters propose to offer some of the units directly to the public at the public offering price set forth on the cover page of this prospectus and some of the units to dealers at the public offering price less a concession not to exceed $ per unit. The underwriters may allow, and dealers may reallow, a concession not to exceed $ unit on sales to other dealers. After the underwriters purchase the units from us, if all of the units are not sold by the underwriters to the public at the initial offering price, the representative may change the public offering price and the other selling terms. Citigroup Global Markets Inc. has advised us that the underwriters do not intend sales to discretionary accounts to exceed five percent of the total number of units offered by them. We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 3,750,000 additional units at the public offering price less the underwriting discount. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional units approximately proportionate to that underwriter s initial purchase commitment. We and our officers and directors have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup Global Markets Inc., offer, sell, contract to sell, transfer, pledge, dispose of or hedge, directly or indirectly, any of our units, warrants, shares or any other securities convertible into or exchangeable for our common stock. Citigroup Global Markets Inc., in its sole discretion, may release any of the securities subject to these lock-up agreements at any time without notice. The 180-day lock-up period will be automatically extended if: (1) during the last 17 days of the 180-day period we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the 180-day period, we announce that we will release earnings results during the 16-day period following the last day of the 180-day period, in which case the restrictions will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or event. In addition, the founders have agreed, subject to certain exceptions, not to sell or otherwise transfer any of the founders common stock until one year after the date we complete our initial business combination, and the purchasers of the sponsors warrants have agreed, subject to certain exceptions, not to sell or otherwise transfer any of the sponsors warrants until we complete our initial business combination. We have been advised by the staff of the Financial Industry Regulatory Authority that NASD Rule 2720 may apply to this offering. In this regard, we have an audit committee, a public director as defined by such rule, and the underwriters have represented that no sale of securities in this offering will be executed by a FINRA member in a discretionary account without the prior written approval of the client. In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a relevant member state ), with effect from and including the date on which the Prospectus Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001407298_fly_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001407298_fly_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..41fdc0f79c3c95dc7a9cf0628d0d3060cf76d7a0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001407298_fly_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common shares and certain other legal matters with respect to the laws of Bermuda will be passed upon for us by Conyers Dill & Pearman, Hamilton, Bermuda. Certain matters of U.S. federal and New York law relating to this offering will be passed upon for us by Weil, Gotshal & Manges LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Clifford Chance US LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001407437_gerova_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001407437_gerova_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f8507e1c19cbaf56e7aeb693f63dd057d157b498
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001407437_gerova_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. Hodgson Russ LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001407539_liberty_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001407539_liberty_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..209fdb543353a678f46b2a31885a79c76654035a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001407539_liberty_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered by this prospectus will be passed upon by Greenberg Traurig, LLP, New York, New York. In connection with this offering, Cleary Gottlieb Steen Hamilton LLP, New York, New York, is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001407623_retail_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001407623_retail_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0c3f4e30237f87ee9ff0a6f052c0b87f54fbeba0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001407623_retail_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS 107
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001407698_biolex_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001407698_biolex_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e9dcd87ef715b0480e144c67fc4b4e211acb3287
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001407698_biolex_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered by us in this offering will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. The underwriters are being represented by Pillsbury Winthrop Shaw Pittman LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001407926_cell_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001407926_cell_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..af89cffb9dc03f6b49c6d8b7eff7b946a5773a03
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001407926_cell_legal_matters.txt
@@ -0,0 +1 @@
+the judgment is enforceable in the state in which it was given; adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; the judgment and the enforcement of the judgment are not contrary to the law, public policy, security or sovereignty of the State of Israel; the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court. As a result of the factors listed in this section, an investor may find it difficult to enforce in an Israeli court a U.S. judgment based upon the civil liability provisions of the U.S. Federal securities laws. We have irrevocably appointed United Corporate Services, Inc. as our agent to receive service of process in any action against us in any federal court or court of the State of New York arising out of this offering. If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to issue a judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli CPI plus interest at the annual statutory rate set by Israeli regulations prevailing at the time. Judgment creditors must bear the risk of unfavorable exchange rate fluctuations. WHERE YOU CAN FIND MORE INFORMATION We filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the rights, the units and the ordinary shares and warrants to be issued upon exercise of the rights hereby. For further information about us, the rights and our ordinary shares, you should refer to our registration statement and its exhibits. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Statements contained in this prospectus as to the contents of any document referred to are not necessarily complete and in each instance, if such document is filed as an exhibit, reference is made to the copy of such document filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at the SEC s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is http://www.sec.gov. As a result of the offering, we will be subject to the information reporting requirements of the Securities and Exchange Act of 1934, as amended, referred to as the Exchange Act, applicable to foreign private issuers. As a foreign private issuer, we are exempt from certain rules and regulations under the Exchange Act prescribing the content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recover provisions contained in Section 16 of the Exchange Act, with respect to their purchase and sale of our ordinary shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we will file with the SEC an annual report on Form 20-F containing financial statements audited by an independent accounting firm. We also intend to furnish reports on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and with respect to other material information relating to us. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT Prior to this offering, the only shares of our capital stock outstanding were the 16,500,000 ordinary shares held by Medis. The following table sets forth, (i) the beneficial ownership of our ordinary shares before the offering, and (ii) the estimated beneficial ownership of our ordinary shares immediately following the completion of the rights offering, by: each of our executive officers and directors; all of our executive officers and directors as a group; and each anticipated beneficial owner of more than 5% of our ordinary shares immediately following completion of the offering. The estimated number of shares beneficially owned and the percentage of ownership each assume the sale of 3,505,337 of our ordinary shares in the rights offering; that all holders of rights elect to exercise in full their basic subscription rights to purchase units, including Robert K. Lifton and Howard Weingrow and their respective affiliates; and that no over-subscription rights are exercised. Name or Group Ordinary Shares Beneficially Owned Before the Offering (1) Estimated Ordinary Shares Beneficially Owned After Offering(1) Number Percentage(2) Number Percentage Medis El Ltd. (2) 16,500,000 100.0% 16,500,000 82.5% Jacob Weiss % 2,000 *% Dr. Asaf Ben-Arye 185,625 (3) 1.1% 185,625 (3) 0.9% Israel Fisher % % Mitchell H. Freeman % % Andrew A. Levy % % Daniel A. Luchansky % % Dr. Leonard Makowka % % All of our executive officers and directors as a group (seven persons) 185,625 1.1% 187,625 0.9% INDEX Page Cell Kinetics Ltd. Carve-out Financial Statements Report of Independent Registered Public Accounting Firm F-2 Financial Statements Carve-out Balance Sheets as of December 31, 2005 and 2006 and June 30, 2007 (Unaudited) F-3 Carve-out Statements of Operations for the years ended December 31, 2004, 2005 and 2006 and for the six months ended June 30, 2006 (Unaudited) and 2007 (Unaudited) F-4 Carve-out Statements of Stockholders Equity for the years ended December 31, 2004, 2005 and 2006 and for the six months ended June 30, 2007 (Unaudited) F-5 Carve-out Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006 and for the six months ended June 30, 2006 (Unaudited) and 2007 (Unaudited) F-6 Notes to Carve-out Financial Statements F-7 F 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Cell Kinetics Ltd. We have audited the accompanying carve-out balance sheets of Cell Kinetics Ltd. (the Company ) as of December 31, 2005 and 2006 and the related carve-out statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the carve-out financial statements are free of material misstatement. We were not engaged to perform an audit of the Company s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the carve-out financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall carve-out financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the carve-out financial statements referred to above present fairly, in all material respects, the carve-out financial position of the Company as of December 31, 2005 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note B-8 to the carve-out financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment , effective January 1, 2006. /s/ KOST FORER GABBAY & KASIERER Tel Aviv, Israel July 30, 2007 KOST FORER GABBAY & KASIERER A MEMBER OF ERNST & YOUNG GLOBAL F 2 Cell Kinetics Ltd. Carve-out Balance Sheets (in U.S. dollars) December 31, June 30, 2005 2006 2007 ASSETS (unaudited) Current assets Cash and cash equivalents $ $ 19,000 $ 14,000 Other accounts receivable and prepaid expenses 34,000 63,000 194,000 Total current assets 34,000 82,000 208,000 Property and equipment, net (Note C) 278,000 230,000 231,000 Goodwill 2,212,000 2,212,000 2,212,000 Severance pay fund 168,000 182,000 145,000 Total assets $ 2,692,000 $ 2,706,000 $ 2,796,000 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities Accounts payable $ 20,000 $ 61,000 $ 15,000 Accrued expenses and other current liabilities (Note D) 376,000 272,000 298,000 Total current liabilities 396,000 333,000 313,000 Leasehold incentive obligations, net 95,000 71,000 59,000 Accrued severance pay 207,000 219,000 175,000 Total Liabilities 698,000 623,000 547,000 Commitments and contingent liabilities (Note F) Stockholders equity (Note E) Ordinary shares, .01 NIS par value; 30,000,000 shares authorized at December 31, 2005 and 2006 and June 30, 2007 (unaudited); 16,500,000 shares issued and outstanding, at December 31, 2005 and 2006 and June 30, 2007 (unaudited) 2,000 2,000 2,000 Receivables in respect of shares issued (2,000 ) Receipts on account of shares 37,000 37,000 37,000 Additional paid-in capital 58,602,000 60,499,000 61,602,000 Accumulated deficit (56,645,000 ) (58,455,000 ) (59,392,000 ) Total stockholders equity 1,994,000 2,083,000 2,249,000 Total liabilities and stockholders equity $ 2,692,000 $ 2,706,000 $ 2,796,000 The accompanying notes are an integral part of these carve-out financial statements. F 3 Cell Kinetics Ltd. Carve-out Statements of Operations (in U.S. dollars) Year ended December 31, Six Months Ended June 30, 2004 2005 2006 2006 2007 Operating expenses: (unaudited) Research and development costs $ 944,000 $ 826,000 $ 1,079,000 $ 563,000 $ 566,000 General and administrative expenses 1,272,000 922,000 698,000 293,000 384,000 Total operating expenses 2,216,000 1,748,000 1,777,000 856,000 950,000 Interest expense (income) 14,000 23,000 33,000 24,000 (13,000 ) Net Loss 2,230,000 1,771,000 1,810,000 880,000 937,000 Basic and diluted net loss per share $ (.14 ) $ (.11 ) $ (.11 ) $ (.05 ) $ (.06 ) Weighted-average number of ordinary shares used in computing basic and diluted net loss per share 16,500,000 16,500,000 16,500,000 16,500,000 16,500,000 Pro forma basic and diluted net loss per share $ (.13 ) $ (.11 ) $ (.11 ) $ (.05 ) $ (.06 ) Pro forma weighted-average number of ordinary shares used in computing basic and diluted net loss per share 16,722,973 16,722,973 16,722,973 16,722,973 16,722,973 The accompanying notes are an integral part of these carve-out financial statements. F 4 Cell Kinetics Ltd. Carve-out Statements of Stockholders Equity (in U.S. dollars) Ordinary Shares Shares Amount Receipts on account of shares Receivables in respect of shares issued Additional Paid-in Capital Accumulated Deficit Total Stockholders Equity Balance at January 1, 2004 16,500,000 $ 2,000 $ 37,000 $ (2,000 ) $ 54,691,000 $ (52,644,000 ) $ 2,084,000 Net loss (2,230,000 ) (2,230,000 ) Funds from parent company 1,751,000 1,751,000 Stock options granted to directors 14,000 14,000 Stock options granted to non-employees 37,000 37,000 Extension of options granted to employees, directors and non-employees 477,000 477,000 Balance at December 31, 2004 16,500,000 2,000 37,000 (2,000 ) 56,970,000 (54,874,000 ) 2,133,000 Net loss (1,771,000 ) (1,771,000 ) Funds from parent company 1,530,000 1,530,000 Stock options granted to directors (2,000 ) (2,000 ) Stock options granted to non-employees 104,000 104,000 Balance at December 31, 2005 16,500,000 2,000 37,000 (2,000 ) 58,602,000 (56,645,000 ) 1,994,000 Proceeds in respect of shares issued 2,000 2,000 Net loss (1,810,000 ) (1,810,000 ) Funds from parent company 1,716,000 1,716,000 Stock-based payments to employees 181,000 181,000 Balance at December 31, 2006 16,500,000 2,000 37,000 60,499,000 (58,455,000 ) 2,083,000 Net loss (unaudited) (937,000 ) (937,000 ) Funds from parent company (unaudited) 969,000 969,000 Stock-based payments to employees (unaudited) 134,000 134,000 Balance at June 30, 2007 (unaudited) 16,500,000 $ 2,000 $ 37,000 $ $ 61,602,000 $ (59,392,000 ) $ 2,249,000 The accompanying notes are an integral part of these carve-out financial statements. F 5 Cell Kinetics Ltd. Carve-out Statements of Cash Flows (in U.S. dollars) Year ended December 31, Six Months Ended June 30 2004 2005 2006 2006 2007 Cash flows from operating activities (unaudited) Net loss $ (2,230,000 ) $ (1,771,000 ) $ (1,810,000 ) $ (880,000 ) $ (937,000 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization of property and equipment 62,000 65,000 64,000 34,000 37,000 Non-cash stock based compensation expense 528,000 102,000 181,000 15,000 134,000 Changes in operating assets and liabilities Other accounts receivable and prepaid expenses (37,000 ) 35,000 (29,000 ) (22,000 ) 28,000 Accounts payable 36,000 (28,000 ) 41,000 35,000 (46,000 ) Accrued expenses and other current liabilities 68,000 103,000 (104,000 ) (115,000 ) (133,000 ) Leasehold incentive obligations, net 119,000 (24,000 ) (24,000 ) (12,000 ) (12,000 ) Accrued severance pay, net (29,000 ) 25,000 (2,000 ) (1,000 ) (7,000 ) Net cash used in operating activities (1,483,000 ) (1,493,000 ) (1,683,000 ) (946,000 ) (936,000 ) Cash flows from investing activities Capital expenditures (268,000 ) (37,000 ) (16,000 ) (12,000 ) (38,000 ) Net cash used in investing activities (268,000 ) (37,000 ) (16,000 ) (12,000 ) (38,000 ) Cash flows from financing activities Proceeds in respect of shares issued 2,000 Funds from the parent company 1,751,000 1,530,000 1,716,000 958,000 969,000 Net cash provided by financing activities 1,751,000 1,530,000 1,718,000 958,000 969,000 Net increase (decrease) in cash and cash equivalents 19,000 (5,000 ) Cash and cash equivalents at beginning of the period 19,000 Cash and cash equivalents at end of the period $ $ $ 19,000 $ $ 14,000 Supplemental disclosures of cash flow information: Accrued offering costs included in other accounts receivable and prepaid expenses $ $ $ $ $ 159,000 The accompanying notes are an integral part of these carve-out financial statements. F 6 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE A GENERAL MATTERS 1. Nature of Business Cell Kinetics Ltd. ( CKL or the Company ), an Israeli corporation, is a wholly-owned subsidiary of Medis Technologies Ltd ( MTL ) (NASDAQ global market: MDTL). CKL was formed in May 2002 and commenced operations in May 2006 to further refine and commercialize MTL s CellScan and related technology, as a successor to Medis El Ltd ( Medis El ), which is also a wholly owned subsidiary of MTL. CKL is seeking to exploit commercially an improved Cell Carrier which is considered to be the nucleus of the CellScan system. This unique cell carrier can accommodate large quantities of cells, each in individual wells, for measuring reactions of living cells while the cells are in a static state for a considerably long period of time. Since the inception of Medis El in July 1992, the Company has recorded revenues aggregating approximately $1,500,000 from the sale of its products, has incurred operating losses and has used cash in its operations. Accordingly, the Company has relied on financing from Medis El and MTL to fund its research and development activities and other operating expenses. Management believes this dependence will continue unless it is able to successfully develop and market its products. In furtherance of MTL s plan to commercialize the Cell Carrier technology, Medis El assigned all of its intellectual property rights to the CellScan, including the Cell Carrier, to the Company on July 26, 2007. MTL has also granted the Company a right of first refusal upon all further medical device company opportunities that are sourced by, or presented to MTL. In addition, MTL has agreed to provide to CKL, over an 18 month period starting with the completion of the currently contemplated rights offering, a capital contribution of up to $1,500,000 on an as needed basis. Furthermore, in the event that such capital contribution of up to $1,500,000 along with other available funds will be insufficient for CKL to carry-out its operations for at least one year from the completion of the currently contemplated rights offering, MTL has agreed to provide CKL with additional financing from time to time to ensure that CKL will have sufficient funds to carry out its operations for at least one year from the completion of the currently contemplated rights offering. See note E-1 for a discussion of CKL s contemplated rights offering. See notes F-1 and F-2 for a discussion of the asset purchase agreement and the license and service agreement for the period prior to the transfer of the CellScan intellectual property rights. All CKL s operating and long lived assets are located in Israel. 2. Basis of presentation These carve-out financial statements reflect the operations of CKL as if it had been a separate legal entity from the inception of Medis El in July 1992 and have been derived from the historical results of operations and historical basis of assets and liabilities of Medis El and MTL and the accounts of CKL after its commencement of operations in May 2006. These carve-out financial statements reflect the financial positions, results of operations, changes in stockholders equity and cash flows of CKL. The method and basis of allocations used in preparing these carve-out financial statements are described below. Management believes the assumptions made and methodology used in preparing these carve-out financial statements are reasonable and that all of the CKL s costs of doing business, comprised of those costs that are clearly applicable to CKL as well those that are reasonably allocable due to expenses incurred by Medis El and MTL on CKL s behalf, have been reflected in these carve-out financial statements and, as such, management does not believe that CKL s costs of doing business would have been materially different had it operated as a privately held company on a stand alone basis. These carve-out financial statements may not be indicative of future performance. In preparing these carve-out financial statements, cost items and balance sheet items that have been identified as specifically related to CellScan operations have been allocated to CKL on a 100% basis, while costs items that do not have such a direct relationship have been allocated on proportional basis. Accordingly, CellScan related research and development costs (excluding occupancy, information technology and depreciation and amortization), patent costs and certain management costs have been allocated to CKL on a 100% basis. Costs related to shared services and corporate services, such as management and administration, stock based compensation, occupancy, accounting, legal, information technology, foreign currency translation adjustments and the like have been allocated to CKL on a proportional basis using an allocation base that would be expected to reasonably reflect F 7 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements the proportion of CKL s incurrence of such costs. Costs categories included in research and development (other than those allocated on a 100% basis) have been allocated as follows: (i) occupancy and depreciation and amortization have been allocated based on relative square footage, and (ii) information technology costs have been allocated based on relative headcount. General and administrative expenses ( G&A ) have been allocated based on relative costs. Management believes that the allocation method described above provides a reasonable allocation of costs. Individual balance sheets accounts have been allocated in a manner that is consistent with their corresponding statement of operation accounts, with the exception of the following items: Goodwill Goodwill has been allocated to CKL based on MTL s allocation of goodwill to its reporting units that was performed in connection with its January 1, 2002 implementation of SFAS 142 Goodwill and Other Intangible Assets. ( SFAS 142 ). See Note B-6 for a discussion of the push down of goodwill to CKL. Cash and Cash Equivalents CKL s cash resources have been provided by MTL, which uses a centralized approach to cash management. As such, these carve-out financial statements include only those cash balances held by CKL after the commencement of its operations in May 2006 and there has been no allocation to CKL of cash held by MTL or its subsidiaries (excluding CKL). 3. Unaudited Information The carve-out financial statements include the unaudited carve-out balance sheet at June 30, 2007, the related unaudited carve-out statements of operations for the six-month periods ended June 30, 2006 and 2007, the unaudited carve-out statements of cash flows for the six-month periods ended June 30, 2006 and 2007 and the unaudited carve-out statement of changes in stockholders equity for the six-month period ended June 30, 2007, presented in accordance with accounting principles generally accepted for interim financial reporting. This unaudited carve-out information has been prepared by the Company on the same basis as the audited annual carve-out financial statements and, in management s opinion, reflects all adjustments necessary for a fair presentation of the carve-out financial information, for the periods presented. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for audited carve-out financial statements. Results for interim periods are not necessarily indicative of the results expected for the entire year. NOTE B SIGNIFICANT ACCOUNTING POLICIES The Company s financial statements are prepared in accordance with U.S. generally accepted accounting principles. The significant accounting policies followed in the preparation of the Carve-out financial statements, applied on a consistent basis, are as follows: 1. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with a maturity of three months or less when purchased. 2. Use of Estimates In preparing the Company s financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the carve-out financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. F 8 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE B SIGNIFICANT ACCOUNTING POLICIES (Continued) 3. Fair Value of Financial Instruments The carrying value of all financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities) approximates their fair value due to the short term maturities of such instruments. 4. Translation of Foreign Currencies The financial statements of the company have been prepared in U.S. dollars, as the dollar is its functional currency. Since the Company s operations are funded in U.S. dollars and a substantial portion of its costs is incurred in U.S. dollars, management believes that the dollar is the primary currency of the economic environment in which the company operates. Thus, the functional and reporting currency of the Company is the U.S. dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with SFAS No. 52 Foreign Currency Translation . All transaction gains and losses from remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expense, as appropriate. 5. Property and Equipment, net Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is provided on property and equipment on the straight-line basis over the estimated useful lives of such assets. The useful lives of property and equipment are as follows: Useful Lives In Years Machinery and equipment 7 Computers 3 Furniture and office equipment 15 Leasehold improvements Over the shorter of the term of the lease or the life of the asset 6. Goodwill The Company applies Staff Accounting Bulletin No. 54, which generally requires that the push down basis of accounting be applied in the separate financial statements of a subsidiary that is substantially wholly-owned by the parent company. Accordingly, goodwill has been recorded in the Company s carve-out financial statements to reflect the allocated portion of the difference between the purchase price and the value of net assets acquired by MTL in connection with MTL s acquisitions of minority interests. In accordance with SFAS 142, goodwill is not amortized, but rather is subject to a test for impairment at lease annually. Goodwill is tested for impairment at the reporting unit level by a comparison of the fair value of a reporting unit with its carrying amount, including Goodwill. During the years ended December 31, 2004, 2005 and 2006, no impairment losses were identified. See note A for a discussion of the allocation on goodwill to the Company. 7. Long-Lived Assets The Company s long-lived assets are reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. During 2004, 2005 and 2006, no impairment losses have been identified. F 9 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE B SIGNIFICANT ACCOUNTING POLICIES (Continued) 8. Stock-based Compensation Effective January 1, 2006, the Company adopted FASB Statement No. 123 (revised 2004), Share-Based Payment ( SFAS 123(R) ), and related Securities and Exchange Commission rules included in Staff Accounting Bulletin No. 107, on a modified prospective basis. Under this method, compensation cost recognized beginning January 1, 2006 will include costs related to 1) all share-based payments (stock options and restricted stock awards) granted prior to but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS 123, Accounting for Stock-Based Compensation ( SFAS 123 ), and 2) all share-based payments granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Compensation cost for stock options is generally recognized ratably over the vesting period. The Company applies SFAS No. 123(R) and Emerging Issues Task Force No. 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services ( EITF 96-18 ), with respect to options issued to non-employees. SFAS No. 123(R) and EITF 96-18 require the use of option valuation models to measure the fair value of the options at the measurement date. Prior to the adoption of SFAS 123(R), the Company applied SFAS 123, amended by SFAS 148, Accounting for Stock-Based Compensation Transition and Disclosure, which allowed companies to apply the existing accounting rules under APB 25, Accounting for Stock Issued to Employees, and related Interpretations. In general, as the exercise price of options granted under these plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost was recognized in the net loss attributed to common stockholders for periods prior to the adoption of SFAS 123(R). 9. Research and Development Costs Research and development costs, which are charged to operations as incurred, consist primarily of labor, materials, subcontractors and consultants, and occupancy costs, as well as depreciation and amortization of property and equipment. 10. Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share ( SFAS No. 128 ). Under the provisions of SFAS No. 128, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of ordinary shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of ordinary shares plus dilutive potential ordinary shares considered outstanding during the period. See Note E-1 for a discussion of loss per share retroactive adjustment included in these carve-out financial statements. 11. Severance Pay The liability of the Company in Israel for severance pay, which comprises the Company s entire severance pay obligation, is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month s salary for each year of employment or a portion thereof. The liability for all of its employees in Israel is fully provided by an accrual and by monthly deposits with insurance companies and other financial institutions. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of these deposited funds is recorded as an asset in the Company s carve-out balance sheets. Severance expenses for the years ended December 31, 2004, 2005 and 2006 amounted to approximately $54,000, $249,000 and $40,000, respectively. F 10 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE B SIGNIFICANT ACCOUNTING POLICIES (Continued) 12. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ( SFAS No. 109 ). SFAS No. 109 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. In July 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes ( FIN 48 ). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as more-likely-than-not to be sustained by the taxing authority. The recently issued literature also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any income tax uncertainties. Pursuant to the provisions of FIN 48, the differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption would be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. Effective January 1, 2007, the Company adopted the provisions of FIN 48. The Company files Israeli income tax returns and may be subject to examination by the Israeli tax authorities for the year 2006. The adoption of FIN 48 did not have a material impact on the Company s carve-out financial statements and no accruals for tax contingencies were recorded. 13. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company s cash and cash equivalents are invested in banks. Management believes that the Company s cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these investments. 14. Recently Issued Accounting Pronouncements in the United States In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. ( SFAS 157 ) This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for F 11 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE B SIGNIFICANT ACCOUNTING POLICIES (Continued) financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its carve-out financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The Company is currently evaluating the impact that SFAS No. 159 will have on its carve-out financial statements. NOTE C PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following: December 31, June 30, 2005 2006 2007 (unaudited) Machinery and equipment $ 603,000 $ 604,000 $ 630,000 Computers 62,000 68,000 78,000 Furniture and office equipment 37,000 37,000 37,000 Leasehold improvements 253,000 262,000 264,000 955,000 971,000 1,009,000 Less accumulated depreciation and amortization 677,000 741,000 778,000 Property and equipment, net $ 278,000 $ 230,000 $ 231,000 Depreciation and amortization expense on property and equipment for the years ended December 31, 2004, 2005 and 2006 amounted to $62,000, $65,000 and $64,000, respectively, and for the six-months periods ended June 30, 2006 and 2007, amounted to $34,000 (unaudited) and $37,000 (unaudited), respectively. NOTE D ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: December 31, June 30, 2005 2006 2007 (unaudited) Employees and related liabilities $ 322,000 $ 185,000 $ 81,000 Subcontractors and consultants 14,000 30,000 36,000 Professional services 7,000 46,000 163,000 Others 33,000 11,000 18,000 $ 376,000 $ 272,000 $ 298,000 NOTE E STOCKHOLDERS EQUITY 1. Share Capital The Company has 10,000,000 authorized shares of .01 New Israeli Shekel ( NIS ) par value ordinary shares, of which 1,000,000 shares were issued and outstanding as of December 31, 2006. All such shares were issued to Medis El in May 2002 for aggregate proceeds of approximately $2,000, which was paid in September 2006. In July 2007, subsequent to the balance sheet date, the Company increased its authorized ordinary shares to 30,000,000 shares. F 12 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE E STOCKHOLDERS EQUITY (Continued) In July 2007, subsequent to the balance sheet date, the Company issued 15,500,000 ordinary shares at their par value of .01 NIS per share to Medis El in connection with the transfer of Medis El s CellScan and Cell Carrier related business, including its intellectual property rights, to the Company, pursuant to the terms of an asset purchase agreement (See note F-2 for a discussion of the asset purchase agreement). Since Medis El owned 100% of the outstanding shares of the Company both before and after the issuance of the 15,500,000 shares at their par value described above and since these carve-out financial statements reflect Medis El s CellScan and Cell Carrier operations from the inception of Medis El in July 1992, in accordance with Accounting Research Bulletin No. 43 Restatement and Revision of Accounting Research Bulletins Chapter 7: Capital Accounts ( ARB 43 ), the issuance of such shares has been accounted for as a stock split-up effected in the form of a dividend. In accordance with SEC Staff Accounting Topic 4.C and SFAS No. 128 outstanding shares, basic and diluted net loss per share, weighted-average number of common shares used in computing basic and diluted net loss per share, pro forma basic and diluted net loss per share and pro forma weighed-average number of common shares used in computing basic and diluted net loss per share included in these carve-out financial statements have been retroactively adjusted for all periods presented to reflect this issuance of 15,500,000 ordinary shares pursuant to the stock split-up effected in the form of a dividend. The Company is contemplating a rights offering subsequent to the balance sheet date whereby it would issue at no cost to holders on the record date of MTL s common stock one non-transferable subscription right for each ten shares of MTL common stock owned. Each subscription right would entitle the holder to acquire one of the Company s ordinary shares at a subscription price of $.30 per share, until the expiration of the subscription right. Additionally, subscribers will receive at no cost a four year warrants to purchase the Company s ordinary shares at an exercise price of $0.60 per share at a rate of one such warrant for every two shares of the Company s ordinary shares acquired pursuant to the exercise of subscription rights. Pursuant to the contemplated rights offering, the Company would issue an aggregate of approximately 3,505,000 subscription rights and, if all such subscription rights are subscribed, a like number of shares and 1,753,000 warrants would be issued. Pro forma basic and diluted net loss per share and pro forma weighted-average number of shares used in computing basic and diluted net loss per share have been retroactively adjusted for all periods presented in the carve-out statements of operations to give effect to shares that would be issued to stockholders as a bonus element in the rights offering 2. Stock Options Medis Technologies Stock Options Historically, Company personnel have participated in the MTL 1999 Stock Option Plan (the Plan ). In July 2007, MTL adopted its 2007 Equity Incentive Plan. Costs related to the issuance of stock options granted to Company personnel under the Plan are included in these financial statements, as more fully described below. During the year ended December 31, 2004, MTL issued options to purchase an aggregate of 734,000 shares of common stock under the Plan. Such amount includes 38,000 options which were granted to Company personnel (including 5,000 options that were granted to Company s consultants). The following table presents the terms of MTL s 2004 grants: Exercise price $10.88 $14.69 Vesting period 0.83 year 1 year Expiration period 2.83 years 4 years During August 2004, MTL extended through December 31, 2006 the expiration dates of its outstanding options that were scheduled to expire on December 31, 2004 and January 31, 2005. MTL accounted for those options issued to employees, officers and directors in accordance with APB No. 25 and FIN 44 and those issued to consultants in accordance with SFAS No. 123 and EITF No. 96-18 using the Black Scholes option pricing model to estimate their fair value. MTL calculated the incremental intrinsic value related to the extension of options issued to employees, officers and directors to be approximately $784,000, of which approximately $477,000 was included in these carve-out financial statements. F 13 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE E STOCKHOLDERS EQUITY (Continued) Compensation costs charged to statements of operations for the year ended December 31, 2004, for options granted to employees and directors at exercise prices below the fair value at the date of grant and for options granted to consultants, including the value of the extensions of the expiration dates in 2004 of employees and directors options, amounted $528,000, of which $480,000 related to options that were granted to Company s personnel and $48,000 that were allocated to the Company based on the methodology detailed in Note A. During the year ended December 31, 2005, MTL issued options to purchase an aggregate of 526,000 shares of common stock under its Plan. Such amount includes 25,500 options which were granted to Company personnel (including 5,000 options that were granted to consultants of the Company). The following table presents the terms of MTL s 2005 grants: Exercise price $14.93 $15.95 Vesting period 0.25 year 1 year Expiration period 3 years 4 years Compensation costs charged to the statements of operations for the year ended December 31, 2005, for options granted to employees and directors at exercise prices below the fair value at the date of grant and for options granted to consultants amounted to $102,000 of which $99,000 related to options that were granted to Company personnel and $3,000 that was allocated to the Company based on the methodology detailed in Note A. In July 2006, MTL issued options to purchase an aggregate of 706,500 shares of its common stock to employees, officers and directors of MTL. Such options are exercisable at $20.98 (the market price of the MTL s common stock on the grant date), vest after one year and expire after four years. MTL accounted for those options issued to employees, officers and directors in accordance with SFAS 123(R). In accordance with SFAS 123(R), share based compensation is based on the grant-date fair value estimate and is recognized over the vesting term of such options, net of an estimated forfeiture rate. MTL estimates the fair value of stock based awards, accounted for in accordance with SFAS 123 (R), using the Black-Scholes option pricing model for all grants made subsequent to January 1, 2006 using the following weighted average assumptions for the year ended December 31, 2006: Dividend yield 0% Expected term (years) 3.20 Risk-free interest rate 4.75% Volatility 60% Forfeiture rate 0.36% Market value at grant date $20.98 During the six months ended on June 30, 2007, MTL granted options to purchase an aggregate of 275,000 shares of its common stock to employees, officers and directors. Such options are exercisable at prices ranging from $13.83 to $17.61 (the market price of the MTL s common stock on the dates of the respective grants), have vesting periods ranging from approximately 6 to 18 months and expire four years from the date of the respective grants. MTL accounted for those options issued to employees, officers and directors in accordance with SFAS 123(R). MTL estimated the aggregate fair value of such options granted during the six months ended June 30, 2007, using the Black-Scholes option pricing model with the following assumptions: Dividend yield 0% Expected term (years) 2.28-3.64 Risk-free interest rate 4.5%-4.88% Volatility 59%-61% Forfeiture rate 0%-2.60% Market value at grant date $13.83-$17.61 F 14 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE E STOCKHOLDERS EQUITY (Continued) In July 2007, subsequent to the balance sheet date, MTL granted options to purchase an aggregate of 337,500 shares of its common stock under its 2007 Equity Incentive Plan, to employees, officers, directors and consultants. Such options are exercisable at $14.23 (the market price of the Company s common stock on the grant date). Also in July 2007, MTL granted 50,000 shares of restricted stock under its 2007 Equity Incentive Plan to each of its Chairman and Chief Executive Officer and its Deputy Chairman and Chief Operation Officer. Such shares of restricted stock shall vest in full after one year. Costs related to such options and restricted stock granted will be allocated to the Company based on the methodology detailed in Note A. In August 2007, subsequent to the balance sheet date, MTL granted options to purchase an aggregate of 165,000 shares of its common stock under its 2007 Equity Incentive Plan, to officers. Such options are exercisable at $11.19 (the market price of MTL s common stock on the grant date), vest one year from the grant date and expire four years from the grant date. Costs related to such options granted will be allocated to the Company based on the methodology detailed in Note A. The following table illustrates the effect on net loss attributed to ordinary shares and net loss per share, assuming that the Company had applied the fair value recognition provision of SFAS No. 123 on its stock-based employee compensation during the years ended December 31, 2004 and 2005: Year ended December 31, 2004 2005 Net loss for the year as reported $ (2,230,000 ) $ (1,771,000 ) Add: Stock-based employee compensation expense (income) included in the reported loss 491,000 (2,000 ) Deduct: Stock-based employee compensation expense determined under fair value based method (1,151,000 ) (494,000 ) Pro forma net loss $ (2,890,000 ) $ (2,267,000 ) Basic and diluted net loss per share as reported $ (.14 ) $ (.11 ) Pro forma basic and diluted net loss per share $ (.18 ) $ (.14 ) Pro forma basic and diluted net loss per share, as adjusted for bonus element of rights offering $ (.17 ) $ (.14 ) The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: Year ended December 31, 2004 2005 Dividend yield 0% 0% Risk-free interest rate 2.25% 3.80% Expected life in years 1.3 3.0 Volatility 63% 70% The average fair value of each option granted in 2004 and 2005 at an exercise price equal to the market price on the grant date was $4.37 and $7.25, respectively, and the average fair value of each option granted in 2004 at an exercise price below the market price on the grant date was $6.39. Cell Kinetics Stock Options In July 2007, subsequent to the balance sheet date, the Company s board of directors approved an equity incentive plan for Company employees, directors, consultants and advisors. The plan has an initial pool of 1,400,000 options or restricted shares, or restricted share units and is intended to qualify for capital gains tax treatment under Section 102 of the Israeli Income Tax Ordinance. The plan provides for the award of both incentive and nonqualified stock options under the U.S. Internal Revenue Code. F 15 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE E STOCKHOLDERS EQUITY (Continued) Pursuant to its employment agreement with its chief executive officer ( CEO ), the Company granted to its CEO options to purchase 2% of the issued shares of the Company on May 1, 2006, the date of the employment agreement. Such options are exercisable at their par value of .01 New Israeli Shekels and vest according to the following schedule: 30% on December 31, 2006 and 8.75% on the last day of each quarter beginning on March 31, 2007 and ending on December 31, 2008. The Company has accounted for these stock options granted to its CEO in accordance with SFAS 123 (R), and has recorded approximately $59,000 as G&A expense for the year ended December 31, 2006 and approximately $15,000 (unaudited) and $19,000 (unaudited) as G&A expense for the six months ended June 30, 2006 and 2007, respectively. As of December 31, 2006 and June 30, 2007, there were unrecognized compensation costs related to these stock options of approximately $40,000 and $21,000 (unaudited), respectively, which are expected to be recognized in future periods. During the year ended December 31, 2006, the Company recorded compensation costs related to options issued of approximately $181,000, of which $173,000 and $8,000 were recorded as G&A expense and research and development costs, respectively. Such amounts include $67,000 related to options that were granted to Company personnel and $114,000 that were allocated to the Company based on the methodology detailed in Note A. During the six months ended June 30, 2007, the Company recorded compensation costs related to options issued of approximately $134,000, of which $125,000 and $9,000 were recorded as G&A expense and research and development costs, respectively. Such amounts include $31,000 related to options that were granted to Company personnel and $103,000 that were allocated to the Company based on the methodology detailed in Note A. During the six months ended June 30, 2006, the Company recorded as G&A expense compensation costs related to options issued to Company personnel of approximately $15,000. As a result of adopting SFAS 123(R) on January 1, 2006, the Company s net loss for year ended December 31, 2006, is $181,000 greater than if the Company had continued to account for share-based compensation under Accounting Principles Board Opinion No. 25 ( APB 25 ). Basic and diluted net loss per share and pro forma basic and diluted net loss per share for the year ended December 31, 2006 is $.01 greater than it would have been if the Company had continued to account for share-based compensation under APB 25. In October 2007, subsequent to the balance sheet date, the Company granted options to purchase an aggregate of 506,750 shares of its ordinary shares to employees, officers, directors and to a non-employee consultant. Such options are exercisable at $.30 per share and expire seven years from the date of the grant. Of such options granted, 381,750 granted to employees, officers and to a non-employee consultant vest in equal installments on each of the first three anniversaries of the grant date. The remaining 125,000 options granted to directors vest quarterly in equal installments in December 31, 2007, March 2008, June 2008 and September 2008. NOTE F COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS Commitments and contingent liabilities 1. License and Service Agreements As of May 1, 2006, the Company entered into a license and service agreement with Medis El and MTL, pursuant to which they provide personnel, administrative services, equipments usage and facilities to the Company and pursuant to which Medis El has granted a license to the Company to use certain of its CellScan and Cell Carrier related intellectual property and certain other assets in connection with the carrying-out of the Company s business. Under the Agreement, Medis El and MTL charge the Company at cost, as an additional contribution to the share capital issued to Medis. In July 2007, subsequent to the balance sheet date, the Company entered into a service agreement with Medis El and MTL pursuant to which Medis El and Medis provide administrative services, equipment usage and facilities to the Company in connection with the carrying-out of the Company s business. Medis El and MTL have agreed to charge the Company at cost for such services provided, as a contribution to the Company s capital, for a period of 18 months from the completion of the contemplated rights offering (See Note E-1 for a discussion of the contemplated rights offering). F 16 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE F COMMITMENTS AND CONTINGENT LIABILITIES AND STRATEGIC AGREEMENTS (Continued) 2. Asset Purchase Agreement As of July 2007, subsequent to the balance sheet date, the Company entered into an Asset Purchase Agreement with Medis El whereby Medis El s transferred its CellScan and Cell Carrier related business, including intellectual property rights, and other related assets and liabilities to the Company, in consideration of 15,500,000 of the Company s ordinary shares. As these carve-out financial statements reflect the operations of CKL as if it had been a separate legal entity from the inception of Medis El in July 1992, Medis El s CellScan and Cell Carrier related intellectual property and other assets, liabilities and related charges to operations are already reflected herein. 3. CellScan License Medis El Ltd acquired the rights to the CellScan in August 1992 by assignment from IAI of a license from Bar Ilan University (the University ) to IAI. Medis El paid IAI $1,000,000 in consideration of the assignment of the license and for certain tooling and equipment. The license is a perpetual worldwide license to develop, manufacture and sell the CellScan, and to sublicense the right to manufacture and sell the device. The license includes all rights to the University s CellScan patents, know-how and inventions including any subsequently acquired, and all improvements thereto. Medis El is obligated to pay the University a royalty for a twenty-year period beginning in 1995. For the first ten years, the royalty is at the rate of 6.5% of proceeds of sales (after deducting sales commissions and other customary charges) and 4.5% on any fees received from granting territorial rights. The royalty for the second ten-year period is 3.5% on all revenues whether from sales or fees. In addition to such royalty payments, the Company is required to grant $100,000 to the University during the first year that the Company s after-tax profits exceed $300,000. Subsequent to the balance sheet date, on July 26, 2007, Medis El assigned all of its intellectual property rights to the CellScan, including the Cell Carrier, to the Company and delegated its royalty payment commitments to the Company. No royalties were required to be paid during the three years ended December 31, 2006 and the six months ended June 30, 2007 (unaudited). 4. Other Royalties In consideration of grants by the State of Israel, Medis El is obligated to pay royalties of 3% of sales of products developed with funds provided by the State of Israel until the dollar linked amount equal to the grant payments received by Medis El is repaid in full. Total grants received with respect to the CellScan technologies, net of royalties paid as of December 31, 2002, aggregate $2,434,000. Subsequent to the balance sheet date, on July 26, 2007, in connection with its transfer to the Company of its intellectual property rights to the CellScan, including the Cell Carrier, Medis El delegated its royalty payment commitments to the Company. No royalties were required to be paid during the three years ended December 31, 2006 and the six months ended June 30, 2007 (unaudited). 5. Lease Commitments In December 2004, Medis El moved its offices and technology center operations (including those of CKL) to an industrial compound in Lod, Israel. Medis El is committed under leases for its facilities, which provide aggregate space of approximately 44,800 square feet and terms of up to five years until November 30, 2009 with two options with duration of 30 months each extending to November 30, 2014. Pursuant to the lease agreements for the facilities in Lod, Israel, the landlord agreed to reimburse Medis El for a specified amount per square foot for leasehold improvements (the Leasehold Incentives ). In accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases and FTB 88-1, Issues Relating to Accounting for Leases , the leasehold improvements are recognized in Property and Equipment, with the corresponding reimbursement recognized as Leasehold Incentive Obligations. The Company amortizes the amount of the incentives aggregating approximately $119,000 on a straight-line basis over the lease term as a reduction of rental expenses. The leasehold improvements in property and equipment are being amortized over the shorter of lease terms or the estimated useful life of the asset. The Leasehold Incentive Obligations, net of amortization, were reflected as an adjustment to reconcile net loss to net cash used in operating activities in the cash flow statement. During the years ended December 31, 2004, 2005 and 2006, the Company incurred expenses under Medis El facility lease commitments in Israel aggregating approximately $54,000, $17,000 and $17,000, respectively, net of amortization of leasehold incentive obligations in 2005 and 2006 of approximately $24,000. During the six months ended June 30, 2006 and 2007, the Company incurred expenses under Medis El facility lease commitments in Israel aggregating approximately $7,000 (unaudited) and $9,000 (unaudited), respectively, net of amortization of leasehold incentive obligations in both periods of approximately $12,000 (unaudited). F 17 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE G RELATED PARTY TRANSACTIONS 1. Consulting Agreements MTL has entered into consulting agreements with its Chairman and Chief Executive Officer and with its Deputy Chairman and Chief Operating Officer. Such agreements have initial terms through December 31, 2001 and provide for automatic extension on a year to year basis. During the years ended December 31, 2004, 2005 and 2006, the Company recorded an allocated portion of the cost arising from MTL s agreement with its Chairman and Chief Executive Officer of approximately $25,000, $18,000 and $19,000, respectively, as compensation for his services to the Company. During the six months ended June 30, 2006 and 2007, the Company recorded an allocated portion of the cost of such agreement with its Chairman and Chief Executive Officer of approximately $9,000 (unaudited) and $8,000 (unaudited), respectively. During the years ended December 31, 2004, 2005 and 2006, the Company recorded an allocated portion of the cost arising from MTL s agreement with its Deputy Chairman and Chief Operating Officer of approximately $15,000, $14,000 and $17,000, respectively, as compensation for his services to the Company. During the six months ended June 30, 2006 and 2007, the Company recorded an allocated portion of the cost of such agreement with its Deputy Chairman and Chief Operating Officer of approximately $8,000 (unaudited) and $7,000 (unaudited), respectively. 2. Administrative Services Secretarial and bookkeeping services are provided to MTL through a costs sharing arrangement with a company that is controlled by its Chairman and Chief Executive Officer and its Deputy Chairman and Chief Operating Officer of MTL. During the years ended December 31, 2004, 2005, and 2006, the Company recorded an allocated portion of MTL s cost sharing arrangement of approximately $6,000, $4,000 and $4,000, respectively. During the six months ended June 30, 2006 and 2007, the Company recorded an allocated portion of MTL s cost sharing arrangement of approximately $2,000 (unaudited) in both periods. 3. Lease Services MTL s office space is provided to MTL for an annual rental fee of approximately $100,000, by a company which is controlled by the chairman and chief executive officer and by the deputy chairman and chief operating officer of MTL. The sublease is on a month to month basis. The Company recorded an allocated portion of rent expense with respect to this sublease aggregating approximately $11,000, $8,000 and $6,000, during the years ended December 31, 2004, 2005 and 2006, respectively. During the six months ended June 30, 2006 (unaudited) and 2007 (unaudited), the Company recorded an allocated portion of rent expense with respect to this sublease of approximately $3,000 (unaudited) in both periods. NOTE H INCOME TAXES a. Tax laws applicable to the companies in Israel: Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: In accordance with the above law, results for tax purposes are measured and reflected in real terms in accordance with the changes in the Israeli CPI. b. Tax rates applicable to the Company are as follows: The income of the Company is taxed at the regular rate. On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of Income Tax Ordinance (No. 147), 2005 which prescribes, among others, a gradual decrease in the corporate tax rates in Israel to the following tax rates: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. Since the Company provided a full a valuation allowance for its deferred tax assets, the abovementioned amendment has no effect on the financial statements. c. Carryforward losses: As of December 31, 2006, the Company had net operating losses, for Israeli tax purposes, aggregating approximately $135,000, which, pursuant to Israeli tax law, may be carried forward and offset against taxable income in the future for indefinite period. F 18 Cell Kinetics Ltd. Notes to Carve-Out Financial Statements NOTE H INCOME TAXES (Continued) d. Deferred income taxes: Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company s deferred tax liabilities and assets are as follows: December 31, 2005 2006 Net operating loss carryforward $ $ 34,000 Other differences 54,000 88,000 Valuation allowance (88,000 ) Deferred tax assets, net of valuation allowance $ $ e. Reconciliation of the theoretical tax benefit to the actual tax expense benefit: In 2004, 2005 and 2006, the main reconciling items between the statutory tax rate of the Company and the effective tax rate are carryforward tax losses, for which a full valuation allowance was provided. NOTE I SUBSEQUENT EVENT In July 2007, subsequent to the balance sheet date, the Company entered into an agreement with Scorpion Surgical Technologies, Ltd. ( Scorpion ) (the Company s CEO is a director and co-founder of Scorpion), whereby it agreed to acquire 20,000 shares which represents a 20% equity interest in Scorpion for $150,000, in three equal installments. The first 6,666 shares were acquired in July 2007, upon the Company s payment of the first $50,000 installment. The acquisition of the remaining 13,334 shares and the final two payments are subject to the performance of milestones that provide for the Company s completion of an equity fund raising of at least $1,500,000 and Scorpion s signing an agreement with a medical research center for the performance of clinical trials, as well as the fulfillment of several administrative conditions. The Company was also given the right to appoint a director to Scorpion s board of directors. After completion of the second milestone payment, subject to the terms of the agreement and for a period to end not later than March 31, 2009, the director that the Company appoints will have a veto right with respect to the following matters: issuance of securities, adoption of stock option plans, approval or modification of annual budgets, related party transactions and other material transactions outside the ordinary course of business. Additionally, the Company has been granted a right of first refusal with respect to Scorpion s next round of financing, for a period of 24 months from the date of the agreement. Such right of first refusal would allow the Company to acquire up to 75% of the securities offered based upon the lower of a pre-money valuation set forth in a bona fide offer made to Scorpion by a third party or a valuation of $3,500,000. *********************************** F 19 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 6. Indemnification of Directors and Officers The Companies Law allows us to indemnify or insure our office holders against the following liabilities incurred for acts performed as an office holder: a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; a breach of duty of care to the company or to a third party; and subject to certain limitation as set forth below, a financial liability imposed on or incurred by the office holder in favor of a third party. We cannot, however, indemnify, exculpate or insure our office holders against any of the following: a breach of duty of loyalty, except for indemnification or insurance of office holders to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; an act or omission committed with intent to derive illegal personal benefit; or a fine levied against the office holder. An Israeli company may not exculpate an office holder from liability for a breach of the duty of loyalty of the office holder. The company may, however, approve an office holder's act performed in breach of the duty of loyalty, provided that the office holder acted in good faith, the act or its approval does not harm the company and the office holder discloses the nature of his or her personal interest in the act and all material facts and documents a reasonable time before discussion of the approval. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for a breach of duty of care, but only if a provision authorizing such exculpation is inserted in its articles of association. Our amended and restated articles of association, which will become effective upon the consummation of this offering, include such a provision. An Israeli company may not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders. Pursuant to the Companies Law, we may indemnify an office holder only for judgments, settlements or arbitrators' awards approved by a court that were rendered in connection with events that the board of directors deemed foreseeable based on the company's actual activities at II-1 the time of the approval by the board of the indemnification, provided that the indemnification is limited to an amount or criteria determined by the board of directors as reasonable under the circumstances and that the indemnification undertaking states the foreseeable activities and the amount or criteria. In addition, we may indemnify an office holder against the following liabilities incurred for acts performed as an office holder: reasonable litigation expenses, including attorneys' fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding and (ii) either (A) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or (B) if the financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and reasonable litigation expenses, including attorneys' fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or in which the office holder was convicted of an offense that does not require proof of criminal intent. Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our audit committee and our board of directors and, in respect of our directors, by our shareholders. Our amended and restated articles of association allow us to indemnify and insure our office holders to the fullest extent permitted by the Companies Law. We are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought. Item 7. Recent Sales of Unregistered Securities In May 2002, Registrant issued 1,000,000 of its ordinary shares to Medis El for aggregate proceeds of $2,000. In July 2007, Registrant issued 15,500,000 of its ordinary shares to Medis El upon Medis El s transfer to Registrant of Medis El s CellScan and Cell Carrier related business, including Medis El s intellectual property rights relating to the CellScan and its Cell Carrier technology. II-2 Item 8. Exhibits and Financial Statement Schedules (a) Exhibits Exhibit Number Description of Exhibit 2.1 Asset Purchase Agreement, dated as of July 26, 2007, between the Registrant and Medis El Ltd. * 3.1 Articles of Association of Registrant ** 4.1 Form of certificate evidencing ordinary shares of Registrant ** 4.2 Form of subscription certificate * 4.3 Form of warrant certificate * 5.1 Opinion of Meitar Liquornik Geva Leshem 8.1 Opinion of Sonnenschein Nath & Rosenthal LLP regarding federal income tax matters 10.1 Employment Agreement, dated as of May 1, 2006, between the Registrant and Dr. Asaf Ben-Arye * 10.2 Service Agreement, dated as of July 27, 2007, between the Registrant, Medis Technologies Ltd. and Medis El Ltd. * 10.3 Letter Agreement, dated as of July 30, 2007, between the Registrant and Medis Technologies Ltd. * 10.4 2007 Share Incentive Plan ** 10.5 Supplementary Funding Agreement, dated as of July 26, 2007, between the Registrant and Scorpion Surgical Technologies, Ltd. 23.1 Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global 23.2 Consent of Meitar Liquornik Geva & Leshem Brandwein (contained in their opinion included under Exhibit 5.1) 23.3 Consent of Sonnenschein Nath & Rosenthal LLP (contained in their opinion included under Exhibit 8.1) 24.1 Power of Attorney (comprises a portion of the signature page to the Registration Statement filed on July 31, 2007) * 99.1 Form of Subscription Agency Agreement among the Registrant, Medis Technologies Ltd. and American Stock Transfer & Trust Company * 99.2 Form of Warrant Agency Agreement between the Registrant and American Stock Transfer & Trust Company * 99.3 Instructions for Use of Subscription Certificates * 99.4 Notice of Guaranteed Delivery * 99.5 Form of Letter to Stockholders * 99.6 Form of Letter to Brokers * II-3 __________ * Previously filed with the Registration Statement on July 31, 2007 ** Previously filed with the Registration Statement on September 11, 2007 (b) Financial Statement Schedules Item 17. Undertakings 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; (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 SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 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; provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) above do not apply if the registration statement is on Form S-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement. (2) That, 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. II-4 (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) To file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20 F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Securities Act of 1933 need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F 3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or 210.3 19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the SEC by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F 3. (5) 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. (6) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the Registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used II-5 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 undersigned Registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to Item 15 of Part II of the registration statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lod, State of Israel on October 23, 2007. CELL KINETICS LTD. By: /s/ Jacob Weiss Jacob Weiss Chairman of the Board _______________ Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Jacob Weiss Jacob Weiss Chairman of the Board October 23, 2007 * Dr. Asaf Ben-Arye President and Chief Executive Officer (Principal Executive Officer) October 23, 2007 * Israel Fisher Chief Financial Officer (Principal Financial Officer) October 23, 2007 /s/ Michael S. Resnick Michael S. Resnick Chief Accounting Officer (Principal Accounting Officer) October 23, 2007 * Mitchell H. Freeman Director October 23, 2007 * Andrew A. Levy Director October 23, 2007 * Daniel A Luchansky Director October 23, 2007 * Dr. Leonard Makowka Director October 23, 2007 II-7 __________ * Jacob Weiss, pursuant to Powers of Attorney (selected by each of the officers and directors listed above and indicated by signing above, and filed with the Securities and Exchange Commission), by signing his name hereto does hereby sign and execute this Amendment to the Registration Statement on behalf of each of the persons referenced above. October 23, 2007 /s/ Jacob Weiss Jacob Weiss II-8 AUTHORIZED REPRESENTATIVE Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the undersigned has signed this Registration Statement, solely in the capacity of the duly authorized representative of Cell Kinetics, Inc. in the United States, on October 23, 2007 in New York, New York. CELL KINETICS LTD. By: /s/ Mitchell H. Freeman Mitchell H. Freeman Director II-9 F-1/A 1 formf-1a_15487.htm AMENDMENT #3 TO FORM F-1 WWW.EXFILE.COM, INC. -- CELL KINETICS LTD. -- FORM F-1/A As Filed with the Securities and Exchange Commission on October 23, TABLE OF CONTENTS Page Prospectus Summary 1 Risk Factors 10 Special Note Regarding Forward-Looking Statements 23 The Rights Offering 24 Taxation 30 Use Of Proceeds 39 Dividend Policy 39 Determination Of Subscription Price 39 Trading Market For Our Securities 39 Capitalization 40 Dilution 41 Selected Financial Data 43 Operating And Financial Review And Prospects 44 Business 52 Management 63 Certain Relationship And Related Party Transactions 74 Security Ownership Of Certain Beneficial Owners, Directors And Management 75 Description Of share Capital 76 Shares Eligible For Future Sale 79 Legal Matters 79
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001408010_iggys_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001408010_iggys_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..608cbf63f613d7f57ef8ead2c792e58e2ae7c37b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001408010_iggys_legal_matters.txt
@@ -0,0 +1,5963 @@
+LEGAL MATTERS 
+ 
+
+ The validity of the securities offered hereby will be passed upon for us by our counsel, Katten Muchin Rosenman LLP, Chicago, Illinois. Faegre &
+Benson LLP, Minneapolis, Minnesota, has advised the underwriters in connection with the offering of the securities.
+
+ 
+
+87
+
+ 
+ 
+ 
+
+EXPERTS 
+ 
+
+ The consolidated financial statements as of December 31, 2005 and December 31, 2006 and for the period from April 11, 2005 (inception) to
+December 31, 2005 and for the year ended December 31, 2006 have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent
+registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 
+
+ The
+audit report covering the December 31, 2006 consolidated financial statements contains an explanatory paragraph stating that we adopted Statement of Financial Accounting
+Standards No. 123(R), Share-based Payment, effective January 1, 2006, and contains an explanatory paragraph that states that our recurring
+losses from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that
+might result from the outcome of this uncertainty. In addition, the report includes a legend that describes that KPMG LLP will not be in a position to render the report until the actions
+referred to in the final paragraph of Note 19 of the notes to the consolidated financial statements have been consummated. 
+
+ 
+ 
+
+WHERE YOU CAN FIND MORE INFORMATION 
+ 
+
+ We have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act with respect to the
+securities to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the
+exhibits and schedules that are part of the registration statement. For further information about us and our securities, you should refer to the registration statement.
+
+ 
+
+ You
+may read, without charge, and copy, at prescribed rates, all or any portion of the registration statement or any reports, statements or other information in the files at the public
+reference room at the SEC's principal office at 100 F Street NE, Washington, D.C., 20549, Room 1580. You may request copies of these documents, for a copying fee, by writing to the SEC.
+You may call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement,
+will also be available to you on the Internet website maintained by the SEC at http://www.sec.gov. 
+
+ As
+a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act and will file annual, quarterly and current reports,
+proxy statements and other information with the SEC. You can request copies of these documents, for a copying fee, by writing to the SEC. We intend to furnish our stockholders with annual reports
+containing financial statements audited by our independent auditors. 
+
+88
+
+ 
+
+ 
+ 
+
+INDEX TO FINANCIAL STATEMENTS 
+ 
+
+Consolidated Financial Statements of Iggys House, Inc.: 
+
+ 
+
+ 
+Page
+
+ 
+Report of Independent Registered Public Accounting Firm
+ 
+F-2
+
+ 
+Consolidated Balance Sheets
+ 
+F-3
+
+ 
+Consolidated Statements of Operations
+ 
+F-4
+
+ 
+Consolidated Statements of Stockholders' Equity (Deficit)
+ 
+F-5
+
+ 
+Consolidated Statements of Cash Flows
+ 
+F-6
+
+ 
+Notes to Consolidated Financial Statements
+ 
+F-7
+
+F-1
+
+ 
+
+ 
+ 
+
+Report of Independent Registered Public Accounting Firm 
+ 
+
+ When the actions referred to in the final paragraph of Note 19 of the notes to consolidated financial statements have been consummated, we will be in a
+position to render the following report. 
+
+/s/ KPMG LLP
+
+Chicago, Illinois
+
+November 16, 2007
+
+ 
+
+The
+Board of Directors
+
+Iggys House, Inc.: 
+
+We
+have audited the accompanying consolidated balance sheets of Iggys House, Inc. (formerly BuySide, Inc.) and subsidiaries (the Company) as of December 31, 2005 and 2006, and the
+related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the period from April 11, 2005 (inception) to December 31, 2005 and for the year ended
+December 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
+statements based on our audits. 
+
+We
+conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
+reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
+financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
+We believe that our audits provide a reasonable basis for our opinion. 
+
+In
+our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Iggys House, Inc. and subsidiaries as of
+December 31, 2005 and 2006, and the results of their operations and their cash flows for the period from April 11, 2005 (inception) to
+December 31, 2005 and for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. 
+
+As
+disclosed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
+
+The
+accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 18 to the consolidated financial statements, the
+Company has incurred recurring losses from operations and has a net capital deficiency, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to
+these matters are also described in Note 18. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 
+
+Chicago, Illinois
+
+November 16, 2007, except as to the final paragraph of Note 19,
+
+which is as of November , 2007
+
+F-2
+
+ 
+
+ 
+ 
+
+IGGYS HOUSE, INC. AND SUBSIDIARIES
+ CONSOLIDATED BALANCE SHEETS 
+ 
+
+ 
+
+ 
+December 31,
+ 
+September 30,
+ 
+
+ 
+
+ 
+2005
+ 
+2006
+ 
+2007
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+ 
+
+Assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash and cash equivalents
+ 
+$
+515,894
+ 
+$
+15,625
+ 
+$
+22,747
+ 
+
+ 
+Accounts receivable, net of allowance of $0 and $0 at December 31, 2006 and September 30, 2007, respectively
+ 
+ 
+ 
+ 
+ 
+21,300
+ 
+ 
+35,005
+ 
+
+ 
+Prepaids
+ 
+ 
+15,796
+ 
+ 
+48,590
+ 
+ 
+26,170
+ 
+
+ 
+Other current assets
+ 
+ 
+46,951
+ 
+ 
+141,188
+ 
+ 
+612,416
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total current assets
+ 
+ 
+578,641
+ 
+ 
+226,703
+ 
+ 
+696,338
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Property and equipment, net
+
+ 
+
+ 
+
+139,373
+
+ 
+
+ 
+
+204,101
+
+ 
+
+ 
+
+450,407
+
+ 
+
+Other assets
+ 
+ 
+88,425
+ 
+ 
+90,798
+ 
+ 
+190,598
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total assets
+ 
+$
+806,439
+ 
+$
+521,602
+ 
+$
+1,337,343
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Liabilities and Stockholders' Equity (Deficit)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Current liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Accounts payable
+ 
+$
+75,758
+ 
+$
+323,282
+ 
+$
+535,507
+ 
+
+ 
+Accrued expenses
+ 
+ 
+77,762
+ 
+ 
+620,186
+ 
+ 
+451,032
+ 
+
+ 
+Bank lines of credit
+ 
+ 
+ 
+ 
+ 
+903,506
+ 
+ 
+526,378
+ 
+
+ 
+Payable to related party
+ 
+ 
+ 
+ 
+ 
+729,008
+ 
+ 
+ 
+ 
+
+ 
+Senior convertible bridge notes
+ 
+ 
+ 
+ 
+ 
+381,305
+ 
+ 
+698,514
+ 
+
+ 
+Other current liabilities
+ 
+ 
+ 
+ 
+ 
+237,286
+ 
+ 
+268,059
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total current liabilities
+ 
+ 
+153,520
+ 
+ 
+3,194,573
+ 
+ 
+2,479,490
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Stockholders' equity (deficit):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Undesignated preferred stock, $0.001 par value; authorized 10,000,000 shares at December 31, 2005 and 9,999,800 shares at December 31, 2006 and September 30, 2007, respectively; no shares issued and
+outstanding at December 31, 2005, 2006 and September 30, 2007
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Series A senior convertible preferred stock, $0.001 par value; authorized no shares at December 31, 2005 and 200 shares at December 31, 2006 and September 30, 2007, respectively; 107 shares issued and
+outstanding at September 30, 2007
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,174,625
+ 
+
+ 
+Common stock, $0.001 par value; authorized 100,000,000 shares; 3,866,917, 3,984,582 and 4,599,503 shares issued and outstanding as of December 31, 2005, 2006 and September 30, 2007, respectively
+ 
+ 
+3,867
+ 
+ 
+3,985
+ 
+ 
+4,600
+ 
+
+ 
+Additional paid-in capital
+ 
+ 
+1,815,783
+ 
+ 
+3,625,443
+ 
+ 
+7,937,465
+ 
+
+ 
+Accumulated deficit
+ 
+ 
+(1,166,731
+)
+ 
+(6,302,399
+)
+ 
+(11,258,837
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total stockholders' equity (deficit)
+ 
+ 
+652,919
+ 
+ 
+(2,672,971
+)
+ 
+(1,142,147
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ Total liabilities and stockholders' equity (deficit)
+
+ 
+
+$
+
+806,439
+
+ 
+
+$
+
+521,602
+
+ 
+
+$
+
+1,337,343
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+See
+accompanying notes to consolidated financial statements. 
+
+F-3
+
+ 
+
+ 
+ 
+
+IGGYS HOUSE, INC. AND SUBSIDIARIES
+ CONSOLIDATED STATEMENTS OF OPERATIONS 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Nine Months Ended
+
+September 30,
+ 
+ 
+
+ 
+
+ 
+Period from April 11,
+
+2005 (inception)
+
+to December 31, 2005
+ 
+Year Ended
+
+December 31,
+
+2006
+ 
+
+ 
+
+ 
+2006
+ 
+2007
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+ 
+
+Revenues:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net real estate commission revenue
+ 
+$
+ 
+ 
+$
+218,775
+ 
+$
+102,805
+ 
+$
+587,683
+ 
+
+ 
+Other revenues
+ 
+ 
+ 
+ 
+ 
+206,399
+ 
+ 
+106,400
+ 
+ 
+128,539
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total revenues
+ 
+ 
+ 
+ 
+ 
+425,174
+ 
+ 
+209,205
+ 
+ 
+716,222
+ 
+
+Cost of services
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+1,376,202
+
+ 
+
+ 
+
+1,054,150
+
+ 
+
+ 
+
+1,292,043
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Gross profit (loss)
+ 
+ 
+ 
+ 
+ 
+(951,028
+)
+ 
+(844,945
+)
+ 
+(575,821
+)
+
+Operating expenses:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Technology development
+ 
+ 
+177,404
+ 
+ 
+1,263,564
+ 
+ 
+917,862
+ 
+ 
+915,963
+ 
+
+ 
+Marketing and advertising
+ 
+ 
+34,986
+ 
+ 
+476,316
+ 
+ 
+389,230
+ 
+ 
+787,281
+ 
+
+ 
+General and administrative
+ 
+ 
+963,555
+ 
+ 
+2,300,222
+ 
+ 
+1,649,345
+ 
+ 
+2,471,069
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total operating expenses
+ 
+ 
+1,175,945
+ 
+ 
+4,040,102
+ 
+ 
+2,956,437
+ 
+ 
+4,174,313
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Income (loss) from operations
+ 
+ 
+(1,175,945
+)
+ 
+(4,991,130
+)
+ 
+(3,801,382
+)
+ 
+(4,750,134
+)
+
+Interest income
+
+ 
+
+ 
+
+9,214
+
+ 
+
+ 
+
+4,593
+
+ 
+
+ 
+
+4,217
+
+ 
+
+ 
+
+4,423
+
+ 
+
+Interest expense
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(149,131
+
+)
+
+ 
+
+(54,663
+
+)
+
+ 
+
+(210,727
+
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net income (loss) before income taxes
+ 
+ 
+(1,166,731
+)
+ 
+(5,135,668
+)
+ 
+(3,851,828
+)
+ 
+(4,956,438
+)
+
+Income taxes
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net income (loss)
+ 
+$
+(1,166,731
+)
+$
+(5,135,668
+)
+$
+(3,851,828
+)
+$
+(4,956,438
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Basic and diluted income (loss) per share
+
+ 
+
+$
+
+(0.36
+
+)
+
+$
+
+(1.38
+
+)
+
+$
+
+(1.05
+
+)
+
+$
+
+(1.19
+
+)
+
+Basic and diluted weighted average common shares outstanding
+ 
+ 
+3,229,030
+ 
+ 
+3,716,599
+ 
+ 
+3,668,425
+ 
+ 
+4,170,825
+ 
+
+See
+accompanying notes to consolidated financial statements. 
+
+F-4
+
+ 
+
+ 
+ 
+
+IGGYS HOUSE, INC. AND SUBSIDIARIES
+ CONSOLIDATED STATEMENTS OF
+ STOCKHOLDERS' EQUITY (DEFICIT) 
+ 
+
+ 
+
+ 
+Common Stock
+ 
+Preferred Stock
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Additional
+
+Paid-In
+
+Capital
+ 
+Accumulated
+
+Deficit
+ 
+Total
+
+Stockholders'
+
+Equity (Deficit)
+ 
+
+ 
+
+ 
+Shares
+ 
+Amount
+ 
+Shares
+ 
+Amount
+ 
+
+Balance at April 11, 2005 (inception)
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 
+ 
+$
+ 
+ 
+$
+ 
+ 
+$
+ 
+ 
+
+Sale of restricted common shares, net
+ 
+435,000
+ 
+ 
+435
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,015
+ 
+ 
+ 
+ 
+ 
+3,450
+ 
+
+Sale of founders' common shares
+ 
+2,557,500
+ 
+ 
+2,558
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,967
+ 
+ 
+ 
+ 
+ 
+8,525
+ 
+
+Sale of common shares
+ 
+909,577
+ 
+ 
+910
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,691,568
+ 
+ 
+ 
+ 
+ 
+1,692,478
+ 
+
+Repurchase and retirement of restricted common shares
+ 
+(45,000
+)
+ 
+(45
+)
+ 
+ 
+ 
+ 
+ 
+ 
+(105
+)
+ 
+ 
+ 
+ 
+(150
+)
+
+Issuance of stock option and warrant grants
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+97,057
+ 
+ 
+ 
+ 
+ 
+97,057
+ 
+
+Exercise of common stock warrants
+ 
+7,440
+ 
+ 
+7
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+283
+ 
+ 
+ 
+ 
+ 
+290
+ 
+
+Issuance of common shares for services rendered
+ 
+2,400
+ 
+ 
+2
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+17,998
+ 
+ 
+ 
+ 
+ 
+18,000
+ 
+
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(1,166,731
+)
+ 
+(1,166,731
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2005
+ 
+3,866,917
+ 
+$
+3,867
+ 
+ 
+ 
+$
+ 
+ 
+$
+1,815,783
+ 
+$
+(1,166,731
+)
+$
+652,919
+ 
+
+Sale of common shares
+ 
+144,341
+ 
+ 
+144
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,182,409
+ 
+ 
+ 
+ 
+ 
+1,182,553
+ 
+
+Repurchase and retirement of restricted common shares
+ 
+(60,000
+)
+ 
+(60
+)
+ 
+ 
+ 
+ 
+ 
+ 
+(140
+)
+ 
+ 
+ 
+ 
+(200
+)
+
+Employee stock-based compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+176,954
+ 
+ 
+ 
+ 
+ 
+176,954
+ 
+
+Non-employee stock-based compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+177,026
+ 
+ 
+ 
+ 
+ 
+177,026
+ 
+
+Exercise of common stock warrants
+ 
+21,550
+ 
+ 
+22
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,187
+ 
+ 
+ 
+ 
+ 
+3,209
+ 
+
+Issuance of common shares for services rendered
+ 
+11,774
+ 
+ 
+12
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+103,734
+ 
+ 
+ 
+ 
+ 
+103,746
+ 
+
+Rights to receive warrants in connection with the issuance of senior convertible bridge notes
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+156,982
+ 
+ 
+ 
+ 
+ 
+156,982
+ 
+
+Capital contribution from AFJ Capital
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+9,508
+ 
+ 
+ 
+ 
+ 
+9,508
+ 
+
+Net loss
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(5,135,668
+)
+ 
+(5,135,668
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2006
+ 
+3,984,582
+ 
+$
+3,985
+ 
+ 
+ 
+$
+ 
+ 
+$
+3,625,443
+ 
+$
+(6,302,399
+)
+$
+(2,672,971
+)
+
+Sale of common shares, net of offering costs (unaudited)
+ 
+476,101
+ 
+ 
+476
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,737,027
+ 
+ 
+ 
+ 
+ 
+2,737,503
+ 
+
+Sale of Series A preferred shares (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+107
+ 
+ 
+2,174,625
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,174,625
+ 
+
+Issuance of common shares for services rendered and other (unaudited)
+ 
+31,912
+ 
+ 
+32
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+201,239
+ 
+ 
+ 
+ 
+ 
+201,271
+ 
+
+Employee stock-based compensation (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+158,347
+ 
+ 
+ 
+ 
+ 
+158,347
+ 
+
+Non-employee stock-based compensation (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+70,305
+ 
+ 
+ 
+ 
+ 
+70,305
+ 
+
+Exercise of common stock warrants (unaudited)
+ 
+2,550
+ 
+ 
+3
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+125
+ 
+ 
+ 
+ 
+ 
+128
+ 
+
+Rights to receive warrants and beneficial conversion option in connection with the issuance of senior convertible bridge note (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+373,056
+ 
+ 
+ 
+ 
+ 
+373,056
+ 
+
+Issuance of warrant grants in connection with the sale of Series A preferred stock (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+192,925
+ 
+ 
+ 
+ 
+ 
+192,925
+ 
+
+Shares issued upon conversion of senior convertible bridge notes (unaudited)
+ 
+104,358
+ 
+ 
+104
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+571,104
+ 
+ 
+ 
+ 
+ 
+571,208
+ 
+
+Capital contribution from AFJ Capital (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+7,894
+ 
+ 
+ 
+ 
+ 
+7,894
+ 
+
+Net loss (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(4,956,438
+)
+ 
+(4,956,438
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at September 30, 2007 (unaudited)
+ 
+4,599,503
+ 
+$
+4,600
+ 
+107
+ 
+$
+2,174,625
+ 
+$
+7,937,465
+ 
+$
+(11,258,837
+)
+$
+(1,142,147
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+See accompanying notes to consolidated financial statements. 
+
+F-5
+
+ 
+
+ 
+ 
+
+IGGYS HOUSE, INC. AND SUBSIDIARIES
+ CONSOLIDATED STATEMENTS OF CASH FLOWS 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Nine Months Ended
+
+September 30,
+ 
+
+ 
+
+ 
+Period from April 11,
+
+2005 (inception) to
+
+December 31,
+
+2005
+ 
+ 
+
+ 
+
+ 
+
+ 
+Year Ended
+
+December 31,
+
+2006
+ 
+
+ 
+
+ 
+2006
+ 
+2007
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+ 
+
+Cash flows from operating activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Net income (loss)
+ 
+$
+(1,166,731
+)
+$
+(5,135,668
+)
+$
+(3,851,828
+)
+$
+(4,956,438
+)
+
+Adjustments to reconcile net income (loss) to net cash used in operating activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Depreciation and amortization
+ 
+ 
+10,459
+ 
+ 
+87,636
+ 
+ 
+64,344
+ 
+ 
+154,454
+ 
+
+ 
+Interest on AFJ Capital loan
+ 
+ 
+ 
+ 
+ 
+9,508
+ 
+ 
+ 
+ 
+ 
+7,894
+ 
+
+ 
+Senior convertible bridge note interest expense
+ 
+ 
+ 
+ 
+ 
+88,288
+ 
+ 
+43,202
+ 
+ 
+163,569
+ 
+
+ 
+Deferred financing cost amortization
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+12,500
+ 
+
+ 
+Non-employee stock-based compensation expense
+ 
+ 
+71,200
+ 
+ 
+222,363
+ 
+ 
+208,331
+ 
+ 
+214,393
+ 
+
+ 
+Employee stock-based compensation expense
+ 
+ 
+43,857
+ 
+ 
+235,363
+ 
+ 
+185,587
+ 
+ 
+204,867
+ 
+
+ 
+Changes in operating assets and liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+Accounts receivable
+ 
+ 
+ 
+ 
+ 
+(21,300
+)
+ 
+(6,051
+)
+ 
+(13,705
+)
+
+ 
+ 
+Prepaid expenses
+ 
+ 
+(15,796
+)
+ 
+(32,794
+)
+ 
+(17,074
+)
+ 
+22,420
+ 
+
+ 
+ 
+Other current assets
+ 
+ 
+(46,951
+)
+ 
+(94,237
+)
+ 
+(121,509
+)
+ 
+(287,602
+)
+
+ 
+ 
+Other assets
+ 
+ 
+(53,425
+)
+ 
+(2,373
+)
+ 
+(2,373
+)
+ 
+(2,300
+)
+
+ 
+ 
+Accounts payable
+ 
+ 
+75,758
+ 
+ 
+247,524
+ 
+ 
+292,806
+ 
+ 
+212,225
+ 
+
+ 
+ 
+Accrued expenses
+ 
+ 
+77,762
+ 
+ 
+545,929
+ 
+ 
+219,822
+ 
+ 
+(165,587
+)
+
+ 
+ 
+Other current liabilities
+ 
+ 
+ 
+ 
+ 
+93,527
+ 
+ 
+31,877
+ 
+ 
+(40,378
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Total adjustments
+ 
+ 
+162,864
+ 
+ 
+1,379,434
+ 
+ 
+898,962
+ 
+ 
+482,750
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash used in operating activities
+ 
+ 
+(1,003,867
+)
+ 
+(3,756,234
+)
+ 
+(2,952,866
+)
+ 
+(4,473,688
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from investing activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Purchases of property and equipment
+ 
+ 
+(149,832
+)
+ 
+(152,364
+)
+ 
+(152,364
+)
+ 
+(72,372
+)
+
+ 
+Capitalization of internally developed software
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(328,388
+)
+
+ 
+Investment in long-term certificate of deposit
+ 
+ 
+(35,000
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash used in investing activities
+ 
+ 
+(184,832
+)
+ 
+(152,364
+)
+ 
+(152,364
+)
+ 
+(400,760
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash flows from financing activities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Proceeds from the issuance of common stock
+ 
+ 
+1,704,453
+ 
+ 
+1,182,553
+ 
+ 
+1,182,553
+ 
+ 
+2,770,803
+ 
+
+ 
+Proceeds from the issuance of Series A preferred stock and related warrant grants
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,367,550
+ 
+
+ 
+Proceeds from the issuance of common stock warrants
+ 
+ 
+290
+ 
+ 
+3,209
+ 
+ 
+3,096
+ 
+ 
+128
+ 
+
+ 
+Proceeds from the issuance of senior convertible bridge notes, net
+ 
+ 
+ 
+ 
+ 
+450,000
+ 
+ 
+325,000
+ 
+ 
+95,000
+ 
+
+ 
+Repurchase of common stock
+ 
+ 
+(150
+)
+ 
+(200
+)
+ 
+(200
+)
+ 
+ 
+ 
+
+ 
+Proceeds from (repayment of) bank lines of credit
+ 
+ 
+ 
+ 
+ 
+900,000
+ 
+ 
+900,000
+ 
+ 
+(377,128
+)
+
+ 
+Bank overdraft
+ 
+ 
+ 
+ 
+ 
+143,759
+ 
+ 
+72,242
+ 
+ 
+21,151
+ 
+
+ 
+Net proceeds from (repayment of) AFJ Capital loan
+ 
+ 
+ 
+ 
+ 
+729,008
+ 
+ 
+113,008
+ 
+ 
+(729,008
+)
+
+ 
+Deferred financing cost
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(100,000
+)
+
+ 
+Proceeds from issuance of bridge notes
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,050,000
+ 
+
+ 
+Deferred initial public offering costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(183,626
+)
+
+ 
+Underwriter's commission on sale of common shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(33,300
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net cash provided by financing activities
+ 
+ 
+1,704,593
+ 
+ 
+3,408,329
+ 
+ 
+2,595,699
+ 
+ 
+4,881,570
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+Net increase (decrease) in cash and cash equivalents
+ 
+ 
+515,894
+ 
+ 
+(500,269
+)
+ 
+(509,531
+)
+ 
+7,122
+ 
+
+Cash and cash equivalents balance at beginning of period
+ 
+ 
+ 
+ 
+ 
+515,894
+ 
+ 
+515,894
+ 
+ 
+15,625
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash and cash equivalents balance at end of period
+ 
+$
+515,894
+ 
+$
+15,625
+ 
+$
+6,363
+ 
+$
+22,747
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Supplemental disclosure of cash flow information:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Cash paid for interest during the period
+ 
+$
+ 
+ 
+$
+26,929
+ 
+$
+8,213
+ 
+$
+40,988
+ 
+
+See accompanying notes to consolidated financial statements. 
+
+F-6
+
+ 
+
+ 
+ 
+
+IGGYS HOUSE, INC. AND SUBSIDIARIES 
+ 
+ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
+ 
+
+(1) Organization and Business 
+
+ Iggys House, Inc. (formerly BuySide, Inc.) and subsidiaries (the Company) is an Internet-based real estate brokerage firm incorporated in the State
+of Delaware on April 11, 2005. Headquartered in Chicago, Illinois, the Company conducts business through two wholly owned operating subsidiaries, BuySide Realty, Inc. (incorporated in
+the state of Illinois on April 14, 2005) and BuySide Realty, Inc. (incorporated in the State of California on May 6, 2005). On March 7, 2007, the Company changed its name
+from BuySide, Inc. to Iggys House, Inc. Refer to note 19 for a description of the launch of IggysHouse.com and Iggys House Realty, Inc. in March 2007. 
+
+ The
+Company provides consumers access to residential real estate Multiple Listing Services, or MLS, data and online offer management technology through its website, as well as access to
+licensed real estate agents to assist with home purchase transactions. The Company also pays a significant percentage of its commission to its buyer clients at the close of a transaction. 
+
+ In
+April 2006, the Company commenced operations when it launched its website, www.BuySideRealty.com. At the time of launch, the Company ceased to be a development-stage company. 
+
+ On
+March 22, 2007, the Company launched a free MLS listing service in 20 states and a free self-publishing website for home sellers throughout the U.S. This service is
+called Iggys House and the new website is www.IggysHouse.com. On May 18, 2007, the Company launched its mortgage brokerage services to consumers in California under the name BuySide Mortgage,
+and launched mortgage brokerage operations in Florida in September 2007. These mortgage brokerage services are initially being marketed primarily to the Company's existing real estate
+customers. 
+
+ The
+Company is subject to risks and uncertainties common to growing technology-based companies, including technological change, dependence on principal products, services and technology,
+the activities of competitors and its limited operating history. See Note 18. 
+
+ On August 9, 2007 the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission to complete an initial public offering. As of
+September 30, 2007, costs related to the offering in the amount of $499,653 were deferred and are included in other current assets in the accompanying consolidated balance sheet.
+
+ The
+consolidated financial statements include the financial statements of Iggys House, Inc. and its wholly owned subsidiaries. All significant intercompany balances and
+transactions have been eliminated in consolidation. 
+
+ The
+Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information,
+establishes standards for reporting information about operating segments in a company's financial statements. Operating segments are defined as components of an enterprise about which separate
+financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The
+Company operates in one segment. 
+
+F-7
+
+ 
+
+(2) Summary of Significant Accounting Policies and Practices 
+
+a.Interim Financial Data
+
+ The
+consolidated financial statements for the nine months ended September 30, 2006 and 2007 are unaudited. In the opinion of management, the unaudited financial statements have
+been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the financial
+position and results of
+operations as of such date and for such periods. Results of interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. 
+
+b.Use of Estimates
+
+ The
+preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
+amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
+period. Actual results could differ from these estimates. 
+
+c.Cash and Cash Equivalents
+
+ The
+Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 
+
+d.Revenue Recognition
+
+ The
+Company derives the majority of its revenues from real estate commissions earned as agents for buyers in residential real estate transactions. The Company recognizes real estate
+commission revenues upon the closing of a transaction, net of any commissions shared with the buyer client, commission discount, or transaction fee adjustment, as evidenced by the closure of the
+escrow or similar account and the transfer of these funds to all appropriate parties. The Company recognizes marketing fee revenues from its other business relationships as the fees are earned from
+the other party, typically on a monthly fee basis. The Company recognizes product sale revenues as the products are shipped to the customers. Revenues are recognized when there is persuasive evidence
+of an arrangement, the price is fixed or determinable, collectibility is reasonably assured and the transaction has been completed. 
+
+e.Impairment of Long-Lived Assets
+
+ In
+accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), long-lived assets, such as property and
+equipment and capitalized software, are reviewed for impairment whenever events or changes in
+circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
+estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the
+amount by which the carrying amount of the asset exceeds the fair value of the asset. 
+
+F-8
+
+ 
+
+f.Property and Equipment
+
+ Property
+and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets, which range from two to five
+years. Leasehold improvements are being amortized over the useful lives of the assets or the lease term, whichever is shorter. Maintenance and repairs are charged to expense as incurred. 
+
+g.Product Development
+
+ The
+Company accounts for its website and internal use software development costs in accordance with the provisions of Emerging Issues Task Force (EITF) Issue No. 00-2, Accounting for Website Development Costs (EITF 00-2), and AICPA Statement of Position 98-1, Accounting
+for the Costs of Computer Software Developed or Obtained for Internal Use. Accordingly, certain costs to develop the Company's websites and internal use software have been
+capitalized and are being amortized over the estimated useful life of the assets. 
+
+ In
+connection with the development of the BuySideRealty.com website, during the period from April 11, 2005 (inception) to December 31, 2005, and the year ended
+December 31, 2006, the Company incurred costs of $174,389 and $593,819, respectively. Of these amounts, $88,760 and $143,930, respectively, were incurred in the application and infrastructure
+development stage and were capitalizable in accordance with the provisions of EITF 00-2. However, the Company expensed such amounts as incurred as the estimated net cash flows of the asset
+over the estimated useful life did not support their recoverability, based on impairment testing pursuant to SFAS No. 144. 
+
+ In
+connection with the development of the Iggyshouse.com website, during the year ended December 31, 2006, the Company incurred costs of $174,535. The Company expensed such
+amounts as incurred as the majority of such costs were incurred in the planning stage and were not capitalizable in accordance with the provisions of EITF 00-2. 
+
+ In
+connection with the development of the IggysHouse.com website, during the nine months ended September 30, 2007, the Company incurred costs of $622,919. Of this amount, $308,810
+was incurred in the application and infrastructure development stage and was capitalizable in accordance with the provisions of EITF 00-2. The Company capitalized such amounts as the
+estimated net cash flows of the asset over its estimated useful life supported its recoverability. The capitalized amounts are being amortized over an estimated useful life of two years. Amortization
+expense is included in technology development expense in the Consolidated Statements of Operations. 
+
+h.Advertising Costs
+
+ The
+costs of advertising are expensed as incurred. Advertising expense was $34,986 and $476,316 for the period from April 11, 2005 (inception) to December 31, 2005 and for
+the year ended December 31, 2006, respectively, and $389,230 and $787,281 for the nine months ended September 30, 2006 and 2007, respectively. Such expense is included in marketing and
+advertising expense. 
+
+F-9
+
+ 
+
+i.Fair Value of Financial Instruments
+
+ The
+carrying amounts of the Company's financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and payable to related party and accrued
+expenses, approximate their fair values due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of senior
+convertible bridge notes payable and bank lines of credit approximates fair value. 
+
+j.Income Taxes
+
+ Deferred
+tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements, as well as from net
+operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided
+under current enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable
+or refundable, as the case may be, for the period plus or minus the change during the period in deferred tax assets and liabilities. 
+
+k.Stock-Based Compensation 
+
+ 
+
+(i) Employees
+
+ Prior
+to 2006, the Company applied the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
+Employees (APB No. 25), and related interpretations, in accounting for stock options granted under its 2005 equity incentive plan. Under the intrinsic value method, no
+compensation cost is recognized if the exercise price of the Company's employee stock options was equal to or greater than the market price of the underlying stock on the date of the grant.
+Accordingly, no compensation cost was recognized in the accompanying consolidated statements of operations prior to 2006 on stock options granted to employees, since all options granted under the
+Company's stock option plan had an exercise price equal to, or greater than, the market value of the underlying common stock on the date of the grant. 
+
+ Effective
+January 1, 2006, the Company adopted FASB Statement No. 123(R), Share-Based Payment (Statement 123(R)). This
+statement replaces FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123) and supersedes APB No. 25. Statement
+123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was adopted
+using the prospective method of application, which requires the Company to recognize compensation cost on a prospective basis. Therefore, prior years' financial statements have not been restated.
+Under this method, the Company recorded stock-based compensation expense for awards granted, modified or cancelled subsequent to January 1, 2006, based on estimated grant date fair value using
+the Black-Scholes option-pricing model. 
+
+ Stock-based
+compensation cost that has been included in the net loss amounted to $235,363 for the year ended December 31, 2006. If the Company had applied the fair 
+
+F-10
+
+ 
+
+value
+recognition provisions of Statement 123(R) during the period from April 11, 2005 (inception) to December 31, 2005, the stock-based compensation cost would not have been
+significant. 
+
+(ii) Non-employees
+
+ The
+Company accounts for equity instruments issued to non-employees in accordance with the provisions of EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
+Conjunction with Selling, Goods or Services.
+ 
+
+ Non-employee
+stock-based compensation cost that has been included in the net loss amounted to $71,200 and $222,363 for the period from April 11, 2005 (inception) to
+December 31, 2005 and for the year ended December 31, 2006, respectively. 
+
+ The
+accounting for and disclosure of employee and non-employee equity compensation instruments, primarily common stock options and common stock warrants, requires judgment by
+management on a number of assumptions, including the fair value of the underlying instrument, estimated lives of the outstanding instruments, and the instrument's volatility. Changes in key
+assumptions will impact the valuation of these instruments. Because there has been no public market for the Company's stock, the Company's board of directors determined the fair value of the Company's
+common and preferred stock based on several factors, including, but not limited to, the Company's operating and financial performance and the price at which the Company's stock was sold in
+arms-length private sales. 
+
+l.Loss Per Share
+
+ The
+Company calculates basic earnings (loss) per share based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is
+calculated based on the weighted average number of shares of common stock outstanding and the dilutive effect of stock options and other common stock equivalents using the treasury stock method.
+Potentially dilutive securities are excluded from the diluted earnings (loss) per share calculation if their effect is anti-dilutive. Since the Company recorded a net loss for all periods
+presented, all
+potentially dilutive securities are excluded from the diluted loss per share calculations, as their inclusion would have been anti-dilutive. 
+
+ Had
+the Company reported net income for any of the periods from April 11, 2005 (inception) to December 31, 2005, the year ended December 31, 2006 and the nine months 
+
+F-11
+
+ 
+
+ended
+September 30, 2006 and 2007, the weighted average number of shares outstanding would have potentially been diluted by the following common equivalent securities: 
+
+ 
+
+ 
+Period from
+
+April 11,
+
+2005
+
+(inception) to
+
+December 31,
+
+2005
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+Nine Months Ended
+
+September 30,
+
+Shares of Common Stock Underlying
+ 
+ 
+Year Ended
+
+December 31,
+
+2006
+
+ 
+2006
+ 
+2007
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+Stock options and warrants
+ 
+303,750
+ 
+331,640
+ 
+327,771
+ 
+636,938
+
+Convertible preferred stock
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+535,000
+
+Restricted shares
+ 
+390,000
+ 
+123,750
+ 
+123,750
+ 
+82,500
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total
+
+ 
+
+693,750
+
+ 
+
+455,390
+
+ 
+
+451,521
+
+ 
+
+1,254,438
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+(3) Other Current Assets 
+
+ Other current assets are summarized as follows: 
+
+ 
+
+ 
+December 31,
+ 
+ 
+
+ 
+
+ 
+September 30,
+
+2007
+
+ 
+
+ 
+2005
+ 
+2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+Security deposits
+ 
+$
+61,699
+ 
+$
+129,601
+ 
+$
+61,699
+
+Deferred offering costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+499,653
+
+Other current assets
+ 
+ 
+361
+ 
+ 
+11,587
+ 
+ 
+51,064
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Total other current assets
+
+ 
+
+$
+
+46,951
+
+ 
+
+$
+
+141,188
+
+ 
+
+$
+
+612,416
+
+ 
+ 
+
+ 
+
+ 
+
+(4) Property and Equipment 
+
+ Property and equipment, at cost, less accumulated depreciation and amortization, are summarized as follows: 
+
+ 
+
+ 
+December 31,
+ 
+ 
+
+ 
+
+ 
+
+ 
+September 30,
+
+2007
+ 
+
+ 
+
+ 
+2005
+ 
+2006
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+ 
+
+Internally developed software
+ 
+$
+ 
+ 
+$
+ 
+ 
+$
+308,810
+ 
+
+Furniture and fixtures
+ 
+ 
+117,992
+ 
+ 
+179,795
+ 
+ 
+187,447
+ 
+
+Office equipment
+ 
+ 
+5,163
+ 
+ 
+20,090
+ 
+ 
+20,090
+ 
+
+Leasehold improvements
+ 
+ 
+ 
+ 
+ 
+3,300
+ 
+ 
+3,300
+ 
+
+Computer hardware
+ 
+ 
+25,597
+ 
+ 
+87,441
+ 
+ 
+149,296
+ 
+
+Purchased software
+ 
+ 
+1,080
+ 
+ 
+11,570
+ 
+ 
+14,435
+ 
+
+Software in development
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+19,578
+ 
+
+Less accumulated depreciation and amortization
+ 
+ 
+(10,459
+)
+ 
+(98,095
+)
+ 
+(252,549
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Net property and equipment
+ 
+$
+139,373
+ 
+$
+204,101
+ 
+$
+450,407
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+F-12
+
+ 
+
+(5) Other Assets 
+
+ Other assets are summarized as follows: 
+
+ 
+
+ 
+December 31,
+ 
+ 
+
+ 
+
+ 
+September 30,
+
+2007
+
+ 
+
+ 
+2005
+ 
+2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+Security deposits (long term)
+ 
+$
+48,425
+ 
+$
+55,798
+ 
+$
+63,098
+
+Certificate of deposit
+ 
+ 
+35,000
+ 
+ 
+35,000
+ 
+ 
+35,000
+
+Deferred financing costs
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+87,500
+
+Other
+ 
+ 
+5,000
+ 
+ 
+ 
+ 
+ 
+5,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Total other assets
+ 
+$
+88,425
+ 
+$
+90,798
+ 
+$
+190,598
+
+ 
+ 
+
+ 
+
+ 
+
+(6) Accrued Expenses 
+
+ Accrued expenses are summarized as follows: 
+
+ 
+
+ 
+December 31,
+ 
+ 
+
+ 
+
+ 
+September 30,
+
+2007
+
+ 
+
+ 
+2005
+ 
+2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+Accrued payroll
+ 
+$
+ 
+ 
+$
+87,317
+ 
+$
+63,071
+
+Accrued bonuses
+ 
+ 
+ 
+ 
+ 
+329,720
+ 
+ 
+55,625
+
+Accrued vacation
+ 
+ 
+1,736
+ 
+ 
+11,634
+ 
+ 
+36,221
+
+Accrued audit and tax fees
+ 
+ 
+ 
+ 
+ 
+5,000
+ 
+ 
+27,005
+
+Rent abatement
+ 
+ 
+21,026
+ 
+ 
+54,171
+ 
+ 
+47,996
+
+Accrued bridge note interest
+ 
+ 
+ 
+ 
+ 
+20,901
+ 
+ 
+1,667
+
+Other
+ 
+ 
+55,000
+ 
+ 
+111,443
+ 
+ 
+219,447
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Total accrued expenses
+ 
+$
+77,762
+ 
+$
+620,186
+ 
+$
+451,032
+
+ 
+ 
+
+ 
+
+ 
+
+F-13
+
+ 
+
+(7) Other Current Liabilities 
+
+ Other current liabilities are summarized as follows: 
+
+ 
+
+ 
+December 31,
+ 
+ 
+
+ 
+
+ 
+September 30,
+
+2007
+
+ 
+
+ 
+2005
+ 
+2006
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(unaudited)
+ 
+
+Customer rebates payable
+ 
+$
+ 
+ 
+$
+91,527
+ 
+$
+35,649
+
+Bank overdraft
+ 
+ 
+ 
+ 
+ 
+143,759
+ 
+ 
+164,910
+
+Notes payable-current
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+50,000
+
+Other
+ 
+ 
+ 
+ 
+ 
+2,000
+ 
+ 
+17,500
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Total other current liabilities
+ 
+$
+ 
+ 
+$
+237,286
+ 
+$
+268,059
+
+ 
+ 
+
+ 
+
+ 
+
+(8) Leases 
+
+ The Company has non-cancelable operating lease commitments for office space and equipment. The future non-cancelable minimum lease
+payments as of December 31, 2006 are as follows: 
+
+2007
+ 
+$
+297,750
+
+2008
+ 
+ 
+258,725
+
+2009
+ 
+ 
+173,274
+
+2010
+ 
+ 
+146,267
+
+ 
+ 
+
+ 
+Total
+ 
+$
+876,016
+
+ 
+ 
+
+ Rent
+expense for the period from April 11, 2005 (inception) to December 31, 2005 and for the year ended December 31, 2006 was $110,565 and $461,772, respectively,
+and $334,293 and $373,833 for the nine months ended September 30, 2006 and 2007, respectively. Expenses for operating leases are recognized on a straight-line basis to adjust for
+periods of free rent and escalating fees. As a result, rent abatement accruals totaling $21,026 and $54,171 have been recorded as of December 31, 2005 and 2006, respectively, and $57,821 and
+$47,996 as of September 30, 2006 and 2007, respectively. In May 2007, the Company signed a new lease for office space located in San Francisco, California. The lease has a term of
+36 months starting June 8, 2007 and expiring June 8, 2010 and has minimum lease payments of $29,200, $30,368 and $31,536 for each respective year of the lease. 
+
+(9) Commitments and Contingencies 
+
+ The Company has a $35,000 letter of credit from a financial institution secured by a certificate of deposit of an equal amount. No amount of the letter of credit
+has been utilized as of September 30, 2007. 
+
+F-14
+
+ 
+
+(10) Income Taxes 
+
+ The provision for income taxes for the period from April 11, 2005 (inception) to December 31, 2005 and for the year ended December 31, 2006
+differs from the amounts that would result by applying the statutory federal income tax rate of 34% to the net losses before income taxes as follows: 
+
+ 
+
+ 
+2005
+ 
+2006
+ 
+
+Expected federal income tax benefit
+ 
+$
+(396,689
+)
+$
+(1,746,127
+)
+
+State tax benefit
+ 
+ 
+(70,007
+)
+ 
+(308,077
+)
+
+Nondeductible expenditures
+ 
+ 
+4,448
+ 
+ 
+3,189
+ 
+
+Valuation allowance
+ 
+ 
+462,248
+ 
+ 
+2,051,015
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+ 
+ 
+$
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ The
+valuation allowance increased $462,248 during the period from April 11, 2005 (inception) to December 31, 2005 and $2,051,015 during the year ended December 31,
+2006. 
+
+ The
+tax effects of temporary differences giving rise to significant portions of the deferred tax assets as of December 31, 2005 and 2006 are as follows: 
+
+ 
+
+ 
+2005
+ 
+2006
+ 
+
+Deferred tax assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net operating loss
+ 
+$
+ 
+ 
+$
+1,526,590
+ 
+
+Start-up costs
+ 
+ 
+461,979
+ 
+ 
+859,923
+ 
+
+Depreciation of furniture and equipment
+ 
+ 
+229
+ 
+ 
+8,741
+ 
+
+Other
+ 
+ 
+40
+ 
+ 
+118,009
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Total deferred tax assets
+ 
+ 
+462,248
+ 
+ 
+2,513,263
+ 
+
+Valuation allowance
+ 
+ 
+(462,248
+)
+ 
+(2,513,263
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+Net deferred tax assets
+ 
+$
+ 
+ 
+$
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ During
+the nine months ended September 30, 2007, the Company incurred additional net losses which generated additional net operating loss carryforwards. The Company recorded a
+full valuation allowance against its net deferred tax assets as of September 30, 2007. As of December 31, 2006, the Company has available for federal and state tax purposes, net operating loss
+carryforwards aggregating approximately $3,230,000 and $570,000, respectively, that begin to expire in 2026 and 2011, respectively. 
+
+ In
+assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
+The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company
+considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company has recorded a full valuation allowance
+against its net deferred tax assets because it is not currently able to conclude that it is more likely than not that these assets will be realized. The amount of deferred tax assets considered to be
+realizable could be increased in the near term if estimates of future taxable income during the carryforward period are increased. 
+
+F-15
+
+ 
+
+ On
+January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48
+prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides
+guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax
+positions, accounting for income taxes in interim periods and income tax disclosures. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The
+adoption of FIN 48 did not have a significant impact on the Company's accounting for or disclosure of income taxes. 
+
+(11) Common and Preferred Stock 
+
+a.Initial Capitalization
+
+ On
+April 11, 2005, BuySide, Inc. was incorporated in the state of Delaware. The Company had 110,000,000 shares of authorized capital stock, consisting of 100,000,000 shares
+of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock. During 2006, the Company designated 200 shares of preferred stock as Series A senior convertible
+preferred stock. 
+
+b.Stock Dividend
+
+ On
+October 7, 2005, the Company paid a stock dividend. The dividend was paid at a ratio of 1.5 shares for every 1 share outstanding. All share and per-share amounts
+have been restated to reflect this stock dividend. 
+
+c.Restricted Common Stock
+
+ During
+the period from April 11, 2005 (inception) to December 31, 2005, the Company sold 885,000 restricted shares of common stock for proceeds of $3,450. Also during that
+period, 450,000 restricted shares of common stock were forfeited and retired. On December 30, 2005, 45,000 restricted shares of common stock were repurchased for $150 and retired. In
+August 2006, 60,000 shares were repurchased for $200 and retired. 
+
+d.Series A Senior Convertible Preferred Stock
+
+ From
+January 26, 2007 through September 30, 2007, the Company sold 105 shares of a new Series A senior convertible preferred stock (the Senior Preferred Stock) in a
+private placement for $2,367,500. In addition, as consideration for $50,000 that would otherwise have been payable to the placement agent as part of its fee, the Company issued two shares of
+Series A preferred stock to the placement agent and one of its employees. The holders of the Senior Preferred Stock have certain rights and preferences senior to those of the Company's common
+stockholders, principally in the event of liquidation, wherein holders are entitled to receive an amount equal to the original purchase price plus all declared but unpaid dividends on such stock. All
+of the Senior Preferred Stock automatically converts to common stock upon an initial public offering of the Company's common stock at a conversion ratio of 5,000 shares 
+
+F-16
+
+ 
+
+of
+common stock for each share of Senior Preferred Stock (subject to adjustment for stock splits and the like). In addition, each holder of Senior Preferred Stock has the right at any time to convert
+the Senior Preferred Stock held by such holder into common stock at a conversion ratio of 5,000 shares of common stock for each share of Senior Preferred Stock (subject to adjustment for stock splits
+and the like). Investors who purchased at least $300,000 of Series A convertible preferred stock were issued a warrant to purchase a number of shares of common stock equal to 10% of the number
+of such shares into which the Series A senior convertible preferred stock were convertible into. 
+
+(12) Bank Lines of Credit 
+
+ The Company maintains two operating lines of credit with a commercial bank. As of December 31, 2006, there was outstanding principal indebtedness of
+$800,000 and $100,000 under these two lines. The Company's Chairman, Avi Fox, has personally guaranteed the $800,000 line and the Company's President, Joseph Barr, has personally guaranteed the
+$100,000 line. As of September 30, 2007, the principal balance on these lines were $475,000 and $50,000, respectively. Both lines of credit bear interest at the bank's prime rate, payable
+monthly, which rate was 8.25% and 7.75% at December 31, 2006 and September 30, 2007, respectively. As of December 31, 2006, the principal under the $800,000 line and the $100,000
+line were due on August 14, 2007 and July 14, 2007, respectively. In June 2007, these lines were renewed with similar terms, except that both now expire on July 14, 2008. 
+
+(13) Senior Convertible Bridge Notes 
+
+ As of December 31, 2006, the Company had issued 10% Senior Convertible Bridge Notes (the Notes) in the total principal amount of $450,000. Notes with a
+total initial principal amount of $400,000 are payable at the earlier of (i) April 30, 2007 or (ii) 72 hours after the closing (the Closing) of a round of financing for the
+Company of at least $10 million. The remaining $50,000 principal amount of the Notes is payable at the earlier of (i) September 30, 2007 or (ii) 72 hours after the
+Closing. The Company has the right to prepay the Notes at any time. In January 2007, the Company issued additional Notes in the principal amount of $125,000, also payable at the earlier of
+(i) September 30, 2007 or (ii) 72 hours after the closing. 
+
+ Each
+of the Notes converts into shares of common stock at the Closing, unless the holder elects to have the entire Note paid off (such payment is due within 72 hours after the
+Closing). If a Note converts into common stock at the Closing, it converts into a number of shares of common stock equal to (i) the total amount of principal and interest then outstanding under
+the Note, divided by (ii) the price (the Institutional Price) per share of common stock indicated by the financing round that is being consummated at the Closing. However, for $50,000 out of
+the $450,000 principal amount of the Notes issued in 2006, as well as the Notes issued in January 2007, the Institutional Price is subject to a cap of $10.00 per share. 
+
+ In
+addition, the holder of each of these Notes is entitled upon conversion or redemption to receive warrants to purchase common stock (warrant shares) at an exercise price of $10.00 per
+share. The number of warrant shares for each Note is equal to: (i) if the Note converts to common stock at the Closing, 0.1 times the initial principal amount; and (ii) if the Note is
+paid off, 0.25 times the initial principal amount of the Note. The Company recorded the Notes in the accompanying December 31, 
+
+F-17
+
+ 
+
+2006
+consolidated balance sheets at their estimated fair value, which totaled $293,018 at issuance. During the nine months ended September 30, 2007, the Company issued additional warrants in
+connection with the notes described above. The estimated fair value of such warrants was $208,056. The estimated fair value of the associated warrants is being accreted as interest expense over the
+term of the Notes and totaled $88,288 for the year ended December 31, 2006 and $141,931 for the nine months ended September 30, 2007. In the nine months ended September 30, 2007,
+all of the Notes either converted into common stock or were paid in full. 
+
+ In
+July 2007, the Company raised $1,000,000 through the sale of a convertible bridge note and warrants. In connection with this offering, the Company issued Northland Securities,
+the placement agent for this offering, a warrant to purchase an aggregate number of shares of its common stock calculated as $100,000 (10% of the principal amount of the note) divided by the lower of
+$7.50 (subject to adjustment for any stock split, stock dividend, reorganization or similar event) or 80% of the initial public offering price, at an exercise price equal to the lower of $7.50
+(subject to adjustment for any stock split, stock dividend, reorganization or similar event) or 80% of the initial public offering price. 
+
+ The
+convertible bridge note bears interest at a rate of 12% per annum, and is due on the earlier of July 30, 2009 or upon a qualified acquisition of the Company, as defined in the
+note. The note is convertible into shares of common stock upon the closing of an initial public offering of the Company's common stock, upon the closing of an acquisition, or by the noteholder on or
+after July 29, 2009. The conversion price of the note varies based upon the method of conversion. If the note is converted upon an initial public offering, the conversion price will be equal to
+the lower of (i) 80% of the initial public offering price, or (ii) $7.50 per share of common stock (the "IPO Conversion Price"). If the note is converted upon an acquisition or at the
+noteholder's option, the conversion price will be $7.50 per share. 
+
+ In
+connection with the issuance of the note, the Company issued the noteholder a warrant to purchase shares of common stock. The number of shares issuable under the warrant is contingent
+upon certain events, including the completion of an initial public offering by certain dates or an acquisition of the Company. The exercise price for the warrant will be equal to the IPO Conversion
+Price in the event of an initial public offering of common stock by the Company, or $7.50 per share otherwise. The warrant expires in five years from the date of issuance. 
+
+ The
+Company estimated the fair value of the warrant issued to the noteholder and the conversion feature to be $330,000 at the time of issuance of the note and warrant. Such amount
+reduced the face
+value of the note to $670,000 and increased additional paid-in capital by $330,000. The note is being accreted to its face value through charges to interest expense over its two-year term. 
+
+ In
+addition, the Company paid a commission of $100,000 in connection with the issuance of the note. This amount was capitalized as debt issuance cost and is being amortized to interest
+expense over the term of the note. In October 2007, the convertible note and warrant was exchanged for a $1,000,000 principal amount non-convertible bridge note. See Note 19 for
+information concerning this exchange. 
+
+F-18
+
+ 
+
+(14) Employee Stock-Based Compensation 
+
+ In 2005, the Company adopted a stock option plan (the Plan) pursuant to which the Company's Board of Directors may grant stock options to employees. The Plan
+authorizes grants of options to purchase up to 1,050,000 shares of authorized but unissued common stock. Stock options are to be granted with an exercise price equal to or greater than 100% of the
+estimated fair value of the Company's stock at the date of grant. Stock options granted can have a maximum term of 10 years. Generally, stock options vest over four years whereby 25% of the
+total options granted vest upon each of the first four 12-month anniversaries of the grant date. Specific terms of each stock option agreement are to be determined by the Board of
+Directors. 
+
+ At
+December 31, 2006 and September 30, 2007, there were 438,004 and 212,227 additional shares, respectively, available for the Company to grant under the Plan. The fair
+value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that used the weighted-average assumptions in the following table. The expected volatility is
+based on consideration of relevant factors such as the volatility assumptions of peer companies. The expected life of options granted during the period from April 11, 2005 (inception) to
+December 31, 2005, the year ended December 31, 2006 and the nine months ended September 30, 2007 is estimated by taking the average of the vesting term and the contractual term of
+the option. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. 
+
+ 
+
+ 
+Options Granted in
+
+ 
+
+ 
+2005
+ 
+2006
+ 
+2007
+
+Valuation assumptions:
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Expected volatility
+ 
+ %
+ 
+50%
+ 
+50%
+
+ 
+Risk-free interest rate
+ 
+3.94 4.58%
+ 
+4.31 5.14%
+ 
+4.53 5.22%
+
+ 
+Expected life
+ 
+10 years
+ 
+6.25 years
+ 
+6.25 years
+
+ 
+Expected dividend yield
+ 
+ 
+ 
+ 
+ 
+ 
+
+F-19
+
+ 
+
+ Stock
+option activity during the periods indicated is as follows: 
+
+ 
+
+ 
+Number of
+
+shares
+ 
+Weighted-
+
+average
+
+exercise price
+ 
+Weighted-
+
+average
+
+remaining
+
+contractual
+
+term
+ 
+Aggregate
+
+intrinsic
+
+value
+
+Balance at April 11, 2005
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+ 
+ 
+
+Granted
+ 
+252,550
+ 
+ 
+3.45
+ 
+ 
+ 
+ 
+ 
+
+Exercised
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Forfeited
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2005
+ 
+252,550
+ 
+$
+3.45
+ 
+ 
+ 
+$
+1,022,828
+
+Granted
+
+ 
+
+83,971
+
+ 
+
+ 
+
+8.50
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Exercised
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cancelled
+ 
+(34,700
+)
+ 
+3.35
+ 
+ 
+ 
+ 
+ 
+
+Forfeited
+ 
+(25,600
+)
+ 
+7.75
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2006
+ 
+276,221
+ 
+$
+4.60
+ 
+9.93 years
+ 
+$
+1,491,596
+
+Granted (unaudited)
+
+ 
+
+344,290
+
+ 
+
+ 
+
+5.73
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Exercised (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cancelled (unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Forfeited (unaudited)
+ 
+(132,725
+)
+ 
+3.94
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+
+Balance at September 30, 2007 (unaudited)
+ 
+487,786
+ 
+$
+5.58
+ 
+9.90 years
+ 
+$
+941,428
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+
+Exercisable at September 30, 2007 (unaudited)
+
+ 
+
+88,749
+
+ 
+
+$
+
+4.27
+
+ 
+
+9.86 years
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+
+Exercisable at December 31, 2006
+
+ 
+
+93,459
+
+ 
+
+$
+
+7.80
+
+ 
+
+9.88 years
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+
+ The
+weighted-average grant date fair value of options granted during the period from April 11, 2005 (inception) to December 31, 2005, the year ended December 31,
+2006 and the nine months ended September 30, 2007, was $1.25, $4.65 and $3.11, respectively. 
+
+ At
+December 31, 2006 and September 30, 2007, there was $260,180 and $754,004 (unaudited), respectively, of unrecognized compensation cost related to employee share-based
+compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.97 years and 3.76 years, respectively. 
+
+F-20
+
+ 
+
+ During
+the 12-month period ended September 30, 2007, the Company granted stock options to employees and non-employees with exercise prices as follows: 
+
+Grants Made During
+
+Quarter Ended
+ 
+ 
+Number of Options Granted
+ 
+Weighted-
+
+Average Exercise Price per Share
+ 
+Weighted-
+
+Average Fair Value per Share
+ 
+Weighted-
+
+Average Intrinsic Value per Share
+
+December 31, 2006
+ 
+18,819
+ 
+$
+10.00
+ 
+$
+5.87
+ 
+$
+0
+
+March 31, 2007 (unaudited)
+
+ 
+
+222,340
+
+ 
+
+ 
+
+4.99
+
+ 
+
+ 
+
+2.88
+
+ 
+
+ 
+
+0
+
+June 30, 2007 (unaudited)
+
+ 
+
+231,293
+
+ 
+
+ 
+
+5.38
+
+ 
+
+ 
+
+3.10
+
+ 
+
+ 
+
+0.03
+
+September 30, 2007 (unaudited)
+
+ 
+
+94,960
+
+ 
+
+$
+
+7.54
+
+ 
+
+$
+
+4.16
+
+ 
+
+$
+
+0
+
+ The
+fair value of the stock options granted during the period from October 1, 2006 through September 30, 2007 were estimated using the Black-Scholes option-pricing model as
+described above. The fair value of the common stock for options granted during this period was based on the price per share at which the Company sold shares of common stock to third parties in
+arm's-length capital raising transactions. 
+
+(15) Non-Employee Stock-Based Compensation 
+
+ The Company also issued options and warrants to certain non-employees for services provided during the period from April 11, 2005 (inception)
+to December 31, 2005, the year ended December 31, 2006 and the nine months ended September 30, 2007. 
+
+ The
+following is a summary of warrants and options issued to non-employees: 
+
+ 
+
+ 
+Number of
+
+shares
+ 
+Weighted-
+
+average
+
+exercise price
+ 
+Weighted-
+
+average
+
+remaining
+
+contractual
+
+term
+ 
+Aggregate
+
+intrinsic
+
+value
+
+Balance at April 11, 2005
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+ 
+ 
+
+Granted
+ 
+57,010
+ 
+ 
+2.45
+ 
+ 
+ 
+ 
+ 
+
+Exercised
+ 
+(5,810
+)
+ 
+0.05
+ 
+ 
+ 
+ 
+ 
+
+Forfeited
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2005
+ 
+51,200
+ 
+$
+2.75
+ 
+ 
+ 
+$
+243,201
+
+Granted
+
+ 
+
+25,769
+
+ 
+
+ 
+
+6.30
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Exercised
+ 
+(21,550
+)
+ 
+0.25
+ 
+ 
+ 
+ 
+ 
+
+Forfeited
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at December 31, 2006
+ 
+55,419
+ 
+$
+5.35
+ 
+9.92 years
+ 
+$
+257,696
+
+Granted (unaudited)
+
+ 
+
+204,303
+
+ 
+
+ 
+
+5.37
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Exercised (unaudited)
+ 
+(2,550
+)
+ 
+0.05
+ 
+ 
+ 
+ 
+ 
+
+Cancelled (unaudited)
+ 
+(106,020
+)
+ 
+7.50
+ 
+ 
+ 
+ 
+ 
+
+Forfeited (unaudited)
+ 
+(2,000
+)
+ 
+5.00
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at September 30, 2007 (unaudited)
+ 
+149,152
+ 
+ 
+5.63
+ 
+9.89 years
+ 
+$
+279,660
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Exercisable at September 30, 2007 (unaudited)
+
+ 
+
+149,152
+
+ 
+
+ 
+
+5.63
+
+ 
+
+9.89 years
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+
+Exercisable at December 31, 2006
+
+ 
+
+55,419
+
+ 
+
+$
+
+5.35
+
+ 
+
+9.92 years
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+
+F-21
+
+ 
+
+ The
+weighted-average grant date fair value of options and warrants granted during the period from April 11, 2005 (inception) to December 31, 2005, the year ended
+December 31, 2006 and the nine months ended September 30, 2007 was $1.70, $6.85 and $3.51, respectively. The total intrinsic value of options and warrants exercised during the period
+from April 11, 2005 (inception) to December 31, 2005 and for the year ended December 31, 2006, was $43,203 and $168,308, respectively. For the nine months ended
+September 30, 2007, the intrinsic value of options and warrants exercised was $18,998. 
+
+ The
+fair value of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 
+
+ 
+
+ 
+2005
+ 
+2006
+ 
+2007
+
+Valuation assumptions:
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Expected volatility
+ 
+50%
+ 
+50%
+ 
+50%
+
+ 
+Risk-free interest rate
+ 
+3.94 4.58%
+ 
+4.36 5.14%
+ 
+4.50 5.10%
+
+ 
+Expected life
+ 
+10 years
+ 
+10 years
+ 
+10 years
+
+ 
+Expected dividend yield
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The
+expected volatility is based on consideration of relevant factors such as the volatility assumptions of peer companies. The expected life of options granted during the period from
+April 11, 2005 (inception) to December 31, 2005 and the year ended December 31, 2006 is the contractual term of the option. The risk-free rate for the expected term of
+the option is based on the U.S. Treasury yield curve in effect at the time of grant. 
+
+ The
+Company currently uses authorized and unissued shares to satisfy share award exercises. 
+
+ In
+addition to the options and warrants above, during the period from April 11, 2005 (inception) to December 31, 2005, 2,400 shares of common stock were issued to
+non-employees for services provided to the Company. The fair value of these shares, totaling $18,000, was expensed during the period from April 11, 2005 (inception) to
+December 31, 2005. During 2006, 6,000 shares of common stock were issued to non-employees for services provided to the Company. The fair value of these shares, totaling $46,000, was
+expensed during the year ended December 31, 2006. During the nine months ended September 30, 2007, 22,700 shares of common stock were issued to non-employees for services provided to the
+Company. The fair value of these shares, totaling $144,750, was expensed during the nine months ended September 30, 2007. 
+
+(16) Employee Benefits 
+
+ On January 1, 2006, the Company established a 401(k) retirement plan covering substantially all of its employees. The participants may contribute up to
+100% of their salary, subject to federal limitations. The Company made no contributions to this plan during the year ended December 31, 2006. 
+
+(17) Related-Party Transactions 
+
+ AFJ Capital, LLC, an Illinois limited liability company wholly owned by the Company's Chairman and its Chief Executive Officer, was the majority owner of the
+Company as of December 31, 2005 and 2006 and as of September 30, 2007. AFJ Capital sold furniture and miscellaneous office equipment to 
+
+F-22
+
+ 
+
+the
+Company in June 2005. The agreed-upon aggregate purchase price for the property was $30,000, which approximated fair market value at the date of purchase. The purchase price was
+paid in 10 equal monthly installments of $3,000, starting in June 2005. 
+
+ The
+Company had outstanding indebtedness of $729,008 to AFJ Capital at December 31, 2006. This loan is unsecured and noninterest bearing. The principal amount of this loan is due
+on demand. The accompanying consolidated statement of operations for the year ended December 31, 2006 includes $9,508 of imputed interest expense on this loan, based on the 8.25% rate of
+interest paid on the Company's bank lines of credit in 2006. This same amount was credited to stockholders' equity at December 31, 2006 as a capital contribution from AFJ Capital. $529,008 of
+the loan was repaid to AFJ Capital as of March 31, 2007 and the remaining $200,000 was repaid in May 2007. A short-term receivable from AFJ Capital of $10,000 was included in other
+current assets at September 30, 2007. 
+
+ On
+January 26, 2007, AFJ Capital purchased 20 shares of Series A convertible preferred stock for $500,000. In connection with the purchase, AFJ Capital was issued a
+warrant to purchase 10,000 shares of common stock for a total exercise price of $50,000. 
+
+ In
+July 2007, the Company issued and sold a $1,000,000 principal amount convertible bridge note and warrant to Glen Taylor, who owns more than 5% of the Company's outstanding
+Series A Preferred Stock, which votes on an as-converted basis with the Company's common stock and will convert into shares of common stock prior to the consummation of the Company's initial
+public offering. In October 2007, the Company exchanged this convertible bridge note and warrant for a $1,000,000 principal amount non-convertible bridge note. 
+
+(18) Liquidity 
+
+ Since inception, the Company has incurred net losses to fund technology development, marketing and advertising, licensing, and other activities. The Company has
+financed its operations through private placements of equity capital, bank lines of credit, and loans from AFJ Capital. In order to continue to meet the projected cash requirements of the business, it
+will be necessary for the Company to obtain additional debt or equity financing, and management is in the process of seeking such financing, including through an initial public offering. 
+
+ The
+Company's future capital requirements will depend on many factors, including its rate of growth into new geographic markets, level of investment in technology, and customer
+acquisition initiatives. Although it is currently not a party to any agreement or letter of intent with respect to investments in, or acquisitions of, complementary businesses, products or
+technologies, the Company may enter into these types of arrangements in the future, which could require it to seek additional equity or debt financing. The Company's ability to secure short-term and
+long-term financing in the future will depend on a variety of factors, including its future profitability, the quality of its short-term and long-term assets, its relative levels of debt and equity
+and the overall condition of the credit markets. In the event that additional financing is required, the Company may not be able to raise it on terms acceptable to it, or at all. If the Company is
+unable to raise additional capital when necessary or desired, its business, operations and results will likely suffer. 
+
+F-23
+
+ 
+
+(19) Subsequent Events 
+
+ In October 2007, the Company exchanged the convertible bridge note and related warrants originally issued in July 2007 for a $1,000,000
+non-convertible bridge note, and the related warrants issued to Northland Securities in this placement were forfeited. Interest on the non-convertible bridge note accrues at a rate of 15%
+per annum computed on the actual number of days outstanding, compounded annually. All outstanding principal of, and accrued interest on, the non-convertible bridge note will be due and
+payable on the earlier to occur of (a) July 30, 2009, (b) the sale of all or substantially all of the Company's assets or the closing of a merger, consolidation, reorganization,
+stock sale or other transaction or series of transactions pursuant to which stockholders of the Company prior to such acquisition own less than 50% of the surviving or resulting entity, or (c) two
+business days after an initial underwritten public offering of the Company's common stock. The non-convertible bridge note is unsecured. The Company intends to pay the full amount of the
+principal of, and accrued but unpaid interest on, the non-convertible bridge note with a portion of the proceeds of its initial public offering.
+
+ 
+
+ On
+October 3, 2007, the Company issued to two of its executive officers restricted stock awards for a total of 200,000 shares of common stock. These restricted stock awards
+vest one-third on March 15, 2009, March 15, 2010 and March 15, 2011, in each case if Mr. Barr or Mr. Otis, as applicable, is still working for the Company as of
+those dates. However, the shares underlying the grants will not vest until the Company earns an aggregate of $18 million in revenue in four or less consecutive quarters. If the Company does not
+meet this revenue target by December 31, 2010, then these awards will be forfeited. 
+
+ On
+October 19, 2007, the Company established a new short-term line of credit with a commercial bank that provides an additional $400,000 of credit through December 1, 2007.
+This new line of credit is renewable on a month-to-month basis at the discretion of the lender, and the terms are otherwise the same as those on the existing $900,000 lines of credit described in
+Note 12 that mature in July 2008. The new $400,000 line of credit is personally guaranteed by the Company's Chairman, Avi Fox. 
+
+ On November , 2007, concurrent with the effectiveness of the registration statement, the Company effected a 1-for-5 reverse stock split of its outstanding shares of
+common stock. All references to share and per share amounts have been retroactively restated for all periods presented to reflect the split.
+
+ 
+
+F-24
+
+ 
+
+ 
+
+1,400,000 Units
+
+ 
+
+ 
+
+P R O S P E C T U S 
+
+ , 2007 
+
+Northland Securities, Inc. 
+
+Bathgate Capital Partners LLC
+
+ 
+
+Until , 2007, all dealers that buy, sell or otherwise effect transactions in units, shares
+of our common stock,
+Class A warrants or Class B warrants, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a
+prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
+
+ 
+
+ 
+
+ 
+ 
+
+PART II
+ 
+ INFORMATION NOT REQUIRED IN PROSPECTUS 
+ 
+
+Item 13. Other Expenses of Issuance and Distribution 
+
+ The following table sets forth all the costs and expenses, other than underwriting discounts, payable in connection with the issuance and distribution of the
+units being registered. Except as otherwise noted, the registrant will pay all of those amounts. All amounts shown below are estimates, except the registration fee.
+
+ 
+
+Registration fee of Securities and Exchange Commission
+ 
+$
+1,112
+
+NASD filing fee
+ 
+ 
+4,123
+
+Accountants' fees and expenses
+ 
+ 
+300,000
+
+Legal fees and expenses
+ 
+ 
+500,000
+
+Printing expenses
+ 
+ 
+150,000
+
+NASDAQ listing fee
+ 
+ 
+50,000
+
+Miscellaneous expenses
+ 
+ 
+38,765
+
+ 
+ 
+
+TOTAL
+ 
+$
+1,044,000
+
+ 
+ 
+
+Item 14. Indemnification of Directors and Officers 
+
+ Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and agents
+against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed
+actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent of the corporation. The Delaware General
+Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or
+disinterested directors or otherwise. The registrant's amended and restated certificate of incorporation provides for indemnification by the registrant of its directors and, at the registrant's
+election, officers to the fullest extent permitted by the Delaware General Corporation Law. The registrant intends to enter into indemnification agreements with each of its directors and executive
+officers prior to consummation of this offering. These agreements will require the registrant, among other things, to indemnify such directors and executive officers against certain liabilities that
+will arise by reason of their status or service as directors or officers and to advance expenses to them as they are incurred (provided that they shall repay the amount advanced if it is ultimately
+determined that they are not entitled to indemnification). 
+
+ In
+addition, the registrant's amended and restated certificate of incorporation provides that the personal liability of directors of the registrant is eliminated to the fullest extent
+permitted by the Delaware General Corporation Law. Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be
+personally liable to the corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (1) for any breach of the director's
+duty of loyalty to the registrant or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) for willful
+or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds, or (4) for any transaction from which the director derives an improper personal
+benefit. 
+
+ The
+registrant maintains standard policies of insurance under which coverage is provided (a) to its directors and officers against loss rising from claims made by reason of breach
+of duty or other wrongful act, and (b) to the registrant with respect to payments which may be made by the registrant to 
+
+II-1
+
+ 
+
+such
+officers and directors pursuant to the above indemnification provision or otherwise as a matter of law. 
+
+ Under
+the terms of the underwriting agreement, the underwriters have agreed to indemnify, under certain conditions, the registrant, its directors, certain of its officers and persons who
+control the registrant within the meaning of the Securities Act. 
+
+Item 15. Recent Sales of Unregistered Securities 
+
+ During the three years preceding the filing of this registration statement, the registrant has issued the following unregistered securities. The common stock
+amounts stated below give effect to the 1.5 for 1 forward stock split effected on October 7, 2005, and the 5 for 1 reverse stock split to be effected prior to the completion of this offering. 
+
+ On
+April 11, 2005, the date of its formation, AFJ Capital, LLC, an entity owned and controlled by Joseph Fox, the registrant's Chief Executive Officer, and Avi Fox, the
+registrant's Chairman ("AFJ Capital"), purchased from the registrant an aggregate of 2,422,500 shares of its common stock for total cash consideration of $8,525. Joseph Fox and Avi Fox were deemed to
+be "accredited investors" as defined in Rule 501(a) of the Securities Act, and appropriate legends were affixed to the share certificates issued in connection with this transaction. The
+registrant issued these shares to AFJ Capital in a transaction exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act ("Section 4(2)") and
+Rule 506 of Regulation D promulgated thereunder ("Rule 506"), as a transaction not involving a public offering. At the direction of Joseph Fox and Avi Fox, 135,000 of these shares
+were transferred to certain other founding stockholders, each of whom had a prior long-term business relationship with Joseph Fox and Avi Fox. Neither Joseph Fox, Avi Fox nor AFJ Capital, LLC had any
+obligation to transfer these shares to the other founding shareholders. The shares were transferred to the other founding stockholders as a gift for no consideration. 
+
+ During
+the period from April 11, 2005 to April 10, 2006, the registrant issued to two employees restricted stock awards of an aggregate of 255,000 shares of its common
+stock for an aggregate consideration of $850 pursuant to its 2005 Equity Incentive Plan. The registrant also issued to 38 employees, including Messrs. Barr and Otis, options to purchase an
+aggregate of 302,650 shares of its common stock, with an aggregate exercise price of $1,246,668. These employees paid nothing for these options. The registrant also issued to 18 consultants (as
+consideration for services rendered) options and warrants to purchase an aggregate of 67,935 shares of its common stock, with an aggregate exercise price of $139,685. The registrant issued these
+shares of common stock, and options and warrants to purchase shares of common stock, in transactions exempt from registration under the Securities Act in reliance upon Rule 701 promulgated
+under Section 3(b) of the Securities Act ("Rule 701"). During the period from September 19, 2005 to April 15, 2006, the registrant issued 25,110 shares of its common
+stock for an aggregate exercise price of $4,100 upon the exercise of certain of these options and warrants to the holders thereof. 
+
+ During
+the period from April 12, 2005 to April 22, 2005, the registrant issued to five employees restricted stock awards for an aggregate of 435,000 shares of its common
+stock for an aggregate consideration of $1,450 pursuant to its 2005 Equity Incentive Plan. The five employees were Joseph
+Fox, Avi Fox, Joseph Barr, Stephen Otis and Marshall Fox, who were then our (1) Co-Chief Executive Officer and President, (2) Co-Chief Executive Officer, (3) Executive Vice
+President and Chief Financial Officer, (4) Senior Vice President and General Counsel, and (5) Senior Vice President Operations, respectively. The registrant issued these
+shares in a transaction exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as a transaction not involving a public offering. 
+
+ On
+April 27, 2005, the registrant issued and sold to Ari Blumofe, a former employee of the registrant, an aggregate of 450,000 shares of its common stock for total cash
+consideration of $100,000. 
+
+II-2
+
+ 
+
+The
+registrant sold these shares in a transaction exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as a transaction not involving a public
+offering. Mr. Blumofe represented in writing to the registrant that such purchaser was an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act
+("accredited investor"). 
+
+ During
+the period from May 16, 2005 to April 4, 2006, the registrant issued and sold to 49 investors an aggregate of 567,918 shares of its common stock for total
+cash consideration of $2,405,031. The registrant sold these shares in transactions exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as
+transactions not involving a public offering. Each of the purchasers of common stock represented in writing to the registrant that such purchaser was an accredited investor. 
+
+ During
+the period from November 30, 2005 to March 31, 2006, the registrant issued to Eastbrooke Ventures LLC ("Eastbrooke Ventures") an aggregate of 4,000 shares of its
+common stock for a total purchase price of $30,000, paid in the form of publicity services rendered by Eastbrooke Ventures to the registrant. The registrant issued these shares in transactions exempt
+from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as transactions not involving a public offering. Eastbrooke Ventures represented in writing to the
+registrant that it was an accredited investor. 
+
+ During
+the period from April 10, 2006 to July 30, 2007, the registrant issued and sold to 37 investors an aggregate of 516,100 shares of its common stock for total cash
+consideration of $3,170,752. The registrant sold these shares in transactions exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as
+transactions not involving a public offering. Each of the purchasers of common stock represented in writing to the registrant that such purchaser was an accredited investor. Northland
+Securities, Inc. acted as placement agent with respect to some of these sales. As consideration for such services, the registrant is obligated to pay to Northland Securities $33,300 in cash.
+Also, in consideration for these services, the registrant issued to Northland Securities, in exchange for cash consideration of $50, warrants to purchase an aggregate of 4,440 shares of its
+common stock with an aggregate exercise price of $33,300. The registrant issued these warrants to Northland Securities in transactions exempt from registration under the Securities Act in reliance
+upon Section 4(2) and Rule 506, as transactions not involving a public offering. 
+
+ During
+the period from April 11, 2006 to April 10, 2007, the registrant issued to two employees restricted stock awards of an aggregate of 9,571 shares of its common stock
+pursuant to its 2005 Equity Incentive Plan (in consideration for services rendered by such two employees). The registrant also issued to two consultants restricted stock awards with respect to an
+aggregate of 10,200 shares of its common stock (in consideration for services rendered). The registrant also issued to 39 employees, including Messrs. Barr and Otis, options to purchase an
+aggregate of 227,961 shares of its common stock, with an aggregate exercise price of $1,312,864. These employees paid nothing for these options. The registrant also issued to 15 consultants (in
+consideration for services rendered) options and warrants to purchase an aggregate of 43,869 shares of its common stock, with an aggregate exercise price of $151,974. The registrant issued
+these shares of common stock, and options and warrants to purchase shares of common stock, in transactions exempt from registration under the Securities Act in reliance upon Rule 701. During
+the period from October 2, 2006 to July 13, 2007, the registrant issued 4,800 shares of its common stock for an aggregate exercise price of $240 upon the exercise of certain of these
+warrants to the holders thereof. 
+
+ On
+April 30, 2006, the registrant issued to Eastbrooke Ventures 400 shares of its common stock for a purchase price of $4,000 paid in the form of publicity services rendered by
+Eastbrooke Ventures to the registrant. The registrant issued these shares in transactions exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as
+transactions not involving a public offering. Eastbrooke Ventures represented in writing to the registrant that it was an accredited investor. 
+
+II-3
+
+ 
+
+ During
+the period from May 15, 2006 to January 10, 2007, the registrant issued and sold to 10 investors 10% senior convertible bridge notes (the "bridge notes") for total
+cash consideration of $575,000. The registrant sold the bridge notes in transactions exempt from registration under the Securities Act in reliance upon Rule 506, as transactions not involving a
+public offering. Each of the purchasers of bridge notes represented in writing to the registrant that such purchaser was an accredited investor. On April 30, 2007 and June 30, 2007, upon
+conversion of these bridge notes, the registrant issued to these note holders an aggregate of 104,358 shares of common stock and warrants to purchase an aggregate of 11,200 shares of
+common stock with an aggregate exercise price of $112,000. On July 30, 2007, upon satisfaction of one of these notes, the registrant issued to the note holder a warrant to purchase 1,500 shares
+of common stock with an aggregate exercise price of $15,000. The registrant issued the shares of common stock and warrants to purchase shares of common stock upon the conversion or satisfaction of
+such bridge notes in reliance upon Section 3(a)(9) of the Securities Act. 
+
+ On
+January 26, 2007, in exchange for $50 cash consideration, the registrant issued to AFJ Capital a warrant to purchase an aggregate of 10,000 shares of its common stock with an
+aggregate exercise price of $50,000. The registrant issued the warrant to AFJ Capital in a transaction exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule
+506, as a transaction not involving a public offering. AFJ Capital is an accredited investor. 
+
+ During
+the period from January 26, 2007 to April 24, 2007, the registrant issued and sold to 49 investors an aggregate of 105 shares of its Series A senior
+convertible preferred stock (the "Series A preferred stock"), at a purchase price of $25,000 per share, for total cash consideration of $2,625,000. Northland Securities acted as placement agent
+with respect to these sales. As consideration for such services, the registrant paid to Northland Securities $255,000 of cash. Also, in consideration for such services, the registrant issued to
+Northland Securities, in exchange for cash consideration of $50, warrants to purchase an aggregate of 51,500 shares of its common stock with an aggregate exercise price of $257,500. In
+addition, as consideration for $50,000 that would otherwise have been payable to Northland Securities as part of its placement fee, the registrant issued two shares of Series A preferred stock
+to Northland Securities and its president. All of the foregoing shares of Series A preferred stock will automatically convert into shares of the registrant's common stock upon the closing of
+this offering at a conversion ratio of one share of Series A preferred stock to 5,000 shares of common stock. The registrant issued the shares of Series A preferred stock in transactions
+exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as transactions not involving a public offering. The registrant issued the warrants to
+purchase shares of common stock to Northland Securities in a transaction exempt from registration under Securities Act in reliance upon Section 4(2) and Rule 506, as a transaction not
+involving a public offering. Northland Securities, its president and each of the purchasers of Series A preferred stock represented in writing to the registrant that they were accredited
+investors. 
+
+ During
+the period from April 11, 2007 to July 23, 2007, the registrant issued to two employees restricted stock awards of an aggregate of 3,416 shares of its common stock
+pursuant to its 2005 Equity Incentive Plan (in consideration for services rendered by such employees). The registrant also issued to four consultants restricted stock awards of an aggregate of
+12,500 shares of its common stock (in consideration for services rendered). The registrant also issued to 19 employees, including Messrs. Barr and Otis, options to purchase an aggregate
+of 152,200 shares of its common stock, with an aggregate exercise price of $1,007,250. These employees paid nothing for these options. The registrant also issued to nine consultants (in consideration
+for services rendered) options and warrants to purchase an aggregate of 10,213 shares of its common stock, with an aggregate exercise price of $71,099. The registrant issued these shares of common
+stock, and options and warrants to purchase shares of common stock, in transactions exempt from registration under the Securities Act in reliance upon Rule 701. 
+
+II-4
+
+ 
+
+ On
+April 24, 2007, the registrant issued and sold 2,000 shares of its common stock to Sheila Rowan in consideration of all of the outstanding shares of capital stock of Loan
+Concepts, Inc. The registrant issued these shares in a transaction exempt from registration under the Securities Act in reliance upon Section 4(2), as a transaction not involving a
+public offering. 
+
+ During
+the period from July 25, 2007 to July 31, 2007, the registrant issued and sold to one investor a $1,000,000 principal amount convertible bridge note and warrants to
+purchase 56,818 shares of our common stock. In October 2007, we exchanged the convertible bridge note and warrants for a $1.0 million principal amount nonconvertible bridge note.
+Each of these transactions were exempt from
+registration under the Securities Act pursuant to Section 4(2) and Rule 506, as transactions not involving a public offering. The purchaser of the convertible bridge note represented in
+writing to the registrant that he was an accredited investor. Northland Securities acted as placement agent with respect to this sale. As consideration for these services, the registrant was obligated
+to pay Northland Securities cash in the aggregate amount equal to 10% of the proceeds of the convertible bridge note. Also, as consideration for these services, the registrant was obligated to issue
+to Northland Securities, in exchange for cash consideration of $50, a warrant to purchase an aggregate of 22,727 shares of its common stock, which warrant was issued in a transaction exempt
+from registration under Securities Act in reliance upon Section 4(2) and Rule 506, as a transaction not involving a public offering. This warrant was extinguished in connection with the
+convertible bridge note exchange described above. 
+
+ On
+October 3, 2007, the registrant issued to two employees restricted stock awards for a total of 200,000 shares of common stock for an aggregate consideration of $1,000 pursuant
+to its 2005 Equity Incentive Plan. The two employees were Joseph Barr and Stephen Otis, who were then our (1) President and Chief Financial Officer, and (2) Executive Vice President and
+General Counsel. The registrant issued these shares in a transaction exempt from registration under the Securities Act in reliance upon Section 4(2) and Rule 506, as a transaction not involving
+a public offering. 
+
+ With
+respect to each transaction described above as being made in reliance on Section 4(2) and/or Rule 506, all certificates representing the issued shares of securities
+included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer. Unless otherwise indicated, no underwriting discounts or commissions
+were paid with respect to the sales described above. 
+
+Item 16. Exhibits and Financial Statement Schedules 
+
+ The Exhibits filed herewith are set forth on the Index to Exhibits filed as a part of this Registration Statement beginning on page II-9 hereof.
+
+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 to:
+
+ (a) include
+any prospectus required by Section 10(a)(3) of the Securities Act;
+
+ 
+
+ (b) reflect in the prospectus any facts or events arising after the effective date of this 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 this Registration Statement. Notwithstanding the foregoing, any increase or decrease in
+the 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)
+
+II-5
+
+ 
+
+under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in maximum aggregate offering price set forth in the "Calculation of Registration
+Fee" table in the effective registration statement; and
+
+ 
+
+ (c) include any additional or changed material information with respect to the plan of distribution not previously disclosed in the registration statement or any material
+change to such information in the registration statement.
+
+ (2) That,
+for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration
+statement relating to the securities offered herein, 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) For the purpose of determining liability under the Securities Act to any purchaser:
+
+ 
+
+ (i) Each
+prospectus filed by the registrant pursuant to Rule 424(b)(3) under the Securities Act shall be deemed to be part of the registration statement as of the
+date the filed prospectus was deemed part of and included in the registration statement; and
+
+ (ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) under the Securities Act as part of a registration statement in reliance on
+Rule 430B relating to an offering made pursuant to rule 415(a)(1)(i), (vii), or (x) under the Securities Act for the purpose of providing the information required by
+section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after
+effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person
+that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that
+prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 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 effective date, 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 effective date.
+
+ (5) For
+the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of 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:
+
+ (a) Any
+preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 of this chapter;
+
+ 
+
+ (b) 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;
+
+II-6
+
+ 
+
+ (c) 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
+
+ 
+
+ (d) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
+
+ 
+
+ (6) To
+provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the
+underwriter to permit prompt delivery to each purchaser.
+
+ (7) For
+purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration
+statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
+deemed to be part of this registration statement as of the time it was declared effective. 
+
+ (8) 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. 
+
+II-7
+
+ 
+
+ 
+ 
+
+SIGNATURES 
+ 
+
+ Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 4 to the Registration Statement
+to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on November 16, 2007.
+
+ 
+
+ 
+ 
+IGGYS HOUSE, INC.
+
+(Registrant)
+
+ 
+
+ 
+
+By:
+
+/s/ JOSEPH J. FOX Joseph J. Fox
+
+Chief Executive Officer
+
+ Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 4 to the Registration Statement has been signed below by the following persons in the
+capacities indicated on November 16, 2007.
+
+ 
+
+Signature
+ 
+Title
+
+ 
+
+ 
+
+ 
+
+/s/ JOSEPH J. FOX Joseph J. Fox
+ 
+Chief Executive Officer and Director
+
+(Principal Executive Officer)
+
+/s/ AVI Y. FOX Avi Y. Fox
+
+ 
+
+Chairman and Director
+
+/s/ JOSEPH A. BARR Joseph A. Barr
+
+ 
+
+President, Chief Financial Officer and Director
+
+(Principal Financial Officer)
+
+II-8
+
+ 
+
+ 
+ 
+
+INDEX TO EXHIBITS 
+ 
+
+EXHIBIT
+
+NUMBER
+ 
+EXHIBIT
+
+1.1
+ 
+Form of Underwriting Agreement.
+
+3.1*
+
+ 
+
+Form of Amended and Restated Certificate of Incorporation of the Registrant to be effective upon the completion of this offering.
+
+3.2*
+
+ 
+
+Form of Amended and Restated Bylaws of the Registrant to be effective upon the completion of this offering.
+
+4.1*
+
+ 
+
+Specimen stock certificate representing the Registrant's common stock.
+
+4.2
+
+ 
+
+Specimen unit certificate.
+
+4.3
+
+ 
+
+Form of Warrant Agreement between Iggys House, Inc. and Continental Stock Transfer & Trust Company and forms of Class A Warrant and Class B Warrant attached thereto.
+
+5.1**
+
+ 
+
+Opinion of Katten Muchin Rosenman LLP, as to the validity of the units, warrants and shares registered.
+
+10.1*
+
+ 
+
+Form of Indemnification Agreement between the Registrant and each of its directors and executive officers.
+
+10.2*
+
+ 
+
+2005 Equity Incentive Plan and forms of agreements thereunder.
+
+10.3*
+
+ 
+
+2007 Equity Incentive Plan and forms of agreements thereunder.
+
+10.4*
+
+ 
+
+Employment Agreement by and between the Registrant and Joseph Fox, dated October 22, 2007.
+
+10.5*
+
+ 
+
+Employment Agreement by and between the Registrant and Avi Fox, dated October 22, 2007.
+
+10.6*
+
+ 
+
+Employment Agreement by and between the Registrant and Joseph Barr, dated October 22, 2007.
+
+10.7*
+
+ 
+
+Employment Agreement by and between the Registrant and Stephen Otis, dated October 22, 2007.
+
+10.8*
+
+ 
+
+Stockholder Agreement by and among the Registrant and Joseph Barr, dated April 22, 2005, and amendment thereto.
+
+10.9*
+
+ 
+
+Stockholder Agreement by and among the Registrant and Stephen Otis, dated April 12, 2005, and amendment thereto.
+
+10.10*
+
+ 
+
+Stockholder Agreement by and among the Registrant and Ari Blumofe, dated April 12, 2005, and amendment thereto.
+
+10.11*
+
+ 
+
+Stockholder Agreement by and among the Registrant and Gregg Shanberg and Ellen Shanberg.
+
+10.12*
+
+ 
+
+Form of Stock Option Agreement issued to certain employees and consultants of the Registrant (not under the 2005 Equity Incentive Plan).
+
+10.13*
+
+ 
+
+Form of Warrant to purchase shares of common stock issued to each of Northland Securities, Inc. and AFJ Capital, LLC in connection with private placements of common stock and Series A senior convertible preferred stock.
+
+ 
+ 
+ 
+
+II-9
+
+ 
+
+10.14*
+
+ 
+
+Amendments to Warrants to purchase shares of common stock issued to Northland Securities, Inc. in connection with private placements of common stock and Series A senior convertible preferred stock.
+
+10.15*
+
+ 
+
+Form of Warrant to purchase shares of common stock issued to investors and service providers.
+
+10.16*
+
+ 
+
+Promissory Notes and related documents related to lines of credit issued by Cole Taylor Bank, N.A., in favor of Registrant.
+
+10.17*
+
+ 
+
+Form of Stock-Based Award agreements under the 2005 Equity Incentive Plan with Joseph Barr and Stephen Otis.
+
+10.18*
+
+ 
+
+Non-convertible Bridge Note issued to Glen Taylor on October 23, 2007.
+
+21.1*
+
+ 
+
+Subsidiaries of the Registrant.
+
+23.1
+
+ 
+
+Consent of KPMG LLP, Independent Registered Public Accounting Firm.
+
+23.2**
+
+ 
+
+Consent of Katten Muchin Rosenman LLP (contained in Exhibit 5.1).
+
+23.3*
+
+ 
+
+Consent of Director Nominee (Lawrence Wert).
+
+23.4*
+
+ 
+
+Consent of Director Nominee (James Roseland).
+
+23.5*
+
+ 
+
+Consent of Director Nominee (Kurt Werth).
+
+23.6*
+
+ 
+
+Consent of Director Nominee (David Dresdner).
+
+24*
+
+ 
+
+Power of Attorney.
+
+*Previously
+filed.
+
+**To
+be filed by amendment. 
+II-10
+
+QuickLinks
+
+Table of Contents
+
+ABOUT THIS PROSPECTUS
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001408120_scope_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001408120_scope_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..abb4d3625f249158a1b9fea5327ca1ce61c89158
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001408120_scope_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the ordinary shares being offered by this prospectus and other legal matters concerning this offering relating to Israeli law will be passed upon for us by Yoram L. Cohen, Ashlagi, Fisher, Eshel — Law Offices, Tel Aviv, Israel. Certain legal matters in connection with this offering relating to United States law will be passed upon for us by Morrison & Foerster LLP, New York, New York. Certain legal matters in connection with this offering relating to Israeli law will be passed upon for the underwriters by Haim Samet, Steinmetz, Haring & Co. — Law Office, Tel Aviv, Israel. Certain legal matters concerning this offering relating to United States law will be passed upon for the underwriters by White & Case LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001408193_tremisis_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001408193_tremisis_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fdd6ef592ea8162176b5b9cf616a7c395569ddae
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001408193_tremisis_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Graubard Miller, New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. Andrews Kurth LLP, Houston, Texas, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001408501_3par-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001408501_3par-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..47615353fb7e1c6e11e5de043b8f26aa52d72508
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001408501_3par-inc_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, Menlo Park, California. Members of Wilson Sonsini Goodrich & Rosati, Professional Corporation and investment funds associated with that firm hold 123,348 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001408792_reef-2007_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001408792_reef-2007_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6637b57103a930e7168ab824207f0827c1c4582d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001408792_reef-2007_legal_matters.txt
@@ -0,0 +1 @@
+Reef Savoie-Fontenot, L.P. $ 20,947,540 $ (3,627,386 ) $ 17,320,154 $ 215,545 $ (50,215 ) $ 165,330 Hardison Sadler Joint Venture (2,453,217 ) (5,505 ) (2,458,722 ) (20,843 ) (56 ) (20,899 ) Thunder Alley Joint Venture (4,118,825 ) (30,125 ) (4,148,950 ) (90,206 ) (692 ) (90,898 ) Reef Bell City #1, L.P. 27,188,389 (5,513,162 ) 21,675,227 725,273 (146,089 ) 579,184 Northwest Bell City Joint Venture (5,937,243 ) (37,253 ) (5,974,496 ) (225,656 ) (1,030 ) (226,686 ) Reef Terpsichore & Treasure Isle Infield Development Joint Venture (4,105,004 ) (4,105,004 ) (41,432 ) (41,432 ) Reef Corpus Christi Bay Joint Venture (4,865,235 ) (24,750 ) (4,889,985 ) (49,144 ) (250 ) (49,394 ) Reef Treasure Isle and Hog Island Infield Joint Venture (5,231,219 ) (5,231,219 ) (52,826 ) (52,826 ) Reef East Euterpe & Gumbo Infield Joint Venture (8,518,045 ) (3,139 ) (8,521,184 ) (66,901 ) (37 ) (66,938 ) Reef Baton Rouge Infield Development Joint Venture (2,651,240 ) (35,071 ) (2,686,311 ) (23,422 ) (354 ) (23,776 ) Reef South Central 3 Well Infield Development Joint Venture (4,162,944 ) (320 ) (4,163,264 ) (42,049 ) (4 ) (42,053 ) Reef Gumbo II, Sweet Bay, Grand Lake Joint Venture (6,104,632 ) (6,104,632 ) (61,663 ) (61,663 ) Reef Private Drilling Venture 2006-IV Joint Venture Reef Global Energy I, L.P. (515,306 ) (185,275 ) (700,581 ) 75,927 (34,104 ) 41,823 Reef Global Energy II, L.P. (986,180 ) (738,972 ) (1,725,152 ) 396,119 (174,918 ) 221,201 Reef Global Energy III, L.P. (6,406,419 ) (151,049 ) (6,557,468 ) (353,085 ) (13,550 ) (366,635 ) Reef Global Energy IV, L.P. (6,262,120 ) (188,098 ) (6,450,218 ) (360,616 ) (10,436 ) (371,052 ) Reef Global Energy V, L.P. (4,970,876 ) (25,656 ) (4,996,532 ) (280,005 ) (4,379 ) (284,384 ) Reef Global Energy VI, L.P. (15,090,875 ) (36,374 ) (15,127,249 ) (857,394 ) (6,647 ) (864,041 ) Reef Global Energy VII, L.P. (6,191,890 ) (6,191,890 ) (317,734 ) (317,734 ) Reef Global Energy VIII, L.P. $ (3,508,928 ) $ $ (3,508,928 ) $ (214,918 ) $ $ (214,918 ) Total $ (43,944,269 ) $ 10,602,135 $ (54,546,404 ) $ (1,645,030 ) $ 442,761 $ (2,087,791 ) TABLE TWO Taxable Income or Loss (continued) Inception through December 31, 2006 (Income Fund and Income and Development Fund Partnerships) Venture Federal Taxable Income (Loss) Investor Reef Entity Serving as Managing Venturer Partnership Name Taxable Income before Depletion Depletion Expense Taxable Income After Depletion Taxable Income before Depletion Depletion Expense Taxable Income After Depletion Reef Income Funds: Reef 1999-A Income Fund L.P. $ 3,050,960 $ 820,398 $ 2,230,562 $ 576,360 $ 68,323 $ 508,037 Reef 1999-B Income Fund L.P. 2,125,474 464,957 1,660,517 440,515 47,073 393,442 Reef Partners 1999-C Ltd. Income Fund 1,111,716 227,507 884,209 261,960 29,684 232,276 Reef 2000-A Income Fund L.P. 4,246,797 1,256,753 2,990,044 1,003,702 62,398 941,304 Reef 2001-A Income Fund L.P. 4,426,244 1,182,824 3,243,420 839,680 46,313 793,367 Reef Partners 2001-B Income Fund 4,548,649 1,281,753 3,266,896 704,620 29,412 675,208 Reef Partners 2002-A Income Fund 4,899,121 771,986 4,127,135 884,927 4,441 880,486 Reef Partners 2003-A Income Fund 3,254,333 2,125,906 1,128,427 567,438 22,118 545,320 Reef Oil & Gas Income Fund IX, L.P. 605,771 1,171,519 (565,748 ) 113,580 32,588 80,992 Reef Oil & Gas Income and Development Fund, L.P. 2,204,178 143,556 2,060,622 (17,411 ) 2,385 (19,796 ) Reef Oil & Gas Income and Development Fund II L.P. (67,036 ) (67,036 ) (2,264 ) (2,264 ) Total $ 30,406,207 $ 9,447,159 $ 20,959,048 $ 5,373,107 $ 344,735 $ 5,028,372 Table Three sets forth the acquisition and drilling results as of December 31, 2006 for each named partnership. For purposes of this Table Three, a "gross well" is a well in which a leasehold interest is owned, a "net well" equals the actual leasehold interest owned in one gross well divided by 100 and a "dry hole" refers to a well that is plugged and abandoned with or without a completion attempt because the operator has determined that it will not be productive in commercial quantities. TABLE THREE Drilling Results for Multiple-Well Drilling Partnerships as of September 30, 2007 Gross Wells** Net Wells Partnership Name Percent Completed** Percent Completed Oil Gas Dry Oil Gas Dry Acquisition and Drilling Results for Income Fund and Income and Development Fund Partnerships as of September 30, 2007 Gross Wells Drilled** Net Wells Drilled Partnership Name Percent Completed** Percent Completed Oil Gas Dry Oil Gas Dry Table Four sets forth the total partnership revenue and expenditures made by each named partnership from its inception through July 31, 2007. TABLE FOUR Revenues and Expenditures of Prior Partnerships from Inception through July 31, 2007 Multiple-Well Drilling Partnerships Total Partnership Revenue Property Sales Proceeds GAAP
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001409134_osg_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001409134_osg_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e57dbfe2393cea14f68890740eee2c5609f7194a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001409134_osg_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common units offered by this prospectus will be passed upon for us by Cravath, Swaine & Moore LLP, New York, New York. Certain legal matters with respect to this offering will be passed upon for the underwriters by Andrews Kurth LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001409302_value_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001409302_value_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fa26ae21718cd8e828cd3b4eca1f8249e65a973b
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001409302_value_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Greenberg Traurig, LLP, New York, NY, has provided us an opinion relating to the validity of the common stock issued in this offering. Legal matters will be passed upon for the underwriters by Proskauer Rose LLP, New York, NY.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001410197_aprimo-inc_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001410197_aprimo-inc_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..36c5809fd6b8d396103748f6bed0bac5881709b6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001410197_aprimo-inc_legal_matters.txt
@@ -0,0 +1 @@
+legal matters relating to this offering for the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001410648_tensar_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001410648_tensar_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2316b00d066d90ed19c1f9e9977de099766d14d5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001410648_tensar_legal_matters.txt
@@ -0,0 +1 @@
+legal matters in connection with this offering will be passed upon for the underwriters by Latham Watkins LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001410660_plains-gp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001410660_plains-gp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6916436fd6dcc9d1c294c246f55663996a0d36d7
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001410660_plains-gp_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common units will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in connection with the common units offered hereby will be passed upon for the underwriters by Baker Botts L.L.P., Houston, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001410703_danvers_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001410703_danvers_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a6bc83964113dccbac75583d6e07e26308cdb129
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001410703_danvers_legal_matters.txt
@@ -0,0 +1 @@
+legal matters regarding the offering will be passed upon for Sandler O'Neill & Partners, L.P. by Thacher Proffitt & Wood LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001411419_chinaedu_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001411419_chinaedu_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..27269fce79aa1578e452af4f341763799a4d5aef
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001411419_chinaedu_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain legal matters as to United States federal and New York law will be passed upon for us by Hogan & Hartson LLP. Certain legal matters as to United States federal and New York law will be passed upon for the underwriters by Cleary Gottlieb Steen & Hamilton LLP. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Conyers Dill & Pearman. Certain legal matters as to Chinese law will be passed upon for us by Jun He Law Offices and for the underwriters by Haiwen & Partners. Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001411875_alma_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001411875_alma_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..466fb423d722dfe1db6c6565ce644f333c1fc2e5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001411875_alma_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ordinary shares offered by this prospectus will be passed upon for us by Naschitz, Brandes Co., Tel-Aviv, Israel, our Israeli counsel. We are also being represented by Goodwin Procter llp, Boston, Massachusetts, as to U.S. legal matters. Dewey LeBoeuf LLP, New York, New York, is U.S. counsel for the underwriters in connection with this offering. Certain matters relating to Israeli law will be passed upon for the underwriters by Gornitzky Co., Tel-Aviv, Israel.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001412204_milestone_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001412204_milestone_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..364e31a562748bd892fb574e001cd6d817a0f455
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001412204_milestone_legal_matters.txt
@@ -0,0 +1 @@
+stockholders by Bingham McCutchen LLP. Certain legal matters with respect to this offering will be passed upon for the underwriters by Sidley Austin LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001412501_critical_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001412501_critical_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d0738c2bbfed195e198dcbbe680c643dcf2558f6
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001412501_critical_legal_matters.txt
@@ -0,0 +1,22 @@
+Legal matters
+
+ 
+153
+
+ 
+Experts
+
+ 
+154
+
+ 
+Where you can find more information
+
+ 
+155
+
+ 
+Index to financial statements
+
+ 
+F-1
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001413440_home_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001413440_home_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1101ae1ee354658832f3c5e6518f9ed6972e6569
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001413440_home_legal_matters.txt
@@ -0,0 +1,92499 @@
+, at .
+
+Participant s Signature: 
+ 
+ 
+ 
+ 
+ 
+Date Signed: 
+ 
+ 
+
+This form must be completed and returned to Denis Trom,
+
+500 12th Avenue South, Nampa, Idaho 83651,
+
+by no later than 
+
+12:00 Noon, Mountain time, on 
+ .
+A-3
+
+PROSPECTUS
+ 
+ 
+
+Up to 13,800,000 Shares of Common Stock
+ 
+ 
+
+(Subject to increase to up to 15,870,000 shares)
+ 
+ 
+
+ 
+ 
+HOME FEDERAL BANCORP, INC.
+
+ 
+ 
+(Proposed Holding Company for Home Federal Bank)
+
+ New Home Federal Bancorp, Inc., is a newly formed Maryland
+corporation, that is offering up to 13,800,000 shares of its common
+stock to the public in connection with the conversion of Home Federal
+MHC from the mutual to the stock form of organization. As part of
+the conversion, Home Federal Bank will become our wholly-owned
+subsidiary. We may increase the maximum number of shares that we sell
+in the offering by up to 15%, to 15,870,000 shares, as a result of
+the demand for shares or changes in market and financial conditions.
+The shares being offered represent the 58.9% ownership interest in
+Home Federal Bancorp, Inc. now owned by Home Federal MHC, its mutual
+holding company parent. Home Federal Bancorp, a Federal corporation,
+currently is the mid-tier holding company of Home Federal Bank and
+will cease to exist upon completion of the conversion. The remaining
+41.1% ownership interest in Home Federal Bancorp is owned by the
+public and will be exchanged for shares of new Home Federal Bancorp
+common stock upon the completion of the conversion . If you are now a stockholder of Home Federal Bancorp,
+your shares will be canceled and exchanged for shares of new Home
+Federal Bancorp. The number of shares you will receive will be based
+on an exchange ratio that will depend upon the number of new shares
+we sell in this offering. All shares of common stock being offered
+for sale will be sold at a price of $10.00 per share.
+
+ 
+ 
+ 
+
+If you are a current or former depositor of Home Federal Bank as of the eligibility record dates,
+you may have priority rights to purchase shares in the subscription offering. if (1) you had
+at least $50.00 on deposit at Home Federal Bank at the close of business on
+March 31, 2006; (2) you had at least $50.00 on deposit at Home Federal Bank at the
+closed of business on September 30, 2007; or (3) you were a depositor or borrower
+of Home Federal Bank on ___________, 2007 and March 15, 2004, respectively.
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+If you are a current stockholder of Home Federal Bancorp, your shares
+will be exchanged automatically for between 7,103,110 and 9,610,090
+new shares of new Home Federal Bancorp, or up to 11,051,604 shares in
+the event the maximum of the offering range is increased by
+15%.
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+If you are not a depositor, but are interested in purchasing shares
+of our common stock, you may be able to purchase shares of our common
+stock in the community offering and/or a syndicated community
+offering (collectively referred to as the offering ) to the extent
+shares remain available after priority orders are filled.
+
+ In order to complete the offering, we must sell, in the aggregate, at
+least 10,200,000 shares. The minimum purchase is 25 shares. The
+subscription offering is scheduled to end at 12:00 Noon, Mountain
+time, on __________ __, 2007. However, we may extend this expiration
+date without notice to you, until ________ __, 2008, unless the
+Office of Thrift Supervision approves a later date, which may not be
+extended beyond _________ __, 2009. Once submitted, orders are
+irrevocable unless the offering is terminated or extended beyond
+_________ __, 2008. If the offering is extended beyond _________ __,
+2008, subscribers will have the right to modify or rescind their
+purchase orders. In the event
+this occurs, or there is a change in the offering range, we will resolicit
+purchasers and you will have the opportunity to maintain, change or cancel your
+order. If you do not provide us with a
+written indication of your intent after you receive the resolicitation
+materials, your order will be cancelled and your funds will be returned to you,
+with interest. New Home Federal Bancorp will hold all subscribers 
+funds received before the completion of the conversion in a
+segregated account at Home Federal Bank or, at our discretion, at an
+independent insured depository institution until the conversion is
+completed or terminated. We will pay interest on all funds received
+at a rate equal to Home Federal Bank s passbook/statement savings
+rate, which is currently 0.20% per annum. Funds will be returned
+promptly with interest if the conversion is terminated.
+
+ Home Federal Bancorp s common stock is currently listed on the Nasdaq
+Global Market under the symbol HOME . We have applied to have the
+common stock of new Home Federal Bancorp listed for trading on the
+Nasdaq Global Select Market. For the first 20 trading days after the
+conversion and offering is completed, we expect new Home Federal
+Bancorp common stock to trade under the symbol HOMED, thereafter it
+will revert to the HOME trading symbol. We cannot assure you that
+our common stock will be approved for listing on the Nasdaq Global
+Select Market.
+
+Investing in our common stock involves risks. See Risk Factors 
+beginning on page 1.
+
+OFFERING SUMMARY
+ Price Per Share: $10.00; Minimum Subscription: 25 shares or $250
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Maximum,
+
+ 
+ 
+ 
+Minimum
+ 
+Maximum
+ 
+as adjusted (1)
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+Number of Shares
+ 
+ 
+ 
+10,200,000
+ 
+ 
+ 
+13,800,000
+ 
+ 
+ 
+15,870,000
+ 
+
+Gross Offering
+ Proceeds
+ 
+ 
+ 
+$102,000,000
+ 
+ 
+ 
+$138,000,000
+ 
+ 
+ 
+$158,700,000
+ 
+
+Underwriting
+ Commission
+ 
+ 
+ 
+3,228,000
+ 
+ 
+ 
+4,370,000
+ 
+ 
+ 
+5,026,000
+ 
+
+Other Expenses
+ 
+ 
+ 
+1,243,000
+ 
+ 
+ 
+1,243,000
+ 
+ 
+ 
+1,243,000
+ 
+
+Net Proceeds
+ to Home Federal Bancorp, Inc.
+ 
+ 
+ 
+97,529,000
+ 
+ 
+ 
+132,387,000
+ 
+ 
+ 
+152,431,000
+ 
+
+Net Proceeds Per Share
+ 
+ 
+ 
+9.56
+ 
+ 
+ 
+9.59
+ 
+ 
+ 
+9.61
+ 
+
+(1)
+ 
+
+For information regarding underwriting compensation to be paid to
+Keefe, Bruyette & Woods, including the assumptions regarding the
+number of shares sold in the offering that we used to determine the
+estimated offering expenses, see Pro Forma Data and The Conversion
+and Stock Offering Marketing Arrangements. 
+
+ 
+Keefe, Bruyette & Woods will use its best efforts to assist us in our
+selling efforts, but is not required to purchase any of the common
+stock that is being offered for sale. Subscribers will not pay any
+commissions to purchase shares of common stock in the offering.
+
+ These securities are not deposits or accounts and are not insured or
+guaranteed by the Federal Deposit Insurance Corporation or any other
+governmental agency. Neither the Securities and Exchange Commission,
+the Office of Thrift Supervision, nor any other federal agency or
+state securities regulator has approved or disapproved these
+securities or determined if this prospectus is accurate or complete.
+Any representation to the contrary is a criminal offense.
+
+ For information on how to subscribe, call
+ the stock information center at (208) ___-___.
+
+ 
+
+KEEFE, BRUYETTE & WOODS
+
+ 
+
+ 
+
+__________ ___, 2007
+
+TABLE OF CONTENTS
+
+ 
+ 
+ 
+ 
+Page
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+Summary
+
+ 
+ 
+
+i
+
+ 
+Risk Factors
+ 
+ 
+1
+
+ 
+Selected Financial and Other Data
+ 
+ 
+
+10
+
+ 
+A Warning About Forward-Looking Statements
+ 
+ 
+12
+
+ 
+How We Intend to Use the Proceeds From this Offering
+ 
+ 
+13
+
+ 
+We Intend to Continue to Pay Quarterly Cash Dividends
+ 
+ 
+14
+
+ 
+Market for Our Common Stock
+ 
+ 
+
+15
+
+ 
+Capitalization
+ 
+ 
+
+16
+
+ 
+Home Federal Bank Exceeds All Regulatory Capital Requirements
+ 
+ 
+17
+
+ 
+Pro Forma Data
+ 
+ 
+
+19
+
+ 
+Recent Developments
+ 
+ 
+
+27
+
+ 
+Management s Discussion and Analysis of Financial Condition and Results of Operations
+
+ 
+ 
+39
+
+ 
+Business of Home Federal Bancorp, Inc. and Home Federal Bank
+ 
+ 
+69
+
+ 
+Management
+ 
+ 
+
+104
+
+ 
+Proposed Purchases by Management
+ 
+ 
+
+129
+
+ 
+Security Ownership of Certain Beneficial Owners and Management
+ 
+ 
+
+130
+
+ 
+How We Are Regulated
+ 
+ 
+
+132
+
+ 
+Taxation
+ 
+ 
+
+141
+
+ 
+The Conversion and Stock Offering
+ 
+ 
+
+144
+
+ 
+Comparison of Rights of New Home Federal Bancorp and Home Federal Bancorp s Stockholders
+ 
+ 
+
+166
+
+ 
+Restrictions on Acquisitions of New Home Federal Bancorp and Home Federal Bank
+ 
+ 
+173
+
+ 
+Description of Capital Stock
+ 
+ 
+177
+
+ 
+Transfer Agent and Registrar
+ 
+ 
+
+178
+
+ 
+Experts
+
+ 
+ 
+
+178
+
+ 
+Legal and Tax Opinions
+ 
+ 
+
+178
+
+ 
+Where You Can Find More Information
+ 
+ 
+
+179
+
+ 
+Index to Consolidated Financial Statements
+ 
+ 
+F-1
+
+SUMMARY
+
+This summary provides an overview of the key aspects of the stock
+offering as described in more detail elsewhere in this prospectus and
+may not contain all the information that is important to you. To
+completely understand the stock offering, you should read the entire
+prospectus carefully, including the sections entitled Risk Factors 
+and The Conversion and Stock Offering and the consolidated
+financial statements and the notes to the consolidated financial
+statements beginning on page F-1, before making a decision to invest
+in our common stock.
+
+Overview
+
+New Home Federal Bancorp, is a newly formed Maryland corporation.
+New Home Federal Bancorp is conducting this offering of between
+10,200,000 and 13,800,000 shares of common stock in connection with
+the conversion of Home Federal MHC from the mutual to the stock form
+of organization. The shares of new Home Federal Bancorp to be sold
+represent the 58.9% ownership interest in the mid-tier holding
+company, Home Federal Bancorp now owned by Home Federal MHC. This
+ownership interest is being sold to raise additional capital to
+support the operational growth of Home Federal Bank. The remaining
+41.1% ownership interest in Home Federal Bancorp is owned by the
+public and will be exchanged for shares of new Home Federal Bancorp
+common stock upon the completion of the conversion . In this exchange, each publicly held share of Home Federal Bancorp common stock will, on the date of completion of the conversion, be
+automatically converted into and become the right to receive a number of shares of common stock of new Home Federal Bancorp
+determined pursuant to an exchange ratio. The current public stockholders of Home Federal Bancorp common stock will own the same
+percentage of common stock in new Home Federal Bancorp after the conversion as they hold in Home Federal Bancorp subject to
+additional purchases, or the receipt of cash in lieu of fractional shares. The actual number of shares a current stockholder of Home
+Federal Bancorp receives pursuant to the exchange ratio will therefore depend on the number of shares we sell in our offering, which
+in turn will depend on the final appraised value of new Home Federal Bancorp.
+
+We may increase the maximum number of shares that we
+sell in the offering by up to 15% to 15,870,000 shares, as a result
+of the demand for shares or changes in market and financial
+conditions. The offering includes a subscription offering in which
+certain persons, including depositors of Home Federal Bank, have
+prioritized subscription rights. There are limitations on how many
+shares of common stock a person may purchase in the offering. The
+amount of capital being raised is based on an appraisal of Home
+Federal Bancorp. Most of the terms and requirements of this offering
+are required by regulations of the Office of Thrift Supervision. The
+same directors and certain officers who manage Home Federal Bancorp
+will manage new Home Federal Bancorp.
+
+The following tables show how many shares of common stock that may be
+issued in the offering, and subsequently issued if our new proposed
+stock benefit plans are adopted.
+
+ 
+ 
+
+Shares to be sold
+ 
+ 
+ 
+ 
+ 
+ 
+Shares proposed
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total shares of
+
+ 
+ 
+
+to the
+ 
+
+Shares to be sold
+ 
+to be sold
+ 
+ 
+ 
+ 
+ 
+ 
+
+common stock to be
+
+ 
+ 
+
+public in
+ 
+
+to the employee stock
+ 
+to directors
+ 
+
+Exchange
+ 
+
+outstanding after the
+
+ 
+ 
+
+this offering
+ 
+
+ownership plan (2)
+ 
+and officers
+ 
+
+shares
+ 
+
+conversion
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+Amount
+ 
+
+%(1)
+ 
+Amount
+ 
+
+%(1)
+ 
+Amount
+ 
+
+%(1)
+ 
+Amount
+ 
+
+%(1)
+ 
+Amount
+ 
+
+%(1)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Minimum
+ 
+9,321,500
+ 
+53.9
+%
+ 
+816,000
+ 
+4.7
+%
+ 
+62,500
+ 
+0.3
+%
+ 
+7,103,110
+ 
+41.1
+%
+ 
+17,303,110
+ 
+100.0
+%
+
+Midpoint
+ 
+10,977,500
+ 
+53.9
+ 
+ 
+960,000
+ 
+4.7
+ 
+ 
+62,500
+ 
+0.3
+ 
+ 
+8,356,600
+ 
+41.1
+ 
+ 
+20,356,600
+ 
+100.0
+ 
+
+Maximum
+ 
+12,633,500
+ 
+53.9
+ 
+ 
+1,104,000
+ 
+4.7
+ 
+ 
+62,500
+ 
+0.3
+ 
+ 
+9,610,090
+ 
+41.1
+ 
+ 
+23,410,090
+ 
+100.0
+ 
+
+Maximum, as adjusted
+
+14,537,900
+ 
+54.0
+ 
+ 
+1,269,600
+ 
+4.7
+ 
+ 
+62,500
+ 
+0.2
+ 
+ 
+11,051,604
+ 
+41.1
+ 
+ 
+26,921,604
+ 
+100.0
+ 
+
+ 
+
+ 
+ 
+
+Shares that
+ 
+
+Shares that
+
+ 
+ 
+
+may be
+ 
+
+may be
+
+ 
+ 
+
+awarded under a
+ 
+
+issued under a
+
+ 
+ 
+
+restricted stock plan
+ 
+
+stock option plan
+
+ 
+ 
+
+ 
+
+ 
+ 
+Amount
+ 
+
+%(1)
+ 
+Amount
+ 
+
+%(1)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Minimum
+ 
+353,510
+ 
+2.0
+%
+ 
+883,776
+ 
+5.1
+%
+
+Midpoint 
+ 
+415,894
+ 
+2.0
+ 
+ 
+1,039,736
+ 
+5.1
+ 
+
+Maximum
+ 
+478,278
+ 
+2.0
+ 
+ 
+1,195,696
+ 
+5.1
+ 
+
+Maximum, as
+ adjusted
+ 
+550,020
+ 
+2.0
+ 
+ 
+1,375,051
+ 
+5.1
+ 
+
+(1)
+As a percentage
+ of total shares outstanding after the offering.
+
+ 
+
+(2)
+Assumes 8%
+ of the shares sold in the conversion are sold to the employee stock ownership plan
+ in the offering.
+
+Dollar amounts in this prospectus are consolidated
+ and refer to Home Federal Bancorp and subsidiary unless otherwise indicated.
+
+i
+
+The Companies:
+
+Home Federal Bancorp,
+ Inc. (new)
+500 12th Avenue South
+Nampa, Idaho 83651
+(208) 466-4634
+
+New Home Federal Bancorp is a newly formed Maryland corporation that
+will hold all of the outstanding shares of Home Federal Bank
+following the conversion to stock ownership. New Home Federal
+Bancorp is conducting the stock offering in connection with the
+conversion of Home Federal MHC from the mutual to the stock form of
+organization. Following the completion of the offering, new Home
+Federal Bancorp will be the savings and loan holding company of Home
+Federal Bank and its primary regulator will be the Office of Thrift
+Supervision.
+
+Home Federal MHC
+
+500 12th Avenue South
+Nampa, Idaho 83651
+(208) 466-4634
+
+Home Federal MHC is a federally chartered mutual holding company that
+owns 58.9% of the outstanding common stock of Home Federal Bancorp.
+Home Federal MHC was formed in 2004 in connection with the
+reorganization of Home Federal Bank into the mutual holding company
+form of organization. Home Federal MHC is a savings and loan holding
+company and its business is to own at least a majority of Home
+Federal Bancorp s outstanding shares of common stock. Following the
+conversion, Home Federal MHC will cease to exist as a separate
+entity; it will be replaced by new Home Federal Bancorp.
+
+Home Federal Bancorp,
+ Inc.
+500 12th Avenue South
+Nampa, Idaho 83651
+(208) 466-4634
+
+Home Federal Bancorp, Inc. is a federal corporation and a mid-tier
+holding company that owns 100% of Home Federal Bank. It was formed
+in 2004 in connection with the reorganization of Home Federal Bank
+into the mutual holding company form of organization. Effective with
+the reorganization, it became a stock holding company and the 58.9%
+owned subsidiary of Home Federal MHC, a federally chartered mutual
+holding company.
+
+Home Federal Bancorp conducts its business as a savings and loan
+holding company and has no significant liabilities. Its primary
+business consists of directing, planning and coordinating the
+business activities of Home Federal Bank. 
+
+Home Federal Bank
+
+500 12th Avenue South
+Nampa, Idaho 83651
+(208) 466-4634
+
+ Home Federal Bank was founded in 1920 as a building and loan
+association and reorganized as a federal mutual savings and loan
+association in 1936. We are a community-based financial institution
+primarily serving the Boise, Idaho and surrounding metropolitan area
+known as the Treasure Valley region of southwestern Idaho, including
+Ada, Canyon, Elmore and Gem counties. We conduct our operations
+through our 15 full-service banking offices, and two loan centers.
+Included in our 15 full-service banking offices are six Wal-Mart
+in-store branch locations. We are in the business of attracting
+deposits from the public and utilizing those deposits to originate
+loans. We offer a wide range of loan products to meet the demands of
+our customers. Historically, lending activities have been primarily
+directed toward the origination of residential and commercial real
+estate loans. Real estate lending activities have been primarily
+focused on first mortgages on owner occupied, one- to four-family
+residential properties. To an increasing extent in recent years,
+lending activities have also included the origination of residential 
+
+ii
+
+and commercial construction and land development loans and home
+equity loans. While continuing our commitment to residential
+lending, management expects commercial lending, including commercial
+real estate, builder finance and commercial business lending, to
+become increasingly important activities for us. Consistent with
+this strategy, we appointed Mr. Len E. Williams as President of Home
+Federal Bank in September 2006 and to Home Federal Bancorp s board of
+directors in April 2007. Mr. Williams has extensive experience in
+business related lending. Before starting his tenure with us, Mr.
+Williams served as Senior Vice President and Head of Business Banking
+of Fifth Third Bank and held several management positions with Key
+Bank, including President of Business Banking from 2003 to 2005. We
+expect him to succeed Mr. Daniel L. Stevens, Home Federal Bancorp s
+Chairman, President and Chief Executive Officer, as President and
+Chief Executive Officer of new Home Federal Bancorp, and to become
+Chief Executive Officer of Home Federal Bank in October 2008. See
+ Business of Home Federal Bancorp, Inc. and Home Federal Bank 
+Lending Activities. 
+
+ At June 30, 2007, we had total assets of $728.3 million, deposit
+accounts of $418.7 million and equity of $110.0 million. Home Federal
+Bank maintains a website at www.myhomefed.com.
+
+Operating Lines
+
+ The following reflects our management structure and responsibilities
+of each of our operating lines before and after the conversion:
+
+iii
+
+Operating Strategy
+
+Our strategies center on our continued development into a full
+service, community-oriented bank. Our goal is to continue to enhance
+our franchise value and earnings through controlled growth in our
+banking operations, especially small business lending, while
+maintaining the community-oriented customer service and sales focus
+that has characterized our success to date. In order to be
+successful in this objective and increase stockholder value, we are
+committed to the following strategies:
+
+Continue Growing in Our Existing Markets. We believe there is a
+large customer base in our market that is dissatisfied with the
+service received from larger regional banks. By offering quicker
+decision making in the delivery of banking products and services,
+offering customized products where appropriate, and providing
+customer access to our senior managers, we hope to distinguish
+ourselves from larger, regional banks operating in our market areas.
+Our larger capital base resulting from this offering and our plans to
+diversify our product mix should allow us to compete effectively
+against smaller banks.
+
+Continue Our Disciplined Execution. We believe our success as a
+banking organization depends on a disciplined approach to originating
+loans and monitoring the performance of our loan portfolio. Despite
+our growth, we have consistently maintained strong asset quality. We
+believe our strong asset quality is the result of our underwriting
+standards, experienced loan officers and the strength of the local
+economy. We do not originate subprime mortgage loans and currently
+hold no such loans in our portfolio or service any of these loans.
+In addition, many of the commercial loans we originate are to
+borrowers well known by our loan officers from existing and prior
+banking relationships. At June 30, 2007, our nonperforming assets as
+a percentage of total assets were 0.07% and for the nine months ended
+June 30, 2007 our ratio of net charge-offs to average loans was
+0.02%. Our year-end (September 30) nonperforming assets as a
+percentage of total assets and ratio of net charge-offs to average
+loans have not exceeded 0.17% and 0.10%, respectively, in any of the
+past five years.
+
+Expanding Our Product Offerings. We intend to continue our emphasis
+on originating commercial lending products that diversify our loan
+portfolio by increasing the percentage of our assets consisting of
+higher-yielding construction and land development, commercial real
+estate and commercial business loans with higher risk-adjusted
+returns, shorter maturities and more sensitivity to interest rate
+fluctuations, while still providing high quality loan products for
+single-family residential borrowers. We also intend to selectively
+add products to provide diversification of revenue sources and to
+capture our customer s full relationship. We intend to continue to
+expand our business by cross selling our loan and deposit products
+and services to our customers in order to increase our fee income. 
+
+Focus on Our Branch Expansion.
+Branch expansion has played a significant role in our ability to grow
+loans, deposits and customer relationships. Since August 2000 we
+have opened eight branches in our existing markets. We are planning
+four to six new branches that we intend to open within the next 24
+months. There is
+currently one new branch under construction in Nampa, Idaho and plans are being
+finalized for the construction of a new branch office in the Meridian, Idaho
+market in 2008. Our long-term strategy is to build two or three branches per
+year if appropriate sites can be identified and obtained. We will
+also actively search for appropriate acquisitions to enhance our
+ability to deliver products and services in our existing markets and
+to expand into surrounding markets. However, there
+are currently no specific acquisitions under consideration.
+
+Increasing Our Core Transaction Deposits. A fundamental part of our
+overall strategy is to improve both the level and the mix of deposits
+that serve as a funding base for asset growth. By growing demand
+deposit accounts and other transaction accounts, we intend to reduce
+our reliance on higher-cost certificates of deposit and borrowings
+such as advances from the Federal Home Loan Bank of Seattle. In
+order to expand our core deposit franchise, we are focusing on
+introducing additional products and services to obtain money market
+and time deposits by bundling them with other consumer services.
+Business deposits are being pursued by the introduction of cash
+management products and by specific targeting of small business
+customers.
+
+Hire Experienced Employees With a Customer Service Focus. Our ability
+to continue to attract and retain banking professionals with strong
+business banking and service skills, community relationships and
+significant
+
+iv
+
+knowledge of our markets is key to our success. We
+believe that by focusing on experienced bankers who are established
+in their communities, we enhance our market position and add
+profitable growth opportunities. We emphasize to our employees the importance of delivering exemplary
+customer service and seeking opportunities to build further
+relationships with our customers. Our goal is to compete by relying
+on the strength of our customer service and relationship banking
+approach.
+
+Continuing an internal management culture which is driven by a focus
+on profitability, productivity and accountability for results and
+which responds proactively to the challenge of change. The primary
+method for reinforcing our culture is the comprehensive application
+of our Pay for Performance total compensation program. Every
+employee has clearly defined accountabilities and performance
+standards that tie directly or indirectly to our profitability. All
+incentive compensation is based on specific profitability measures,
+sales volume goals or a combination of specific profitability
+measures and individual performance goals. This approach encourages
+all employees to focus on our profitability and has created an
+environment that embraces new products, services and delivery systems.
+
+The Conversion and Stock Offering
+
+Home Federal MHC is currently in the mutual form of ownership. Our
+depositors and certain borrowers as members have the right to vote on
+certain matters, such as the conversion. The conversion is a series
+of transactions by which we are reorganizing from a mutual holding
+company structure, where the mid-tier holding company, Home Federal
+Bancorp, is 58.9% owned by a mutual holding company, Home Federal
+MHC, and 41.1% owned by other stockholders (who are sometimes
+referred to as the public stockholders ), to a stock holding company
+which will be 100% owned by public stockholders. As part of the
+conversion, Home Federal Bancorp and Home Federal MHC will cease to
+exist as separate entities, and Home Federal Bank will be owned
+directly by new Home Federal Bancorp. Voting rights in new Home
+Federal Bancorp will be vested solely in the public stockholders
+following the conversion.
+
+As a result of the conversion of Home Federal MHC into new Home
+Federal Bancorp, the shares of common stock of the mid-tier holding
+company, Home Federal Bancorp, owned by Home Federal MHC will be
+cancelled. New shares of common stock, representing the 58.9%
+ownership interest of Home Federal MHC in the mid-tier holding
+company, Home Federal Bancorp, are being offered for sale by new Home
+Federal Bancorp in this offering. The remaining 41.1% ownership
+interest in Home Federal Bancorp is currently owned by public
+stockholders and will be exchanged for shares of new Home Federal
+Bancorp s common stock based on an exchange ratio of 1.1360 to
+1.5369. The exchange ratio may be increased to as much as 1.7674 in
+the event the maximum of the offering range is increased by 15%. The
+actual exchange ratio will be determined at the closing of the
+offering and will depend on the number of shares of new Home Federal
+Bancorp s common stock that are sold in the offering.
+
+v
+
+ 
+ 
+ 
+
+Terms of the Offering
+
+ 
+ 
+ 
+
+We are offering between 10,200,000 and 13,800,000
+shares of common stock, to those with subscription rights in the
+following order of priority:
+
+ 
+ 
+ 
+
+(1)
+ 
+Depositors
+ who held at least $50 with us on March 31, 2006.
+ 
+
+ 
+ 
+ 
+
+(2)
+ 
+The Home Federal
+ Bancorp employee stock ownership plan.
+ 
+
+ 
+ 
+ 
+
+(3)
+ 
+Depositors
+ who held at least $50 with us on September 30, 2007.
+ 
+
+vi
+
+ 
+ 
+ 
+
+(4)
+ 
+Depositors and borrowers with us as of , 2007
+and March 16, 2004, respectively, to the extent not already included
+in a prior category.
+ 
+
+ 
+ 
+ 
+
+We may increase the maximum number of shares that we
+sell in the offering by up to 15% to 15,870,000 shares as a result of
+market demand, regulatory considerations or changes in financial
+conditions with the approval of the Office of Thrift Supervision and
+without any notice to you. If we increase the number of shares in
+the offering, you will not have the opportunity to change or cancel
+your stock order. The offering price is $10.00 per share. All
+purchasers will pay the same purchase price per share. No commission
+will be charged to purchasers in the offering. 
+
+ 
+ 
+ 
+
+If we receive subscriptions for more shares than are
+to be sold in the subscription offering, shares will be allocated in
+order of the priorities described above under a formula outlined in
+the plan of conversion and reorganization. If we increase the number
+of shares to be sold above 13,800,000, the employee stock ownership
+plan will have the first priority right to purchase any shares
+exceeding that amount to the extent that its subscription has not
+previously been filled. Any shares remaining will be allocated in
+the order of priorities described above. Shares of common stock not
+subscribed for in the subscription offering will be offered to the
+general public in a direct community offering with a preference to
+natural persons residing in Ada, Canyon, Elmore and Gem counties,
+Idaho and, if necessary, a syndicated community offering. The direct
+community offering, if any, shall begin at the same time as, during
+or promptly after the subscription offering. See The Conversion and
+Stock Offering Subscription Offering and Subscription Rights, Direct Community Offering and Syndicated Community Offering. 
+
+ 
+ 
+ 
+
+Keefe, Bruyette & Woods, our financial advisor and selling agent in
+connection with the offering, will use its best efforts to assist us
+in selling our common stock in the offering. Keefe, Bruyette & Woods
+is not obligated to purchase any shares of common stock in the
+offering. For further information about the role of Keefe, Bruyette
+& Woods in the offering, see The Conversion and Stock Offering Marketing Arrangements. 
+
+ 
+ 
+ 
+
+Reasons for the Conversion and Offering
+
+We believe
+that this is the right time for Home Federal MHC to convert to the stock
+form. Generally, the conversion and
+stock offering will give us the financial strength to continue to grow our bank,
+better
+enable us to serve our customers in our market area, help us retain and
+attract qualified management through stock-based compensation plans, and
+provide us with easier access to the capital markets through possible future
+equity and debt offerings.
+
+We believe
+that the conversion also will help us grow our loan portfolio, particularly in
+the commercial lending area. The
+increased capital from the offering proceeds will enable us to make larger
+loans than we have been able to in the past and make us a more effective
+competitor in our market areas. In
+order to capitalize on these opportunities we have hired and plan to hire
+several additional commercial lending officers who will focus on increasing our
+commercial loan portfolio. We believe
+that, as a stock-form institution, we may be in a better position to attract
+and retain quality loan officers. In
+addition, we plan to expand our banking franchise by opening additional branch
+offices. We are planning four to six
+new branches that we intend to open within the next 24 months. There is
+currently one new branch under construction in Nampa, Idaho and plans are being
+finalized for the construction of a new branch office in the Meridian, Idaho
+market in 2008. We hope to be able to
+use these new branches to enhance our commercial lending efforts in which we
+open new offices. In addition, we
+believe that there may be opportunities to make acquisitions of other financial
+institutions in the future, although we do not currently have any plans,
+agreements or understandings regarding any acquisition transactions. The proceeds from the offering as well as
+the stock form of ownership will facilitate our ability to consider
+acquisitions in the future.
+
+The Exchange of Home Federal Bancorp
+ Common Stock
+
+If you are now a stockholder of Home Federal Bancorp,
+the existing publicly traded mid-tier holding company, your shares
+will be cancelled and exchanged for new shares of new Home Federal
+Bancorp common stock. The exchange of shares is subject to the completion of the conversion inculding the approval of the 
+
+vii
+
+ members of Home Federal MHC, the stockholders of
+Home Federal Bancorp, Inc. and the approval of the appraisal update by the Office of Thrift Supervision.
+The number of shares you receive will be based
+on an exchange ratio determined as of the closing of the conversion.
+The actual number of shares you receive will depend upon the number
+of shares we sell in our offering, which in turn will depend upon the
+final appraised value of new Home Federal Bancorp. The following
+table shows how the exchange ratio will adjust, based on the number
+of shares sold in our offering. The table also shows how many shares a hypothetical owner of Home Federal Bancorp common stock would receive in the exchange, based on
+the number of shares sold in the offering.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+100
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+shares of
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Home
+ 
+Value of
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Federal
+ 
+new Home
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Bancorp
+ 
+Federal
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+common
+ 
+Bancorp
+ shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+stock
+ 
+to be received
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Total shares
+ 
+ 
+ 
+would be
+ 
+in exchange
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+of new
+ 
+ 
+ 
+exchanged
+ 
+for 100
+ shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Shares of new Home
+ 
+Home
+ 
+ 
+ 
+for the
+ 
+of Home
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal Bancorp stock
+ 
+Federal
+ 
+ 
+ 
+following
+ 
+Federal
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+to be exchanged for
+ 
+Bancorp
+ 
+ 
+ 
+number of
+ 
+Bancorp
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+current Home Federal
+ 
+common
+ 
+ 
+ 
+shares of
+ 
+common stock
+
+ 
+ 
+
+Shares to be sold in
+ 
+
+Bancorp common
+ 
+stock to
+ be
+ 
+ 
+ 
+new
+ 
+assuming
+
+ 
+ 
+
+the offering
+ 
+
+stock
+ 
+outstanding
+ 
+ 
+ 
+Home
+ 
+value at
+
+ 
+ 
+
+ 
+
+ 
+after the
+ 
+Exchange
+ 
+Federal
+ 
+$10.00 per
+
+ 
+ 
+Amount
+ 
+
+Percent
+ 
+Amount
+ 
+
+Percent
+ 
+conversion
+ 
+ratio
+ 
+Bancorp
+ 
+share
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Minimum
+ 
+10,200,000
+ 
+58.9
+%
+ 
+ 7,103,110
+ 
+41.1
+%
+ 
+17,303,110
+ 
+1.1360
+ 
+113
+ 
+$1,130
+
+Midpoint
+ 
+12,000,000
+ 
+58.9
+ 
+ 
+ 8,356,600
+ 
+41.1
+ 
+ 
+20,356,600
+ 
+1.3364
+ 
+133
+ 
+1,330
+
+Maximum
+ 
+13,800,000
+ 
+58.9
+ 
+ 
+ 9,610,090
+ 
+41.1
+ 
+ 
+23,410,090
+ 
+1.5369
+ 
+153
+ 
+1,530
+
+15% above
+ the maximum
+ 
+15,870,000
+ 
+58.9
+ 
+ 
+11,051,604
+ 
+41.1
+ 
+ 
+26,921,604
+ 
+1.7674
+ 
+176
+ 
+1,760
+
+If you currently own shares of Home Federal Bancorp which are held in
+ street name, they will be exchanged without any action on your part. If you
+currently are the record owner of shares of Home Federal Bancorp and hold
+certificates for these shares you will receive, after the conversion and
+offering is completed, a transmittal form with instructions to surrender your
+stock certificates. New certificates of our common stock will be mailed within
+five business days after the exchange agent receives properly executed
+transmittal forms and stock certificates. You should not submit a stock
+certificate for exchange until you receive a transmittal form.
+
+No fractional shares of our common stock will be issued to any public
+stockholder of Home Federal Bancorp upon consummation of the conversion. For
+each fractional share that would otherwise be issued, we will pay an amount
+equal to the product obtained by multiplying the fractional share interest to
+which the holder would otherwise be entitled by the $10.00 per share
+subscription price.
+
+Under federal law and regulations, current public stockholders of Home
+Federal Bancorp do not have dissenters rights or appraisal rights.
+
+Outstanding options to purchase shares of Home Federal Bancorp common
+stock also will convert into and become options to purchase new shares of new
+Home Federal Bancorp, Inc. common stock. The number of shares of common stock to
+be received upon exercise of these options will be determined pursuant to the
+exchange ratio. The aggregate exercise price, duration and vesting schedule of
+these options will not be affected by the conversion. At June 30, 2007, there
+were 559,228 outstanding options to purchase shares of Home Federal Bancorp
+common stock, 49,233 of which have vested. Such options will be converted into
+options to purchase 635,283 shares of common stock at the minimum of the
+offering range and 859,478 shares of common stock at the maximum of the offering
+range. Because Office of Thrift Supervision regulations prohibit us from
+repurchasing our common stock during the first year following the conversion
+unless compelling business reasons exist for such repurchases, we may use
+authorized but unissued shares to fund option exercises that occur during the
+first year following the conversion. If
+
+viii
+
+all existing options were exercised for
+authorized, but unissued shares of common stock following the conversion,
+stockholders would experience dilution of approximately 3.5%.
+
+How We Determined the Offering Range
+ and the $10.00 Price Per Share
+
+The offering range is based on an independent appraisal of the market
+value of the common stock to be issued in the offering. RP Financial, LC., an
+appraisal firm experienced in appraisals of financial institutions, has advised
+us that, as of September 14, 2007, the estimated pro forma market value of our
+common stock, including exchange shares, ranges from a minimum of $173.0 million
+to a maximum of $234.1 million, with a midpoint of $203.6 million. Based on this
+valuation range, the percentage of Home Federal Bancorp s common stock owned by
+Home Federal MHC, and the $10.00 price per share, the respective boards of
+directors of Home Federal Bank, Home Federal MHC and Home Federal Bancorp
+determined to offer shares of new Home Federal Bancorp s common stock ranging
+from a minimum of 10,200,000 shares to a maximum of 13,800,000 shares, with a
+midpoint of 12,000,000 shares. The pro forma market value can be adjusted
+upward by us subsequent to the expiration date of the offering and prior to
+closing to reflect the demand for shares in the offering or changes in market
+and financial conditions without the resolicitation of subscribers if supported
+by an appropriate change in our independent appraisal and the approval of the
+Office of Thrift Supervision. At the adjusted maximum, the estimated pro forma
+market value of new Home Federal Bancorp s common stock would be $269.2 million
+and the number of shares offered would equal 15,870,000 shares. 
+
+ The
+independent appraisal was based in part on our financial condition and results
+of operations, the pro forma impact of the additional capital raised by the sale
+of common stock in the offering, and an analysis of a peer group of companies
+that RP Financial considered comparable to us. The peer group, which consists
+of 10 publicly traded thrift institutions, includes companies that range in
+asset size from $531 million to $1.2 billion, have market capitalizations that
+range from $53.2 million to $174.6 million, and have been in fully converted
+form for more than one year. A majority of the peer group companies are located
+in the Western states. 
+
+ The
+independent valuation was prepared by RP Financial in reliance upon the
+information contained in this prospectus, including the consolidated financial
+statements of Home Federal Bancorp. RP Financial also considered the following
+factors, among others:
+
+ 
+ 
+the
+present results and financial condition of Home Federal Bank, and the projected
+results and financial condition of new Home Federal Bancorp, a Maryland
+corporation;
+
+ 
+ 
+ 
+
+ 
+ 
+the economic
+ and demographic conditions in Home Federal Bank s existing market area;
+
+ 
+ 
+ 
+
+ 
+ 
+certain historical,
+ financial and other information relating to Home Federal Bank;
+
+ 
+ 
+ 
+
+ 
+ 
+a
+comparative evaluation of the operating and financial characteristics of Home
+Federal Bank with those of other similarly situated publicly traded savings
+institutions located in the United States;
+
+ 
+ 
+ 
+
+ 
+ 
+the impact of the conversion and the offering on Home Federal Bancorp s stockholders equity and earnings potential;
+
+ 
+ 
+ 
+
+ 
+ 
+the proposed
+ dividend policy of new Home Federal Bancorp; and
+
+ 
+ 
+ 
+
+ 
+ 
+the trading
+ market for securities of comparable institutions and general conditions in the market for such securities.
+
+ The
+following table presents a summary of selected pricing ratios for the companies
+comprising the peer group used by RP Financial in its independent appraisal
+report dated September 14, 2007 and the pro forma pricing ratios for us, as
+calculated in the table on page 20 in the section of this prospectus entitled
+ Pro Forma Data. Compared to the median pricing of the peer group, our pro
+forma pricing ratios at the midpoint of the offering range indicated a premium
+of 86.9% on a price-to-earnings basis and discounts of 25.0% on a price-to-book
+value basis and 27.9% on a price-to-tangible book value basis. The estimated
+appraised value and the resulting premiums and
+
+ix
+
+discounts took into consideration
+the potential financial impact of the conversion and offering and RP Financial s
+analysis of the results of operations and financial condition of Home Federal
+Bancorp compared to the peer group. 
+
+ 
+ 
+ 
+ 
+Price-to-earnings
+ 
+Price-to-book
+ 
+Price-to-tangible
+ 
+
+ 
+ 
+ 
+ 
+multiple(1)
+ 
+value ratio
+ 
+book value ratio
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+New Home
+ Federal Bancorp
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Minimum
+ of offering range
+
+ 
+ 
+24.34x
+ 
+ 
+88.26
+%
+ 
+ 
+88.26
+%
+ 
+
+ 
+Midpoint
+ of offering range
+
+ 
+ 
+27.66
+ 
+ 
+96.34
+ 
+ 
+ 
+96.34
+ 
+ 
+
+ 
+Maximum
+ of offering range
+
+ 
+ 
+33.77
+ 
+ 
+103.20
+ 
+ 
+ 
+103.20
+ 
+ 
+
+ 
+Maximum
+ of offering range, as adjusted
+
+ 
+ 
+34.10
+ 
+ 
+110.13
+ 
+ 
+ 
+110.13
+ 
+ 
+
+ 
+
+ 
+Valuation of peer group companies as of September 14, 2007(2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Average
+
+ 
+ 
+18.90x
+ 
+ 
+129.19
+%
+ 
+ 
+145.75
+%
+ 
+
+ 
+Median
+
+ 
+ 
+14.80
+ 
+ 
+128.49
+ 
+ 
+ 
+133.67
+ 
+ 
+
+(1)
+ 
+
+Reflects our pro forma price-to-earnings multiples based on pro forma net income for the 12 months ended June 30, 2007.
+
+(2)
+ 
+
+Reflects earnings for the most recent twelve month period for which data was publicly available. 
+
+The independent appraisal is not necessarily indicative of
+post-offering trading value. You should not assume or expect that the valuation
+of new Home Federal Bancorp as indicated above means that the common stock will
+trade at or above the $10.00 purchase price after the offering is completed.
+
+The independent appraisal will be updated before we complete the
+conversion. Any changes in the appraisal would be subject to the approval of
+the Office of Thrift Supervision The estimated pro forma market value of new
+Home Federal Bancorp may be increased by up to 15%, or up to $269.2 million.
+See Pro Forma Data. 
+
+After-Market Performance Information Provided by the Independent Appraiser
+
+The following table, prepared by our independent appraiser, presents
+for all second step conversions that began trading from January 1, 2006 to
+September 14, 2007, the percentage change in the trading price from the initial
+trading date of the offering to the dates shown in the table. The table also
+presents the average and median trading prices and percentage change in trading
+prices for the same dates. This information relates to stock performance
+experienced by other companies that may have no similarities to us with regard
+to market capitalization, offering size, earnings quality and growth potential,
+among other factors. 
+
+The table is not intended to indicate how our common stock may perform.
+Data represented in the table reflects a small number of transactions and is not
+indicative of general stock market performance trends or of price performance
+trends of companies that undergo conversions. Furthermore, this table presents
+only short-term price performance and may not be indicative of the longer-term
+stock price performance of these companies. There can be no assurance that our
+stock price will appreciate or that our stock price will not trade below $10.00
+per share. The movement of any particular company s stock price is subject to
+various factors, including, but not limited to, the amount of proceeds a company
+raises, the company s historical and anticipated operating results, the nature
+and quality of the company s assets, the company s market area and the quality
+of management and management s ability to deploy proceeds (such as through loans
+and investments, the acquisition of other financial institutions or other
+businesses, the payment of dividends and common stock repurchases). In addition,
+stock prices may be affected by general market and economic conditions, the
+interest rate environment, the market for financial institutions and merger or
+takeover transactions and the presence of professional and other investors who
+purchase stock on speculation, as well as other unforeseeable events not in the
+control of management. Before you make an investment decision, please carefully
+read this prospectus, including Risk Factors. 
+
+x
+
+After Market Trading Activity
+Second Step Offerings
+Completed Closing Dates
+ between January 1, 2006 and September 14, 2007
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+Appreciation from Initial Trading Date(1)
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Transaction
+
+Conversion
+Date
+ 
+1 Day
+
+ 
+ 
+1 Week
+ 
+ 
+1 Month
+ 
+ 
+Through
+September
+ 14, 2007
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Abington Bancorp,
+ Inc.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(NASDAQ:
+ ABBC)
+
+ 
+ 
+6/28/07
+ 
+ 
+ 
+(4.0
+)%
+ 
+ 
+ 
+(1.6
+)%
+ 
+ 
+ 
+(7.5
+)%
+ 
+ 
+ 
+(4.2
+)%
+ 
+ 
+
+Peoples United
+ Financial, Inc.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(NASDAQ:
+ PBCT)
+
+ 
+ 
+4/16/07
+ 
+ 
+ 
+3.8
+ 
+ 
+ 
+ 
+2.0
+ 
+ 
+ 
+ 
+(0.3
+)
+ 
+ 
+ 
+(14.9
+)
+ 
+ 
+
+Osage Bancshares,
+ Inc.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(NASDAQ:
+ OSBK)
+
+ 
+ 
+1/18/07
+ 
+ 
+ 
+(0.5
+)
+ 
+ 
+ 
+(0.5
+)
+ 
+ 
+ 
+(6.8
+)
+ 
+ 
+ 
+(9.1
+)
+ 
+ 
+
+Westfield
+ Financial, Inc.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(AMEX:
+ WFD)
+
+ 
+ 
+1/4/07
+ 
+ 
+ 
+7.0
+ 
+ 
+ 
+ 
+7.5
+ 
+ 
+ 
+ 
+9.0
+ 
+ 
+ 
+ 
+(0.1
+)
+ 
+ 
+
+Citizens Community
+ Bancorp, Inc.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(NASDAQ: CZ WI)
+
+ 
+ 
+11/1/06
+ 
+ 
+ 
+(2.5
+)
+ 
+ 
+ 
+(1.0
+)
+ 
+ 
+ 
+(3.3
+)
+ 
+ 
+ 
+(7.7
+)
+ 
+ 
+
+Liberty Bancorp,
+ Inc.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(NASDAQ:
+ LBCP)
+
+ 
+ 
+7/24/06
+ 
+ 
+ 
+2.5
+ 
+ 
+ 
+ 
+1.0
+ 
+ 
+ 
+ 
+1.5
+ 
+ 
+ 
+ 
+7.2
+ 
+ 
+ 
+
+First Clover
+ Leaf Fin. Corp.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(NASDAQ:
+ FCLF)
+
+ 
+ 
+7/11/06
+ 
+ 
+ 
+3.9
+ 
+ 
+ 
+ 
+6.0
+ 
+ 
+ 
+ 
+11.2
+ 
+ 
+ 
+ 
+15.0
+ 
+ 
+ 
+
+Monadnock
+ Bancorp, Inc.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(OTCBB : MN KB )
+
+ 
+ 
+6/29/06
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(5.0
+)
+ 
+ 
+ 
+(13.8
+)
+ 
+ 
+ 
+(17.5
+)
+ 
+ 
+
+Average
+ 
+ 
+ 
+ 
+ 
+ 
+1.3
+ 
+ 
+ 
+ 
+1.1
+ 
+ 
+ 
+ 
+(1.2
+)
+ 
+ 
+ 
+(3.9
+)
+ 
+ 
+
+Median
+ 
+ 
+ 
+ 
+ 
+ 
+1.3
+ 
+ 
+ 
+ 
+0.3
+ 
+ 
+ 
+ 
+(1.8
+)
+ 
+ 
+ 
+(6.0
+)
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1) The offering price for each transaction was $10.00 per share.
+
+Termination of the Offering
+
+The subscription offering will end at 12:00 Noon, Mountain time, on
+ 
+ , 2007, unless extended. The direct
+community offering and syndicated community offering, if any, will also end at
+12:00 Noon, Mountain time, on
+ 
+ , 2007. If fewer than the minimum
+number of shares are subscribed for in the subscription offering and we do not
+get orders for at least the minimum number of shares by
+ 
+ , 2008, we will either:
+
+(1)
+ 
+promptly return
+ any payment you made to us, with interest, or cancel any withdrawal authorization
+ you gave us; or
+
+ 
+ 
+ 
+ 
+
+(2)
+ 
+extend
+the offering, if allowed, and give you notice of the extension and of your
+rights to cancel, change or confirm your order. If we extend the offering and
+you do not respond to the notice, then we will cancel your order and return your
+payment, with interest, or cancel any withdrawal authorization you gave us. We
+must complete or terminate the offering by 
+ , 2009.
+
+xi
+
+How We Will Use the Proceeds Raised From
+ the Sale of Common Stock
+
+We intend to use the net proceeds received from
+ the stock offering as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Maximum,
+ 
+
+ 
+ 
+Minimum
+ 
+ 
+ 
+Maximum
+ 
+ 
+ 
+as adjusted
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+(In Thousands)
+ 
+ 
+ 
+ 
+ 
+
+Gross proceeds
+ 
+ 
+$102,000
+ 
+ 
+ 
+ 
+$138,000
+ 
+ 
+ 
+$158,700
+ 
+
+Less: estimated
+ underwriting commission and other offering commissions
+ 
+ 
+4,471
+ 
+ 
+ 
+ 
+5,613
+ 
+ 
+ 
+6,269
+ 
+
+Net proceeds
+ 
+ 
+97,529
+ 
+ 
+ 
+ 
+132,387
+ 
+ 
+ 
+152,431
+ 
+
+Less:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ proceeds to Home Federal Bank
+
+ 
+ 
+48,765
+ 
+ 
+ 
+ 
+66,194
+ 
+ 
+ 
+76,216
+ 
+
+Loan
+ to our employee stock ownership plan
+
+ 
+ 
+8,160
+ 
+ 
+ 
+ 
+11,040
+ 
+ 
+ 
+12,696
+ 
+
+Net cash proceeds
+ retained by new Home Federal Bancorp
+ 
+ 
+40,604
+ 
+ 
+ 
+ 
+55,153
+ 
+ 
+ 
+63,519
+ 
+
+We expect to expand our branch network and are planning
+four to six new branches that we intend to open within the next 24 months.
+There is currently one new branch under construction in Nampa, Idaho and plans
+are being finalized for the construction of a new branch office in the
+Meridian, Idaho market in 2008. Our
+long-term strategy is to build two or three branches per year if appropriate
+sites can be identified and obtained.
+We expect that each new branch office will cost between $1.3 million to
+$2.2 million, depending upon the location, cost of land, and the size and
+design of the building and permitting costs, which may vary from one
+jurisdiction to another. Initially, the
+net proceeds from the offering will be utilized to fund new loan originations,
+particularly in the commercial lending area.
+
+Except as
+described above, neither new Home Bancorp, Inc. and Home Federal has any
+specific plans for the investment of the proceeds of this offering and has not
+allocated a specific portion of the proceeds to any particular use. The net proceeds retained by new Home Federal Bancorp will initially be
+deposited with Home Federal Bank and may ultimately be used to support lending
+and investment activities, future expansion of operations through the
+establishment or acquisition of banking offices or other financial service
+providers, to pay dividends or for other general corporate purposes, including
+repurchasing shares of its common stock. No such acquisitions are specifically
+being considered at this time. Initially, a substantial portion of the net
+proceeds will be invested in short-term investments, investment-grade debt
+obligations and mortgage-backed securities.
+
+See Risk Factors and How We Intend
+ to Use the Proceeds From This Offering. 
+
+Our Dividend Policy
+
+Home Federal Bancorp has paid quarterly cash dividends since the
+quarter ended June 30, 2005. During the quarter ended June 30, 2007, the cash
+dividend was $0.055 per share. We intend to continue to pay cash dividends on a
+quarterly basis after we complete the conversion and the offering. We currently
+expect that the level of cash dividends per share after the conversion and
+offering will be substantially consistent with the current amount of dividends
+per share paid by Home Federal Bancorp on its common stock as adjusted for the
+additional shares issued pursuant to the exchange ratio. For example, based on
+the current cash dividend of $0.055 per share and an assumed exchange ratio of
+1.5369 at the maximum of the offering range, the cash dividend, if paid, would
+be approximately $.035 per share. However, the dividend rate and the continued
+payment of dividends will depend on a number of factors, including our capital
+requirements, our financial condition and results of operations, tax
+considerations, statutory and regulatory limitations and general economic
+conditions. No assurance can be given that we will continue to pay dividends or
+that they will not be reduced in the future. Additionally, we can not guarantee
+that the amount of dividends that we pay after the conversion will be equal to
+the per share dividend amount that Home Bancorp s stockholders currently
+receive, as adjusted to reflect the exchange ratio.
+
+xii
+
+Market for Common Stock
+
+Home Federal Bancorp s common stock is currently listed on the Nasdaq
+Global Market under the symbol HOME . We have applied to have the common stock
+of new Home Federal Bancorp listed for trading on the Nasdaq Global Select
+Market. For the first 20 trading days after the conversion and offering is
+completed, we expect new Home Federal Bancorp common stock to trade under the
+symbol HOMED, thereafter it will revert to the HOME" trading symbol.
+
+Limitations on the Purchase of Common
+ Stock in the Conversion
+
+The minimum purchase is 25 shares.
+
+The maximum
+ purchase in the subscription offering and community offering by any person or group
+ of persons through a single deposit account is 5% of the common stock sold in the
+ offering. For example, if 12,000,000 shares are sold at the midpoint
+ of the offering range, any person or group persons through a single deposit account
+ may purchase up to 600,000 shares. If 13,800,000 shares are sold at the maximum
+ of the offering range, any person or group persons through a single deposit account
+ may purchase up to 690,000 shares. Finally, if 10,200,000 shares are sold at the
+ minimum of the offering range, any person or group persons through a single deposit
+ account may purchase up to 510,000 shares.
+
+The maximum purchase in the subscription offering and community
+offering combined by any person, related persons or persons acting together is
+5% of the common stock sold in the offering. This means that the same
+limitations that are described in the preceding paragraph are applicable to
+purchases combined by any person, related persons or persons acting
+together.
+
+If any of the following persons purchase common stock, their purchases when combined
+ with your purchases cannot exceed 5% of the common stock sold in the offering:
+
+(1)
+ 
+your spouse,
+ or your relatives or your spouse s relatives living in your house;
+
+ 
+ 
+ 
+ 
+
+(2)
+ 
+companies
+ or other entities in which you have a 10% or greater equity or substantial beneficial
+ interest or in which you serve as a senior officer or partner;
+
+ 
+ 
+ 
+ 
+
+(3)
+ 
+a trust or
+ other estate if you have a substantial beneficial interest in the trust or estate
+ or you are a trustee or fiduciary for the trust or other estate; or
+
+ 
+ 
+ 
+ 
+
+(4)
+ 
+other persons who may be acting together with you (including, but not
+limited to, persons who file jointly a Schedule 13G or Schedule 13D Beneficial
+Ownership Report with the Securities and Exchange Commission, persons living at
+the same address or persons exercising subscription rights through qualifying
+deposits registered at the same address, whether or not related).
+
+In addition to the above purchase limitations, there is an ownership
+limitation for stockholders other than our employee stock ownership plan. Shares
+of common stock that you purchase in the offering individually and together with
+persons described above, plus any shares you and they receive in exchange for
+existing shares of Home Federal Bancorp common stock, may not exceed 5% of the
+total shares of common stock to be issued and outstanding after the completion
+of the conversion. 
+
+Subject to Office of Thrift Supervision approval, we may increase or
+decrease the purchase limitations in the offering at any time. Our
+tax-qualified benefit plans, including our employee stock ownership plan, are
+authorized to purchase up to 10% of the shares sold in the offering without
+regard to these purchase limitations. See The Conversion and Stock Offering 
+Limitations on Stock Purchases. 
+
+xiii
+
+Steps We May Take if We Do Not Receive
+ Orders for the Minimum Number of Shares
+
+If we do not receive orders for at least 10,200,000 shares of common
+stock in the subscription, community and/or syndicated community offering, we
+may take several steps in order to issue the minimum number of shares of common
+stock in the offering range. Specifically, we may:
+
+ 
+ 
+increase the purchase and ownership limitations; and/or
+
+ 
+ 
+ 
+
+ 
+ 
+seek regulatory
+ approval to extend the offering beyond the 
+ , 2007 expiration date, provided that
+ any such extension will require us to resolicit subscriptions received in the offering.
+
+Alternatively, we may terminate the offering,
+ return funds with interest and cancel deposit account withdrawal authorizations.
+
+How to Purchase Common Stock
+
+Note: Once we receive your order, you cannot cancel or change it
+without our consent. If new Home Federal Bancorp intends to sell fewer than
+10,200,000 shares or more than 15,870,000 shares, all subscribers will be
+notified and given the opportunity to change or cancel their orders. If you do
+not respond to this notice, we will return your funds promptly with interest or
+cancel your withdrawal authorization.
+
+If you want to subscribe for shares, you must complete an original
+stock order form and drop it off at any Home Federal Bank branch or send it,
+together with full payment or withdrawal authorization, to Home Federal Bank in
+the postage-paid envelope provided. You must sign the certification that is
+part of the stock order form. We must receive your stock order form before the
+end of the offering period.
+
+You may pay for shares in any of the following
+ ways:
+
+ 
+ 
+By check
+ or money order made payable to Home Federal Bancorp, Inc.
+
+ 
+ 
+ 
+
+ 
+ 
+By authorizing
+ a withdrawal from an account at Home Federal Bank, including certificates of deposit,
+ designated o n the stock order form. To use funds in an individual
+ retirement account ( IRA ) at Home Federal, you must transfer your account
+ to an unaffiliated institution or broker. Please contact the stock information center
+ as soon as possible for assistance.
+
+ 
+ 
+ 
+
+ 
+ 
+In cash, if delivered in person to any Home Federal Bank branch office.
+
+We will pay interest on your subscription funds at the rate Home
+Federal Bank pays on passbook savings accounts from the date it receives your
+funds until the conversion is completed or terminated. All funds received
+before the completion of the conversion will be held in a segregated account at
+Home Federal Bank or, at our discretion, at an independent insured depository
+institution. All funds authorized for withdrawal from deposit accounts with
+Home Federal Bank will earn interest at the applicable account rate until the
+conversion is completed. There will be no early withdrawal penalty for
+withdrawals from certificates of deposit at Home Federal Bank used to pay for
+stock.
+
+You may subscribe for shares of common stock using funds in your IRA at
+Home Federal Bank or elsewhere. However, common stock must be held in a
+self-directed retirement account. Home Federal Bank s IRAs are not
+self-directed, so they cannot be invested in common stock. If you wish to use
+some or all of the funds in your Home Federal Bank IRA, the applicable funds
+must be transferred to a self-directed account reinvested by an independent
+trustee, such as a brokerage firm. If you do not have such an account, you will
+need to establish one before placing your stock order. An annual administrative
+fee may be payable to the independent trustee. Because individual circumstances
+differ and processing of retirement fund orders takes additional time, we
+recommend that you contact the stock information center promptly, preferably at
+least two weeks before the
+
+xiv
+
+end of the offering period, for assistance with
+purchases using your IRA or other retirement account that you may have. Whether
+you may use such funds for the purchase of shares in the stock offering may
+depend on timing constraints and possible limitations imposed by the institution
+where the funds are held.
+
+Purchases of Common Stock by Our Officers
+ and Directors
+
+Our directors and executive officers, as a group, beneficially owned
+approximately 4.42% of Home Federal Bancorp s outstanding common stock as of
+June 30, 2007 which shall be exchanged for new Home Federal Bancorp common
+stock. Collectively, our directors and executive officers intend to subscribe
+for 62,500 shares regardless of the number of shares sold in the offering. This
+number equals 0.2% of the 23,410,090 shares that would be issued at the maximum
+of the offering range. If fewer shares are issued in the conversion, then
+officers and directors will own a greater percentage of new Home Federal
+Bancorp. These shares do not include any shares that may be awarded or issued
+in the future under any stock option plan or recognition and retention plan we
+intend to adopt. Directors and executive officers will pay the same $10.00 per
+share price for these shares as everyone else who purchases shares in the
+conversion.
+
+These proposed purchases of common stock by our directors and executive
+officers, together with shares exchanged, the purchase by the employee stock
+ownership plan of 8% of the aggregate shares sold in the offering, as well as
+the potential acquisition of common stock through the proposed stock option plan
+and recognition and retention plan will result in ownership by insiders of new
+Home Federal Bancorp in excess of 13.9% of the total shares outstanding after the
+offering at the maximum of the offering range. As a result, it could be more
+difficult to obtain majority support for stockholder proposals opposed by the
+Board and management. See Risk Factors Risks Related to This Offering The
+amount of common stock we will control, our articles of incorporation and
+bylaws, and state and federal law could discourage hostile acquisitions of
+control of new Home Federal Bancorp. 
+
+Tax Consequences of the Conversion
+
+We have received the opinion of Silver Freedman & Taff, L.L.P. and
+Munther Goodrum Sperry, Chartered, Boise, Idaho, respectively, that, under
+federal and Idaho income tax law and regulation, there will be no taxable gain
+or loss and no change in tax basis upon the receipt of exchange shares and that
+the conversion will not be a taxable event for us. This opinion, however, is
+not binding on the Internal Revenue Service. See The Conversion and Stock
+Offering Effects of the Conversion Tax Effects of the
+Conversion. 
+
+Benefits to Management from the Offering
+
+Our employees, officers and directors will benefit from the offering as
+a result of various stock-based benefit plans. Full-time employees, including
+officers, are participants in our existing employee stock ownership plan, which
+will purchase additional shares of common stock in the offering. The employee
+stock ownership plan intends to purchase in the offering 8% of the aggregate
+shares sold in the offering, or if shares are not available, in the open market
+after the conversion. Our employee stock ownership plan expects to purchase up
+to 8.0% of the shares of common stock we sell in the offering, or 1,104,000
+shares of common stock, assuming we sell the maximum number of the shares
+proposed to be sold which when combined with the existing shares held by the
+employee stock ownership plan will be less than 8.0% of the shares outstanding
+following the conversion as required by Office of Thrift Supervision
+regulations. A loan from new Home Federal Bancorp to the employee stock
+ownership plan, funded by a portion of the proceeds from this offering, will be
+used to purchase these shares. The loan will accrue interest at an appropriate
+interest rate in effect at the time the employee stock ownership loan is entered
+into. The employee stock ownership plan provides a retirement benefit to all
+employees eligible to participate in the plan.
+
+Subsequent to completion of the offering, we intend to implement new
+stock option and stock recognition and retention plans which will benefit our
+employees and directors no earlier than six months after the conversion. Under
+these plans, we may award stock options and shares of restricted stock to
+employees and directors. Stock options will be granted at an exercise price
+equal to 100% of the fair market value of our common stock on the option grant
+date. Under the new stock option plan, we may grant stock options in an amount
+up to 10% of new
+
+xv
+
+Home Federal Bancorp s common stock sold in the offering.
+Under the stock recognition and retention plan, we may award restricted stock in
+an amount equal to 3.5% of new Home Federal Bancorp s common stock sold in the
+offering. Shares of restricted stock will be awarded at no cost to the
+recipient. All the stock benefit plans will comply with all applicable Office of
+Thrift Supervision regulations. The new stock option and stock recognition and
+retention plans will supplement our existing 2005 Stock Option and Incentive
+Plan and 2005 Recognition and Retention Plan, which will continue as plans of
+new Home Federal Bancorp. Both the employee stock ownership plan and the
+recognition and retention plan will increase the voting control of management
+without a cash outlay by the recipient.
+
+The number of options granted or shares
+ awarded under the proposed and existing stock option plans and stock recognition
+ and retention plans may not in the aggregate, pursuant to Federal regulations, exceed
+ 10% and 4%, respectively, of our total outstanding shares (including shares sold
+ to our employee stock ownership plan).
+
+The additional shares purchased by the employee
+ stock ownership plan and our new stock-based incentive plans will increase our future
+ compensation costs, thereby reducing our earnings. We cannot determine the actual
+ amount of these new stock-related compensation and benefit expenses at this time
+ because applicable accounting
+
+practices generally require that they be
+ based on the fair market value of the options or shares of common stock at the date
+ of the grant; however, we expect them to be significant. We will recognize expenses
+ for our employee stock ownership plan when shares are committed to be released to
+ participants accounts and will recognize expenses for restricted stock awards
+ and stock options generally over the vesting period of awards made to recipients.
+ We estimate, once these plans are adopted, the increase in compensation expense
+ will be approximately $1.6 million on an after-tax basis, based on the maximum of
+ the valuation range. Additionally, stockholders will experience a reduction in their
+ ownership interest if newly issued shares of common stock are used to fund stock
+ options and restricted stock awards. In the event newly issued shares of our common
+ stock are used to fund stock options and restricted stock option awards in an amount
+ equal to 8.7% and 3.5% , respectively, of the shares sold in the offering, stockholders
+ would experience dilution in their ownership interest of 4.9% and 2.0%, respectively,
+ or 6.7% in the aggregate. See Risk Factors Risks Related to this Offering
+ After this offering, our compensation expenses will increase and our return
+ on equity will be low compared to other companies. These factors could negatively
+ impact the price of our stock. and Management Benefits to Be
+ Considered Following Completion of the Conversion and Reorganization. 
+
+The following table summarizes the new stock benefits that our
+officers, directors and employees may receive following the offering at the
+maximum of the offering range. It assumes that the proposed new stock option
+plan is approved by stockholders within one year after completion of the
+offering to permit the granting of options to purchase a number of shares equal
+to 8.7% of the shares sold in the offering and the proposed new stock
+recognition and retention plan is approved by stockholders within one year after
+completion of the offering to permit the awarding of a number of shares of
+common stock equal to 3.5% of the shares sold in the offering. It further
+assumes that, at the maximum of the offering range, a total of 13,800,000 shares
+will be sold to the public and that our tangible regulatory capital is 10% or
+more following the proposed stock issuance.
+
+ 
+Number
+
+of Shares
+ Based on
+ Minimum of
+ Offering
+ 
+ 
+ 
+Number
+
+of Shares
+ Based on
+ Maximum of
+ Offering
+ 
+ 
+ 
+Plan
+ 
+ 
+As a % of
+
+Shares Issued
+ in the
+ Conversion
+ 
+ 
+Individuals
+
+ Eligible to
+ Receive
+ Awards
+ 
+As a % of
+
+ Total
+ Shares
+ Sold in
+ the
+ Offering
+ 
+ 
+Value of
+Benefits
+Based on
+Minimum of
+Offering
+Range (1)
+ 
+Value of
+
+Benefits
+ Based on
+ Maximum of
+ Offering
+ Range (1 )
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Employee stock
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+816,000
+ 
+ 
+ 
+1,104,000
+ 
+ 
+ 
+ ownership plan
+ 
+ 
+ 
+4.7
+%
+ 
+ 
+ 
+Employees
+ 
+ 
+ 
+8.0
+%
+ 
+ 
+$
+8,160
+ 
+ 
+$
+11,040
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Restricted
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Directors/
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+353,510
+ 
+ 
+ 
+478,278
+ 
+ 
+ 
+ stock plan
+ 
+ 
+ 
+2.0
+ 
+ 
+ 
+ 
+Employees
+ 
+ 
+ 
+3.5
+ 
+ 
+ 
+ 
+3,535
+ 
+ 
+ 
+4,783
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Stock option
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Directors/
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+883,776
+ 
+ 
+ 
+1,195,696
+ 
+ 
+ 
+ plan
+ 
+ 
+ 
+5.1
+ 
+ 
+ 
+ 
+Employees
+ 
+ 
+ 
+8.7
+ 
+ 
+ 
+ 
+2,395
+ 
+ 
+ 
+3,240
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+11.9
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+xvi
+
+(1)
+ 
+
+The actual value of the restricted stock awards will be determined based on
+their fair value as of the date the grants are made. For purposes of this
+table, fair value is assumed to be the offering price of $10.00 per share. The
+fair value of stock options has been estimated at $2.71 per option using the
+Black-Scholes option pricing model with the following assumptions: a grant-date
+share price and option exercise price of $10.00; dividend yield of 1.6%;
+expected option life of 10 years; risk free interest rate of 5.03% (based on the
+ten-year Treasury Note rate); and a volatility rate of 11.31% based on an index
+of publicly traded mutual holding company institutions. The actual expense of
+the stock options will be determined by the grant-date fair value of the
+options, which will depend on a number of factors, including the valuation
+assumptions used in the option pricing model ultimately adopted. 
+
+The value of the restricted stock awards will be based on the price of
+Home Federal Bancorp s common stock at the time those shares are granted, which,
+subject to stockholder approval, cannot occur until at least six months after
+the offering is completed. The following table presents the total value of all
+restricted shares to be available for award and issuance under the new stock
+recognition and retention plan, assuming the shares for the plan are issued in a
+range of market prices from $8.00 per share to $14.00 per share.
+
+Share Price
+ 
+ 
+353,510
+Shares
+Awarded at
+Minimum of Range
+ 
+415,894
+Shares
+Awarded at
+Midpoint of Range
+ 
+478,278
+Shares
+Awarded at
+Maximum of Range
+ 
+550,020
+Shares
+Awarded at
+Maximum of Range,
+as adjusted
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+(In Thousands,
+ Except Per Share Amounts)
+
+ 
+$ 8.00
+ 
+ 
+ 
+$
+2,828
+ 
+ 
+$
+3,327
+ 
+ 
+ 
+$3,826
+ 
+ 
+$
+4,400
+ 
+
+ 
+$10.00
+ 
+ 
+ 
+ 
+3,535
+ 
+ 
+ 
+4,159
+ 
+ 
+ 
+4,783
+ 
+ 
+ 
+5,500
+ 
+
+ 
+$12.00
+ 
+ 
+ 
+ 
+4,242
+ 
+ 
+ 
+4,991
+ 
+ 
+ 
+5,739
+ 
+ 
+ 
+6,600
+ 
+
+ 
+$14.00
+ 
+ 
+ 
+ 
+4,949
+ 
+ 
+ 
+5,823
+ 
+ 
+ 
+6,696
+ 
+ 
+ 
+7,700
+ 
+
+The grant-date fair value of the options granted under the stock-based
+incentive plan will be based in part on the price of new Home Federal Bancorp s
+common stock at the time the options are granted, which, subject to stockholder
+approval, cannot occur until at least six months after the offering is
+completed. The value also will depend on the various assumptions utilized in
+estimating the value using the Black-Scholes option pricing model. The
+following table presents the total estimated value of the options to be
+available for grant under the new stock option plan, assuming the market price
+and exercise price for the stock options are equal, with a range of market
+prices for the shares from $8.00 per share to $14.00 per share.
+
+Market/Exercise Price
+ 
+ 
+Grant-Date
+Fair Value
+Per Option
+ 
+883,776
+Options 
+at Minimum 
+of Range
+ 
+1,039,736
+Options
+at Midpoint
+of Range
+ 
+1,195,696
+ Options 
+at Maximum 
+of Range
+ 
+1,375,051
+ Options 
+at Maximum 
+of Range,
+ as adjusted
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(In Thousands, Except Per Share Amounts)
+
+ 
+$ 8.00
+ 
+ 
+ 
+$2.17
+ 
+ 
+$1,918
+ 
+ 
+$2,256
+ 
+ 
+$2,595
+ 
+ 
+$2,984
+ 
+
+ 
+$10.00
+ 
+ 
+ 
+2.71
+ 
+ 
+2,395
+ 
+ 
+2,818
+ 
+ 
+3,240
+ 
+ 
+3,726
+ 
+
+ 
+$12.00
+ 
+ 
+ 
+3.26
+ 
+ 
+2,881
+ 
+ 
+3,390
+ 
+ 
+3,898
+ 
+ 
+4,483
+ 
+
+ 
+$14.00
+ 
+ 
+ 
+3.80
+ 
+ 
+3,358
+ 
+ 
+3,951
+ 
+ 
+4,544
+ 
+ 
+5,225
+ 
+
+The following table presents information regarding our existing
+employee stock ownership plan, options and restricted stock previously awarded
+under our 2005 Stock Option and Incentive Plan and our 2005 Recognition and
+Retention Plan, our employee stock ownership plan, and our proposed new stock
+option plan and new recognition and retention plan. The table below assumes
+that 23,410,090 shares are outstanding after the offering, which includes the
+sale of 13,800,000 shares in the offering at the maximum of the offering range
+and the issuance of 9,610,090 shares in exchange for shares of Home Federal
+Bancorp common stock using an exchange ratio of 1.5369. It is also assumed that
+the value of the stock is $10.00 per share and that the exchange of existing
+shares is in accordance with the exchange ratio at the maximum of the offering
+range.
+
+xvii
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Percentage
+ of Shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Estimated
+ 
+Outstanding
+ After the
+
+Existing and
+ New Stock Benefit Plans
+ 
+Participants
+ 
+Shares (1)
+ 
+ 
+Value
+ 
+Conversion
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(In Thousands)
+ 
+ 
+
+Employee Stock
+ Ownership Plan:
+ 
+ 
+All Employees
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Shares
+ purchased in 2004 mutual holding
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+company
+ reorganization
+
+ 
+ 
+ 
+ 
+ 
+765,929
+(2)
+ 
+ 
+$
+7,659
+ 
+ 
+ 
+3.3
+%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Shares
+ to be purchased in this offering
+
+ 
+ 
+ 
+ 
+ 
+1,104,000
+ 
+ 
+ 
+ 
+11,040
+ 
+ 
+ 
+4.7
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ Employee Stock Ownership Plan
+
+ 
+ 
+ 
+ 
+ 
+1,869,929
+ 
+ 
+ 
+$
+18,699
+ 
+ 
+ 
+8.0
+%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Recognition
+ and Retention Plans:
+ 
+ 
+Directors
+ and Officers
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2005
+ Recognition and Retention Plan
+
+ 
+ 
+ 
+ 
+ 
+458,138
+(3)
+ 
+ 
+$
+4,581
+ 
+ 
+ 
+2.0
+%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proposed New
+ Recognition and Retention Plan
+ 
+ 
+ 
+ 
+ 
+478,278
+(4)
+ 
+ 
+ 
+4,783
+ 
+ 
+ 
+2.0
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ recognition and Retention Plan
+
+ 
+ 
+ 
+ 
+ 
+936,416
+ 
+ 
+ 
+$
+9,364
+ 
+ 
+ 
+4.0
+%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stock Option
+ Plans:
+ 
+ 
+Directors
+ and Officers
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2005
+ Stock Option and Incentive Plan
+
+ 
+ 
+ 
+ 
+ 
+ 
+1,145,342
+(5)
+ 
+ 
+ 
+ 
+ 
+4.9
+%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proposed
+ New Stock Option Plan
+
+ 
+ 
+ 
+ 
+ 
+ 
+1,195,696
+ 
+ 
+ 
+3,240
+ 
+ 
+5.1
+%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ Stock Option Plans
+
+ 
+ 
+ 
+ 
+ 
+ 
+2,341,038
+ 
+ 
+ 
+ 
+ 
+ 
+10.0
+%
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total
+ stock benefits plans
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1)
+ 
+
+Shares purchased or awarded and options granted prior to the conversion have been
+ adjusted for the 1.5369 exchange ratio at the maximum of the offering range.
+
+(2)
+ 
+
+Approximately 153,186 (99,672 shares prior to adjustment for the exchange ratio)
+ of these shares have been allocated to the accounts of participants.
+
+(3)
+ 
+
+A total of 74,836 shares (48,693 shares prior to adjustment for the exchange
+ratio) of the indicated 2005 Recognition and Retention Plan awards have vested,
+and the shares of Home Federal Bancorp common stock subject to these awards have
+been distributed.
+
+(4)
+ 
+
+The actual value of new recognition and retention plan awards will be determined
+based on their fair value as of the date grants are made. For purposes of this
+table, fair value is assumed to be the same as the offering price of $10.00 per
+share.
+
+(5)
+ 
+
+A total of 107,664 options (70,053 options prior to adjustment for the exchange
+ratio) of the indicated 2005 Stock Option Plan options have been
+exercised.
+
+(6)
+ 
+
+The weighted-average fair value of stock options granted under the 2005 Stock
+Option and Incentive Plan is $2.60 using the Black-Scholes option pricing model.
+Prior to the adjustments for exchange ratio, the 2005 Stock Option Plan covered
+745,229 shares (i.e., the total number of options that could be granted), before
+exercises of options. The assumptions used for the options were the following:
+exercise price, $12.20 to $17.43; dividend yield, 2.0%; expected life, five to
+eight years; expected volatility, 14.96% to 17.43% and risk-free interest rate,
+3.98% to 4.72%. The fair value of stock options to be granted under the new
+stock option plan has been estimated at $2.71 per option using the Black-Scholes
+option pricing model with the following assumptions: exercise price, $10.00;
+trading price on date of grant, $10.00; dividend yield, 1.6%; expected life, ten
+years: expected volatility, 11.31%; and risk-free interest rate,
+5.03%.
+
+For a further discussion of benefits to
+ management, see Management. 
+
+Conditions to Completing the Conversion
+ and Offering
+
+We are conducting the conversion and offering and the exchange of shares under the terms of our
+plan of conversion and reorganization. We cannot complete the conversion ,
+offering and exchange of shares unless: 
+
+xviii
+
+ 
+ 
+
+our plan of conversion and reorganization is approved by at least a majority of
+votes eligible to be cast by depositors and borrowers of Home Federal
+Bank;
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+our plan of conversion and reorganization is approved by at least two-thirds of
+the outstanding shares of our common stock entitled to vote at a meeting of
+stockholders of Home Federal Bancorp including the shares held by Home Federal
+MHC (because Home Federal MHC owns more than 50% of the outstanding shares of
+Home Federal Bancorp common stock, we expect that Home Federal MHC will control
+the outcome of this vote);
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+our plan of conversion and reorganization is approved by a majority of the
+outstanding shares of Home Federal Bancorp, excluding shares held by the Home
+Federal MHC; 
+ 
+ we sell at least the minimum
+number of shares of common stock offered; and 
+ 
+ we receive
+approval from the Office of Thrift Supervision to complete the conversion and
+offering. 
+
+Home Federal MHC
+intends to vote its ownership interest in favor of the plan of conversion and
+reorganization. At June 30, 2007, Home Federal MHC owned 58.9% of the
+outstanding shares of common stock of Home Federal Bancorp. The directors and
+executive officers of Home Federal Bancorp and their affiliates beneficially
+owned 673,945 shares of Home Federal Bancorp, or 4.42% of the outstanding shares
+of common stock as of June 30, 2007. They have indicated their intention to vote
+those shares in favor of the plan of conversion and reorganization.
+
+Delivery of Stock
+Certificates
+ Certificates representing shares of common stock
+issued in the offering and the exchange shares will be mailed to the persons
+entitled to receive these certificates at the certificate registration address
+noted on the order form, as soon as practicable following completion of the
+offering and receipt of all necessary regulatory approvals. Until
+certificates for the shares of common stock are available and delivered to
+purchasers, purchasers may not be able to sell the shares of common stock which
+they ordered or received in the exchange, even though the common stock will have
+begun trading.
+ Subscription Rights
+ Subscription
+rights are not allowed to be transferred, and we will act to ensure that you do
+not do so. We will not accept any stock orders that we believe involve the
+transfer of subscription rights.
+ Restrictions on the Acquisition of New Home Federal
+Bancorp
+
+Federal regulations, as well as provisions contained in our articles of
+incorporation and bylaws, restrict the ability of any person, firm or entity to
+acquire new Home Federal Bancorp or its capital stock. These restrictions
+include the requirement that a potential acquirer of common stock obtain the
+prior approval of the Office of Thrift Supervision before acquiring in excess of
+10% of the voting stock of new Home Federal Bancorp. Additionally, Office of
+Thrift Supervision regulations prohibit anyone from acquiring new Home Federal
+Bancorp for a period of three years following the offering, unless this
+prohibition is waived by the Office of Thrift Supervision. See Risk Factors 
+Risks Related to the Offering The amount of common stock we will control, our
+articles of incorporation and bylaws, and state and federal law could discourage
+hostile acquisitions of control of new Home Federal Bancorp. 
+
+Important Risks in Owning New Home Federal
+ Bancorp s Common Stock
+
+Before you decide to purchase stock, you should
+ read the Risk Factors section on pages 1 to 9 of this prospectus.
+
+xix
+
+Stock Information Center
+
+If you have any questions regarding the offering or our conversion to
+stock form, please call the stock information center at (208) - from 9:00
+a.m. to 5:00 p.m., Mountain time, Monday through Friday. The Stock Information
+Center is closed on weekends and bank holidays. The Stock Information Center is
+located at our main office, 500 12th Avenue South, Nampa, Idaho. The banking
+operations portion of our main office is separate and apart from the Stock
+Information Center and will not have offering materials and cannot accept
+completed order forms or proxy cards. 
+
+To ensure that you receive a prospectus at least 48 hours before the
+offering deadline, we may not mail a prospectus any later than five days prior
+to such date or hand-deliver any prospectus later than two days prior to this
+date. Stock order forms may only be distributed with or preceded by a
+prospectus. 
+
+By signing the stock order form, you are acknowledging your receipt
+of a prospectus and your understanding that the shares are not a deposit account
+and are not insured or guaranteed by Home Federal MHC, Home Federal Bancorp,
+Home Federal Bank, new Home Federal Bancorp, the Federal Deposit Insurance
+Corporation or any other federal or state governmental agency.
+
+We will make reasonable attempts to provide a prospectus and
+offering materials to holders of subscription rights. The subscription offering
+and all subscription rights will expire at 12:00 Noon, Mountain time, on
+ , 2007, whether or not we have been able to locate each person
+entitled to subscription rights.
+
+xx
+
+RISK FACTORS
+
+You should
+ consider these risk factors, in addition to the other information in this prospectus,
+ in deciding how to vote on the conversion and before deciding whether to make an
+ investment in new Home Federal Bancorp s stock.
+
+Risks Related to Our Business
+
+Our increased emphasis on commercial lending may expose us to increased lending risks.
+
+Our business
+ strategy is focused on the expansion of commercial real estate, construction and
+ land development and commercial business lending. These types of lending activities,
+ while potentially more profitable than single-family residential lending, are generally
+ more sensitive to regional and local economic conditions, making loss levels more
+ difficult to predict. Collateral evaluation and financial statement analysis in
+ these types of loans requires a more detailed analysis at the time of loan underwriting
+ and on an ongoing basis. While economic trends in the Treasure Valley Region of
+ Southwest Idaho have been relatively positive, a decline in real estate values,
+ would reduce the value of the real estate collateral securing our loans and increase
+ the risk that we would incur losses if borrowers defaulted on their loans. In addition,
+ these loans generally expose a lender to greater risk of non-payment and loss than
+ one- to four-family residential mortgage loans because repayment of the loans often
+ depends on the successful operation of the property and the income stream of the
+ borrowers. Further, such loans typically involve larger loan balances to single
+ borrowers or groups of related borrowers compared to one- to four-family residential
+ mortgage loans. Also, many of our commercial borrowers have more than one loan outstanding
+ with us. Consequently, an adverse development with respect to one loan or one credit
+ relationship can expose us to a significantly greater risk of loss compared to
+ an adverse development with respect to a one- to four-family residential mortgage
+ loan. Accordingly, when there are defaults and losses on these types of loans, they
+ are often larger on a per loan basis than those for permanent single-family or
+ consumer loans. A secondary market for most types of commercial real estate and
+ construction loans is not readily liquid, so we have less opportunity to mitigate
+ credit risk by selling part or all of our interest in these loans.
+
+Our business strategy includes significant
+ growth plans, and our financial condition and results of operations could be
+ negatively affected if we fail to grow or fail to manage our growth effectively.
+
+We intend
+ to continue pursuing a significant growth strategy for our business. Our growth
+ initiatives are based upon recruiting experienced personnel to lead such initiatives,
+ and, accordingly, the failure to identify and retain such personnel would place
+ significant limitations on our ability to execute our growth strategy. In addition,
+ achieving our growth targets requires us to attract customers that currently have
+ banking relationships with other financial institutions in our market, thereby increasing
+ our share of the market. To the extent we expand our lending beyond our current
+ market area, we could incur additional risk related to those new market areas. We cannot assure that we will be able to expand our market presence in our existing
+ markets or successfully enter new markets or that any such expansion will not adversely
+ affect our profitability. If we do not manage our growth effectively, we may not
+ be able to achieve our business plan, and our business, profitability and prospects
+ could be harmed. Also, if our growth occurs more slowly than anticipated or declines,
+ our profitability could be materially adversely affected.
+
+Our ability to successfully
+ grow will depend on a variety of factors, including our ability to attract and retain
+ experienced bankers, the continued availability of desirable business opportunities,
+ the competitive responses from other financial institutions in our market area and
+ our ability to manage our growth. While we believe we have the executive management
+ resources and internal systems in place to successfully manage our future growth,
+ there can be no assurance growth opportunities will be available or that we will
+ successfully manage our growth.
+
+1
+
+We are highly dependent on key individuals
+ and a number of the members of the original senior management team that were in
+ place at the time of our mutual holding company reorganization have either left
+ Home Federal Bank or will be retiring in the next year and as a result there will
+ be a new management team leading us going forward.
+
+Consistent
+ with our policy of focusing on select growth initiatives we are highly dependent
+ on the continued services of a limited number of our executive officers and key
+ management personnel. The loss of services of any of these individuals could have
+ a material adverse impact on our operations because other officers may not have
+ the experience and expertise to readily replace these individuals.
+
+The senior
+ management team of Home Federal Bancorp in place at the time of the mutual holding
+ company reorganization had worked together for a number of years and, until recently,
+ virtually all of them had worked for us for five years or more. Daniel L. Stevens
+ who has been our President and Chief Executive Officer since 1995 has announced
+ that he will retire on September 30, 2008 and has begun the transition to his
+ retirement, including working with his replacement, Len E. Williams. Roger D. Eisenbarth
+ who has been our Senior Vice President and Chief Lending Officer since 1993 retired
+ on October 15, 2007. Karen Wardwell who had been a Senior Vice President in Operations
+ and Technology left in June 2007 and T. Blake Burgess our Corporate Secretary
+ and Director of Accounting left in August 2007. In addition, we are currently interviewing
+ potential candidates for the chief financial officer position. Once this individual
+ is hired, Robert A. Schoelkoph, our current Chief Financial Officer, will continue
+ to serve as Treasurer and Secretary of Home Federal Bancorp and Home Federal Bank.
+
+While we believe we have in place qualified individuals to replace these individuals
+ and have provided for an orderly transition, the new individuals will need to develop
+ a cohesive and unified management team. Changes in key personnel and their responsibilities
+ may be disruptive to our business and could have a material adverse effect on our
+ business, financial condition and profitability. Moreover, our anticipated growth
+ is expected to place increased demands on our human resources and will require the
+ recruitment of additional middle management personnel. The competition to hire experienced
+ banking professionals is also intense. If we are unable to attract qualified banking
+ professionals, our expansion plans could be delayed or curtailed and our business,
+ financial condition, and profitability may be adversely affected.
+
+Fluctuations in interest rates could
+ reduce our profitability and affect the value of our assets.
+
+Like other
+ financial institutions, we are subject to interest rate risk. Our primary source
+ of income is net interest income, which is the difference between interest earned
+ on loans and investments and the interest paid on deposits and borrowings. We expect
+ that we will periodically experience imbalances in the interest rate sensitivities
+ of our assets and liabilities and the relationships of various interest rates to
+ each other. Over any defined period of time, our interest-earning assets may be
+ more sensitive to changes in market interest rates than our interest-bearing liabilities,
+ or vice versa. In addition, the individual market interest rates underlying our
+ loan and deposit products (e.g., prime) may not change to the same degree
+ over a given time period. In any event, if market interest rates should move contrary
+ to our position, our earnings may be negatively affected. In addition, loan volume
+ and quality and deposit volume and mix can be affected by market interest rates.
+ Changes in levels of market interest rates could materially affect our net interest
+ spread, asset quality, origination volume, and overall profitability.
+
+Interest
+ rates have recently been at historically low levels. However, since June 30, 2004,
+ the U.S. Federal Reserve Board has increased its target for the federal funds rate
+ 17 times, from 1.00% to 5.25%. While these short-term market interest rates (which
+ we use as a guide to price our deposits) have increased, longer-term market interest
+ rates (which we use as a guide to price our longer-term loans such as one- to four-family
+ residential mortgages) have not. This flattening of the market yield
+ curve has had a negative impact on our interest rate spread and net interest margin
+ to date. If short-term interest rates continue to rise, and if rates on our deposits
+ and borrowings continue to reprice upwards faster than the rates on our long-term
+ loans and investments, we would experience further compression of our interest rate
+ spread and net interest margin, which would have a negative effect on our profitability.
+
+We principally manage interest rate risk by managing our volume and mix of our
+ earning assets and funding liabilities. In a changing interest
+ rate environment, we may not be able to manage this risk effectively. If we
+
+2
+
+are unable to manage interest rate risk
+ effectively, our business, financial condition and results of operations could
+be materially harmed.
+
+Changes in
+ the level of interest rates also may negatively affect our ability to originate
+ real estate loans, the value of our assets and our ability to realize gains from
+ the sale of our assets, all of which ultimately affect our earnings. At June 30, 2007, we had $215.2 million in loans due after one year with fixed rates of
+ interest, representing 43.4% of our total loan portfolio and 29.5% of our total
+ assets. Our most recent rate shock analysis indicates that our net portfolio
+ value would be more adversely affected by an increase in interest rates than by
+ a decrease. See Management s Discussion and Analysis of Financial Condition
+ and Results of Operations Asset and Liability Management and Market Risk. 
+
+Our business is subject to various lending
+ risks which could adversely impact our results of operations and financial condition.
+
+Our business
+ strategy centers on the continued transition to commercial banking activities in
+ order to expand our net interest margin. Consistent with this strategy, we are working
+ to further reduce the percentage of our assets that are lower-yielding residential
+ loans and mortgage-backed securities and to increase the percentage of our assets
+ consisting of construction and land development, commercial and multi-family real
+ estate and commercial business loans that have higher risk-adjusted returns. Our
+ increasing focus on these types of lending will continue to increase our risk profile
+ relative to traditional thrift institutions as we continue to implement our business
+ strategy for the following reasons:
+
+Our commercial and multi-family real estate
+ loans involve higher principal amounts than other loans and repayment of these loans
+ may be dependent on factors outside our control or the control of our borrowers.
+ We originate commercial and multi-family real estate loans for individuals and businesses
+ for various purposes which are secured by commercial properties. As of June 30,
+ 2007, $134.7 million, or 27.2% and $6.9 million, or 1.4% (excluding commercial real
+ estate construction loans of $15.2 million), of our total loan portfolio was secured
+ by commercial and multi-family real estate property, respectively.
+
+The credit
+ risk related to commercial and multi-family real estate loans is considered to be
+ greater than the risk related to one- to four-family residential or consumer loans
+ because the repayment of commercial and multifamily real estate loans typically
+ is dependent on the income stream of the real estate securing the loan as collateral
+ and the successful operation of the borrower s business, which can be significantly
+ affected by conditions in the real estate markets or in the economy. For example,
+ if the cash flow from the borrower s project is reduced as a result of leases
+ not being obtained or renewed, the borrower s ability to repay the loan may
+ be impaired. In addition, many of our commercial and multi-family real estate loans
+ are not fully amortizing and contain large balloon payments upon maturity. These
+ balloon payments may require the borrower to either sell or refinance the underlying
+ property in order to make the balloon payment.
+
+If we foreclose on a commercial
+ and multi-family real estate loan, our holding period for the collateral typically
+ is longer than for one- to four-family residential mortgage loans because there
+ are fewer potential purchasers of the collateral. Additionally, commercial and multi-family
+ real estate loans generally have relatively large balances to single borrowers or
+ related groups of borrowers. Accordingly, if we make any errors in judgment in the
+ collectibility of our commercial and multi-family real estate loans, any resulting
+ charge-offs may be larger on a per loan basis than those incurred with our residential
+ or consumer loan portfolios. See Business of Home Federal Bancorp and Home
+ Federal Bank Lending Activities Commercial and Multi-Family Real Estate Lending. 
+
+Our construction and land development loans are based
+ upon estimates of costs and value associated with the complete project. We
+ make land purchase, lot development and real estate construction loans to individuals
+ and builders, primarily for the construction of residential properties and, to
+ a lesser extent, commercial and multi-family real estate projects. We will originate
+ these loans whether or not the collateral property underlying the loan is under
+contract for sale. Residential real estate construction loans include single-family
+ tract construction loans for the construction of entry level residential homes.
+ Over the last two years, we have significantly increased the amount of construction
+ and land development loans in our loan portfolio, both in dollar amounts and as
+ a percentage of our
+
+3
+
+total loans. At June 30, 2007, $46.2 million
+ or 9.32% of our total loan portfolio consisted of construction and land development
+ loans.
+
+Our construction
+ and land development loans are based upon estimates of costs and values associated
+ with the completed project, which may be inaccurate. Construction and land development
+ lending involves additional risks when compared with permanent residential lending
+ because funds are advanced upon the security of the project, which is of uncertain
+ value prior to its completion. Because of the uncertainties inherent in estimating
+ construction costs, as well as the market value of the completed project and the
+ effects of governmental regulation of real property, it is relatively difficult
+ to evaluate accurately the total funds required to complete a project and the related
+ loan-to-value ratio. This type of lending also typically involves higher loan principal
+ amounts and is often concentrated with a small number of builders. These loans
+ often involve the disbursement of substantial funds with repayment primarily dependent
+ on the success of the ultimate project and the ability of the borrower to sell or
+ lease the property or obtain permanent take-out financing, rather than the ability
+ of the borrower or guarantor to repay principal and interest. If our appraisal of
+ the value of a completed project proves to be overstated, we may have inadequate
+ security for the repayment of the loan upon completion of construction of the project
+ and may incur a loss. Our ability to continue to originate a significant amount
+ of construction loans is dependent on the continued strength of the housing market
+ in the Treasure Valley Region of Southwest, Idaho. Further, if we lost our relationship
+ with one or more of our larger borrowers building in these counties or there is
+ a decline in the demand for new housing in these counties, it is expected that the
+ demand for construction loans would decline, our liquidity would substantially increase
+ and our net income would be adversely affected.
+
+Repayment of our commercial business
+ loans is often dependent on the cash flows of the borrower, which may be unpredictable,
+ and the collateral securing these loans may fluctuate in value. At June 30, 2007,
+ commercial business loans totaled $4.1 million of our total loan portfolio, however,
+ we intend to significantly expand these types of loans as a percentage of our total
+ loan portfolio. Our commercial business loans are primarily made based on the identified
+ cash flow of the borrower and secondarily on the underlying collateral provided
+ by the borrower. Most often, this collateral consists of accounts receivable, inventory
+ or equipment. Credit support provided by the borrower for most of these loans and
+ the probability of repayment is based on the liquidation of the pledged collateral
+ and enforcement of a personal guarantee, if any exists. As a result, in the case
+ of loans secured by accounts receivable, the availability of funds for the repayment
+ of these loans may be substantially dependent on the ability of the borrower to
+ collect amounts due from it customers. The collateral securing other loans may depreciate
+ over time, may be difficult to appraise and may fluctuate in value based on the
+ success of the business.
+
+If our allowance for loan losses is not
+ sufficient to cover actual loan losses, our earnings could be reduced.
+
+We make various
+ assumptions and judgments about the collectibility of our loan portfolio, including
+ the creditworthiness of our borrowers and the value of the real estate and other
+ assets serving as collateral for the repayment of many of our loans. In determining
+ the amount of the allowance for loan losses, we review our loans and our loss and
+ delinquency experience, and evaluate economic conditions. Management recognizes
+ that significant new growth in loan portfolios, new loan products and the refinancing
+ of existing loans can result in portfolios comprised of unseasoned loans that may
+ not perform in a historical or projected manner. If our assumptions are incorrect,
+ our allowance for loan losses may not be sufficient to cover actual losses, resulting
+ in additions to our allowance. Material additions to our allowance could materially
+ decrease our net income. In addition, bank regulators periodically review our allowance
+ for loan losses and may require us to increase our provision for loan losses or
+ recognize additional loan charge-offs. Any increase in our allowance for loan losses
+ or loan charge-offs as required by these regulatory authorities could have a material
+ adverse effect on our financial condition and profitability.
+
+If the value of real estate in the Boise
+ metropolitan area were to decline materially, a significant portion of our loan
+ portfolio could become under-collateralized, which could have a material adverse
+ effect on us.
+
+With substantially
+ all of our loans secured by real property and concentrated in the State of Idaho,
+ and specifically 43.9%, 30.0%, 4.4% and 3.2%, respectively, of our total loan
+ portfolio concentrated in Ada, Canyon, Elmore and Gem counties, Idaho, respectively,
+ a decline in local economic conditions could adversely affect the values of our
+ real estate collateral. As a result, we have a greater risk of loan defaults and
+ losses in the event of an economic downturn in our market area as adverse economic
+ changes may have a negative effect on the ability of our
+
+4
+
+borrowers to make timely repayment of their
+ loans. Consequently, a decline in local economic conditions may have a greater effect
+ on our earnings and capital than on the earnings and capital of larger financial
+ institutions whose real estate loan portfolios are geographically diverse. If we
+ are required to liquidate a significant amount of collateral during a period of
+ reduced real estate values to satisfy the debt, our financial condition and profitability
+ could be adversely affected.
+
+Because our
+loans are concentrated to borrowers in our market area, a downturn in the local
+economy or a decline in local real estate values could cause increases in
+nonperforming loans, which could hurt our profits.
+
+Because the
+ majority of our borrowers and depositors are individuals and businesses located
+ and doing business in the Boise and surrounding metropolitan area, our success depends
+ to a significant extent upon economic conditions in the Boise and surrounding metropolitan
+ 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 do not have the ability of 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 Idaho could adversely affect the value of our assets, revenues, profitability
+ 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.
+
+The building of market share through
+ our branching strategy could cause our expenses to increase faster than revenues.
+
+We intend
+ to continue to build market share through our branching strategy. We are planning
+ four to six new branches that we intend to open within the next 24 months. There
+ are costs involved in opening branches and new branches generally require a period
+ of time to generate sufficient revenues to offset their costs, especially in areas
+ in which we do not have an established presence. Accordingly, any new branch may
+ negatively impact our earnings for some period of time until the branch reaches
+ certain economies of scale. Our expenses could be further increased if we encounter
+ delays in the opening of any of our new branches. Finally, there is a risk that
+ our new branches will not be successful even after they have been established.
+
+If external funds are not available,
+ this could adversely impact our growth and future prospects.
+
+We rely on
+ deposits, brokered deposits, Federal Home Loan Bank advances and other borrowings
+ to fund our operations. Although we have historically been able to replace maturing
+ deposits if desired, no assurance can be given that we will be able to replace
+ such funds in the future if our financial condition or market conditions were to
+ change. Although we consider the sources of existing funds adequate for our current
+ liquidity needs, we may seek additional brokered deposits or debt in the future
+ to achieve our long-term business objectives. There can be no assurance additional
+ funds, if sought, would be available to us or, if available, would be on favorable
+ terms. If additional financing sources are unavailable or are not available on reasonable
+ terms, our growth and future prospects could be adversely affected.
+
+We face strong competition from other
+ financial institutions, financial service companies and other organizations offering
+ services similar to those offered by us, which could limit our growth and profitability.
+
+We face direct
+ competition from a significant number of financial institutions, many with a state-wide
+ or regional presence, and in some cases a national presence, in both originating
+ loans and attracting deposits. Competition in originating loans comes primarily
+ from other banks, mortgage companies and consumer finance institutions that make
+ loans in our primary market areas. We also face substantial competition in attracting
+ deposits from other banking institutions, money market and mutual funds, credit
+ unions and other investment vehicles.
+
+In addition, banks with larger capitalization
+ and non-bank financial institutions that are not governed by bank regulatory restrictions
+ have large lending limits and are better able to serve the needs of larger customers.
+
+5
+
+ Many of these financial institutions are also significantly larger and have greater
+ financial resources than us, have been in business for a long period of time and
+ have established customer bases and name recognition.
+
+We compete
+ for loans principally on the basis of interest rates and loan fees, the types of
+ loans we originate and the quality of service we provide to borrowers. Our ability
+ to attract and retain deposits requires that we provide customers with competitive
+ investment opportunities with respect to rate of return, liquidity, risk and other
+ factors. To effectively compete, we may have to pay higher rates of interest to
+ attract deposits, resulting in reduced profitability. If we are not able to effectively
+ compete in our market area, our profitability may be negatively affected, potentially
+ limiting our ability to pay dividends. The greater resources and deposit and loan
+ products offered by some of our competitors may also limit our ability to increase
+ our interest-earning assets. See Business of Home Federal Bancorp and Home
+ Federal Bank Competition. 
+
+We continually encounter technological
+ change, and we may have fewer resources than many of our competitors to continue
+ to invest in technological improvements.
+
+The financial
+ services industry is undergoing rapid technological changes, 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 will depend, in part, upon our ability to
+ address the needs of our clients by using technology to provide products and services
+ that will satisfy client demands for convenience, 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.
+
+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. Because our business
+ is highly regulated, the laws, rules and regulations applicable to it are subject
+ to regular modification and change. Regulatory authorities have extensive discretion
+ in their supervisory and enforcement activities, including the imposition of restrictions
+ on our operations, the classification of our assets and determination of the level
+ of our allowance for loan losses. Any change in this regulation and oversight,
+ whether in the form of regulatory policy, regulations, legislation or supervisory
+ action, may have a material impact on our operations or otherwise materially and
+ adversely affect our business, financial condition, prospects or profitability.
+ See How We Are Regulated Regulation and Supervision of Home Federal
+ Bank. 
+
+Risks Related to this Offering
+
+After
+ this offering, our compensation expenses will increase and our return on equity
+ will be low compared to other companies. These factors could negatively impact
+ the price of our stock.
+
+The proceeds
+ we will receive from the sale of our common stock will significantly increase our
+ capital and it will take us time to fully deploy those proceeds in our business
+ operations. Our compensation expense will increase because of the costs associated
+ with the employee stock ownership and new stock-based incentive plans. These additional
+ expenses will adversely affect our net income. We cannot determine the actual amount
+ of these new stock-related compensation and benefit expenses at this time because
+ applicable accounting practices generally require that they be based on the fair
+ market value of the options or shares of common stock at the date of the grant;
+ however, we expect them to be significant. We will recognize expenses for our employee
+ stock ownership plan when shares are committed to be released to participants 
+ accounts and will recognize expenses for restricted stock awards and stock options
+ generally over the vesting period of awards made to recipients. We estimate, once
+ these plans are adopted, the increase in compensation expense will be approximately
+ $1.6 million on an after-tax basis, based on the maximum of the valuation range.
+ As a result we expect our return on equity to be below our historical level and
+ less than many of our regional and national peers. Following the
+first step conversion, which occurred in December 2004, return on equity
+decreased from 10.47% for the year ended September 30, 2004 to 5.69% for the
+year ended September 30, 2005. In addition, return on assets also decreased
+from 0.93% for the year ended September 30, 2004 to 0.82% for the year ended September 30, 2005.
+ For the nine months ended June
+ 30, 2007 and
+
+6
+
+for the year ended September 30, 2006, our return on equity was 4.92%
+ and 5.90%, respectively. Although we expect that our net income will increase following
+ the offering, we expect that our return on equity will also be reduced as a result
+ of the additional capital that we will raise in the offering. For example, our pro forma return on equity for the twelve months ended June 30, 2007 was 3.36%, assuming
+ the sale of shares at the maximum of the offering range. In comparison, the peer
+ group used by RP Financial in its appraisal had an average return on equity of 7.18%
+ for the twelve months ended June 30, 2007. If our return on equity remains below
+ the industry average following the stock offering, this could hurt our stock price.
+ We cannot guarantee when or if we will achieve returns on equity that are comparable
+ to industry peers. For further information regarding pro forma income and expenses,
+ see Pro Forma Data. 
+
+Your subscription funds could be held for
+ an extended time period and will be unavailable to you for other investments
+ if completion of the conversion is delayed.
+
+Your subscription
+ funds could be held for an extended time period if the conversion is not completed
+ by _____ ____ _ _, 2007 and the regulators
+ give new Home Federal Bancorp more time to complete the conversion. If this occurs,
+ your funds would not be available to use for other purposes. If the regulators give
+ new Home Federal Bancorp more time to complete the conversion, new Home Federal
+ Bancorp will contact everyone who subscribed for shares to see if they still want
+ to purchase stock. A material change in the independent appraisal of new Home Federal
+ Bancorp would be the most likely, but not necessarily the only, reason for a delay
+ in completing the conversion. The conversion requirements permit the Office of Thrift
+ Supervision to grant one or more time extensions, none of which may exceed 90 days.
+ Extensions may not go beyond ___________ __, 2009.
+
+Management and the board
+ of directors have significant discretion over the investment of the offering
+proceeds and may not be able to achieve acceptable returns on the proceeds from the
+ offering.
+
+We expect
+ that a significant amount of capital will be raised in this offering. The board
+ of directors and management of new Home Federal Bancorp will have discretion in
+ the investment of this additional capital. We will use a portion of the net proceeds
+ retained to finance the purchase of common stock in the offering by the employee
+ stock ownership plan and may use the remaining net proceeds to pay dividends to
+ stockholders, repurchase shares of common stock, purchase securities, deposit funds
+ in Home Federal Bank or other financial institutions, acquire other financial services
+ companies or for other general corporate purposes. Home Federal Bank may use the
+ proceeds it receives to fund new loans, establish or acquire new branches or loan
+ production offices, acquire other financial service providers, purchase securities,
+ or for general corporate purposes. We have not, however, identified specific amounts
+ of proceeds for any of these purposes and we will have significant flexibility in
+ determining the amount of net proceeds we apply to different uses and the timing
+ of these applications. Our failure to utilize these funds effectively could reduce
+ our profitability. We have not established a timetable for the effective deployment
+ of the proceeds, and we cannot predict how long we will require to effectively deploy
+ the proceeds. Initially, a substantial portion of the net proceeds will be invested
+ in short-term investments, investment-grade debt obligations and mortgage-backed
+ securities. Investing the offering proceeds in securities until we are able to deploy
+ the proceeds will provide lower margins than we generally earn on loans, potentially
+ adversely affecting stockholder returns, including earnings per share, return on
+ assets and return on equity.
+
+Holders of New
+Home Federal Bancorp common stock may not be able to sell their shares when
+desired if a liquid trading market does not develop.
+
+Currently
+shares of Home Federal Bancorp s common stock are listed on the Nasdaq Global
+Market under the symbol HOME and there is an established market for the
+common stock. In connection with the
+offering, we have applied to have our common stock listed for trading on the
+Nasdaq Global Select Market under the symbol HOME. We cannot predict whether a liquid trading market in shares of
+new Home Federal Bancorp s common stock
+will develop or how liquid that market might become. The development of a liquid public market depends upon the
+existence of willing buyers and sellers, the presence of which is not within
+our control or the control of any market maker. See Market for Our Common
+Stock. 
+
+7
+
+ The shares of most recent second step conversions have traded below their initial offering price and as a result,
+our stock price may decline when trading commences.
+
+If you
+purchase shares in the offering, you may not be able to sell them at above the
+$10.00 per share purchase price even if a liquid trading market develops. The shares of several recent offerings in
+connection with second step conversions have traded below the initial offering
+price after completion of the offering.
+After our shares begin trading, the trading price of our common stock
+will be determined by the marketplace and may be influenced by many factors,
+including prevailing interest rates, investor perceptions, securities analysts
+reports and general industry, geopolitical and economic conditions. See The Conversion and Stock Offering How
+We Determined Our Price and the Number of Shares to Be Issued in the Stock
+Offering. 
+
+The amount of common stock we will control,
+ our articles of incorporation and bylaws, and state and federal law could discourage
+ hostile acquisitions of control of Home Federal Bancorp.
+
+Our directors
+ and executive officers, as a group, beneficially owned approximately 4.42% of Home
+ Federal Bancorp s outstanding common stock as of June 30, 2007 which will
+ be exchanged for new Home Federal Bancorp common stock. Our board of directors
+ and executive officers intend to purchase approximately 0.5% and 0.4% of additional
+ common stock at the minimum and maximum of the offering range, respectively. These
+ purchases, together with their prior ownership, as well as their potential acquisition
+ of common stock through the employee stock ownership plan and proposed new stock
+ option and stock recognition and retention plans will result in ownership by insiders
+ of new Home Federal Bancorp in excess of 13.9% of the total shares issued in the
+ offering at the maximum of the offering range. This inside ownership and provisions
+ in our articles of incorporation and bylaws may discourage attempts to acquire new
+ Home Federal Bancorp, pursue a proxy contest for control of new Home Federal Bancorp,
+ assume control of new Home Federal Bancorp by a holder of a large block of common
+ stock, and remove new Home Federal Bancorp s management, all of which stockholders
+ might think are in their best interests. These provisions include a prohibition
+ on any holder of common stock voting more than 10% of the outstanding common stock.
+ See Restrictions on Acquisition of Home Federal Bancorp and Home Federal Anti-takeover Provisions in Home Federal Bancorp s Articles of Incorporation
+ and Bylaws. 
+
+In addition, the business corporation law of Maryland, the
+ state where new Home Federal Bancorp is incorporated, provides for certain restrictions
+ on acquisition of new Home Federal Bancorp. Furthermore, federal law restricts acquisitions
+ of control of savings and loan holding companies such as new Home Federal Bancorp.
+
+We intend to remain independent which
+ may mean you will not receive a premium for your common stock.
+
+We intend
+ to remain independent for the foreseeable future. Because we do not plan on seeking
+ possible acquirors, it is unlikely that we will be acquired in the foreseeable future.
+ Accordingly, you should not purchase our common stock with any expectation that
+ a takeover premium will be paid to you in the near term.
+
+We intend to grant stock options and
+ restricted stock to the board of directors and certain employees following the
+ conversion which will likely reduce your ownership interest.
+
+New Home Federal Bancorp s articles of incorporation would not restrict new Home Federal Bancorp from adopting other stock-related
+compensation plans, however, the rules of the NASDAQ Stock Market, on which the common stock of Home Federal Bancorp is currently
+listed and on which the common stock of new Home Federal Bancorp will be listed, generally require stockholder approval of most
+compensation plans for directors, officers and key employees of the corporation. Moreover, although generally not required,
+stockholder approval of stock-related compensation plans may be sought in certain instances to qualify such plans for favorable
+treatment under current federal income tax laws and regulations. In addition, we plan to submit the stock compensation plans
+discussed in this prospectus to the stockholders for their approval.
+
+For a further discussion, see Comparison of Rights of New Home Federal Bancorp
+and Home Federal Bancorp s Stockholders - Issuance of Capital Stock. 
+
+If approved
+ by a vote of the stockholders following the conversion, we intend to establish a
+ new stock option plan with a number of shares equal to 8.7% of the shares sold in
+ the offering and a new stock recognition and retention plan with a number of shares
+ equal to 3.5% of the shares sold in the offering. These new stock benefit plans
+ are being established for the benefit of selected directors, officers and employees
+ of new Home Federal
+
+8
+
+Bancorp and Home Federal Bank and are worth a total of $8.0
+ million at the purchase price, based on the maximum of the estimated offering range.
+ Awards under these plans will likely reduce the ownership interest of all stockholders
+ by increasing the number of shares outstanding. The issuance of authorized but unissued
+ shares of common stock pursuant to the exercise of options under the new stock option
+ plan and the new stock recognition and retention plan would dilute the voting interests
+ of existing stockholders, by up to 4.9% and 2.0%, respectively. For further discussion
+ regarding these plans, see Pro Forma Data and Management 
+ Benefits to Be Considered Following Completion of the Conversion and Reorganization. 
+
+9
+
+SELECTED FINANCIAL AND OTHER DATA
+
+The Financial
+ Condition Data as of September 30, 2006 and 2005 and the Operating Data for the
+ years ended September 30, 2006, 2005 and 2004 are derived from the audited consolidated
+ financial statements and related notes included elsewhere in the prospectus. The
+ Financial Condition Data as of September 30, 2004, 2003 and 2002 and the Operating
+ Data for the years ended September 30, 2003 and 2002 are derived from audited consolidated
+ financial statements, not included in this prospectus. The Financial Condition Data
+ as of June 30, 2007 and the Operating Data for the nine months ended June 30, 2007
+ and 2006 are derived from unaudited consolidated financial statements included elsewhere
+ in this prospectus which, in the opinion of management, include all adjustments
+ (consisting of normal recurring adjustments) necessary to present fairly the data
+ for the unaudited periods. Historical results are not necessarily indicative of
+ results to be expected in any future period, and results for the nine months ended
+ June 30, 2007 are not necessarily indicative of the results to be expected for the
+ year ended September 30, 2007. The following information is only a summary and you
+ should read it in conjunction with our consolidated financial statements and related
+ notes beginning on page F-1 and with Management s Discussion and Analysis
+ of Financial Condition and Results of Operations included elsewhere in this
+ prospectus.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+
+At June 30,
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+FINANCIAL
+ CONDITION DATA:
+
+ 
+
+(Unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total assets
+ 
+ 
+$
+728,315
+ 
+ 
+ 
+$
+761,292
+ 
+ 
+ 
+$
+689,577
+ 
+ 
+ 
+$
+743,867
+ 
+ 
+ 
+$
+450,196
+ 
+ 
+ 
+$
+416,543
+ 
+
+Investment
+ securities available for sale, at fair value
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,440
+ 
+ 
+ 
+ 
+2,507
+ 
+
+Mortgage-backed
+ securities, available for sale
+
+ 
+ 
+ 
+166,755
+ 
+ 
+ 
+ 
+12,182
+ 
+ 
+ 
+ 
+14,830
+ 
+ 
+ 
+ 
+871
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mortgage-backed
+ securities, held to maturity
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+183,279
+ 
+ 
+ 
+ 
+180,974
+ 
+ 
+ 
+ 
+96,595
+ 
+ 
+ 
+ 
+24,425
+ 
+ 
+ 
+ 
+44,325
+ 
+
+Loans
+ receivable, net (1)
+
+ 
+ 
+ 
+491,768 
+ 
+ 
+ 
+ 
+503,065
+ 
+ 
+ 
+ 
+430,944
+ 
+ 
+ 
+ 
+392,634
+ 
+ 
+ 
+ 
+372,629
+ 
+ 
+ 
+ 
+318,297
+ 
+
+Loans
+ held for sale
+
+ 
+ 
+ 
+4,363
+ 
+ 
+ 
+ 
+4,119
+ 
+ 
+ 
+ 
+5,549
+ 
+ 
+ 
+ 
+3,577
+ 
+ 
+ 
+ 
+5,066
+ 
+ 
+ 
+ 
+12,722
+ 
+
+Total
+ deposit accounts
+
+ 
+ 
+ 
+418,698
+ 
+ 
+ 
+ 
+430,281
+ 
+ 
+ 
+ 
+396,325
+ 
+ 
+ 
+ 
+343,087
+ 
+ 
+ 
+ 
+301,273
+ 
+ 
+ 
+ 
+279,772
+ 
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+189,264
+ 
+ 
+ 
+ 
+210,759
+ 
+ 
+ 
+ 
+175,932
+ 
+ 
+ 
+ 
+122,797
+ 
+ 
+ 
+ 
+96,527
+ 
+ 
+ 
+ 
+91,008
+ 
+
+Stockholders equity
+
+ 
+ 
+ 
+109,998
+ 
+ 
+ 
+ 
+107,869
+ 
+ 
+ 
+ 
+101,367
+ 
+ 
+ 
+ 
+45,097
+ 
+ 
+ 
+ 
+40,399
+ 
+ 
+ 
+ 
+34,961
+ 
+
+ 
+ 
+ 
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+June 30,
+ 
+ 
+ 
+
+Year Ended September 30,
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+OPERATING
+ DATA:
+
+ 
+ 
+2007
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+
+2004
+ 
+ 
+ 
+2003
+ 
+ 
+ 
+
+2002
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Unaudited)
+ 
+(In Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest
+ income
+
+ 
+ 
+$
+32,260
+ 
+ 
+ 
+$
+29,293
+ 
+ 
+ 
+$
+39,913
+ 
+ 
+ 
+$
+33,910
+ 
+ 
+ 
+$
+27,512
+ 
+ 
+ 
+$
+26,896
+ 
+ 
+ 
+$
+26,904
+ 
+
+Interest
+ expense
+
+ 
+ 
+ 
+16,088
+ 
+ 
+ 
+ 
+11,883
+ 
+ 
+ 
+ 
+16,917
+ 
+ 
+ 
+ 
+12,231
+ 
+ 
+ 
+ 
+9,650
+ 
+ 
+ 
+ 
+9,705
+ 
+ 
+ 
+ 
+11,465
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ interest income
+
+ 
+ 
+ 
+16,172
+ 
+ 
+ 
+ 
+17,410
+ 
+ 
+ 
+ 
+22,996
+ 
+ 
+ 
+ 
+21,679
+ 
+ 
+ 
+ 
+17,862
+ 
+ 
+ 
+ 
+17,191
+ 
+ 
+ 
+ 
+15,439
+ 
+
+Provision
+ for loan losses
+
+ 
+ 
+ 
+71
+ 
+ 
+ 
+ 
+320
+ 
+ 
+ 
+ 
+138
+ 
+ 
+ 
+ 
+456
+ 
+ 
+ 
+ 
+900
+ 
+ 
+ 
+ 
+615
+ 
+ 
+ 
+ 
+277
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net interest
+ income after provision for loan losses
+
+ 
+ 
+ 
+16,101
+ 
+ 
+ 
+ 
+17,090
+ 
+ 
+ 
+ 
+22,858
+ 
+ 
+ 
+ 
+21,223
+ 
+ 
+ 
+ 
+16,962
+ 
+ 
+ 
+ 
+16,576
+ 
+ 
+ 
+ 
+15,162
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Noninterest
+ income
+
+ 
+ 
+ 
+8,626
+ 
+ 
+ 
+ 
+8,343
+ 
+ 
+ 
+ 
+11,109
+ 
+ 
+ 
+ 
+10,128
+ 
+ 
+ 
+ 
+8,982
+ 
+ 
+ 
+ 
+11,188
+ 
+ 
+ 
+ 
+5,767
+ 
+
+Noninterest
+ expense
+
+ 
+ 
+ 
+18,134
+ 
+ 
+ 
+ 
+18,062
+ 
+ 
+ 
+ 
+23,945
+ 
+ 
+ 
+ 
+23,158
+ 
+ 
+ 
+ 
+18,576
+ 
+ 
+ 
+ 
+18,885
+ 
+ 
+ 
+ 
+17,178
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Income
+ before income taxes
+
+ 
+ 
+ 
+6,593
+ 
+ 
+ 
+ 
+7,371
+ 
+ 
+ 
+ 
+10,022
+ 
+ 
+ 
+ 
+8,193
+ 
+ 
+ 
+ 
+7,368
+ 
+ 
+ 
+ 
+8,879
+ 
+ 
+ 
+ 
+3,751
+ 
+
+Federal
+ income tax expense
+
+ 
+ 
+ 
+2,517
+ 
+ 
+ 
+ 
+2,817
+ 
+ 
+ 
+ 
+3,810
+ 
+ 
+ 
+ 
+2,910
+ 
+ 
+ 
+ 
+2,684
+ 
+ 
+ 
+ 
+3,423
+ 
+ 
+ 
+ 
+1,644
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ income
+
+ 
+ 
+$
+4,076
+ 
+ 
+ 
+$
+4,544
+ 
+ 
+ 
+$
+ 6,212
+ 
+ 
+ 
+$
+ 5,283
+ 
+ 
+ 
+$
+ 4,684
+ 
+ 
+ 
+$
+ 5,456
+ 
+ 
+ 
+$
+ 2,107
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Earnings
+ per common share:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Basic
+
+ 
+ 
+$
+0.28
+ 
+ 
+ 
+$
+0.31
+ 
+ 
+ 
+$
+0.43
+ 
+ 
+ 
+$
+0.36
+ 
+ 
+ 
+ 
+nm
+(2)
+ 
+ 
+ 
+nm
+(2)
+ 
+ 
+ 
+nm
+(2)
+
+Diluted
+
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+ 
+0.31
+ 
+ 
+ 
+ 
+0.43
+ 
+ 
+ 
+ 
+0.36
+ 
+ 
+ 
+ 
+nm
+(2)
+ 
+ 
+ 
+nm
+(2)
+ 
+ 
+ 
+nm
+(2)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Dividends
+ declared per share:
+
+ 
+ 
+$
+0.165
+ 
+ 
+ 
+$
+0.160
+ 
+ 
+ 
+$
+0.215
+ 
+ 
+ 
+$
+0.100
+ 
+ 
+ 
+ 
+nm
+(2)
+ 
+ 
+ 
+nm
+(2)
+ 
+ 
+ 
+nm
+(2)
+
+(1)
+ 
+ 
+Net of
+ allowances for loan losses, loans in process and deferred loan fees.
+
+(2)
+ 
+ 
+Per share
+ information is not meaningful. Home Federal Bancorp did not complete its minority
+ stock offering until December 6, 2004 and did not have any outstanding shares prior
+ to that date.
+
+10
+
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+
+At June 30,
+ 
+
+OTHER
+ DATA:
+
+ 
+
+2007
+ 
+
+2006
+ 
+ 
+
+2005
+ 
+ 
+
+2004
+ 
+ 
+
+2003
+ 
+ 
+
+2002
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Number
+ of:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real
+ estate loans outstanding
+
+ 
+ 
+ 
+3,047
+ 
+ 
+ 
+ 
+3,389
+ 
+ 
+ 
+ 
+3,236
+ 
+ 
+ 
+ 
+3,081
+ 
+ 
+ 
+ 
+3,053
+ 
+ 
+ 
+ 
+2,565
+ 
+
+Deposit
+ accounts
+
+ 
+ 
+ 
+70,546
+ 
+ 
+ 
+ 
+70,373
+ 
+ 
+ 
+ 
+73,013
+ 
+ 
+ 
+ 
+75,565
+ 
+ 
+ 
+ 
+72,327
+ 
+ 
+ 
+ 
+70,183
+ 
+
+Full-service
+ offices
+
+ 
+ 
+ 
+15
+ 
+ 
+ 
+ 
+14
+ 
+ 
+ 
+ 
+15
+ 
+ 
+ 
+ 
+14
+ 
+ 
+ 
+ 
+14
+ 
+ 
+ 
+ 
+14
+ 
+
+ 
+ 
+
+At or For the
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Nine Months Ended
+ 
+
+At or For the
+
+ 
+ 
+
+June 30, (1)
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+
+KEY
+ FINANCIAL RATIOS:
+
+ 
+
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Performance
+ Ratios:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Return
+ on average assets (2)
+
+ 
+ 
+ 
+0.72
+%
+ 
+ 
+ 
+0.85
+%
+ 
+ 
+ 
+0.85
+%
+ 
+ 
+ 
+0.82
+%
+ 
+ 
+ 
+0.93
+%
+ 
+ 
+ 
+1.23
+%
+ 
+ 
+ 
+0.53
+%
+
+Return
+ on average equity (3)
+
+ 
+ 
+ 
+4.92
+ 
+ 
+ 
+ 
+5.81
+ 
+ 
+ 
+ 
+5.90
+ 
+ 
+ 
+ 
+5.69
+ 
+ 
+ 
+ 
+10.47
+ 
+ 
+ 
+ 
+13.39
+ 
+ 
+ 
+ 
+6.03
+ 
+
+Dividend
+ payout ratio
+
+ 
+ 
+ 
+21.96
+ 
+ 
+ 
+ 
+21.76
+ 
+ 
+ 
+ 
+19.72
+ 
+ 
+ 
+ 
+10.68
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Equity
+ to asset ratio (4)
+
+ 
+ 
+ 
+14.70
+ 
+ 
+ 
+ 
+14.56
+ 
+ 
+ 
+ 
+14.47
+ 
+ 
+ 
+ 
+14.38
+ 
+ 
+ 
+ 
+8.86
+ 
+ 
+ 
+ 
+9.17
+ 
+ 
+ 
+ 
+8.74
+ 
+
+Interest
+ rate spread (5)
+
+ 
+ 
+ 
+2.41
+ 
+ 
+ 
+ 
+2.87
+ 
+ 
+ 
+ 
+2.79
+ 
+ 
+ 
+ 
+3.15
+ 
+ 
+ 
+ 
+3.55
+ 
+ 
+ 
+ 
+3.93
+ 
+ 
+ 
+ 
+3.98
+ 
+
+Net
+ interest margin (6)
+
+ 
+ 
+ 
+3.02
+ 
+ 
+ 
+ 
+3.41
+ 
+ 
+ 
+ 
+3.33
+ 
+ 
+ 
+ 
+3.57
+ 
+ 
+ 
+ 
+3.84
+ 
+ 
+ 
+ 
+4.19
+ 
+ 
+ 
+ 
+4.23
+ 
+
+Efficiency
+ ratio (8)
+
+ 
+ 
+ 
+73.13
+ 
+ 
+ 
+ 
+70.14
+ 
+ 
+ 
+ 
+70.21
+ 
+ 
+ 
+ 
+72.81
+ 
+ 
+ 
+ 
+69.20
+ 
+ 
+ 
+ 
+66.55
+ 
+ 
+ 
+ 
+81.01
+ 
+
+Noninterest
+ income/operating revenue (9)
+
+ 
+ 
+ 
+ 34.8 
+ 
+ 
+ 
+ 
+ 32.4 
+ 
+ 
+ 
+ 
+ 32.6 
+ 
+ 
+ 
+ 
+ 31.8 
+ 
+ 
+ 
+ 
+ 33.5 
+ 
+ 
+ 
+ 
+ 39.4 
+ 
+ 
+ 
+ 
+ 27.2 
+ 
+
+Average interest-earning assets to average interest-bearing liabilities
+
+ 
+ 
+ 
+120.44
+ 
+ 
+ 
+ 
+122.86
+ 
+ 
+ 
+ 
+122.32
+ 
+ 
+ 
+ 
+121.07
+ 
+ 
+ 
+ 
+113.62
+ 
+ 
+ 
+ 
+110.96
+ 
+ 
+ 
+ 
+107.83
+ 
+
+Noninterest
+ expense as a percent of average total assets
+
+ 
+ 
+ 
+2.41
+ 
+ 
+ 
+ 
+2.52
+ 
+ 
+ 
+ 
+3.29
+ 
+ 
+ 
+ 
+3.59
+ 
+ 
+ 
+ 
+3.68
+ 
+ 
+ 
+ 
+4.25
+ 
+ 
+ 
+ 
+4.29
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Capital
+ Ratios:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Tier I (core)
+ capital (to tangible assets)
+
+ 
+ 
+ 
+12.97
+ 
+ 
+ 
+ 
+11.59
+ 
+ 
+ 
+ 
+11.77
+ 
+ 
+ 
+ 
+12.00
+ 
+ 
+ 
+ 
+6.01
+ 
+ 
+ 
+ 
+8.89
+ 
+ 
+ 
+ 
+8.50
+ 
+
+Total risk-based capital (to risk-weighted assets)
+
+ 
+ 
+ 
+20.58
+ 
+ 
+ 
+ 
+19.34
+ 
+ 
+ 
+ 
+19.46
+ 
+ 
+ 
+ 
+20.46
+ 
+ 
+ 
+ 
+12.76
+ 
+ 
+ 
+ 
+14.18
+ 
+ 
+ 
+ 
+13.79
+ 
+
+Tier I risk-based
+ capital (to risk-weighted assets)
+
+ 
+ 
+ 
+19.95
+ 
+ 
+ 
+ 
+18.65
+ 
+ 
+ 
+ 
+18.82
+ 
+ 
+ 
+ 
+19.75
+ 
+ 
+ 
+ 
+12.05
+ 
+ 
+ 
+ 
+13.56
+ 
+ 
+ 
+ 
+13.27
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Asset
+ Quality Ratios:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Non-accrual
+ and 90 days or more past due loans as a percent of total loans 
+
+ 
+ 
+ 
+0.07
+ 
+ 
+ 
+ 
+0.01
+ 
+ 
+ 
+ 
+0.08
+ 
+ 
+ 
+ 
+0.11
+ 
+ 
+ 
+ 
+0.16
+ 
+ 
+ 
+ 
+0.04
+ 
+ 
+ 
+ 
+0.14
+ 
+
+Non-performing assets as a percent of total assets
+
+ 
+ 
+ 
+0.07
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+0.05
+ 
+ 
+ 
+ 
+0.15
+ 
+ 
+ 
+ 
+0.10
+ 
+ 
+ 
+ 
+0.03
+ 
+ 
+ 
+ 
+0.17
+ 
+
+Allowance
+ for losses as a percent of gross loans receivable
+
+ 
+ 
+ 
+0.56
+ 
+ 
+ 
+ 
+0.64
+ 
+ 
+ 
+ 
+0.59
+ 
+ 
+ 
+ 
+0.67
+ 
+ 
+ 
+ 
+0.67
+ 
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+ 
+0.41
+ 
+
+Allowance
+ for losses as a percent of nonperforming loans
+
+ 
+ 
+ 
+748.77
+ 
+ 
+ 
+ 
+10,533.33
+ 
+ 
+ 
+ 
+766.49
+ 
+ 
+ 
+ 
+602.97
+ 
+ 
+ 
+ 
+432.30
+ 
+ 
+ 
+ 
+1,393.23
+ 
+ 
+ 
+ 
+295.94
+ 
+
+Net charge-offs
+ to average loans
+
+ 
+ 
+ 
+0.02
+ 
+ 
+ 
+ 
+0.01
+ 
+ 
+ 
+ 
+0.01
+ 
+ 
+ 
+ 
+0.05
+ 
+ 
+ 
+ 
+0.03
+ 
+ 
+ 
+ 
+0.04
+ 
+ 
+ 
+ 
+0.10
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1)
+ 
+Ratios have
+ been annualized.
+
+(2)
+ 
+Net income
+ divide d by average total assets.
+
+(footnotes continued on following page)
+
+11
+
+(3)
+ 
+Net income
+ divided by average equity.
+
+(4)
+ 
+Average
+ equity divided by average total assets.
+
+(5)
+ 
+Difference
+ between weighted average yield on interest-earning assets and weighted average rate
+ on interest-bearing liabilities.
+
+(6)
+ 
+Net interest
+ margin, otherwise known as net yield on interest-earning assets, is calculated as
+ net interest income divided by average interest-earning assets.
+
+(7)
+ 
+Tangible
+ equity is equity less goodwill and other intangible assets.
+
+(8)
+
+ 
+The efficiency
+ ratio represents the ratio of noninterest expense divided by the sum of net interest
+ income and noninterest income (expense).
+
+(9)
+ 
+Operating
+ revenue is defined as the sum of net interest and non-interest income.
+
+A WARNING ABOUT FORWARD-LOOKING STATEMENTS
+
+This prospectus
+ contains forward-looking statements, which can be identified by the use of words
+ such as believes, expects, anticipates, estimates or similar expressions. Forward-looking statements include:
+
+ 
+ 
+ 
+statements
+ of our goals, intentions and expectations;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+statements
+ regarding our business plans, prospects, growth and operating strategies;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+statements
+ regarding the quality of our loan and investment portfolios; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+estimates
+ of our risks and future costs and benefits.
+
+These forward-looking
+ statements are subject to significant risks and uncertainties. Actual results may
+ differ materially from those contemplated by the forward-looking statements due
+ to, among others, the following factors:
+
+ 
+ 
+ 
+general
+ economic conditions, either nationally or in our market area, that are worse than
+ expected;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+changes
+ in the interest rate environment that reduce our interest margins or reduce the
+ fair value of financial instruments;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+increased
+ competitive pressures among financial services companies;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+changes
+ in consumer spending, borrowing and savings habits;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+our ability
+ to successfully manage our growth;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+legislative
+ or regulatory change s that adversely affect our business;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+adverse
+ changes in the securities markets; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+changes
+ in accounting policies and practices, as may be adopted by the bank regulatory agencies,
+ the Public Company Accounting Oversight Board or the Financial Accounting Standards
+ Board.
+
+Any of the
+ forward-looking statements that we make in this prospectus and in other public statements
+ we make may turn out to be wrong because of inaccurate assumptions we might make,
+ because of the factors illustrated above or because of other factors that we cannot
+ foresee. Because of these and other uncertainties, our actual future results may
+ be materially different from the results indicated by these forward-looking statements
+ and you should not rely on such statements.
+
+12
+
+HOW WE INTEND TO USE THE PROCEEDS FROM
+ THIS OFFERING
+
+Although the
+ actual net proceeds from the sale of the shares of common stock cannot be determined
+ until the conversion is completed, we presently anticipate that the net proceeds
+ will be between $97.5 million at the minimum of the offering range and $132.4 million
+ at the maximum of the offering range and may be up to $152.4 million assuming
+ an increase in the estimated offering range by 15%. See Pro Forma Data 
+ and The Conversion and Stock Offering How We Determined Our Price
+ and the Number of Shares to Be Issued in the Stock Offering as to the assumptions
+ used to arrive at these amounts.
+
+We
+ intend to use the net proceed s received from the stock offering as follows:
+
+ 
+ 
+
+Minimum
+ 
+
+Maximum
+ 
+
+Maximum,
+as adjusted
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(In Thousands)
+ 
+ 
+ 
+ 
+ 
+
+Gross proceeds
+
+ 
+ 
+$
+102,000
+ 
+ 
+ 
+$
+138,000
+ 
+ 
+ 
+$
+158,700
+ 
+
+Less:
+ estimated underwriting commission and other offering expenses
+
+ 
+ 
+ 
+4,471
+ 
+ 
+ 
+ 
+5,613
+ 
+ 
+ 
+ 
+6,269
+ 
+
+Estimated
+ net proceeds
+
+ 
+ 
+ 
+97,529
+ 
+ 
+ 
+ 
+132,387
+ 
+ 
+ 
+ 
+152,431
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Less:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ proceeds to Home Federal Bank
+
+ 
+ 
+ 
+48,765
+ 
+ 
+ 
+ 
+66,194
+ 
+ 
+ 
+ 
+76,216
+ 
+
+Loan
+ to our employee stock ownership plan
+
+ 
+ 
+ 
+8,160
+ 
+ 
+ 
+ 
+11,040
+ 
+ 
+ 
+ 
+12,696
+ 
+
+Net
+ cash proceeds retained by new Home Federal Bancorp
+
+ 
+ 
+ 
+40,604
+ 
+ 
+ 
+ 
+55,153
+ 
+ 
+ 
+ 
+63,519
+ 
+
+New Home Federal
+ Bancorp will retain 50% of the net conversion proceeds and will purchase all of
+ the capital stock of Home Federal Bank to be issued in the conversion in exchange
+ for the remaining 50% of the net conversion proceeds. The net proceeds retained
+ by new Home Federal Bancorp will initially be deposited with Home Federal Bank
+ and may ultimately be used to support lending and investment activities, future
+ expansion of operations through the establishment or acquisition of banking offices
+ or other financial service providers, to pay dividends or for other general corporate
+ purposes, including repurchasing shares of its common stock. No such acquisitions
+ are specifically being considered at this time. Home Federal Bank intends to use
+ the proceeds received from new Home Federal Bancorp for future lending and investment
+ activities, in addition to general and other corporate purposes. Initially, a substantial
+ portion of the net proceeds will be invested in short-term investments, investment-grade
+ debt obligations and mortgage-backed securities.
+
+In particular,
+the net conversion proceeds will be used to expand our branch network and are
+planning four to six new branches that we intend to open within the next 24
+months. There is currently one new branch under construction in Nampa, Idaho
+and plans are being finalized for the construction of a new branch office in
+the Meridian, Idaho market in 2008. Our
+long-term strategy is to build two or three branches per year if appropriate
+sites can be identified and obtained.
+We expect that each new branch office will cost between $1.3 million to
+$2.2 million, depending upon the location, cost of land, and the size and
+design of the building and permitting costs, which may vary from one
+jurisdiction to another. Initially, the
+net proceeds from the offering will be utilized to fund new loan originations,
+particularly in the commercial lending area.
+
+As our
+strategic plan for growth and enhanced business model implementation is
+realized, new services and products will continue to be offered. We expect that these new services and
+products will reflect our plans to expand our commercial business related
+banking and therefore the new product and services will be directed towards
+attracting and retaining commercial business customers.
+
+New Home Federal
+ Bancorp intends to use a portion of the net proceeds to make a loan directly to
+ the employee stock ownership plan to enable it to purchase up to 8% of the aggregate
+ shares of common stock sold in the offering; or if shares are not available, in
+ the open market after the conversion. Based upon the sale of 10,200,000 shares of
+ common stock in the offering and the sale of 13,800,000 shares of common stock in
+ the offering and at the minimum and maximum of the estimated offering range, respectively,
+ the loan to the Home Federal Bancorp employee stock ownership plan would be $8.2
+ million and $11.0 million, respectively. See
+
+13
+
+ Management Benefits to
+ Be Considered Following Completion of the Conversion and Reorganization Employee
+ Stock Ownership Plan. 
+
+New Home Federal
+ Bancorp intends to adopt a new stock recognition and retention plan, subject to
+ stockholder approval, and will use a portion of its proceeds to fund the purchase
+ of shares in the open market for the plan. The stock recognition and retention plan
+ intends to purchase in the open market 3.5% of the aggregate shares sold in the
+ offering or $3.5 million and $4.8 million at the minimum and maximum of the estimated
+ offering range, respectively.
+
+The
+ net proceeds may vary because total expenses
+ of the conversion may be more or less than those estimated. The net proceeds
+ will also vary if the number of shares to be issued in the conversion is adjusted
+ to reflect a change in the estimated pro forma market value of new Home Federal
+ Bancorp. Payments for shares made through withdrawals from existing deposit accounts
+ at Home Federal Bank will not result in the receipt of new funds
+
+for investment by Home Federal Bank but
+ will result in a reduction of Home Federal Bank s interest expense and liabilities
+ as funds are transferred from interest-bearing certificates or other deposit accounts.
+
+WE INTEND TO CONTINUE TO PAY QUARTERLY
+ CASH DIVIDENDS
+
+Home Federal
+ Bancorp has paid quarterly cash dividends since the quarter ended June 30, 2005.
+ Home Federal Bancorp s current quarterly dividend is $0.055 per share. After
+ we complete the conversion, dividends will be paid by new Home Federal Bancorp
+ on its outstanding shares of common stock. We currently expect that the level of
+ cash dividends per share after the conversion, and offering will be substantially
+ consistent with the current amount of dividends per share paid by Home Federal Bancorp
+ on its common stock as adjusted for the additional shares issued pursuant to the
+ exchange ratio. For example, based on the current cash dividend of $0.055 per share
+ and an assumed exchange ratio of 1.5369 at the maximum of the offering range, the
+ cash dividend, if paid, would be approximately $0.035 per share. However, the rate
+ of such dividends and the initial or continued payment thereof will be in the discretion
+ of the board of directors of new Home Federal Bancorp and will depend upon a number
+ of factors, including the amount of net proceeds retained by us in the offering,
+ investment opportunities available to us, capital requirements, our financial condition
+ and result of operations, tax considerations, statutory and regulatory limitations,
+ and general economic conditions. No assurance can be given that we will continue
+ to pay dividends or that they will not be reduced in the future. We cannot guarantee
+ that the amount of dividends that we pay after the conversion will be equal to the
+ per share dividend amount that Home Federal Bancorp s stockholders currently
+ receive, as adjusted to reflect the exchange ratio. In addition, during the first
+ three years after the conversion, no dividend will be declared or paid if it would
+ be classified as a return of capital.
+
+Dividends from new Home Federal Bancorp
+ may eventually depend, in part, upon receipt of dividends from Home Federal Bank,
+ because new Home Federal Bancorp initially will have no source of income other than
+ dividends from Home Federal Bank, earnings from the investment of proceeds from
+ the sale of common stock retained by us, and interest payments with respect to our
+ loan to our employee stock ownership plan.
+
+Home Federal
+ Bank s ability to pay dividends to new Home Federal Bancorp will be governed
+ by the Home Owners Loan Act, as amended, and the regulations of the Office
+ of Thrift Supervision. In addition, the prior approval of the Office of Thrift Supervision
+ will be required for the payment of a dividend if the total of all dividends declared
+ by Home Federal Bank in any calendar year would exceed the total of its net profits
+ for the year combined with its nets profits for the two preceding years, less any
+ required transfers to surplus or a fund for the retirement of any preferred stock.
+ In addition, Home Federal Bank will be prohibited from paying cash dividends to
+ new Home Federal Bancorp to the extent that any such payment would reduce Home
+ Federal Bank s regulatory capital below required capital levels or would impair
+ the liquidation account to be established for the benefit of Home Federal Bank s
+ eligible account holders and supplemental eligible account holders. See The
+ Conversion and Offering Liquidation Rights. 
+
+Any payment
+ of dividends by Home Federal Bank to new Home Federal Bancorp which would be deemed
+ to be drawn out of Home Federal Bank s bad debt reserves would require a payment
+ of taxes at the then-current tax rate of Home Federal Bank on the amount of earnings
+ deemed to be removed from the reserves for such distribution.
+
+14
+
+Home Federal Bank
+ does not intend to make any distribution to new Home Federal Bancorp that would
+ create such a federal tax liability. See Taxation. 
+
+Unlike Home
+ Federal Bank, new Home Federal Bancorp is not subject to the above regulatory restrictions
+ on the payment of dividends to its stockholders.
+
+MARKET FOR OUR COMMON STOCK
+
+Home Federal
+ Bancorp s common stock is currently listed on the Nasdaq Global Market under
+ the symbol HOME, and there is an established market for such common
+ stock. We have applied to have the common stock of new Home Federal Bancorp listed
+ for trading on the Nasdaq Global Select Market and we expect that the common stock
+ will trade under the symbol HOMED for a period of 20 trading days
+ after completion of the offering.
+
+Thereafter,
+ new Home Federal Bancorp s trading symbol will revert to HOME 
+ We cannot assure you our common stock will be approved for listing on the Nasdaq
+ Global Select Market.
+
+ 
+
+Making a market
+ may include the solicitation of potential buyers and sellers in order to match buy
+ and sellorders. The development of a liquid public market depends upon the existence
+ of willing buyers and sellers, the presence of which is not within our control or
+ the control of any market maker. You should view the common stock as a long-term
+ investment. Furthermore, there can be no assurance that you will be able to sell
+ your shares at or above the purchase price.
+
+ 
+
+The following
+ table sets forth the high and low closing stock prices for Home Federal Bancorp
+ common stock as reported by The Nasdaq Stock Market LLC and cash dividends per share
+ declared for the periods indicated.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Stock Price Per Share
+ 
+
+Cash
+
+ 
+ 
+
+ 
+
+Dividends
+
+ 
+ 
+High
+ 
+Low
+ 
+
+Per Share
+
+ 
+ 
+
+ 
+
+ 
+
+Fiscal Year
+ Ended September 30, 2007
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Quarter Ended
+ December 31, 2006
+ 
+$
+17.91
+ 
+ 
+$
+15.51
+ 
+ 
+$
+ 0.055
+ 
+
+Quarter Ended
+ March 31, 2007
+ 
+ 
+17.69
+ 
+ 
+ 
+14.02
+ 
+ 
+ 
+0.055
+ 
+
+Quarter Ended
+ June 30, 2007
+ 
+ 
+17.80
+ 
+ 
+ 
+14.53
+ 
+ 
+ 
+0.055
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fiscal Year
+ Ended September 30, 2006
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Quarter Ended
+ December 31, 2005
+ 
+$
+13.00
+ 
+ 
+$
+12.10
+ 
+ 
+$
+0.050
+ 
+
+Quarter Ended
+ March 31, 2006
+ 
+ 
+13.67
+ 
+ 
+ 
+12.16
+ 
+ 
+ 
+0.055
+ 
+
+Quarter Ended
+ June 30, 2006
+ 
+ 
+15.64
+ 
+ 
+ 
+13.30
+ 
+ 
+ 
+0.055
+ 
+
+Quarter Ended
+ September 30, 2006
+ 
+ 
+15.74
+ 
+ 
+ 
+13.63
+ 
+ 
+ 
+0.055
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fiscal Year
+ Ended September 30, 2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Quarter Ended
+ December 31, 2004
+ 
+$
+12.96
+ 
+ 
+$
+12.49
+ 
+ 
+$
+ 
+ 
+
+Quarter Ended
+ March 31, 2005
+ 
+ 
+13.04
+ 
+ 
+ 
+11.91
+ 
+ 
+ 
+ 
+ 
+
+Quarter Ended
+ June 30, 2005
+ 
+ 
+13.42
+ 
+ 
+ 
+11.16
+ 
+ 
+ 
+0.050
+ 
+
+Quarter Ended
+ September 30, 2005
+ 
+ 
+13.19
+ 
+ 
+ 
+11.97
+ 
+ 
+ 
+0.050
+ 
+
+ 
+
+At May 10
+ , 2007, the business day immediately preceding the public announcement of the conversion,
+ and at ______, 2007, the date of this prospectus, the closing prices of Home Federal
+ Bancorp common stock as reported on the Nasdaq Global Market were $15.03 per share
+ and $____ per share, respectively. At June 30, 2007, Home Federal Bancorp had approximately
+ 680 stockholders of record, excluding persons or entities that hold stock in nominee
+ or street name accounts with brokers.
+
+15
+
+CAPITALIZATION
+
+ 
+
+The following
+ table presents the capitalization of Home Federal Bancorp at June 30, 200 7, and
+ the pro forma consolidated capitalization of new Home Federal Bancorp after giving
+ effect to the conversion, excluding assumed earnings on the net proceeds, based
+ upon the sale of the number of shares shown below and the other assumptions set
+ forth under Pro Form a Data. 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+New Home Federal Bancorp Pro Forma
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+Based Upon Sale at $10.00 Per Share
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Home Federal
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Bancorp
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+15,870,000
+
+ 
+
+Capitalization
+ 
+
+10,200,000
+ 
+ 
+
+12,000,000
+ 
+ 
+
+13,800,000
+ 
+ 
+
+Shares (1)
+
+ 
+at
+ 
+Shares
+ 
+ 
+Shares
+ 
+ 
+
+Shares
+ 
+ 
+
+(Maximum of
+
+ 
+
+June 30,
+ 
+(Minimum
+ 
+ 
+
+(Midpoint
+ 
+ 
+(Maximum
+ 
+ 
+
+Range, as
+
+ 
+2007
+ 
+
+of Range)
+ 
+ 
+
+of Range)
+ 
+ 
+
+of Range)
+ 
+ 
+
+Adjusted)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+ 
+ 
+ 
+
+Deposits (2)
+ 
+$
+418,698
+ 
+ 
+$
+418,698
+ 
+ 
+$
+418,698
+ 
+ 
+$
+418,698
+ 
+ 
+$
+418,698
+ 
+
+Borrowings
+ (2)
+ 
+ 
+189,264
+ 
+ 
+ 
+189,264
+ 
+ 
+ 
+189,264
+ 
+ 
+ 
+189,264
+ 
+ 
+ 
+189,264
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ deposits and borrowings
+
+ 
+$
+607,962
+ 
+ 
+$
+607,962
+ 
+ 
+$
+607,962
+ 
+ 
+$
+607,962
+ 
+ 
+$
+607,962
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Stockholders equity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Preferred
+ stock, $0.01 par value, 5,000,000 shares authorized; issued and outstanding,
+ none
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Common
+ stock, $0.01 par value, 100,000,000
+ shares authorized;
+shares
+ to be issued as reflected (3)
+
+ 
+$
+152
+ 
+ 
+$
+173
+ 
+ 
+$
+204
+ 
+ 
+$
+ 234
+ 
+ 
+$
+269
+ 
+
+Additional
+ paid-in capital
+
+ 
+ 
+59,209
+ 
+ 
+ 
+156,717
+ 
+ 
+ 
+174,115
+ 
+ 
+ 
+191,514
+ 
+ 
+ 
+211,523
+ 
+
+Retained
+ earnings (4)
+
+ 
+ 
+57,922
+ 
+ 
+ 
+57,922
+ 
+ 
+ 
+57,922
+ 
+ 
+ 
+57,922
+ 
+ 
+ 
+57,922
+ 
+
+Equity
+ Received from MHC
+
+ 
+ 
+ 
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+
+Accumulated
+ other comprehensive
+ loss
+
+ 
+ 
+(3,477
+)
+ 
+ 
+(3,477
+)
+ 
+ 
+(3,477
+)
+ 
+ 
+(3,477
+)
+ 
+ 
+(3,477
+)
+
+Less:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Common
+ stock to be acquired by the employee
+ stock ownership plan (5)
+
+ 
+ 
+(3,808
+)
+ 
+ 
+(11,968
+)
+ 
+ 
+(13,408
+)
+ 
+ 
+(14,848
+)
+ 
+ 
+(16,504
+)
+
+Common
+ stock to be acquired by the stock
+ recognition and retention plan
+ (6)
+
+ 
+ 
+ 
+ 
+ 
+ 
+(3,535
+)
+ 
+ 
+(4,159
+)
+ 
+ 
+(4,783
+)
+ 
+ 
+(5,500
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total stockholders equity
+ 
+$
+109,998
+ 
+ 
+$
+195,882
+ 
+ 
+$
+211,247
+ 
+ 
+$
+226,612
+ 
+ 
+$
+244,283
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total stockholders equity as a percentage
+ of pro forma assets
+ 
+ 
+15.10
+%
+ 
+ 
+24.06
+%
+ 
+ 
+25.46
+%
+ 
+ 
+26.82
+%
+ 
+ 
+28.32
+%
+
+Pro forma
+ shares outstanding
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Shares
+ offered for sale in offering
+
+ 
+ 
+ 
+ 
+ 
+ 
+10,200,000
+ 
+ 
+ 
+12,000,000
+ 
+ 
+ 
+13,800,000
+ 
+ 
+ 
+15,870,000
+ 
+
+Shares
+ to be exchanged
+
+ 
+ 
+ 
+ 
+ 
+ 
+7,103,110
+ 
+ 
+ 
+8,356,600
+ 
+ 
+ 
+9,610,090
+ 
+ 
+ 
+11,051,064
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ shares outstanding
+
+ 
+ 
+ 
+ 
+ 
+ 
+17,303,110
+ 
+ 
+ 
+20,356,600
+ 
+ 
+ 
+23,410,090
+ 
+ 
+ 
+26,921,604
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+(footnotes on following page)
+
+16
+
+(1)
+ 
+As adjusted
+ to give effect to an increase in the number of shares of common stock which would
+ be offered as a result of a 15% increase in the estimated offering range to reflect
+ demand for shares, changes in market and general financial conditions following
+ the commencement of the subscription and community offerings or regulatory considerations.
+
+(2)
+ 
+Does not reflect
+ withdrawals from deposit accounts for the purchase of shares of common stock in
+ the conversion. These withdrawals would reduce pro forma deposits by the amount of the withdrawals.
+
+(3)
+ 
+No effect
+ has been given to the issuance of additional shares of common stock pursuant to
+ the proposed stock option plan. If this plan is implemented, an amount up to 10%
+ of the shares of new Home Federal Bancorp common stock sold in the offering will
+ be reserved for issuance upon the exercise of options under the stock option plan.
+ See Management Benefits to be Considered Following Completion of the
+ Conversion and Reorganization. 
+
+(4)
+ 
+The retained
+ earnings of Home Federal Bank will be substantially restricted after the conversion. Additionally, Home Federal Bank will be prohibited from paying any dividend
+ that would reduce its regulatory capital below the amount required for the liquidation
+ account that will be set up in connection with the conversion. See The Conversion
+ and Stock Offering Effects of the Conversion Depositors Rights
+ if We Liquidate. 
+
+(5)
+ 
+Assumes that
+ 8% of the shares sold in the offering will be purchased by the employee stock
+ ownership plan financed by a loan from new Home Federal Bancorp. The loan will
+ be repaid principally from Home Federal Bank s contributions to the employee stock ownership plan. Since new Home Federal Bancorp will finance the
+ employee stock ownership plan debt, this debt will be eliminated through consolidation
+ and no liability will be reflected on new Home Federal Bancorp s consolidated
+ financial statements. Accordingly, the amount of shares of common stock acquired by the employee
+ stock ownership plan is shown in this table as a reduction of total
+ stockholders equity.
+
+(6)
+ 
+Assumes a
+ number of shares of common stock equal to 3.5% of the shares of common stock sold
+ in the offering. The dollar amount of common stock to be purchased is based on the $10.00
+ per share subscription price in the offering and represents unearned compensation.
+ This amount does not reflect possible increases or decreases in the value of common
+ stock relative to the subscription price in the offering. As new Home Federal Bancorp
+ accrues compensation expense to reflect the vesting of shares pursuant to the new
+ stock recognition and retention plan, the credit to equity will be offset by a charge
+ to noninterest expense. Implementation of the new stock recognition and retention
+ plan will require stockholder approval. The funds to be used by the new stock recognition
+ and retention plan to purchase the shares will be provided by new Home Federal
+ Bancorp. See Management Benefits to Be Considered Following Completion
+ of the Conversion and Reorganization Stock Recognition and Retention Plan. 
+
+HOME FEDERAL BANK
+EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
+
+ At June 30, 2007, Home Federal Bank exceeded all of its applicable regulatory capital requirements.
+ The table on the following page sets forth the regulatory capital of Home Federal
+ Bank at June 30, 2007 and the pro forma regulatory capital of Home Federal Bank
+ after giving effect to the conversion, based upon the sale of the number of shares
+ shown in the table. The pro forma regulatory capital amounts reflect the receipt
+ by Home Federal Bank of 50% of the net stock proceeds, after expenses. The pro forma
+ risk-based capital amounts assume the investment of the net proceeds received by
+ Home Federal Bank in assets that have a risk-weight of 20% under applicable regulations,
+ as if such net proceeds had been received and so applied at June 30, 2007.
+
+17
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Pro Forma at June 30, 2007
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+15,870,000 Shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+10,200,000 Shares
+ 
+ 
+
+12,000,000 Shares
+ 
+13,800,000 Shares
+ 
+
+Sold at
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Sold at
+ 
+ 
+
+Sold at
+ 
+
+Sold at
+ 
+
+$10.00 per Share
+
+ 
+
+At
+ 
+ 
+
+$10.00 per Share
+ 
+ 
+
+$10.00 per Share
+ 
+
+$10.00 per Share
+ 
+(Maximum of Range,
+
+ 
+
+June 30, 2007
+ 
+ 
+(Minimum of Range)
+ 
+ 
+(Midpoint of Range)
+ 
+(Maximum of Range)
+ 
+
+as Adjusted)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+Percent of
+ 
+ 
+ 
+ 
+ 
+Percent of
+ 
+ 
+ 
+ 
+Percent of
+ 
+ 
+ 
+ 
+ 
+Percent of
+ 
+ 
+ 
+ 
+ 
+Percent of
+
+ 
+ 
+Amount
+ 
+ 
+Assets (1)
+ 
+Amount
+ 
+ 
+Assets
+ 
+ 
+Amount
+ 
+Assets
+ 
+ 
+Amount
+ 
+ 
+Assets
+ 
+ 
+Amount
+ 
+ 
+Assets
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(Dollars in Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Equity capital
+ under generally accepted accounting principles ( GAAP )
+
+ 
+$
+89,306
+ 
+ 
+ 
+12.61
+%
+ 
+$
+129,911
+ 
+ 
+ 
+17.16
+%
+ 
+$
+137,185
+ 
+ 
+17.91
+%
+ 
+$
+144,460
+ 
+ 
+ 
+18.65
+%
+ 
+$
+152,826
+ 
+ 
+ 
+19.48
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Tangible capital
+ 
+$
+.92,234
+ 
+ 
+ 
+12.97
+%
+ 
+$
+132,839
+ 
+ 
+ 
+17.48
+%
+ 
+$
+140,113
+ 
+ 
+18.23
+%
+ 
+$
+147,388
+ 
+ 
+ 
+18.96
+%
+ 
+$
+155,754
+ 
+ 
+ 
+19.78
+%
+
+Requirement
+ 
+ 
+10,669
+ 
+ 
+ 
+1.50
+ 
+ 
+ 
+11,401
+ 
+ 
+ 
+1.50
+ 
+ 
+ 
+11,532
+ 
+ 
+1.50
+ 
+ 
+ 
+11,662
+ 
+ 
+ 
+1.50
+ 
+ 
+ 
+11,813
+ 
+ 
+ 
+1.50
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Excess
+ 
+$
+81,565
+ 
+ 
+ 
+11.47
+%
+ 
+$
+121,438
+ 
+ 
+ 
+15.98
+%
+ 
+$
+128,581
+ 
+ 
+16.73
+%
+ 
+$
+135,726
+ 
+ 
+ 
+17.46
+%
+ 
+$
+143,941
+ 
+ 
+ 
+18.28
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Core capital
+ 
+$
+92,234
+ 
+ 
+ 
+12.97
+%
+ 
+$
+132,839
+ 
+ 
+ 
+17.48
+%
+ 
+$
+140,113
+ 
+ 
+18.23
+%
+ 
+$
+147,388
+ 
+ 
+ 
+18.96
+%
+ 
+$
+155,754
+ 
+ 
+ 
+19.78
+%
+
+Requirement
+ 
+ 
+28,452
+ 
+ 
+ 
+4.00
+ 
+ 
+ 
+30,402
+ 
+ 
+ 
+4.00
+ 
+ 
+ 
+30,751
+ 
+ 
+4.00
+ 
+ 
+ 
+31,099
+ 
+ 
+ 
+4.00
+ 
+ 
+ 
+31,500
+ 
+ 
+ 
+4.00
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Excess
+ 
+$
+63,782
+ 
+ 
+ 
+8.97
+%
+ 
+$
+102,437
+ 
+ 
+ 
+13.48
+%
+ 
+$
+109,362
+ 
+ 
+14.23
+%
+ 
+$
+116,289
+ 
+ 
+ 
+14.96
+%
+ 
+$
+124,254
+ 
+ 
+ 
+15.78
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total risk
+ based capital
+ 
+$
+95,063
+ 
+ 
+ 
+20.58
+%
+ 
+$
+135,668
+ 
+ 
+ 
+28.76
+%
+ 
+$
+142,942
+ 
+ 
+30.19
+%
+ 
+$
+150,217
+ 
+ 
+ 
+31.61
+%
+ 
+$
+158,583
+ 
+ 
+ 
+33.23
+%
+
+Risk based
+ requirement
+ 
+ 
+36,954
+ 
+ 
+ 
+8.00
+ 
+ 
+ 
+37,734
+ 
+ 
+ 
+8.00
+ 
+ 
+ 
+37,873
+ 
+ 
+8.00
+ 
+ 
+ 
+38,013
+ 
+ 
+ 
+8.00
+ 
+ 
+ 
+38,173
+ 
+ 
+ 
+8.00
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Excess
+ 
+$
+58,109
+ 
+ 
+ 
+ 12.58
+%
+ 
+$
+97,934
+ 
+ 
+ 
+20.76
+%
+ 
+$
+105,069
+ 
+ 
+22.19
+%
+ 
+$
+112,204
+ 
+ 
+ 
+23.61
+%
+ 
+$
+120,410
+ 
+ 
+ 
+25.23
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Reconciliation
+ of capital infused into Home Federal Bank:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net proceeds
+ infused
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+ 48,765
+ 
+ 
+ 
+ 
+ 
+ 
+$
+ 57,479
+ 
+ 
+ 
+ 
+ 
+$
+ 66,194
+ 
+ 
+ 
+ 
+ 
+ 
+$
+ 76,216
+ 
+ 
+ 
+ 
+ 
+
+Less:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Common stock
+ acquired by employee stock ownership plan
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(8,160
+)
+ 
+ 
+ 
+ 
+ 
+ 
+(9,600
+)
+ 
+ 
+ 
+ 
+ 
+(11,040
+)
+ 
+ 
+ 
+ 
+ 
+ 
+(12,696
+)
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+Pro forma
+ increase in GAAP and regulatory capital
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+40,605
+ 
+ 
+ 
+ 
+ 
+ 
+$
+47,879
+ 
+ 
+ 
+ 
+ 
+$
+55,154
+ 
+ 
+ 
+ 
+ 
+ 
+$
+63,520
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+(1)
+ 
+ 
+ 
+Adjusted total or adjusted risk-weighted assets, as appropriate.
+ 
+ 
+
+18
+
+PRO FORMA DATA
+
+ We cannot
+ determine the actual net proceeds from the sale of our common stock until the
+ conversion is completed. However, we estimate that net proceeds will be between
+ $97.5 million and $132.4 million, or $152.4 million if the estimated offering range
+ is increased by 15%, based upon the following assumptions:
+
+ 
+ 
+all shares
+ of common stock will be sold through non-transferable rights to subscribe for the
+ common stock, in order of priority, to:
+
+ 
+ 
+ 
+ 
+eligible account
+ holders, who are depositors of Home Federal Bank with account balances of at least $50.00
+ as of the close of business on March 31, 2006,
+
+ 
+
+ 
+ 
+ 
+ 
+the proposed
+ employee stock ownership plan, which will purchase 8% of the shares of common stock sold in the offering,
+
+ 
+
+ 
+ 
+ 
+ 
+supplemental
+ eligible account holders, who are depositors of Home Federal Bank with account balances
+ of at least $50.00 as of the close of business on September 30, 2007, and
+
+ 
+
+ 
+ 
+ 
+ 
+other members,
+ who are depositors of Home Federal Bank and borrowers of Home Federal Bank as of
+ the close of business on _______ __ , 2007, and March 16, 2004, respectively, other than
+ eligible account holders or supplemental eligible account holders.
+
+ 
+ 
+Keefe, Bruyette
+ & Woods will receive a success fee equal to 1.0% of the gross proceeds from
+ the offering, excluding shares of common stock sold to directors, officers, employees
+ and the employee stock ownership plan; and
+
+ 
+
+ 
+ 
+total expenses,
+ excluding the success fee paid to Keefe, Bruyette & Woods, are estimated to
+ be approximately $1.2 million. Actual expenses may vary from those estimated.
+
+ Pro forma
+ consolidated net income and stockholders equity of new Home Federal Bancorp
+ have been calculated for the year ended September 30, 2006 and for the nine months
+ ended June 30, 2007 as if the common stock to be issued in the conversion had been
+ sold at the beginning of the period and the net proceeds had been invested at 4.91%
+ and 4.91%, which represent the yields on one-year U.S. Government securities at
+ September 30, 2006 and at June 30, 2007. We believe that this rate more accurately
+ reflects a pro forma reinvestment rate than the arithmetic average method, which
+ assumes reinvestment of the net proceeds at a rate equal to the average of the yield
+ on interest-earning assets and the cost of deposits for these periods. The effect
+ of withdrawals from deposit accounts for the purchase of common stock has not
+ been reflected. A tax rate of 39.0% has been assumed for periods resulting in an
+ after-tax yields of 3.00% and 3.00% for the year ended September 30, 2006 and
+ for the nine months ended June 30, 2007, respectively. We have also assumed that
+ approximately 50% of the shares of common stock being offered will be sold in the
+ subscription and community offerings and the remaining 50% of the shares of common stock will be sold in the syndicated community offering. Historical and pro forma
+ per share amounts have been calculated by dividing historical and pro forma amounts
+ by the indicated number of shares of common stock, as adjusted to give effect to
+ the shares purchased by the employee stock ownership plan. See Note 2 to the following
+ tables. As discussed under How We Intend to Use the Proceeds From this Offering, new Home Federal Bancorp intends to make a loan to fund the purchase of 8%
+ of the common stock sold in the offering by the employee stock ownership plan and
+ intends to retain 50% of the net proceeds from the conversion.
+
+ No effect
+ has been given in the tables to the issuance of additional shares of common stock
+ pursuant to the proposed stock option plan. See Management Benefits
+ to Be Considered Following Completion of the Conversion and Reorganization 
+ Stock Option Plan. The table below gives effect to the new stock recognition
+ and retention plan, which is expected to be adopted by new Home Federal Bancorp
+ following the conversion and presented along with the new stock option plan to stockholders
+ for approval at an annual or special meeting of
+
+19
+
+stockholders to be held at least six months
+ following the completion of the conversion. If the new stock recognition and retention
+ plan is approved by stockholders, the stock recognition and retention plan intends
+ to acquire an amount of common stock equal to 3.5% of the shares of common stock
+ sold in the offering, either through open market purchases or from authorized but
+ unissued shares of common stock, if permissible. The following tables assume that
+ stockholder approval has been obtained, as to which there can be no assurance, and
+ that the shares acquired by the stock recognition and retention plan are purchased
+ in the open market at $10.00 per share. No effect has been given to new Home Federal
+ Bancorp s results of operations after the conversion, the market price of the
+ common stock after the conversion or a less than 3.5% purchase by the new stock
+ recognition and retention plan.
+
+ The following
+ pro forma information may not be representative of the financial effects of the
+ foregoing transactions at the dates on which such transactions actually occur and
+ should not be taken as indicative of future results of operations. Pro forma stockholders equity represents the difference between the stated amount of assets and
+ liabilities of Home Federal Bancorp computed in accordance with GAAP. Stockholders equity does not give effect to intangible assets in the event of a liquidation,
+ to Home Federal Bank s bad debt reserve or to the liquidation account to be
+ maintained by Home Federal Bank. The pro forma stockholders equity is not
+ intended to represent the fair market value of the common stock and may be different
+ than amounts that would be available for distribution to stockholders in the event
+ of liquidation.
+
+ The tables on the following
+ pages summarize historical consolidated data of Home Federal Bank and new Home
+ Federal Bancorp s pro forma data at or for the dates and periods indicated
+ based on the assumptions set forth above and in the table and should not be used
+ as a basis for projection of the market value of our common stock following the
+ conversion and the offering.
+
+20
+
+ 
+ 
+
+At or For the Nine Months Ended June 30, 2007
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+10,200,000
+ 
+
+12,000,000
+ 
+
+13,800,000
+ 
+
+15,870,000
+
+ 
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+
+ 
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per Share
+
+ 
+ 
+
+Share
+ 
+
+Share
+ 
+
+Share
+ 
+
+(Maximum of
+
+ 
+ 
+
+(Minimum
+ 
+
+(Midpoint
+ 
+
+(Maximum
+ 
+
+Range, as
+
+ 
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+Adjusted) (1)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+(Dollars in Thousands)
+ 
+ 
+ 
+ 
+
+ 
+
+Gross proceeds of offering
+ 
+$
+102,000
+ 
+ 
+$
+120,000
+ 
+ 
+$
+138,000
+ 
+ 
+$
+158,700
+ 
+
+Less Expenses
+
+ 
+ 
+(4,471
+)
+ 
+ 
+(5,042
+)
+ 
+ 
+(5,613
+)
+ 
+ 
+(6,269
+)
+
+Plus: MHC
+ assets reinvested
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Estimated
+ net proceeds
+
+ 
+ 
+97,579
+ 
+ 
+ 
+115,008
+ 
+ 
+ 
+132,437
+ 
+ 
+ 
+152,481
+ 
+
+Less: Common stock purchased by employee stock ownership plan (2)
+
+ 
+ 
+(8,160
+)
+ 
+ 
+(9,600
+)
+ 
+ 
+(11,040
+)
+ 
+ 
+(12,696
+)
+
+Less: Common stock purchased by the stock recognition and retention plan (3)
+
+ 
+ 
+(3,535
+)
+ 
+ 
+(4,159
+)
+ 
+ 
+(4,783
+)
+ 
+ 
+(5,500
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Estimated
+ investable net proceeds
+ 
+$
+85,884
+ 
+ 
+$
+101,249
+ 
+ 
+$
+116,614
+ 
+ 
+$
+134,285
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+For the
+ Nine Months ended June 30, 2007:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consolidated
+ net income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+4,076
+ 
+ 
+$
+4,076
+ 
+ 
+$
+4,076
+ 
+ 
+$
+4,076
+ 
+
+Pro forma
+ income on net proceeds
+ 
+ 
+1,928
+ 
+ 
+ 
+2,273
+ 
+ 
+ 
+2,618
+ 
+ 
+ 
+3,015
+ 
+
+Pro forma
+ income on assets from MHC
+
+ 
+ 
+1
+ 
+ 
+ 
+1
+ 
+ 
+ 
+1
+ 
+ 
+ 
+1
+ 
+
+Pro forma
+ employee stock ownership plan adjustment (2)
+
+ 
+ 
+(249
+)
+ 
+ 
+(293
+)
+ 
+ 
+(337
+)
+ 
+ 
+(387
+)
+
+Pro forma
+ restricted stock award adjustment (3)
+
+ 
+ 
+(323
+)
+ 
+ 
+(380
+)
+ 
+ 
+(437
+)
+ 
+ 
+(503
+)
+
+Pro forma
+ stock option adjustment (4)
+
+ 
+ 
+(324
+)
+ 
+ 
+(382
+)
+ 
+ 
+(439
+)
+ 
+ 
+(505
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro forma
+ net income
+
+ 
+$
+5,109
+ 
+ 
+$
+5,296
+ 
+ 
+$
+5,483
+ 
+ 
+$
+5,697
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Per share
+ net income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+0.26
+ 
+ 
+$
+0.22
+ 
+ 
+$
+0.19
+ 
+ 
+$
+0.17
+ 
+
+Pro forma
+ income on net proceeds, as adjusted
+ 
+ 
+0.12
+ 
+ 
+ 
+0.12
+ 
+ 
+ 
+0.12
+ 
+ 
+ 
+0.12
+ 
+
+Pro forma
+ employee stock ownership plan adjustment (2)
+
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+
+Pro forma
+ restricted stock award adjustment (3)
+
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+
+Pro forma
+ stock option adjustment (4)
+
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro forma
+ net income per share (5)
+
+ 
+$
+0.32
+ 
+ 
+$
+0.28
+ 
+ 
+$
+0.25
+ 
+ 
+$
+0.23
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Offering price
+ as a multiple of pro forma net earnings per share
+ 
+ 
+23.44
+x
+ 
+ 
+26.79
+x
+ 
+ 
+30.00
+x
+ 
+ 
+32.61
+x
+
+Number of
+ shares outstanding for pro forma income per share calculations
+ 
+ 
+15,804,647
+ 
+ 
+ 
+18,592,672
+ 
+ 
+ 
+21,382,157
+ 
+ 
+ 
+24,588,970
+ 
+
+(table continued on following page)
+(Footnotes on page 25) 
+
+21
+
+ 
+ 
+
+At or For the Nine Months Ended June 30, 2007
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+10,200,000
+ 
+
+12,000,000
+ 
+
+13,800,000
+ 
+
+15,870,000
+
+ 
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+
+ 
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per Share
+
+ 
+ 
+
+Share
+ 
+
+Share
+ 
+
+Share
+ 
+
+(Maximum of
+
+ 
+ 
+
+(Minimum
+ 
+
+(Midpoint
+ 
+
+(Maximum
+ 
+
+Range, as
+
+ 
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+Adjusted) (1)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+At June
+ 30, 2007:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stockholders equity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+109,998
+ 
+ 
+$
+109,998
+ 
+ 
+$
+109,998
+ 
+ 
+$
+109,998
+ 
+
+Estimated
+ net proceeds
+
+ 
+ 
+97,529
+ 
+ 
+ 
+114,958
+ 
+ 
+ 
+132,387
+ 
+ 
+ 
+152,431
+ 
+
+Plus:
+ Equity Increase from MHC
+
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+
+Less:
+ Common stock acquired by
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+the
+ employee stock ownership plan (2)
+
+ 
+ 
+(8,160
+)
+ 
+ 
+(9,600
+)
+ 
+ 
+(11,040
+)
+ 
+ 
+(12,696
+)
+
+Less:
+ Common stock acquired by
+ the stock recognition and
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+retention
+ plan (3)(4)
+
+ 
+ 
+(3,535
+)
+ 
+ 
+(4,159
+)
+ 
+ 
+(4,783
+)
+ 
+ 
+(5,500
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro
+ forma stockholders equity
+
+ 
+$
+195,882
+ 
+ 
+$
+211,247
+ 
+ 
+$
+226,612
+ 
+ 
+$
+244,283
+ 
+
+Less: 
+ Intangibles
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro
+ forma tangible stockholders equity
+
+ 
+$
+195,882
+ 
+ 
+$
+211,247
+ 
+ 
+$
+226,612
+ 
+ 
+$
+244,283
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Stockholders equity per share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+6.36
+ 
+ 
+$
+5.40
+ 
+ 
+$
+4.70
+ 
+ 
+$
+4.09
+ 
+
+Estimated
+ net proceeds
+
+ 
+ 
+5.64
+ 
+ 
+ 
+5.65
+ 
+ 
+ 
+5.66
+ 
+ 
+ 
+5.66
+ 
+
+Less: Common
+ stock acquired by the employee
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+stock
+ ownership plan (2)
+
+ 
+ 
+(0.47
+)
+ 
+ 
+(0.47
+)
+ 
+ 
+(0.47
+)
+ 
+ 
+(0.47
+)
+
+Less: Common
+ stock acquired by the stock
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+recognition
+ and retention plan (3)(4)
+
+ 
+ 
+(0.20
+)
+ 
+ 
+(0.20
+)
+ 
+ 
+(0.20
+)
+ 
+ 
+(0.20
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro forma
+ stockholders equity per share (6)
+ 
+$
+11.33
+ 
+ 
+$
+10.38
+ 
+ 
+$
+9.69
+ 
+ 
+$
+9.08
+ 
+
+Less: Intangibles
+ per share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro forma
+ tangible stockholders equity per share
+ 
+$
+11.33
+ 
+ 
+$
+10.38
+ 
+ 
+$
+9.69
+ 
+ 
+$
+9.08
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Offering price
+ as a percentage of pro
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+forma
+ stockholders equity (5)
+
+ 
+ 
+88.26
+%
+ 
+ 
+96.34
+%
+ 
+ 
+103.20
+%
+ 
+ 
+110.13
+%
+
+Offering price
+ as a percentage of pro forma tangible stockholders equity per share
+ 
+ 
+88.26
+%
+ 
+ 
+96.34
+%
+ 
+ 
+103.20
+%
+ 
+ 
+110.13
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Number of
+ shares outstanding for pro forma
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+book
+ value per share calculations
+
+ 
+ 
+17,303,110
+ 
+ 
+ 
+20,356,600
+ 
+ 
+ 
+23,410,090
+ 
+ 
+ 
+26,921,604
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(Footnotes on page 25) 
+
+22
+
+ 
+ 
+At or For the Year Ended September 30, 2006
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+10,200,000
+ 
+
+12,000,000
+ 
+
+13,800,000
+ 
+
+15,870,000
+
+ 
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+
+ 
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per Share
+
+ 
+ 
+
+Share
+ 
+
+Share
+ 
+
+Share
+ 
+
+(Maximum of
+
+ 
+ 
+
+(Minimum
+ 
+
+(Midpoint
+ 
+
+(Maximum
+ 
+
+Range, as
+
+ 
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+Adjusted) (1)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Gross proceed
+ s of offering
+ 
+$
+102,000
+ 
+ 
+$
+120,000
+ 
+ 
+$
+138,000
+ 
+ 
+$
+158,700
+ 
+
+Less
+ Expenses
+
+ 
+ 
+(4,471
+)
+ 
+ 
+(5,042
+)
+ 
+ 
+(5,613
+)
+ 
+ 
+(6,269
+)
+
+Plus:
+ Assets Received from MHC
+
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Estimated
+ net proceeds
+
+ 
+ 
+97,579
+ 
+ 
+ 
+115,008
+ 
+ 
+ 
+132,437
+ 
+ 
+ 
+152,481
+ 
+
+Less:
+ Common stock purchased by
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+employee
+ stock ownership plan (2)
+
+ 
+ 
+(8,160
+)
+ 
+ 
+(9,600
+)
+ 
+ 
+(11,040
+)
+ 
+ 
+(12,696
+)
+
+Less:
+ Common stock purchased by the
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+stock
+ recognition and retention plan
+ (3)
+
+ 
+ 
+(3,535
+)
+ 
+ 
+(4,159
+)
+ 
+ 
+(4,783
+)
+ 
+ 
+(5,500
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Estimated
+ investable net proceeds
+
+ 
+$
+ 85,884
+ 
+ 
+$
+101,249
+ 
+ 
+$
+116,614
+ 
+ 
+$
+134,285
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+For the
+ Year Ended September 30, 2006:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consolidated
+ net income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+6,212
+ 
+ 
+$
+6,212
+ 
+ 
+$
+6,212
+ 
+ 
+$
+6,212
+ 
+
+Pro forma
+ income on net proceeds
+ 
+ 
+2,571
+ 
+ 
+ 
+3,031
+ 
+ 
+ 
+3,491
+ 
+ 
+ 
+4,020
+ 
+
+Pro forma
+ income on assets from MHC
+ 
+ 
+1
+ 
+ 
+ 
+1
+ 
+ 
+ 
+1
+ 
+ 
+ 
+1
+ 
+
+Pro
+ forma employee stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ownership
+ plan adjustment (2)
+
+ 
+ 
+(332
+)
+ 
+ 
+(390
+)
+ 
+ 
+(449
+)
+ 
+ 
+(516
+)
+
+Pro
+ forma restricted stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+award
+ adjustment (3)
+
+ 
+ 
+(431
+)
+ 
+ 
+(507
+)
+ 
+ 
+(583
+)
+ 
+ 
+(671
+)
+
+Pro
+ forma stock option adjustment (4)
+
+ 
+ 
+(432
+)
+ 
+ 
+(509
+)
+ 
+ 
+(585
+)
+ 
+ 
+(673
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro
+ forma net income
+
+ 
+$
+7,589
+ 
+ 
+$
+7,838
+ 
+ 
+$
+8,087
+ 
+ 
+$
+8,373
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Per share
+ net income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+0.40
+ 
+ 
+$
+0.34
+ 
+ 
+$
+0.29
+ 
+ 
+$
+0.25
+ 
+
+Pro forma
+ income on net proceeds, as adjusted
+ 
+ 
+0.16
+ 
+ 
+ 
+0.16
+ 
+ 
+ 
+0.16
+ 
+ 
+ 
+0.16
+ 
+
+Pro
+ forma employee stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ownership
+ plan adjustment (2)
+
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+ 
+ 
+(0.02
+)
+
+Pro
+ forma restricted stock award
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+adjustment
+ (3)
+
+ 
+ 
+(0.03
+)
+ 
+ 
+(0.03
+)
+ 
+ 
+(0.03
+)
+ 
+ 
+(0.03
+)
+
+Pro
+ forma stock option adjustment (4)
+
+ 
+ 
+(0.03
+)
+ 
+ 
+(0.03
+)
+ 
+ 
+(0.03
+)
+ 
+ 
+(0.03
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro
+ forma net income per share (5)
+
+ 
+$
+0.48
+ 
+ 
+$
+0.42
+ 
+ 
+$
+0.37
+ 
+ 
+$
+0.33
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Offering price
+ as a multiple of pro forma
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+net
+ earnings per share
+
+ 
+ 
+20.83
+x
+ 
+ 
+23.81
+x
+ 
+ 
+27.03
+x
+ 
+ 
+30.30
+x
+
+Number of
+ shares outstanding for pro forma
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+income
+ per share calculations
+
+ 
+ 
+15,693,340
+ 
+ 
+ 
+18,461,730
+ 
+ 
+ 
+21,231,569
+ 
+ 
+ 
+24,415,797
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(table continued on following page)
+ 
+ 
+ 
+ 
+ 
+
+ (Footnotes on page 25) 
+ 
+
+23
+
+ 
+ 
+
+At or For the Year Ended September 30, 2006
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+10,200,000
+ 
+
+12,000,000
+ 
+
+13,800,000
+ 
+
+15,870,000
+
+ 
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+ 
+
+Shares Sold at
+
+ 
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per
+ 
+
+$10.00 Per Share
+
+ 
+ 
+
+Share
+ 
+
+Share
+ 
+
+Share
+ 
+
+(Maximum of
+
+ 
+ 
+
+(Minimum
+ 
+
+(Midpoint
+ 
+
+(Maximum
+ 
+
+Range, as
+
+ 
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+of Range)
+ 
+
+Adjusted) (1)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+At September
+ 30, 2006:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stockholders equity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+107,869
+ 
+ 
+$
+107,869
+ 
+ 
+$
+107,869
+ 
+ 
+$
+107,869
+ 
+
+Estimated
+ net proceeds
+
+ 
+ 
+97,529
+ 
+ 
+ 
+114,958
+ 
+ 
+ 
+132,387
+ 
+ 
+ 
+152,431
+ 
+
+Plus:
+ Equity Increase from MHC
+
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+ 
+ 
+50
+ 
+
+Less:
+ Common stock acquired by
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+the
+ employee stock ownership plan
+ (2)
+
+ 
+ 
+(8,160
+)
+ 
+ 
+(9,600
+)
+ 
+ 
+(11,040
+)
+ 
+ 
+(12,696
+)
+
+Less:
+ Common stock acquired
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+by
+ the stock recognition and retention
+ plan (3)(4)
+
+ 
+ 
+(3,535
+)
+ 
+ 
+(4,159
+)
+ 
+ 
+(4,783
+)
+ 
+ 
+(5,500
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro
+ forma stockholders equity
+
+ 
+ 
+193,753
+ 
+ 
+ 
+209,118
+ 
+ 
+ 
+224,483
+ 
+ 
+ 
+242,154
+ 
+
+Less: Intangibles
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro
+ forma tangible stockholders equity
+
+ 
+$
+193,753
+ 
+ 
+$
+209,118
+ 
+ 
+$
+224,483
+ 
+ 
+$
+242,154
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Stockholders equity per share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Historical
+
+ 
+$
+6.23
+ 
+ 
+$
+5.30
+ 
+ 
+$
+4.61
+ 
+ 
+$
+4.01
+ 
+
+Estimated
+ net proceeds
+
+ 
+ 
+5.64
+ 
+ 
+ 
+5.65
+ 
+ 
+ 
+5.66
+ 
+ 
+ 
+5.66
+ 
+
+Less: Common
+ stock acquired by the employee
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+stock
+ ownership plan (2)
+
+ 
+ 
+(0.47
+)
+ 
+ 
+(0.47
+)
+ 
+ 
+(0.47
+)
+ 
+ 
+(0.47
+)
+
+Less: Common
+ stock acquired by the stock recognition
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+and
+ retention plan (3)(4)
+
+ 
+ 
+(0.20
+)
+ 
+ 
+(0.20
+)
+ 
+ 
+(0.20
+)
+ 
+ 
+(0.20
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro forma
+ stockholders equity per share (6)
+ 
+$
+11.20
+ 
+ 
+$
+10.28
+ 
+ 
+$
+9.60
+ 
+ 
+$
+9.00
+ 
+
+Less: Intangibles
+ per share
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Pro
+ forma tangible stockholders equity per share
+
+ 
+$
+11.20
+ 
+ 
+$
+10.28
+ 
+ 
+$
+9.60
+ 
+ 
+$
+9.00
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Offering price
+ as a percentage of pro
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+forma
+ stockholders equity (5)
+
+ 
+ 
+89.29
+%
+ 
+ 
+97.28
+%
+ 
+ 
+104.17
+%
+ 
+ 
+111.11
+%
+
+Offering price
+ as a percentage of pro forma tangible
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+stockholders equity per share
+
+ 
+ 
+89.29
+%
+ 
+ 
+97.28
+%
+ 
+ 
+104.17
+%
+ 
+ 
+111.11
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Number of
+ shares outstanding for pro forma
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+book
+ value per share calculations
+
+ 
+ 
+17,303,110
+ 
+ 
+ 
+20,356,600
+ 
+ 
+ 
+23,410,090
+ 
+ 
+ 
+26,921,604
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(footnotes on following page)
+
+24
+
+(1)
+ 
+As adjusted
+ to give effect to an increase in the number of shares which could occur as a result
+ of a 15% increase in the offering range to reflect demand for the shares, changes
+ in market and financial conditions following the commencement of the offering or
+ regulatory considerations.
+
+ 
+ 
+ 
+
+(2)
+ 
+Assumes
+ that 8% of shares of common stock sold in the offering will be purchased by the
+ employee stock ownership plan. For purposes of this table, the funds used to acquire
+ these shares are assumed to have been borrowed by the employee stock ownership
+ plan from new Home Federal Bancorp. Home Federal Bank intends to make annual contributions
+ to the employee stock ownership plan in an amount at least equal to the required
+ principal and interest payments on the debt. Home Federal Bank s total annual
+ payments on the employee stock ownership plan debt are based upon 15 equal annual
+ installments of principal and interest. Statement of Position 93-6 requires that
+ an employer record compensation expense in an amount equal to the fair value of
+ the shares committed to be released to employees. The pro forma adjustments assume
+ that the employee stock ownership plan shares are allocated in equal annual installments
+ based on the number of loan repayment installments assumed to be paid by Home Federal
+ Bank, the fair value of the common stock remains equal to the subscription price
+ and the employee stock ownership plan expense reflects an effective combined federal
+ and state tax rate of 39.0%. The unallocated employee stock ownership plan shares
+ are reflected as a reduction of stockholders equity. No reinvestment is assumed
+ on proceeds contributed to fund the employee stock ownership plan. The pro forma
+ net income further assumes that 40,800, 48,000, 55,200 and 63,480 shares were committed
+ to be released during the nine-month period ending June 30, 2007; and 54,400, 64,000, 73,600
+ and 84,640 shares were committed to be released during the 12-month period ending
+ September 30, 2006, at the minimum, midpoint, maximum, and adjusted maximum of
+ the offering range, respectively, and in accordance with Statement of Position 93-6,
+ only the employee stock ownership plan shares committed to be released during the
+ period were considered outstanding for purposes of income per share calculations.
+ See Management Benefits to Be Considered Following Completion of the
+ Conversion and Reorganization Employee Stock Ownership Plan. 
+
+ 
+ 
+ 
+
+(3)
+ 
+If approved
+ by new Home Federal Bancorp s stockholders, the new stock recognition and retention
+ plan may purchase an aggregate number of shares of common stock equal to 3.5% of
+ the shares sold in the offering (or possibly a greater number of shares if the
+ plan is implemented more than one year after completion of the conversion). Stockholder
+ approval of the new stock recognition and retention plan, and purchases by the plan
+ may not occur earlier than six months after the completion of the conversion. The
+ shares may be acquired directly from new Home Federal Bancorp or through open market
+ purchases. The funds to be used by the new stock recognition and retention plan
+ to purchase the shares will be provided by new Home Federal Bancorp. The table assumes
+ that (i) the new stock recognition and retention plan acquires the shares through
+ open market purchases at $10.00 per share, (ii) 15% and 20% of the amount contributed
+ to the new stock recognition and retention plan is amortized as an expense during
+ the nine months ended June 30, 2007 and the year ended September 30, 2006, respectively,
+ and (iii) the stock recognition and retention plan expense reflects an effective
+ combined federal and state tax rate of 39.0%. Assuming stockholder approval of the
+ new stock recognition and retention plan and that shares of common stock (equal
+ to 3.5% of the shares sold in the offering) are awarded through the use of authorized
+ but un issued shares of common stock, stockholders would have their ownership and
+ voting interests diluted by approximately 2.0%. See Management Benefits
+ to Be Considered Following Completion of the Conversion and Reorganization 
+ Stock Recognition and Retention Plan. 
+
+ 
+ 
+ 
+
+(4)
+ 
+If approved
+ by new Home Federal Bancorp s stockholders, the new stock option plan may grant
+ options to acquire an aggregate number of shares of common stock equal to 10% of
+ the shares sold in the offering (or possibly a greater number of shares if the plan
+ is implemented more than one year after completion of the conversion). Stockholder
+ approval of the new stock option plan may not occur earlier than six months after
+ the completion of the conversion. In calculating the pro forma effect of the stock
+ option plan, it is assumed that the exercise price of the stock options and the
+ trading price of the common stock at the date of grant were $10.00 per share, the
+ estimated grant-date fair value determined using the Black-Scholes option pricing
+ model was $2.71 for each option, the aggregate grant-date fair value of the stock
+ options was 
+
+25
+
+ 
+ 
+amortized to expense on a straight-line basis over a five-year vesting
+ period of the options, and that 25% of the amortization
+ expense (or the assumed portion relating to options granted to directors) resulted
+ in a tax benefit using an assumed tax rate of 39.0%. The actual expense of the stock
+ option plan will be determined by the grant-date fair value of the options, which
+ will depend on a number of factors, including the valuation assumptions used in
+ the option pricing model ultimately adopted. Under the above assumptions, the adoption
+ of the stock option plan will result in no additional shares under the treasury
+ stock method for purposes of calculating earnings per share. There can be no assurance
+ that the actual exercise price of the stock options will be equal to the $10.00 price
+ per share. If a portion of the shares to satisfy the exercise of options under the
+ stock option plan are obtained from the issuance of authorized but unissued shares,
+ our net income per share and stockholders equity per share will decrease.
+ The issuance of authorized but previously unissued shares of common stock pursuant
+ to the exercise of options under such plan would dilute existing stockholders 
+ ownership and voting interests by approximately 4.9%.
+
+ 
+ 
+ 
+
+(5)
+ 
+Income
+ per share computations are determined by taking the number of shares assumed to
+ be sold in the offering and, in accordance with Statement of Position 93-6, subtracting
+ the employee stock ownership plan shares that have not been committed for release
+ during the period. See note 2, above.
+
+ 
+ 
+ 
+
+(6)
+ 
+The retained
+ earnings of Home Federal Bank will be substantially restricted after the conversion.
+ See The Conversion and Stock Offering Effect of the Conversion 
+ Depositors Rights if We Liquidate Liquidation Rights. 
+
+26
+
+RECENT DEVELOPMENTS
+
+ The
+following tables set forth certain information concerning our consolidated
+financial position and results of operations at the dates and for the periods
+indicated. Information at September 30, 2007 and June 30, 2007, the three and
+twelve months ended September 30, 2007 and the three months ended September 30,
+2006 are unaudited, but, in the opinion of management, contain all adjustments
+(none of which were other than normal recurring entries) necessary for a fair
+presentation of the results of these periods. This information should be read
+in conjunction with our consolidated financial statements and related notes
+beginning on page F-1 of this prospectus.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+FINANCIAL
+CONDITION DATA: 
+
+ 
+
+At September 30,
+
+2007 
+
+ 
+
+At June 30,
+
+2007 
+
+ 
+
+At September 30,
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(In Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total assets
+
+ 
+
+$
+
+709,954
+
+ 
+
+$
+
+728,315
+
+ 
+
+$
+
+761,292
+
+ 
+
+Mortgage-backed
+ securities, available for sale
+
+ 
+
+ 
+
+162,258
+
+ 
+
+ 
+
+166,755
+
+ 
+
+ 
+
+12,182
+
+ 
+
+Mortgage-backed
+ securities, held to maturity
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+183,279
+
+ 
+
+Loans
+ receivable, net (1)
+
+ 
+
+ 
+
+480,118
+
+ 
+
+ 
+
+491,768
+
+ 
+
+ 
+
+503,065
+
+ 
+
+Loans held
+ for sale
+
+ 
+
+ 
+
+4,904
+
+ 
+
+ 
+
+4,363
+
+ 
+
+ 
+
+4,119
+
+ 
+
+Total
+ deposit accounts
+
+ 
+
+ 
+
+404,609
+
+ 
+
+ 
+
+418,698
+
+ 
+
+ 
+
+430,281
+
+ 
+
+Federal Home
+ Loan Bank advances
+
+ 
+
+ 
+
+180,730
+
+ 
+
+ 
+
+189,264
+
+ 
+
+ 
+
+210,759
+
+ 
+
+Stockholders 
+ equity
+
+ 
+
+ 
+
+112,637
+
+ 
+
+ 
+
+109,998
+
+ 
+
+ 
+
+107,869
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Three Months Ended
+
+September 30, 
+
+ 
+
+Twelve Months Ended
+
+September 30, 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+OPERATING
+DATA: 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(In Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Interest income
+
+ 
+
+$
+
+10,378
+
+ 
+
+$
+
+10,620
+
+ 
+
+$
+
+42,638
+
+ 
+
+$
+
+39,913
+
+ 
+
+Interest expense
+
+ 
+
+ 
+
+5,248
+
+ 
+
+ 
+
+5,034
+
+ 
+
+ 
+
+21,336
+
+ 
+
+ 
+
+16,917
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net interest income
+
+ 
+
+ 
+
+5,130
+
+ 
+
+ 
+
+5,586
+
+ 
+
+ 
+
+21,302
+
+ 
+
+ 
+
+22,996
+
+ 
+
+Provision for loan losses
+
+ 
+
+ 
+
+338
+
+ 
+
+ 
+
+(182
+
+)
+
+ 
+
+409
+
+ 
+
+ 
+
+138
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net interest income after provision for
+ loan losses
+
+ 
+
+ 
+
+4,792
+
+ 
+
+ 
+
+5,768
+
+ 
+
+ 
+
+20,893
+
+ 
+
+ 
+
+22,858
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Noninterest income
+
+ 
+
+ 
+
+2,564
+
+ 
+
+ 
+
+2,766
+
+ 
+
+ 
+
+11,190
+
+ 
+
+ 
+
+11,109
+
+ 
+
+Noninterest expense
+
+ 
+
+ 
+
+5,411
+
+ 
+
+ 
+
+5,883
+
+ 
+
+ 
+
+23,545
+
+ 
+
+ 
+
+23,945
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Income before income taxes
+
+ 
+
+ 
+
+1,945
+
+ 
+
+ 
+
+2,651
+
+ 
+
+ 
+
+8,538
+
+ 
+
+ 
+
+10,022
+
+ 
+
+Income tax expense
+
+ 
+
+ 
+
+750
+
+ 
+
+ 
+
+993
+
+ 
+
+ 
+
+3,267
+
+ 
+
+ 
+
+3,810
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net income
+
+ 
+
+$
+
+1,195
+
+ 
+
+$
+
+1,658
+
+ 
+
+$
+
+5,271
+
+ 
+
+$
+
+6,212
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Earnings per common share
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Basic
+
+ 
+
+$
+
+0.08
+
+ 
+
+$
+
+0.11
+
+ 
+
+$
+
+0.36
+
+ 
+
+$
+
+0.43
+
+ 
+
+Diluted
+
+ 
+
+ 
+
+0.08
+
+ 
+
+ 
+
+0.11
+
+ 
+
+ 
+
+0.36
+
+ 
+
+ 
+
+0.43
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Dividends declared per share
+
+ 
+
+$
+
+0.055
+
+ 
+
+$
+
+0.055
+
+ 
+
+$
+
+0.22
+
+ 
+
+$
+
+0.215
+
+ 
+
+ 
+
+ 
+
+(1)
+
+Net of
+ allowances for loan losses, loans in process and deferred loan fees.
+
+27
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+At or For the
+
+Three Months Ended
+
+September 30, (1) 
+
+ 
+
+At or For the
+
+Twelve Months Ended
+
+September 30, 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+KEY
+FINANCIAL RATIOS: 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Performance Ratios:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Return on average assets (2)
+
+ 
+
+ 
+
+0.67
+
+%
+
+ 
+
+0.88
+
+%
+
+ 
+
+0.71
+
+%
+
+ 
+
+0.85
+
+%
+
+Return on average equity (3)
+
+ 
+
+ 
+
+4.27
+
+ 
+
+ 
+
+6.16
+
+ 
+
+ 
+
+4.75
+
+ 
+
+ 
+
+5.90
+
+ 
+
+Dividend payout ratio
+
+ 
+
+ 
+
+26.19
+
+ 
+
+ 
+
+18.32
+
+ 
+
+ 
+
+23.52
+
+ 
+
+ 
+
+19.72
+
+ 
+
+Equity-to-assets ratio (4)
+
+ 
+
+ 
+
+15.70
+
+ 
+
+ 
+
+14.24
+
+ 
+
+ 
+
+14.94
+
+ 
+
+ 
+
+14. 47 
+
+ 
+
+Interest rate spread (5)
+
+ 
+
+ 
+
+2.37
+
+ 
+
+ 
+
+2.54
+
+ 
+
+ 
+
+2.40
+
+ 
+
+ 
+
+2.79
+
+ 
+
+Net interest margin (6)
+
+ 
+
+ 
+
+3.04
+
+ 
+
+ 
+
+3.12
+
+ 
+
+ 
+
+3.03
+
+ 
+
+ 
+
+3.33
+
+ 
+
+Efficiency ratio (7)
+
+ 
+
+ 
+
+70.33
+
+ 
+
+ 
+
+70.44
+
+ 
+
+ 
+
+72.46
+
+ 
+
+ 
+
+70.21 
+
+ 
+
+Noninterest income/operating revenue (8)
+
+ 
+
+ 
+
+33.32
+
+ 
+
+ 
+
+33.12
+
+ 
+
+ 
+
+34.43
+
+ 
+
+ 
+
+ 32.57 
+
+ 
+
+Average interest-earning assets to average
+ interest-bearing liabilities
+
+ 
+
+ 
+
+121.59
+
+ 
+
+ 
+
+120.83
+
+ 
+
+ 
+
+120.71
+
+ 
+
+ 
+
+122.32
+
+ 
+
+Noninterest expense as a percent of average
+ total assets
+
+ 
+
+ 
+
+3.04
+
+ 
+
+ 
+
+3.11
+
+ 
+
+ 
+
+3.17
+
+ 
+
+ 
+
+3.29
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Capital Ratios:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Tier 1 (core) capital (to tangible assets)
+
+ 
+
+ 
+
+13.56
+
+ 
+
+ 
+
+11.77
+
+ 
+
+ 
+
+13.56
+
+ 
+
+ 
+
+11.77
+
+ 
+
+Total risk-based capital (to risk-weighted
+ assets)
+
+ 
+
+ 
+
+21.38
+
+ 
+
+ 
+
+19.46
+
+ 
+
+ 
+
+21.38
+
+ 
+
+ 
+
+19.46
+
+ 
+
+Tier 1 risk-based capital (to risk-weighted
+ assets)
+
+ 
+
+ 
+
+20.69
+
+ 
+
+ 
+
+18.82
+
+ 
+
+ 
+
+20.69
+
+ 
+
+ 
+
+18.82
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Asset Quality Ratios:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Nonaccrual and 90 days or more past due
+ loans as a percent of total loans
+
+ 
+
+ 
+
+0.32
+
+ 
+
+ 
+
+0.08
+
+ 
+
+ 
+
+0.32
+
+ 
+
+ 
+
+0.08
+
+ 
+
+Nonperforming assets as a percent of total
+ assets
+
+ 
+
+ 
+
+0.29
+
+ 
+
+ 
+
+0.05
+
+ 
+
+ 
+
+0.29
+
+ 
+
+ 
+
+0.05
+
+ 
+
+Allowance for losses as a percent of gross
+ loans receivable
+
+ 
+
+ 
+
+0.62
+
+ 
+
+ 
+
+0.59
+
+ 
+
+ 
+
+0.62
+
+ 
+
+ 
+
+0.59
+
+ 
+
+Allowance for losses as a percent of
+ nonperforming loans
+
+ 
+
+ 
+
+195.17
+
+ 
+
+ 
+
+766.55
+
+ 
+
+ 
+
+195.17
+
+ 
+
+ 
+
+766.55
+
+ 
+
+Net charge-offs to average loans
+
+ 
+
+ 
+
+0.02
+
+ 
+
+ 
+
+0.001
+
+ 
+
+ 
+
+0.04
+
+ 
+
+ 
+
+0.01
+
+ 
+
+ 
+
+ 
+
+(1)
+
+Ratios have
+ been annualized
+
+ 
+
+ 
+
+(2)
+
+Net income
+ divided by average total assets.
+
+ 
+
+ 
+
+(3)
+
+Net income
+ divided by average equity.
+
+ 
+
+ 
+
+(4)
+
+Average
+ equity divided by average total assets.
+
+ 
+
+ 
+
+(5)
+
+Difference
+ between weighted average yield on interest-earning assets and weighted
+ average rate on interest-bearing liabilities.
+
+ 
+
+ 
+
+(6)
+
+Net interest
+ margin, otherwise known as net yield on interest-earning assets, is
+ calculated as net interest income divided by average interest-earning assets.
+
+ 
+
+ 
+
+(7)
+
+The
+ efficiency ratio represents the ratio of noninterest expense divided by the
+ sum of net interest income and noninterest income.
+
+ 
+
+ 
+
+(8)
+
+Operating
+ revenue is defined as the sum of net interest and noninterest income
+
+28
+
+Regulatory Capital
+
+ The
+table below sets forth Home Federal s capital position relative to its Office
+of Thrift Supervision capital requirements at September 30, 2007. The
+definitions used in the table are those provided in the capital regulations
+issued by the Office of Thrift Supervision. See How We Are Regulated -
+Regulation and Supervision of Home Federal - Capital Requirements. 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+At September 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Amount 
+
+ 
+
+Percent of
+
+Assets (1) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Equity capital under generally accepted
+ accounting principles ( GAAP )
+
+ 
+
+$
+
+91,908
+
+ 
+
+ 
+
+13.33
+
+%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Tier 1 risk-based capital
+
+ 
+
+$
+
+93,678
+
+ 
+
+ 
+
+20.69
+
+%
+
+Requirement
+
+ 
+
+ 
+
+18,112
+
+ 
+
+ 
+
+10.00
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Excess
+
+ 
+
+$
+
+75,566
+
+ 
+
+ 
+
+16.69
+
+%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Tier 1 (core) capital
+
+ 
+
+$
+
+93,736
+
+ 
+
+ 
+
+13.56
+
+%
+
+Requirement
+
+ 
+
+ 
+
+20,741
+
+ 
+
+ 
+
+3.00
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Excess
+
+ 
+
+$
+
+72,995
+
+ 
+
+ 
+
+10.56
+
+%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total risk-based capital
+
+ 
+
+$
+
+96,805
+
+ 
+
+ 
+
+21.38
+
+%
+
+Risk-based requirement
+
+ 
+
+ 
+
+36,224
+
+ 
+
+ 
+
+8.00
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Excess
+
+ 
+
+$
+
+60,581
+
+ 
+
+ 
+
+13.38
+
+%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(1)
+ Adjusted total or adjusted risk-weighted assets, as appropriate.
+
+MANAGEMENT S DISCUSSION AND ANALYSIS OF
+RECENT DEVELOPMENTS
+
+Comparison of Financial Condition at
+September 30, 2007 and September 30, 2006
+
+ General. Total assets decreased
+$51.4 million, or 6.7%, to $709.9 million at September 30, 2007 from $761.3
+million at September 30, 2006. Mortgage-backed securities and loans, net
+decreased $33.2 million and $22.9 million respectively and were the primary
+reason for the asset decline during the twelve-month period. Total liabilities
+decreased $56.1 million, or 8.6% to $597.3 million. Federal Home Loan Bank advances
+and deposits decreased by $30.0 million and $25.7 million respectively. 
+
+ Assets. For the year ended September
+30, 2007, total assets decreased $51.4 million. The increases and decreases
+were primarily concentrated in the following asset categories:
+
+29
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Increase (decrease) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at
+
+September 30,
+
+2007 
+
+ 
+
+Balance at
+
+September 30,
+
+2006 
+
+ 
+
+Amount 
+
+ 
+
+Percent 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash and amounts due from depository
+ institutions
+
+ 
+
+$
+
+20,588
+
+ 
+
+$
+
+18,385
+
+ 
+
+ 
+
+2,203
+
+ 
+
+ 
+
+12.0
+
+%
+
+Mortgage-backed securities, available for
+ sale
+
+ 
+
+ 
+
+162,258
+
+ 
+
+ 
+
+12,182
+
+ 
+
+ 
+
+150,076
+
+ 
+
+ 
+
+1,231.9 
+
+ 
+
+Mortgage-backed securities, held to
+ maturity
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+183,279
+
+ 
+
+ 
+
+(183,279
+
+)
+
+ 
+
+(100.0 
+
+)
+
+Loans receivable, net of allowance for loan
+ losses
+
+ 
+
+ 
+
+480,118
+
+ 
+
+ 
+
+503,065
+
+ 
+
+ 
+
+(22,947
+
+)
+
+ 
+
+(4.6 
+
+)
+
+ Cash
+and amounts due from depository institutions increased $2.2 million as a result
+of normal fluctuations of amounts due from other financial institutions.
+
+ Mortgage-backed
+securities decreased $33.2 million to $162.3 million at September 30, 2007,
+from $195.5 million at September 30, 2006. During the year ended September 30,
+2007, we purchased $2.1 million of 5/1 hybrid adjustable-rate mortgage-backed
+securities issued by Freddie Mac. Repayments of principal and proceeds from
+sales totaled $31.9 million for the year ended September 30, 2007. We purchase
+mortgage-backed securities to manage interest rate sensitivity, supplement loan
+originations and provide liquidity. 
+
+ During
+the quarter ended June 30, 2007, we transferred our entire portfolio of
+held-to-maturity mortgage-backed securities to available for sale to help meet
+future liquidity needs associated with increasing commercial banking and other
+lending activities. As part of our liquidity management, we do not intend to
+classify any investments as held to maturity in the foreseeable future.
+
+ Loans
+receivable, net, decreased $23.0 million to $480.1 million at September 30,
+2007, from $503.1 million at September 30, 2006. One-to four-family residential
+mortgage loans decreased $49.5 million as we sold a majority of the one-to
+four-family loans that we originated. In prior years, we held a portion of the
+one-to four-family loans we originated in our loan portfolio. Commercial loans
+increased $18.6 million during the year ended September 30, 2007. We have made
+significant progress in building our commercial and small business banking
+programs, including the addition of an experienced commercial banking team to
+expand our existing commercial real estate lending program. We will also
+emphasize other commercial banking activities, including business banking, cash
+management and other products associated with a full-service commercial bank.
+
+ Deposits. Deposits decreased $25.7
+million, or 6.0%, to $404.6 million at September 30, 2007, from $430.3 million
+at September 30, 2006. Certificates of deposit accounted for the majority of
+the decrease in total deposits during the period. The decrease in certificates
+of deposit was primarily the result of our choosing not to match rates offered
+by local competitors that in some cases exceeded our alternative funding
+sources. The following table details the changes in deposit accounts:
+
+30
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Increase (decrease)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at
+
+September 30,
+
+2007 
+
+ 
+
+Balance at
+
+September 30,
+
+2006 
+
+ 
+
+Amount 
+
+ 
+
+Percent 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Noninterest-bearing
+ demand deposits
+
+ 
+
+$
+
+38,643
+
+ 
+
+$
+
+44,626
+
+ 
+
+ 
+
+(5,983
+
+)
+
+ 
+
+(13.4
+
+)%
+
+Interest-bearing
+ demand deposits
+
+ 
+
+ 
+
+127,659
+
+ 
+
+ 
+
+128,276
+
+ 
+
+ 
+
+(617
+
+)
+
+ 
+
+(0.5
+
+)
+
+Savings
+ deposits
+
+ 
+
+ 
+
+23,116
+
+ 
+
+ 
+
+23,655
+
+ 
+
+ 
+
+(539
+
+)
+
+ 
+
+(2.3
+
+)
+
+Certificates
+ of deposit
+
+ 
+
+ 
+
+215,191
+
+ 
+
+ 
+
+233,724
+
+ 
+
+ 
+
+(18,533
+
+)
+
+ 
+
+(7.9 
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ deposit accounts
+
+ 
+
+ 
+
+404,609
+
+ 
+
+$
+
+430,281
+
+ 
+
+ 
+
+(25,672
+
+)
+
+ 
+
+(6.0 
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Borrowings. Federal Home Loan Bank
+advances decreased $30.1 million, or 14.3%, to $180.7 million at September 30,
+2007, from $210.8 million at September 30, 2006. We use Federal Home Loan Bank
+advances as an alternative funding source to deposits, and to manage funding
+costs, reduce interest rate risk and to leverage our balance sheet. 
+
+ Equity. Stockholders equity
+increased $4.8 million, or 4.4%, to $112.6 million at September 30, 2007, from
+$107.9 million at September 30, 2006. The increase was primarily a result of
+the $5.3 million in net income and the allocation of earned employee stock
+ownership plan shares, equity compensation and the exercise of stock options
+totaling $2. 2 million, offset by $1.3 million in cash dividends paid to
+stockholders and $2.0 million increase in unrealized losses on securities
+available for sale. On September 14, 2007, the Company paid $0.055 per share in
+cash dividends to stockholders of record as of August 31, 2007, excluding
+shares held by Home Federal MHC.
+
+Comparison of Operating Results for the Three
+Months ended September 30, 2007 and September 30, 2006 
+
+ General. Net income for the three
+months ended September 30, 2007 was $1.2 million, or $0.08 per diluted share,
+compared to net income of $1.7 million, or $0.11 per diluted share, for the
+three months ended September 30, 2006.
+
+ Net Interest Income. Our net
+interest income decreased $456,000 or 8.2% to $5.1 million for the three months
+ended September 30, 2007 from $5.6 million for the three months ended September
+30, 2006. Average total interest-earning assets decreased $41.1 million between
+the two three month time periods. During that same period, our net interest
+spread decreased 17 basis points.
+
+ Interest and Dividend Income. Total
+interest and dividend income for the three months ended September 30, 2007
+decreased $242,000 to $10.4 million from $10.6 million for the three months
+ended September 30, 2006. The decrease during the period was primarily
+attributable to the $41.1 million or 5.7% decrease in the average balance of
+interest-earning assets. 
+
+ The
+following table compares detailed average earning asset balances, associated
+yields and resulting changes in interest and dividend income for the three
+months ended September 30, 2007 and 2006:
+
+31
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Three Months Ended September 30,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+Increase/
+
+(Decrease) in
+
+Interest and
+
+Dividend
+
+Income from
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+Yield 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+Yield 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Loans receivable, net of deferred taxes 
+
+ 
+
+$
+
+487,737
+
+ 
+
+ 
+
+6.70
+
+%
+
+$
+
+501,279
+
+ 
+
+ 
+
+6.51
+
+%
+
+$
+
+8
+
+ 
+
+Loans held for sale
+
+ 
+
+ 
+
+3,587
+
+ 
+
+ 
+
+6.48
+
+ 
+
+ 
+
+3,661
+
+ 
+
+ 
+
+6.56
+
+ 
+
+ 
+
+(2
+
+)
+
+Investment securities, including
+interest-bearing deposits in other banks
+
+ 
+
+ 
+
+9,412
+
+ 
+
+ 
+
+5.18
+
+ 
+
+ 
+
+1,952
+
+ 
+
+ 
+
+5.33
+
+ 
+
+ 
+
+96
+
+ 
+
+Mortgage-backed securities
+
+ 
+
+ 
+
+164,326
+
+ 
+
+ 
+
+4.91
+
+ 
+
+ 
+
+199,304
+
+ 
+
+ 
+
+4.77
+
+ 
+
+ 
+
+(359
+
+)
+
+Federal Home Loan Bank stock
+
+ 
+
+ 
+
+9,591
+
+ 
+
+ 
+
+0.63
+
+ 
+
+ 
+
+9,591
+
+ 
+
+ 
+
+0.00
+
+ 
+
+ 
+
+15
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total interest-earning assets
+
+ 
+
+$
+
+674,653
+
+ 
+
+ 
+
+6.15
+
+%
+
+$
+
+715,787
+
+ 
+
+ 
+
+5.93
+
+%
+
+$
+
+(2 42 
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Interest Expense. Interest expense
+increased $214,000 or 4.3% to $5.2 million for the three months ended September
+30, 2007 from $5.0 million for the three months ended September 30, 2006. The
+average balance of total interest-bearing liabilities decreased $37.5 million,
+or 6.3% to $554.9 million for the three months ended September 30, 2007 from
+$592.4 million for the three months ended September 30, 2006. The increase in
+interest expense from the prior year is primarily due to an increase in cost of
+funds. The average cost of funds increased 38 basis points to 3.78% for the
+three months ended September 30, 2007 compared to 3.40% for the three months
+ended September 30, 2006.
+
+ The
+following table details average balances, cost of funds and the change in
+interest expense for the three months ended September 30, 2007 and 2006:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Three Months Ended September 30,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+Increase/
+
+(Decrease) in
+
+Interest
+
+Expense from
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+Cost 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+Cost 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Savings deposits
+
+ 
+
+$
+
+23,220
+
+ 
+
+ 
+
+0.60
+
+%
+
+$
+
+23,610
+
+ 
+
+ 
+
+0.22
+
+%
+
+$
+
+22
+
+ 
+
+Interest-bearing demand deposits
+
+ 
+
+ 
+
+84,868
+
+ 
+
+ 
+
+0.70
+
+ 
+
+ 
+
+96,464
+
+ 
+
+ 
+
+0.58
+
+ 
+
+ 
+
+10
+
+ 
+
+Money market accounts
+
+ 
+
+ 
+
+46,009
+
+ 
+
+ 
+
+3.47
+
+ 
+
+ 
+
+32,220
+
+ 
+
+ 
+
+2.04
+
+ 
+
+ 
+
+235
+
+ 
+
+Certificates of deposit
+
+ 
+
+ 
+
+215,484
+
+ 
+
+ 
+
+4.73
+
+ 
+
+ 
+
+230,183
+
+ 
+
+ 
+
+4.19
+
+ 
+
+ 
+
+139
+
+ 
+
+Federal Home Loan Bank advances
+
+ 
+
+ 
+
+185,277
+
+ 
+
+ 
+
+4.57
+
+ 
+
+ 
+
+204,898
+
+ 
+
+ 
+
+4.40
+
+ 
+
+ 
+
+(192
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total interest-bearing liabilities
+
+ 
+
+$
+
+554,858
+
+ 
+
+ 
+
+3.78
+
+%
+
+$
+
+592,375
+
+ 
+
+ 
+
+3.40
+
+%
+
+$
+
+214
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Provision for Loan Losses.. In
+connection with its analysis of the loan portfolio for the three months ended
+September 30, 2007, management determined that a provision for loan losses of
+$338,000 was required for the three months ended September 30, 2007, compared
+to a reversal of allowance of $182,000 for the three months ended September 30,
+2006. The $52 0 ,000 increase in the provision takes into account increased
+activity within classified assets as well as the current downturn in the real
+estate market. We do not originate or purchase one- to four-family subprime
+loans. Management considers the allowance for loans losses at September 30,
+2007 to be adequate to cover probable losses inherent in the loan portfolio based
+on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the
+estimates and assumptions used in its determination of the adequacy of the
+allowance are reasonable, there can be no assurance that such estimates and
+
+32
+
+assumptions will not be proven incorrect in the future, or that the actual
+amount of future provisions will not exceed the amount of past provisions or
+that any increased provision that may be required will not adversely impact our
+financial condition and results of operations. In addition, the determination
+of the amount of our allowance for loan losses is subject to review by bank
+regulators, as part of the routine examination process, which may result in the
+establishment of additional reserves based upon their judgment of information
+available to them at the time of their examination. 
+
+ The
+following table details selected activity associated with the allowance for
+loan losses for the three months ended September 30, 2007 and 2006:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+At or For the Three Months
+
+Ended September 30, 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Provision for loan losses
+
+ 
+
+$
+
+338
+
+ 
+
+$
+
+(182 
+
+)
+
+ 
+
+Net charge-offs
+
+ 
+
+ 
+
+98
+
+ 
+
+ 
+
+3 
+
+ 
+
+ 
+
+Allowance for loan losses
+
+ 
+
+ 
+
+2,988
+
+ 
+
+ 
+
+2,974 
+
+ 
+
+ 
+
+Allowance for loan losses as a percentage
+ of gross loans receivable at the end of the period
+
+ 
+
+ 
+
+0.62
+
+%
+
+ 
+
+0.59
+
+%
+
+ 
+
+Allowance for loan losses as a percentage
+ of nonperforming loans at the end of the period
+
+ 
+
+ 
+
+195.17
+
+ 
+
+ 
+
+766.49 
+
+ 
+
+ 
+
+Nonperforming loans
+
+ 
+
+$
+
+1,531
+
+ 
+
+$
+
+388 
+
+ 
+
+ 
+
+Nonaccrual and 90 days or more past due
+ loans as a percentage of loans receivable at the end of the period
+
+ 
+
+ 
+
+0.32
+
+%
+
+ 
+
+0.08
+
+%
+
+ 
+
+Loans receivable, net
+
+ 
+
+$
+
+480,118
+
+ 
+
+$
+
+503,065 
+
+ 
+
+ Noninterest Income. Noninterest
+income for the three months ended September 30, 2007 was $2.6 million, a
+decrease of $202,000, or 7.3%, from the three months ended September 30, 2006. 
+
+ The
+following table provides a detailed analysis of the changes in components of
+noninterest income:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Three Months Ended
+
+September 30, 2007 
+
+ 
+
+Increase/(Decrease) from
+
+September 30, 2006 
+
+ 
+
+Percentage
+
+Increase/(Decrease) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Service fees and charges
+
+ 
+
+$
+
+2,297
+
+ 
+
+$
+
+(102
+
+)
+
+ 
+
+(4.3
+
+)%
+
+Gain on sale of loans
+
+ 
+
+ 
+
+251
+
+ 
+
+ 
+
+(11
+
+)
+
+ 
+
+(4.2 
+
+)
+
+Increase in cash surrender value of bank
+ life insurance
+
+ 
+
+ 
+
+104
+
+ 
+
+ 
+
+6
+
+ 
+
+ 
+
+(6.1 
+
+)
+
+Loan servicing fees
+
+ 
+
+ 
+
+129
+
+ 
+
+ 
+
+(21
+
+)
+
+ 
+
+(14.0 
+
+)
+
+Mortgage servicing rights, net
+
+ 
+
+ 
+
+(222
+
+)
+
+ 
+
+(90
+
+)
+
+ 
+
+(68.2 
+
+)
+
+Other
+
+ 
+
+ 
+
+5
+
+ 
+
+ 
+
+16
+
+ 
+
+ 
+
+(145.5 
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total noninterest income
+
+ 
+
+$
+
+2,564
+
+ 
+
+$
+
+(202
+
+)
+
+ 
+
+(7.30
+
+)%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Noninterest
+income decreased $202,000, or 7.3%, to $2.6 million for the three months ended
+September 30, 2007 from $2.8 million for the three months ended September 30,
+2006. The decrease was primarily attributable to a $102,000 or 4.3% decrease in
+fees and service charges and a $90,000 or 68.2% decrease in the value of the
+mortgage servicing asset.
+
+ Noninterest
+Expense. Total noninterest expense for the
+three months ended September 30, 2007 was $5.4 million, a decrease of $472,000
+or 8.0% compared to the three months ended September 30, 2006. 
+
+33
+
+ The
+following table provides a detailed analysis of the changes in components of
+noninterest expense:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Three Months Ended
+
+September 30, 2007 
+
+ 
+
+Increase/(Decrease) 
+
+from September 30, 2006 
+
+ 
+
+Percentage 
+
+Increase/(Decrease) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Compensation
+ and benefits
+
+ 
+
+$
+
+2,886
+
+ 
+
+$
+
+(767
+
+)
+
+ 
+
+(21.0
+
+)%
+
+Occupancy
+ and equipment
+
+ 
+
+ 
+
+726
+
+ 
+
+ 
+
+40
+
+ 
+
+ 
+
+5.8
+
+ 
+
+Data
+ processing
+
+ 
+
+ 
+
+548
+
+ 
+
+ 
+
+110
+
+ 
+
+ 
+
+25.1
+
+ 
+
+Advertising
+
+ 
+
+ 
+
+503
+
+ 
+
+ 
+
+218
+
+ 
+
+ 
+
+76.5
+
+ 
+
+Other
+
+ 
+
+ 
+
+748
+
+ 
+
+ 
+
+(73 
+
+)
+
+ 
+
+(8.9
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ noninterest expense
+
+ 
+
+$
+
+5,411
+
+ 
+
+$
+
+(472
+
+)
+
+ 
+
+(8.0
+
+)%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Compensation
+and benefits decreased $767,000 or 21.0% to $2.9 million for the three months
+ended September 30, 2007 from $3.7 million for the same period a year ago. The
+decrease was primarily attributable to a decreased incentive payout in the
+current year. Advertising costs increased $218,000 or 76.5%, primarily as a
+result of marketing costs related to a debit card rewards program and a
+business banking campaign that were recently initiated. 
+
+ Income
+Tax Expense. Income tax expense for the three
+months ended September 30, 2007 was $750,000, which represented a decrease of
+$243,000 from the three months ended September 30, 2006. Income before income
+taxes was $1.9 million for the three months ended September 30, 2007 compared
+to $2.6 million for the three months ended September 30, 2006, a decrease of
+$706,000, or 26.6%. Our combined federal and state effective income tax rate
+for the quarter ending September 30, 2007 was 38.6% compared to 37.5% for the
+three months ended September 30,2006.
+
+Comparison of Operating Results for the Years
+ended September 30, 2007 and September 30, 2006 
+
+ General.
+Net income for the year ended September 30, 2007 was $5.3 million, or $0.36 per
+diluted share, compared to net income of $6.2 million, or $0.43 per diluted
+share, for the year ended September 30, 2006.
+
+ Net
+Interest Income. Net interest income decreased
+$1.7 million, or 7.4%, to $21.3 million for the year ended September 30, 2007,
+from $23.0 million for the year ended September 30, 2006. The decrease in net
+interest income was primarily attributable to a lower net interest margin,
+despite an overall increase in average interest- earning assets and
+interest-bearing liabilities 2007 versus 2006. 
+
+ Our
+net interest margin decreased 30 basis points to 3.03% for the year ended
+September 30, 2007, from 3.33% for the same period last year. The cost of
+interest bearing liabilities increased 66 basis points to 3.66% for the fiscal
+year from 3.00% for the same period of the prior year. The decline in the net
+interest margin reflects the relatively flat yield curve that currently exists,
+as the cost of shorter-term deposits and borrowed funds increased more rapidly
+than the yield on longer-term assets. Although we believe the repricing of
+existing loans and the emphasis on expanding the commercial and small business
+banking programs, including both loan and deposit products, will help counter
+the trend in net interest margin, pressure will likely continue in the near term
+as a result of the flat yield curve environment. 
+
+ The
+following table sets forth the results of balance sheet growth and changes in
+interest rates to our net interest income. The rate column shows the effects
+attributable to changes in rate (changes in rate multiplied by prior volume).
+The volume column shows the effects attributable to changes in volume (changes
+in volume multiplied by prior rate). Changes attributable to both rate and
+volume, which cannot be segregated, are allocated proportionately to the
+changes in rate and volume.
+
+34
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Year Ended September 30, 2007 Compared to
+
+ September 30, 2006
+
+ Increase (Decrease) Due to
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Rate
+
+ 
+
+Volume 
+
+ 
+
+Total 
+
+ 
+
+ 
+
+ 
+
+(In Thousands) 
+
+ 
+
+Interest-earning assets:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Loans receivable, net
+
+ 
+
+$
+
+1,276
+
+ 
+
+$
+
+2,098
+
+ 
+
+$
+
+3,374 
+
+ 
+
+Loans held for sale
+
+ 
+
+ 
+
+11
+
+ 
+
+ 
+
+(7
+
+)
+
+ 
+
+4 
+
+ 
+
+Investment securities, including
+ interest-bearing deposits in other
+ banks
+
+ 
+
+ 
+
+30
+
+ 
+
+ 
+
+175
+
+ 
+
+ 
+
+205 
+
+ 
+
+Mortgage-backed securities
+
+ 
+
+ 
+
+130
+
+ 
+
+ 
+
+(1,036
+
+)
+
+ 
+
+(906
+
+)
+
+Federal Home Loan Bank stock
+
+ 
+
+ 
+
+48 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+48 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total net change in income on
+ interest-earning assets
+
+ 
+
+$
+
+1,495 
+
+ 
+
+$
+
+1,230 
+
+ 
+
+$
+
+2,725 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Interest-bearing liabilities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Savings deposits
+
+ 
+
+$
+
+55
+
+ 
+
+$
+
+(3
+
+)
+
+$
+
+52 
+
+ 
+
+Interest-bearing demand deposits
+
+ 
+
+ 
+
+137
+
+ 
+
+ 
+
+(34
+
+)
+
+ 
+
+103 
+
+ 
+
+Money market accounts
+
+ 
+
+ 
+
+519
+
+ 
+
+ 
+
+161
+
+ 
+
+ 
+
+680 
+
+ 
+
+Certificates of deposit
+
+ 
+
+ 
+
+2,232 
+
+ 
+
+ 
+
+298 
+
+ 
+
+ 
+
+2,530 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total deposits
+
+ 
+
+ 
+
+2,943
+
+ 
+
+ 
+
+422
+
+ 
+
+ 
+
+3,365 
+
+ 
+
+Federal Home Loan Bank advances
+
+ 
+
+ 
+
+568 
+
+ 
+
+ 
+
+486 
+
+ 
+
+ 
+
+1,054 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total net change in expense on
+ interest-bearing liabilities
+
+ 
+
+$
+
+3,511 
+
+ 
+
+$
+
+908 
+
+ 
+
+$
+
+4,419 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total increase (decrease) in net interest
+ income
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+$
+
+(1,694 
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Interest
+and Dividend Income. Total interest and
+dividend income for the year ended September 30, 2007 increased $2.7 million,
+or 6.8%, to $42.6 million, from $39.9 million for the same period of the prior
+year. The increase during the period was primarily attributable to the $14.0
+million, or 2.0%, increase in the average balance of interest-earning assets
+and an increase in the yield on interest-earning assets to 6.06% from 5.79% as
+a result of the general increase in interest rates and changes in our loan
+portfolio mix.
+
+35
+
+ The
+following table compares detailed average earning asset balances, associated
+yields, and resulting changes in interest and dividend income for the years
+ended September 30, 2007 and 2006.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Year Ended September 30, 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Increase/
+
+(Decrease) in
+
+Interest and
+
+Dividend
+
+Income from
+
+2006 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+ 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Yield 
+
+ 
+
+ 
+
+Yield 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Loans receivable, net
+of deferred taxes 
+
+ 
+
+$
+
+503,478
+
+ 
+
+ 
+
+6.62
+
+%
+
+$
+
+471,291
+
+ 
+
+ 
+
+6.35
+
+%
+
+$
+
+3,374 
+
+ 
+
+Loans held for sale
+
+ 
+
+ 
+
+3,652
+
+ 
+
+ 
+
+6.46
+
+ 
+
+ 
+
+3,771
+
+ 
+
+ 
+
+6.15
+
+ 
+
+ 
+
+4 
+
+ 
+
+Investment securities, available for sale, including
+interest-bearing deposits in other banks
+
+ 
+
+ 
+
+6,645
+
+ 
+
+ 
+
+5.19
+
+ 
+
+ 
+
+3,197
+
+ 
+
+ 
+
+4.38
+
+ 
+
+ 
+
+205 
+
+ 
+
+Mortgage-backed securities
+
+ 
+
+ 
+
+180,309
+
+ 
+
+ 
+
+4.82
+
+ 
+
+ 
+
+201,838
+
+ 
+
+ 
+
+4.76
+
+ 
+
+ 
+
+(906
+
+)
+
+FHLB stock
+
+ 
+
+ 
+
+9,591 
+
+ 
+
+ 
+
+0.50 
+
+ 
+
+ 
+
+9,591 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+48 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total interest-earning assets
+
+ 
+
+$
+
+703,675 
+
+ 
+
+ 
+
+6.06 
+
+%
+
+$
+
+689,688 
+
+ 
+
+ 
+
+5.79 
+
+%
+
+$
+
+2,725 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Interest
+Expense. Interest expense increased $4.4
+million, or 26.1%, to $21.3 million for the year ended September 30, 2007 from
+$16.9 million for the year ended September 30, 2006. The average balance of
+total interest-bearing liabilities increased $19.1 million, or 3.4%, to $582.9
+million for the year ended September 30, 2007 from $563.8 million for the year
+ended September 30, 2006. The increase was primarily a result of growth in
+certificates of deposit, money market accounts, and additional FHLB advances.
+As a result of general market rate increases, the average cost of funds for
+total interest-bearing liabilities increased 66 basis points to 3.66% for the
+year ended September 30, 2007 compared to 3.00% for the year ended September
+30, 2006.
+
+ The
+following table details average balances, cost of funds and the change in
+interest expense for the years ended September 30, 2007 and 2006:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Year Ended September 30, 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+Increase/
+
+(Decrease) in
+
+Interest
+
+Expense from
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+ 
+
+ 
+
+Average
+
+Balance 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cost 
+
+ 
+
+ 
+
+Cost 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Savings
+ deposits
+
+ 
+
+$
+
+23,397
+
+ 
+
+ 
+
+0.44
+
+%
+
+$
+
+24,863
+
+ 
+
+ 
+
+0.21
+
+%
+
+$
+
+52
+
+ 
+
+Interest-bearing
+ demand deposits
+
+ 
+
+ 
+
+91,198
+
+ 
+
+ 
+
+0.62
+
+ 
+
+ 
+
+97,916
+
+ 
+
+ 
+
+0.48
+
+ 
+
+ 
+
+103
+
+ 
+
+Money market
+ deposits
+
+ 
+
+ 
+
+39,908
+
+ 
+
+ 
+
+3.04
+
+ 
+
+ 
+
+31,875
+
+ 
+
+ 
+
+1.68
+
+ 
+
+ 
+
+680
+
+ 
+
+Certificates
+ of deposit
+
+ 
+
+ 
+
+226,522
+
+ 
+
+ 
+
+4.59
+
+ 
+
+ 
+
+218,496
+
+ 
+
+ 
+
+3.60
+
+ 
+
+ 
+
+2,530
+
+ 
+
+FHLB
+ advances
+
+ 
+
+ 
+
+201,911 
+
+ 
+
+ 
+
+4.49 
+
+ 
+
+ 
+
+190,684 
+
+ 
+
+ 
+
+4.20 
+
+ 
+
+ 
+
+1,054 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ interest-bearing liabilities
+
+ 
+
+$
+
+582,936 
+
+ 
+
+ 
+
+3.66 
+
+%
+
+$
+
+563,834 
+
+ 
+
+ 
+
+3.00 
+
+%
+
+$
+
+4,419 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Provision for Loan Losses. A
+provision for loan losses of $409,000 was established by management in
+connection with its analysis of the loan portfolio for the year ended September
+30, 2007, compared to a provision for loan losses of $138,000 established for
+the same period of 2006. The $271,000 increase in the provision takes into
+account increased activity within classified assets as well as the current
+downturn in the real estate market. We do not originate or purchase one- to
+four-family subprime loans. Management considers the allowance for loans losses at September 30, 2007 to be adequate to cover probable losses inherent
+in the loan portfolio based on the assessment
+
+36
+
+of the above-mentioned factors
+affecting the loan portfolio. While management believes the estimates and
+assumptions used in its determination of the adequacy of the allowance are
+reasonable, there can be no assurance that such estimates and assumptions will
+not be proven incorrect in the future, or that the actual amount of future
+provisions will not exceed the amount of past provisions or that any increased
+provision that may be required will not adversely impact our financial
+condition and results of operations. In addition, the determination of the
+amount of our allowance for loan losses is subject to review by bank
+regulators, as part of the routine examination process, which may result in the
+establishment of additional reserves based upon their judgment of information
+available to them at the time of their examination. 
+
+ The
+following table details selected activity associated with the allowance for
+loan losses for the years ended September 30, 2007 and 2006:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+At or For the Year
+
+Ended September 30, 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands) 
+
+ 
+
+Provision for loan losses
+
+ 
+
+$
+
+409
+
+ 
+
+$
+
+138
+
+ 
+
+Net charge-offs
+
+ 
+
+ 
+
+203
+
+ 
+
+ 
+
+46
+
+ 
+
+Allowance for loan losses
+
+ 
+
+ 
+
+2,988
+
+ 
+
+ 
+
+2,974
+
+ 
+
+Allowance for loan losses as a percentage
+ of gross loans receivable at the end
+ of the period
+
+ 
+
+ 
+
+0.6 2 
+
+%
+
+ 
+
+0.5 9 
+
+%
+
+Allowance for loan losses as a percentage
+ of nonperforming loans at the end of
+ the period
+
+ 
+
+ 
+
+195.17
+
+%
+
+ 
+
+766.49
+
+%
+
+Nonperforming loans
+
+ 
+
+$
+
+1,531
+
+ 
+
+$
+
+388
+
+ 
+
+Nonaccrual and 90 days or more past due
+ loans as a percentage of loans receivable at the end of the period
+
+ 
+
+ 
+
+0.32
+
+%
+
+ 
+
+0.08
+
+%
+
+Loans receivable, net
+
+ 
+
+$
+
+480,118
+
+ 
+
+$
+
+503,065
+
+ 
+
+ Noninterest
+Income. Noninterest income increased $81,000,
+or 0.7%, to $11.2 million for the year ended September 30, 2007 from $11.1
+million for the year ended September 30, 2006. While overall noninterest income
+was flat, gain on sale of loans increased $363,000 or 34.4%. This increase in
+noninterest income was offset by a $266,000 or 148.6% decrease in the value of
+the mortgage servicing asset. We currently sell a majority of the one-to
+four-family residential loans we originate. For the year ended September 30,
+2006, a larger percentage of the residential mortgage loans originated were
+held in the loan portfolio. For the year ended September 30, 2007 we had a
+$150,000 write down of the value of the mortgage servicing rights. 
+
+37
+
+ The
+following table provides a detailed analysis of the changes in components of
+noninterest income:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Year Ended
+
+September 30, 
+
+ 
+
+Increase (decrease) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+Amount 
+
+ 
+
+Percent 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Service fees and charges
+
+ 
+
+$
+
+9,218
+
+ 
+
+$
+
+9,292
+
+ 
+
+$
+
+(74
+
+)
+
+ 
+
+(0.8
+
+)%
+
+Gain on sale of loans
+
+ 
+
+ 
+
+1,419
+
+ 
+
+ 
+
+1,056
+
+ 
+
+ 
+
+363
+
+ 
+
+ 
+
+34.4
+
+ 
+
+Increase in cash surrender value of bank owned life
+insurance
+
+ 
+
+ 
+
+405
+
+ 
+
+ 
+
+383
+
+ 
+
+ 
+
+22
+
+ 
+
+ 
+
+5.7
+
+ 
+
+Loan servicing fees
+
+ 
+
+ 
+
+549
+
+ 
+
+ 
+
+620
+
+ 
+
+ 
+
+(71
+
+)
+
+ 
+
+(11.5
+
+)
+
+Mortgage servicing rights, net
+
+ 
+
+ 
+
+(445
+
+)
+
+ 
+
+(179
+
+)
+
+ 
+
+(266
+
+)
+
+ 
+
+(148.6
+
+)
+
+Other
+
+ 
+
+ 
+
+44 
+
+ 
+
+ 
+
+(63 
+
+)
+
+ 
+
+107 
+
+ 
+
+ 
+
+169.8 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total noninterest income
+
+ 
+
+$
+
+11,190 
+
+ 
+
+$
+
+11,109 
+
+ 
+
+$
+
+81 
+
+ 
+
+ 
+
+0.7 
+
+%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Noninterest
+Expense. Noninterest expense decreased
+$400,000, or 1.7%, to $23.5 million for the year ended September 30, 2007 from
+$23.9 million for the year ended September 30, 2006.
+
+ The
+following table provides a detailed analysis of the changes in components of
+noninterest expense:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Year Ended
+
+September 30, 
+
+ 
+
+Increase (decrease) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2007 
+
+ 
+
+2006 
+
+ 
+
+Amount 
+
+ 
+
+Percent 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(Dollars in Thousands) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Compensation
+ and benefits
+
+ 
+
+$
+
+14,249
+
+ 
+
+$
+
+15,081
+
+ 
+
+$
+
+(832
+
+)
+
+ 
+
+(5.5
+
+)%
+
+Occupancy
+ and equipment
+
+ 
+
+ 
+
+2,871
+
+ 
+
+ 
+
+2,759
+
+ 
+
+ 
+
+112
+
+ 
+
+ 
+
+4.1
+
+ 
+
+Data
+ processing
+
+ 
+
+ 
+
+2,097
+
+ 
+
+ 
+
+1,802
+
+ 
+
+ 
+
+295
+
+ 
+
+ 
+
+16.4
+
+ 
+
+Advertising
+
+ 
+
+ 
+
+1,475
+
+ 
+
+ 
+
+1,025
+
+ 
+
+ 
+
+450
+
+ 
+
+ 
+
+43.9
+
+ 
+
+Other
+
+ 
+
+ 
+
+2,853 
+
+ 
+
+ 
+
+3,278 
+
+ 
+
+ 
+
+(425 
+
+)
+
+ 
+
+(13.0 
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ noninterest expense
+
+ 
+
+$
+
+23,545 
+
+ 
+
+$
+
+23,945 
+
+ 
+
+$
+
+(400 
+
+)
+
+ 
+
+(1.7 
+
+)%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Compensation
+and benefits decreased $832,000 or 5.5% to $14.2 million for the year ended
+September 30, 2007 from $15.1 million for the same period a year ago. The
+decrease was primarily attributable to a decreased incentive payout in the
+current year. In addition, full-time equivalent employees has decreased from
+240 as of September 30, 2006 to 223 as of September 30, 2007. Advertising costs
+increased $450,000 or 43.9%, primarily as a result of marketing costs related
+to a debit card rewards program and a business banking campaign that were
+initiated during the current fiscal year. Other noninterest expenses decreased
+$425,000 primarily as a result of costs incurred in the prior fiscal year
+related to the conversion of the core processing system and professional costs
+associated with the initial year of Sarbanes-Oxley compliance. 
+
+ Our
+efficiency ratio, which is the percentage of noninterest expense to net
+interest income plus noninterest income, was 72.5% for the year ended September
+30, 2007 compared to 70.2% for the year ended September 30, 2006. The increase
+in efficiency ratio was primarily attributable to a $1.7 million, or 7.4%
+decrease in net interest income. By definition, a lower efficiency ratio would
+be an indication that we are more efficiently utilizing resources to generate
+net interest income and other fee income. 
+
+ Income
+Tax Expense. Income tax expense decreased
+$543,000, or 14.3%, to $3.3 million for the year ended September 30, 2007 from
+$3.8 million for the same period a year ago. Income before income taxes
+decreased $1.5 million
+or 14.8% to $8.5 million for the year ended September 30, 2007 compared to
+$10.0 million for the year ended September 30, 2006. Our combined federal and
+state effective income tax rate for the current period was 38.3% compared to
+38.0% for the same period of the prior year. 
+
+38
+
+MANAGEMENT S DISCUSSION
+ AND ANALYSIS OF FINANCIAL CONDITION
+AND RESULTS OF OPERATIONS
+
+Overview
+
+ We
+ are a community-based financial institution primarily serving the Boise, Idaho and
+ surrounding metropolitan area known as the Treasure Valley region of southwestern
+ Idaho, including Ada, Canyon, Elmore and Gem counties, through our 15 full-service
+ banking offices and two loan centers. We are in the business of attracting deposits
+ from the public and utilizing those deposits to originate loans. We offer a wide
+ range of loan products to meet the demands of our customers. Historically, lending
+ activities have been primarily directed toward the origination of residential and
+ commercial real estate loans. Real estate lending activities have been primarily
+ focused on first mortgages on owner occupied, and one- to four-family residential
+ properties. To an increasing extent in recent years, lending activities have also
+ included the origination of residential and commercial construction and land development
+ loans and home equity loans. While continuing our commitment to residential lending,
+ management expects commercial lending, including commercial real estate, builder
+ finance and commercial business lending, to become increasingly important activities
+ for us. Consistent with this strategy, we appointed Mr. Williams as President of
+ Home Federal Bank in September 2006 and expect him to succeed Mr. Stevens in September
+ 2008. Mr. Williams has extensive experience in business related lending.
+
+ Our
+ primary source of pre-tax income is net interest income. Net interest income is
+ the difference between interest income, which is the income that we earn on our
+ loans and investments, and interest expense, which is the interest that we pay on
+ our deposits and borrowings. Changes in levels of interest rates affect our net
+ interest income. The recent interest rate environment, which has caused short-term
+ market interest rates to rise, while longer term interest rates have remained stable,
+ has had a negative impact on our interest rate spread and net interest margin, which
+ has reduced profitability and caused a decrease in our return on average assets
+ and return on average equity. To offset the negative impact the current interest
+ rate environment is having on our profitability, we are seeking to find means of
+ increasing interest income while controlling expenses. We intend to diversity the
+ mix of our assets by reducing the percentage of our assets that are lower-yielding
+ residential loans and mortgage-backed securities and increasing the percentage of
+ our assets consisting of construction and land development, commercial real estate,
+ and commercial business loans that have higher risk-adjusted returns.
+
+ Our
+ operating expenses consist primarily of compensation and benefits, occupancy and
+ equipment, data processing, advertising, postage and supplies, professional services
+ and, when applicable, deposit insurance premiums. Compensation and benefits consist
+ primarily of the salaries and wages paid to our employees, payroll taxes, expenses
+ for retirement and other employee benefits. Occupancy and equipment expenses, which
+ are the fixed and variable costs of building and equipment, consist primarily of
+ lease payments, taxes, depreciation charges, maintenance and costs of utilities.
+
+ Following
+ the completion of the offering, we anticipate that our operating expense will increase
+ as a result of the increased compensation expenses associated with the purchases
+ of shares of common stock by our employee stock ownership plan, and awards under
+ additional stock-based incentive plans. While these additional expenses will negatively
+ impact earnings, we do not expect them to completely offset the additional income
+ we expect to receive by leveraging the proceeds from this offering.
+
+ Assuming
+ that the adjusted maximum number of shares is sold in the offering:
+
+ 
+ 
+ 
+our employee
+ stock ownership plan will acquire 1,269,600 additional shares of common stock with
+ a $12.7 million loan from new Home Federal Bancorp, that is expected to be repaid
+ over 15 years, resulting in an annual pre-tax expense of approximately $846,400 (assuming
+ that the common stock maintains a value of $10.00 per shares);
+
+ 
+
+ 
+ 
+ 
+our new stock
+ option plan would authorize the grant of options to purchase shares up to 8.7% of
+ the amount of our shares sold in the offering to eligible participants, which would
+ result in
+
+39
+
+ 
+ 
+ 
+compensation
+ expense over the vesting period of the options. Assuming
+ the market price of the common stock is $10.00 per share, all options are granted
+ with an exercise price of $10.00 per share and have a term of 10 years; the dividend
+ yield on the stock is zero; the risk free interest rate is 5.03%; and the volatility
+ rate on the common stock is 11.31%, the estimated grant-date fair value of the options
+ utilizing a Black-Scholes option pricing analysis is $2.71 per option granted. Assuming
+ this value is amortized over the five year vesting period, the corresponding annual
+ pre-tax expense associated with the stock option plan would be approximately $745,000;
+ and
+
+ 
+
+ 
+ 
+ 
+our new stock
+ recognition and retention plan would authorize the award of a number of shares equal
+ to up to 3.5% of the amount of our shares sold in the offering to eligible participants,
+ which would be expense as the awards vest. Assuming that all shares are awarded
+ at a price of $10.00 per share, and that the awards vest over a five year period,
+ the corresponding annual pre-tax expense would be approximately $1.1 million.
+
+ The
+ actual expense that will be recorded for the additional shares purchased by our
+ employee stock ownership plan will be determined by the market value of the shares
+ of common stock as they are released to employees over the term of the loan, and
+ depending on whether the loan is repaid faster than its contractual term allowing
+ for an acceleration in the release of shares held as collateral for the loan. Accordingly,
+ increases in the stock price above $10.00 per share will increase the total employee
+ stock ownership plan expense, and any accelerated repayment of the loan along with
+ an accelerated release of shares will increase the annual employee stock ownership
+ plan expense. Additionally, the actual expense of the restricted shares will be
+ determined by the fair market value of the stock on the grant date, which might
+ be greater than $10.00 per share. Further, the actual expense of the stock options
+ will be determined by the grant-date fair value of the options which will depend
+ on a number of factors, including the valuation assumptions used in the Black-Scholes
+ option pricing model. For more information of expenses associated with new equity
+ based benefit plans, see Pro Forma Data. 
+
+ Our
+ results of operations may also be affected significantly by general and local economic
+ and competitive conditions, changes in market interest rates, governmental policies
+ and actions of regulatory authorities.
+
+Operating Strategy
+
+ Our
+ strategies center on our continued development into a full service, community-oriented
+ bank. Our goal is to continue to enhance our franchise value and earnings through
+ controlled growth in our banking operations, especially small business lending,
+ while maintaining the community-oriented customer service and sales focus that has
+ characterized our success to date. In order to be successful in this objective and
+ increase stockholder value, we are committed to the following strategies:
+
+ 
+Continue Growing in Our Existing Markets. We believe there is a large customer
+ base in our market that is dissatisfied with the service received from larger regional
+ banks. By offering quicker decision making in the delivery of banking products and
+ services, offering customized products where appropriate, and providing customer
+ access to our senior managers, we hope to distinguish ourselves from larger, regional
+ banks operating in our market areas. Our larger capital base resulting from this
+ offering and our plans to diversify our product mix should allow us to compete effectively
+ against smaller banks.
+
+ 
+Continue Our Disciplined Execution.We believe our success as a banking organization
+ depends on a disciplined approach to originating loans and monitoring the performance
+ of our loan portfolio. Despite our growth, we have consistently maintained strong
+ asset quality. We believe our strong asset quality is the result of our underwriting
+ standards, experienced loan officers and the strength of the local economy. In addition,
+ many of the commercial loans we originate are to borrowers well known by our loan
+ officers from existing and prior banking relationships. At June 30, 2007, our nonperforming
+ assets as a percentage of total assets were 0.07% and for the nine months ended
+ June 30, 2007 our ratio of net charge-offs to average loans was 0.02%. Our year-end
+ nonperforming assets as a percentage of total assets and ratio of net charge-offs
+ to average loans have not exceeded 0.17% and 0.10%, respectively, in any of the
+ past five years.
+
+40
+
+ Expanding Our Product Offerings. We intend to continue
+ our emphasis on originating commercial lending products that diversify our loan
+ portfolio by increasing the percentage of our assets consisting of higher-yielding
+ construction and land development and commercial real estate and commercial business
+ loans with higher risk-adjusted returns, shorter maturities and more sensitivity
+ to interest rate fluctuations, while still providing high quality loan products
+ for single-family residential borrowers. We also intend to selectively add products
+ to provide diversification of revenue sources and to capture our customer s
+ full relationship. We intend to continue to expand our business by cross selling
+ our loan and deposit products and services to our customers in order to increase
+ our fee income.
+
+ 
+Focus on our Branch Expansion. Branch expansion has played a significant role
+ in our ability to grow loans, deposits and customer relationships. Since August
+ 2000 we have opened eight branches in our existing markets. We are planning four
+ to six new branches that we intend to open within the next 24 months.
+
+There is currently one new branch under construction in Nampa, Idaho and plans are being finalized for the construction of a new
+branch office in the Meridian, Idaho market in 2008.
+
+ Our long-term
+ strategy is to build two or three branches per year if appropriate sites can be
+ identified and obtained. We will also actively search for appropriate acquisitions
+ to enhance our ability to deliver products and services in our existing markets
+ and to expand into surrounding markets. However, there are currently no specific acquisitions under consideration.
+
+ 
+Increasing Our Core Transaction Deposits. A fundamental part of our overall strategy
+ is to improve both the level and the mix of deposits that serve as a funding base
+ for asset growth. By growing demand deposit accounts and other transaction accounts,
+ we intend to reduce our reliance on higher-cost certificates of deposit and borrowings
+ such as advances from the Federal Home Loan Bank of Seattle. In order to expand
+ our core deposit franchise, we are focusing on introducing additional products and
+ services to obtain money market and time deposits by bundling them with other consumer
+ services. Business deposits are being pursued by the introduction of cash management
+ products and by specific targeting of small business customers.
+
+ 
+Hire Experienced Employees With a Customer Service Focus. Our ability to continue
+ to attract and retain banking professionals with strong business banking and service
+ skills, community relationships and significant knowledge of our markets is key
+ to our success. We believe that by focusing on experienced bankers who are established
+ in their communities, we enhance our market position and add profitable growth opportunities.
+ We emphasize to our employees the importance of delivering exemplary customer service
+ and seeking opportunities to build further relationships with our customers. Our
+ goal is to compete by relying on the strength of our customer service and relationship
+ banking approach.
+
+ Continuing
+ an internal management culture which is driven by a focus on profitability, productivity
+ and accountability for results and which responds proactively to the challenge of
+ change. The primary method for reinforcing our culture is the comprehensive application
+ of our Pay for Performance total compensation program. Every employee
+ has clearly defined accountabilities and performance standards that tie directly
+ or indirectly to our profitability. All incentive compensation is based on specific
+ profitability measures, sales volume goals or a combination of specific profitability
+ measures and individual performance goals. This approach encourages all employees
+ to focus on our profitability and has created an environment that embraces new products,
+ services and delivery systems.
+
+Critical Accounting Policies
+
+ We
+ use estimates and assumptions in our financial statements in accordance with generally
+ accepted accounting principles. Management has identified several accounting policies
+ that, due to the judgments, estimates and assumptions inherent in those policies,
+ are critical to an understanding of our financial statements. These policies relate
+ to the determination of the allowance for loan losses and the associated provision
+ for loan losses, the fair market value of capitalized mortgage servicing rights,
+ as well as deferred income taxes and the associated income tax expense. Management
+ reviews the allowance for loan losses for adequacy on a quarterly basis and establishes
+ a provision for loan losses that it believes is sufficient for the loan portfolio
+ growth expected and the loan quality of the existing portfolio. The carrying value
+ of the capitalized mortgage servicing rights is also assessed on a 
+
+41
+
+quarterly basis.
+ Income tax expense and deferred income taxes are calculated using an estimated tax
+ rate and are based on management s and our tax advisor s understanding
+ of our effective tax rate and the tax code. These estimates are reviewed by our
+ independent auditor on an annual basis and by our regulators when they examine Home
+ Federal Bank.
+
+ 
+Allowance for Loan Losses. Management recognizes that loan losses may occur over
+ the life of a loan and that the allowance for loan losses must be maintained at
+ a level necessary to absorb specific losses on impaired loans and probable losses
+ inherent in the loan portfolio. Our Asset Liability Management Committee assesses
+ the allowance for loan losses on a quarterly basis. The Committee analyzes several
+ different factors including delinquency rates, charge-off rates and the changing
+ risk profile of our loan portfolio, as well as local economic conditions such as
+ unemployment rates, bankruptcies and vacancy rates of business and residential properties.
+
+ We
+ believe that the accounting estimate related to the allowance for loan losses is
+ a critical accounting estimate because it is highly susceptible to change from period
+ to period, requiring management to make assumptions about future losses on loans.
+ The impact of a sudden large loss could deplete the allowance and require increased
+ provisions to replenish the allowance, which would negatively affect earnings.
+
+ Our
+ methodology for analyzing the allowance for loan losses consists of specific allocations
+ on significant individual credits and a general allowance amount, including a range
+ of losses. The specific allowance component is determined when management believes
+ that the collectibility of a specific large loan has been impaired and a loss is
+ probable. The general allowance component relates to assets with no well-defined
+ deficiency or weakness and takes into consideration loss that is inherent within
+ the portfolio but has not been realized. The general allowance is determined by
+ applying a historical loss percentage to various types of loans with similar characteristics
+ and classified loans that are not analyzed specifically. Due to the imprecision
+ in calculating inherent and potential losses, a range is added to the general allowance
+ to provide an allowance for loan losses that is adequate to cover losses that may
+ arise as a result of changing economic conditions and other factors that may alter
+ our historical loss experience.
+
+ The allowance is increased by the provision for
+ loan losses, which is charged against current period operating results and decreased
+ by the amount of actual loan charge-offs, net of recoveries.
+
+ 
+Mortgage Servicing Rights. Mortgage servicing rights represent the present value
+ of the future loan servicing fees from the right to service loans for others. The
+ most critical accounting policy associated with mortgage servicing is the methodology
+ used to determine the fair value of capitalized mortgage servicing rights, which
+ requires the development of a number of estimates, the most critical of which is
+ the mortgage loan prepayment speeds assumption. The mortgage loan prepayment speeds
+ assumption is significantly impacted by interest rates. In general, during periods
+ of falling interest rates, the mortgage loans prepay faster and the value of our
+ mortgage servicing asset declines. Conversely, during periods of rising rates, the
+ value of mortgage servicing rights generally increases due to slower rates of prepayments.
+ We perform a quarterly review of mortgage servicing rights for potential changes
+ in value. This review may include an independent appraisal by an outside party of
+ the fair value of the mortgage servicing rights.
+
+ 
+Deferred Income Taxes. Deferred income taxes are reported for temporary differences
+ between items of income or expense reported in the financial statements and those
+ reported for income tax purposes. Deferred taxes are computed using the asset and
+ liability approach as prescribed in Statement of Financial Accounting Standards
+ No. 109, Accounting for Income Taxes. Under this method, a deferred
+ tax asset or liability is determined based on the enacted tax rates that will be
+ in effect when the differences between the financial statement carrying amounts
+ and tax basis of existing assets and liabilities are expected to be reported in
+ an institution s income tax returns. The deferred tax provision for the year
+ is equal to the net change in the net deferred tax asset from the beginning to the
+ end of the year, less amounts applicable to the change in value related to investments
+ available for sale. The effect on deferred taxes of a change in tax rates is recognized
+ as income in the period that includes the enactment date. The primary differences
+ between financial statement income and taxable income result from depreciation expense,
+ mortgage servicing rights, loan loss reserves and dividends received from the Federal
+ Home Loan Bank of Seattle.
+
+42
+
+Deferred income taxes do not include a liability for
+ pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured
+ if the institution fails to qualify as a bank for income tax purposes in the future.
+
+Comparison of Financial Condition at
+ June 30, 2007 and September 30, 2006
+
+ 
+General. Total assets decreased $33.0 million, or 4.3%, to $728.3 million at
+ June 30, 2007 from $761.3 million at September 30, 2006. Mortgage-backed securities
+ decreased $28.7 million, or 14.7%, to $166.8 million and were the primary reason
+ for the asset decline during the nine-month period. As a result, we also reduced
+ outstanding Federal Home Loan Bank advances by $21.5 million, or 10.2%, to $189.3
+ million. Total deposits decreased $11.6 million, or 2.7%, to $418.7 million as customers
+ transferred funds into higher rate deposit products during the past several quarters
+ and as a result of the transfer from Home Federal Bank of a single commercial relationship
+ that reduced outstanding balances by approximately $4.1 million during the nine-month
+ period.
+
+ 
+Assets. For the nine months ended June 30, 2007, total assets decreased $33.0
+ million. The increases and decreases were primarily concentrated in the following
+ asset categories:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Increase (Decrease)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+Balance at
+ 
+Balance at
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+June 30,
+ 
+September
+ 30,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+2006
+ 
+ 
+Amount
+ 
+Percent
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+Cash
+ and amounts due from depository institutions
+
+ 
+ 
+$
+ 23,086
+ 
+ 
+$
+ 18,385
+ 
+ 
+$
+ 4,701
+ 
+ 
+ 
+25.6
+%
+
+Mortgage-backed
+ securities, available for sale
+
+ 
+ 
+ 
+166,755
+ 
+ 
+ 
+ 12,182
+ 
+ 
+ 
+154,573 
+ 
+ 
+ 
+1,268.9 
+ 
+
+Mortgage-backed
+ securities, held to maturity
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+183,279
+ 
+ 
+ 
+(183,279
+)
+ 
+ 
+(100.0
+)
+
+Loans
+ receivable, net of allowance for loan losses
+
+ 
+ 
+ 
+491,768
+ 
+ 
+ 
+503,065
+ 
+ 
+ 
+(11,297
+)
+ 
+ 
+(2.2
+)
+
+ Cash
+ and amounts due from depository institutions increased $4.7 million as a result
+ of normal fluctuations of amounts due from other financial institutions.
+
+ Mortgage-backed
+ securities decreased $28.7 million to $166.8 million at June 30, 2007, from $195.5
+ million at September 30, 2006. During the nine months ended June 30, 2007, we purchased
+ $2.1 million of 5/1 hybrid adjustable-rate mortgage-backed securities issued by
+ Freddie Mac. Repayments of principal and proceeds from sales totaled $25.4 million
+ for the nine months ended June 30, 2007. We purchase mortgage-backed securities
+ to manage interest rate sensitivity, supplement loan originations and provide liquidity.
+
+ We had a
+change in our strategy regarding mortgage-backed securities and during
+ the quarter ended June 30, 2007, we transferred our entire portfolio of held-to-maturity
+ mortgage-backed securities to available for sale to help meet future liquidity needs
+ associated with increasing commercial banking and other lending activities. As part
+ of our liquidity management, we do not currently intend to classify any investments as held
+ to maturity in the foreseeable future.
+
+ Loans
+ receivable, net, decreased $11.3 million to $491.8 million at June 30, 2007, from
+ $503.1 million at September 30, 2006. One- to four-family residential mortgage loans
+ decreased $34.0 million as we sold a majority of the one- to four-family loans that
+ we originate. In prior years, we held a portion of the one- to four-family loans
+ we originated in our loan portfolio. Commercial loans increased $18.5 million, or
+ 12.8%, during the nine months ended June 30, 2007. We have made significant progress
+ in building our commercial and small business banking programs, including the addition
+ of an experienced commercial banking team to expand our existing commercial real
+ estate lending program. We will also emphasize other commercial banking activities,
+ including business banking, cash management and other products associated with a
+ full-service commercial bank.
+
+ 
+Deposits. Deposits decreased $11.6 million, or 2.7%, to $418.7 million at June
+ 30, 2007, from $430.3 million at September 30, 2006. A significant portion of the
+ decrease in noninterest-bearing demand deposits was the 
+
+43
+
+result of a single commercial
+ relationship that reduced outstanding balances by approximately $4.1 million during
+ the nine-month period. Money market deposits accounted for the majority of the increase
+ in interest-bearing deposits as a result of our increased emphasis on commercial
+ accounts and as customers transferred funds into higher rate deposit products. The
+ decrease in certificates of deposit was primarily the result of our choosing not
+ to match rates offered by local competitors that in some instances exceeded our
+ alternative funding sources.
+
+ The
+ following table details the changes in deposit accounts:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Increase (Decrease)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Balance at
+June
+ 30,
+2007
+ 
+ 
+Balance at
+September
+ 30,
+2006
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Noninterest-bearing
+ demand deposits
+
+ 
+ 
+ 
+$
+ 34,368
+ 
+ 
+ 
+ 
+$
+ 44,626
+ 
+ 
+ 
+ 
+$
+(10,258
+)
+ 
+ 
+ 
+ 
+(23.0
+)%
+
+Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+ 
+133,770
+ 
+ 
+ 
+ 
+ 
+128,276
+ 
+ 
+ 
+ 
+ 
+5,494
+ 
+ 
+ 
+ 
+ 
+4.3
+ 
+
+Savings
+ deposits
+
+ 
+ 
+ 
+ 
+23,465
+ 
+ 
+ 
+ 
+ 
+23,655
+ 
+ 
+ 
+ 
+ 
+(190
+)
+ 
+ 
+ 
+ 
+(0.8
+)
+
+Certificates
+ of deposit
+
+ 
+ 
+ 
+ 
+227,095
+ 
+ 
+ 
+ 
+ 
+233,724
+ 
+ 
+ 
+ 
+ 
+(6,629
+)
+ 
+ 
+ 
+ 
+(2.8
+)
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ Total
+ deposit accounts
+
+ 
+ 
+ 
+$
+418,698
+ 
+ 
+ 
+ 
+$
+430,281
+ 
+ 
+ 
+ 
+$
+(11,583
+)
+ 
+ 
+ 
+ 
+(2.7
+)%
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+Borrowings. Federal Home Loan Bank advances decreased $21.5 million, or 10.2%,
+ to $189.3 million at June 30, 2007, from $210.8 million at September 30, 2006. We
+ use Federal Home Loan Bank advances as an alternative funding source to deposits,
+ and to manage funding costs, reduce interest rate risk and to leverage our balance
+ sheet.
+
+ 
+Equity. Stockholders equity increased $2.1 million, or 2.0%, to $110.0
+ million at June 30, 2007, from $107.9 million at September 30, 2006. The increase
+ was primarily a result of the $4.1 million in net income and the allocation of earned
+ employee stock ownership plan shares, equity compensation and the exercise of stock
+ options totaling $2.3 million, offset by $959,000 in cash dividends paid to stockholders
+ and $3.3 million increase in unrealized losses on securities available for sale.
+ During the quarter ended June 30, 2007, we transferred our entire portfolio of held-to-maturity
+ mortgage-backed securities to available for sale for additional liquidity purposes.
+ As a result, stockholders equity was decreased by the securities unrealized
+ holding loss of $1.9 million at the date of transfer. On June 15, 2007, we paid
+ $0.055 per share in cash dividends to stockholders of record as of June 1, 2007,
+ excluding shares held by Home Federal MHC.
+
+Comparison of Operating Results for the
+ Nine Months ended June 30, 2007 and June 30, 2006
+
+ 
+General. Net income for the nine months ended June 30, 2007 was $4.1 million,
+ or $0.28 per diluted share, compared to net income of $4.6 million, or $0.31 per
+ diluted share, for the nine months ended June 30, 2006.
+
+ 
+Net Interest Income. Net interest income decreased $1.2 million, or 7.1%, to
+ $16.2 million for the nine months ended June 30, 2007, from $17.4 million for the
+ nine months ended June 30, 2006. The decrease in net interest income was primarily
+ attributable to the ongoing compression of our net interest margin, despite an overall
+ increase in average interest-earning assets and interest-bearing liabilities of
+ $32.6 million and $38.2 million, respectively.
+
+ Our
+ net interest margin decreased 39 basis points to 3.02% for the nine months ended
+ June 30, 2007, from 3.41% for the same period of the prior year. The cost of interest-bearing
+ liabilities increased 76 basis points to 3.62% for the nine months of fiscal 2007
+ compared to 2.86% for the same period of the prior year. The decline in the net
+ interest margin reflects the relatively flat yield curve that currently exists,
+ as the cost of shorter-term deposits and borrowed funds increased more rapidly than
+ the yield on longer-term assets. Although we believe the repricing of existing loans
+ and the emphasis on expanding the commercial and small business banking programs,
+ including
+
+44
+
+both loan and deposit products, will help counter the trend in net interest
+ margin, pressure will likely continue in the near term as a result of the flat yield
+ curve environment.
+
+ The
+ following table sets forth the results of balance sheet growth and changes in interest
+ rates to our net interest income. The rate column shows the effects attributable
+ to changes in rate (changes in rate multiplied by prior volume). The volume column
+ shows the effects attributable to changes in volume (changes in volume multiplied
+ by prior rate). Changes attributable to both rate and volume, which cannot be segregated,
+ are allocated proportionately to the changes in rate and volume.
+
+ 
+ 
+ 
+ 
+ 
+Nine Months
+ Ended June 30, 2007
+ 
+
+ 
+ 
+ 
+ 
+ 
+Compared to
+ June 30, 2006
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+Increase (Decrease)
+ Due
+to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+Rate
+ 
+ 
+ 
+ Volume
+ 
+ 
+ 
+ 
+ 
+Total
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(In Thousands)
+
+Interest-earning
+ assets:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Loans
+ receivable, net
+
+ 
+ 
+ 
+ 
+$
+1,049
+ 
+ 
+ 
+ 
+$
+2,320
+ 
+ 
+ 
+ 
+ 
+$
+ 3,369
+ 
+
+ Loans
+ held for sale
+
+ 
+ 
+ 
+ 
+ 
+7
+ 
+ 
+ 
+ 
+ 
+(4
+)
+ 
+ 
+ 
+ 
+ 
+3
+ 
+
+ Investment
+ securities, including interest-bearing deposits in other banks
+
+ 
+ 
+ 
+ 
+ 
+32
+ 
+ 
+ 
+ 
+ 
+77
+ 
+ 
+ 
+ 
+ 
+ 
+109
+ 
+
+ Mortgage-backed
+ securities
+
+ 
+ 
+ 
+ 
+ 
+25
+ 
+ 
+ 
+ 
+ 
+(572
+)
+ 
+ 
+ 
+ 
+ 
+(547
+)
+
+ Federal
+ Home Loan Bank stock
+
+ 
+ 
+ 
+ 
+ 
+33
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+33
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total
+ net change in income on interest-earning assets
+
+ 
+ 
+ 
+ 
+$
+1,146
+ 
+ 
+ 
+ 
+$
+1,821
+ 
+ 
+ 
+ 
+ 
+$
+ 2,967
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest-bearing
+ liabilities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Savings
+ deposits
+
+ 
+ 
+ 
+ 
+$
+ 31
+ 
+ 
+ 
+ 
+$
+ (1
+)
+ 
+ 
+ 
+ 
+$
+ 30
+ 
+
+ Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+ 
+ 
+100
+ 
+ 
+ 
+ 
+ 
+(8
+)
+ 
+ 
+ 
+ 
+ 
+92
+ 
+
+ Money
+ market accounts
+
+ 
+ 
+ 
+ 
+ 
+363
+ 
+ 
+ 
+ 
+ 
+82
+ 
+ 
+ 
+ 
+ 
+ 
+445
+ 
+
+ Certificates
+ of deposit
+
+ 
+ 
+ 
+ 
+ 
+1,969
+ 
+ 
+ 
+ 
+ 
+423
+ 
+ 
+ 
+ 
+ 
+ 
+2,392
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total
+ deposits
+
+ 
+ 
+ 
+ 
+ 
+2,463
+ 
+ 
+ 
+ 
+ 
+496
+ 
+ 
+ 
+ 
+ 
+ 
+2,959
+ 
+
+ Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+ 
+ 
+490
+ 
+ 
+ 
+ 
+ 
+756
+ 
+ 
+ 
+ 
+ 
+ 
+1,246
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total
+ net change in expense on interest-bearing liabilities
+
+ 
+ 
+ 
+ 
+$
+2,953
+ 
+ 
+ 
+ 
+$
+1,252
+ 
+ 
+ 
+ 
+ 
+$
+ 4,205
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total
+ decrease in net interest income
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+(1,238
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+Interest and Dividend Income. Total interest and dividend income for the nine
+ months ended June 30, 2007 increased $3.0 million, or 10.1%, to $32.3 million, from
+ $29.3 million for the nine months ended June 30, 2006. The increase during the period
+ was primarily attributable to the $32.6 million, or 4.8%, increase in the average
+ balance of interest-earning assets and an increase in the yield on interest-earning
+ assets to 6.03% from 5.73% as a result of the general increase in interest rates
+ and changes in the our loan portfolio mix.
+
+45
+
+ The following table compares detailed
+ average earning asset balances, associated yields, and resulting changes in interest
+ and dividend income for the nine months ended June 30, 2007 and 2006:
+
+ 
+ 
+ 
+Nine Months Ended June 30,
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+2007
+ 
+ 
+2006
+ 
+ 
+
+Increase/
+(Decrease) in
+Interest and
+Dividend
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+Average
+ Balance
+ 
+ 
+Yield
+ 
+ 
+Average
+ Balance
+ 
+ 
+Yield
+ 
+ 
+ 
+Income from
+2006
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Loans
+ receivable, net
+
+ 
+ 
+$
+508,782
+ 
+ 
+ 
+6.59
+%
+ 
+$
+461,185
+ 
+ 
+ 
+6.30
+%
+ 
+ 
+$
+3,369
+ 
+
+Loans
+ held for sale
+
+ 
+ 
+ 
+3,675
+ 
+ 
+ 
+6.54
+ 
+ 
+ 
+3,809
+ 
+ 
+ 
+6.21
+ 
+ 
+ 
+ 
+3
+ 
+
+Investment
+ securities, available for sale, including interest-bearing deposits
+ in other banks
+
+ 
+ 
+ 
+5,713
+ 
+ 
+ 
+5.20
+ 
+ 
+ 
+3,617
+ 
+ 
+ 
+4.20
+ 
+ 
+ 
+ 
+109
+ 
+
+Mortgage-backed
+ securities
+
+ 
+ 
+ 
+185,694
+ 
+ 
+ 
+4.79
+ 
+ 
+ 
+202,692
+ 
+ 
+ 
+4.75
+ 
+ 
+ 
+ 
+(547
+)
+
+Federal
+ Home Loan Bank stock
+
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+0.46
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+33
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ interest-earning assets
+
+ 
+ 
+$
+713,455
+ 
+ 
+ 
+6.03
+%
+ 
+$
+680,894
+ 
+ 
+ 
+5.73
+%
+ 
+ 
+$
+2,967
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+Interest Expense. Interest expense increased $4.2 million, or 35.4%, to $16.1
+ million for the nine months ended June 30, 2007 from $11.9 million for the nine
+ months ended June 30, 2006. The average balance of total interest-bearing liabilities
+ increased $38.2 million, or 6.9%, to $592.4 million for the nine months ended June
+ 30, 2007 from $554.2 million for the nine months ended June 30, 2006. The increase
+ was primarily a result of growth in certificates of deposits and additional Federal
+ Home Loan Bank advances. As a result of general market rate increases, the average
+ cost of funds for total interest-bearing liabilities increased 76 basis points to
+ 3.62% for the nine months ended June 30, 2007 compared to 2.86% for the nine months
+ ended June 30, 2006.
+
+ The
+ following table details average balances, cost of funds and the change in interest
+ expense for the nine months ended June 30, 2007 and 2006:
+
+ 
+ 
+ 
+ 
+
+Nine Months Ended June 30,
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+ 
+
+2006
+ 
+ 
+ 
+
+Increase/
+(Decrease) in
+Interest
+ 
+
+ 
+ 
+ 
+ 
+
+Average Balance
+ 
+ 
+ 
+
+Cost
+ 
+ 
+ 
+ 
+
+Average Balance
+ 
+ 
+
+Cost
+ 
+ 
+ 
+ 
+Expense from
+2006
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+(Dollars in Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Savings
+ deposits
+
+ 
+ 
+ 
+$
+23,457
+ 
+ 
+ 
+ 
+0.39
+%
+ 
+ 
+ 
+$
+25,285
+ 
+ 
+ 
+0.20
+%
+ 
+ 
+ 
+$
+30
+ 
+
+Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+ 
+93,330
+ 
+ 
+ 
+ 
+0.60
+ 
+ 
+ 
+ 
+ 
+98,405
+ 
+ 
+ 
+0.44
+ 
+ 
+ 
+ 
+ 
+92
+ 
+
+Money
+ market deposits
+
+ 
+ 
+ 
+ 
+37,852
+ 
+ 
+ 
+ 
+2.87
+ 
+ 
+ 
+ 
+ 
+31,759
+ 
+ 
+ 
+1.55
+ 
+ 
+ 
+ 
+ 
+445
+ 
+
+Certificates
+ of deposit
+
+ 
+ 
+ 
+ 
+230,242 
+ 
+ 
+ 
+ 
+4.54
+ 
+ 
+ 
+ 
+ 
+214,558 
+ 
+ 
+ 
+3.39
+ 
+ 
+ 
+ 
+ 
+2,392
+ 
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+ 
+207,517 
+ 
+ 
+ 
+ 
+4.46
+ 
+ 
+ 
+ 
+ 
+184,209 
+ 
+ 
+ 
+4.12
+ 
+ 
+ 
+ 
+ 
+1,246
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Total
+ interest-bearing liabilities
+
+ 
+ 
+ 
+$
+592,398
+ 
+ 
+ 
+ 
+3.62
+%
+ 
+ 
+ 
+$
+554,216
+ 
+ 
+ 
+2.86
+%
+ 
+ 
+ 
+$
+4,205
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ Provision
+ for Loan Losses. In connection with its analysis of the loan portfolio for the
+ nine months ended June 30, 2007, management determined that a provision for loan
+ losses of $71,000 was required for the nine months ended June 30, 2007, compared
+ to a provision for loan losses of $320,000 established for the nine months ended
+
+46
+
+June 30, 2006. The $249,000, or 77.8% decrease in the provision primarily reflects
+ an $11.9 million reduction in loans receivable for the current year as compared
+ to an increased of $63.1 million for the same period of last year. Our credit quality
+ also remained excellent, as non-performing assets were $520,000, or 0.07% of total
+ assets, at June 30, 2007, compared to $30,000, or 0.004% of total assets, at June
+ 30, 2006. We do not originate or purchase one- to four-family subprime loans. Management
+ considers the allowance for loan losses at June 30, 2007 to be adequate to cover
+ probable losses inherent in the loan portfolio based on the assessment of the above-mentioned
+ factors affecting the loan portfolio. While management believes the estimates and
+ assumptions used in its determination of the adequacy of the allowance are reasonable,
+ there can be no assurance that such estimates and assumptions will not be proven
+ incorrect in the future, or that the actual amount of future provisions will not
+ exceed the amount of past provisions or that any increased provisions that may be
+ required will not adversely impact our financial condition and results of operations.
+ In addition, the determination of the amount of our allowance for loan losses is
+ subject to review by bank regulators, as part of the routine examination process,
+ which may result in the establishment of additional reserves based upon their judgment
+ of information available to them at the time of their examination.
+
+ Prior to March
+ 31, 2007, the allowance for loan losses included the estimated loss from unfunded
+ loan commitments. The preferred accounting method is to separate the unfunded loan
+ commitments from the disbursed loan amounts and record the unfunded loan commitment
+ portion as a liability. At June 30, 2007, the reserve for unfunded loan commitments
+ was $139,000, which was included in other liabilities on the Consolidated Balance
+ Sheet. Combining the $139,000 liability for unfunded commitments with the allowance
+ for loan losses provides an allowance of $2.9 million, or 0.59% of gross loans at June 30, 2007, compared
+ to $3.2 million, or 0.64% at June 30, 2006.
+
+ The following
+ table details selected activity associated with the allowance for loan losses for
+ the nine months ended June 30, 2007 and 2006:
+
+ 
+ 
+ 
+ 
+At or For
+ the Nine Months
+ 
+
+ 
+ 
+ 
+ 
+Ended June 30,
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+ 
+2006
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Provision for loan losses
+
+ 
+ 
+ 
+$
+ 71
+ 
+ 
+ 
+ 
+$
+320
+ 
+
+Net
+ charge-offs
+
+ 
+ 
+ 
+ 
+105
+ 
+ 
+ 
+ 
+ 
+43
+ 
+
+Allowance
+ for loan losses
+
+ 
+ 
+ 
+ 
+2,748
+ 
+ 
+ 
+ 
+ 
+3,160
+ 
+
+Allowance
+ for loan losses as a percentage of gross loans receivable at the end of the period
+
+ 
+ 
+ 
+ 
+0.56
+%
+ 
+ 
+ 
+ 
+0.64
+%
+
+Nonperforming
+ loans
+
+ 
+ 
+ 
+$
+ 367
+ 
+ 
+ 
+ 
+$
+ 30
+ 
+
+Allowance
+ for loan losses as a percentage of nonperforming loans at the end of the period
+
+ 
+ 
+ 
+ 
+748.77
+%
+ 
+ 
+ 
+ 
+10,533.33
+%
+
+Nonaccrual
+ and 90 days or more past due loans as a percentage of loans receivable at the end
+ of the period
+
+ 
+ 
+ 
+ 
+0.074
+ 
+ 
+ 
+ 
+ 
+0.006
+ 
+
+Loans
+ receivable, net
+
+ 
+ 
+ 
+$
+491,768
+ 
+ 
+ 
+ 
+$
+494,016
+ 
+
+ Noninterest
+ Income. Noninterest income increased $283,000, or 3.4%, to $8.6 million for
+ the nine months ended June 30, 2007 from $8.3 million for the nine months ended
+ June 30, 2006. The increase was primarily attributable to a $374,000, or 47.1%,
+ increase in gains on the sale of residential mortgage loans offset by a $176,000,
+ or 374.5%, decrease related to the value of the mortgage servicing rights. We currently
+ sell a majority of the one- to four-family residential mortgage loans that we originate.
+ For the nine months ended June 30, 2006, a larger percentage of the residential
+ mortgage loans originated were held in the loan portfolio. For the nine months ended
+ June 30, 2006, we had a $201,000 write-up of the value of the mortgage servicing
+ rights. As a result of the conversion of our core processing system during the quarter
+ ended December 31, 2005, we retired fixed assets and 
+
+47
+
+software related to the prior
+ system, resulting in an $86,000 charge to other noninterest income for the nine
+ months ended June 30, 2006.
+
+The following table provides a detailed analysis
+ of the changes in components of noninterest income:
+
+ 
+ 
+ 
+Nine Months
+ Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+June 30,
+ 
+ 
+Increase (Decrease)
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+Amount
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars In
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Service
+ fees and charges
+
+ 
+ 
+$
+6,921
+ 
+ 
+ 
+$
+6,893
+ 
+ 
+ 
+$
+ 28
+ 
+ 
+ 
+0.4
+%
+
+Gain
+ on sale of loans
+
+ 
+ 
+ 
+1,168
+ 
+ 
+ 
+ 
+794
+ 
+ 
+ 
+ 
+374
+ 
+ 
+ 
+47.1
+ 
+
+Increase
+ in cash surrender value of bank owned life insurance
+
+ 
+ 
+ 
+301
+ 
+ 
+ 
+ 
+285
+ 
+ 
+ 
+ 
+16
+ 
+ 
+ 
+5.6
+ 
+
+Loan
+ servicing fees
+
+ 
+ 
+ 
+420
+ 
+ 
+ 
+ 
+470
+ 
+ 
+ 
+ 
+(50
+)
+ 
+ 
+(10.6
+)
+
+Mortgage
+ servicing rights, net
+
+ 
+ 
+ 
+(223
+)
+ 
+ 
+ 
+(47
+)
+ 
+ 
+ 
+(176
+)
+ 
+ 
+(374.5
+)
+
+Other
+
+ 
+ 
+ 
+39
+ 
+ 
+ 
+ 
+(52
+)
+ 
+ 
+ 
+91
+ 
+ 
+ 
+(175.0
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ Total
+ noninterest income
+
+ 
+ 
+$
+8,626
+ 
+ 
+ 
+$
+8,343
+ 
+ 
+ 
+$
+ 283
+ 
+ 
+ 
+3.4
+%
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ Noninterest
+ Expense. Noninterest expense increased $72,000, or less than 1%, to $18.1 million
+ for the nine months ended June 30, 2007 from $18.1 million for the nine months ended
+ June 30, 2006.
+
+ The following
+ table provides a detailed analysis of the changes in components of noninterest expense:
+
+ 
+ 
+ 
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+June 30,
+ 
+ 
+ 
+Increase (Decrease)
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Compensation
+ and benefits
+
+ 
+ 
+$
+11,363
+ 
+ 
+ 
+$
+11,428
+ 
+ 
+ 
+$
+ (65
+)
+ 
+ 
+ 
+(0.6
+)%
+
+Occupancy
+ and equipment
+
+ 
+ 
+ 
+2,145
+ 
+ 
+ 
+ 
+2,073
+ 
+ 
+ 
+ 
+72
+ 
+ 
+ 
+ 
+3.5
+ 
+
+Data
+ processing
+
+ 
+ 
+ 
+1,549
+ 
+ 
+ 
+ 
+1,364
+ 
+ 
+ 
+ 
+185
+ 
+ 
+ 
+ 
+13.6
+ 
+
+Advertising
+
+ 
+ 
+ 
+972
+ 
+ 
+ 
+ 
+740
+ 
+ 
+ 
+ 
+232
+ 
+ 
+ 
+ 
+31.4
+ 
+
+Other
+
+ 
+ 
+ 
+2,105
+ 
+ 
+ 
+ 
+2,457
+ 
+ 
+ 
+ 
+(352
+)
+ 
+ 
+ 
+(14.3
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Total
+ noninterest expense
+
+ 
+ 
+$
+18,134
+ 
+ 
+ 
+$
+18,062
+ 
+ 
+ 
+$
+ 72
+ 
+ 
+ 
+ 
+0.4
+%
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Compensation
+ and benefits decreased $65,000, or less than 1%, to $11.4 million for the nine months
+ ended June 30, 2007 from $11.4 million for the same period a year ago. The decrease
+ was primarily attributable to a decrease in the number of full-time equivalent employees
+ offset by increased costs related to equity compensation plans and annual merit
+ increases. As of June 30, 2007, we employed 215 full-time equivalent employees,
+ compared to 240 at June 30, 2006, a decrease of approximately 10%. Advertising costs
+ increased $232,000, or 31.4%, primarily as a result of marketing costs related to
+ a debit card rewards program and a business banking campaign that were initiated
+ during the current fiscal year. Other noninterest expenses decreased $352,000 primarily
+ as a result of costs incurred in the prior fiscal year related to the conversion
+ of the core processing system and professional costs associated with the initial
+ year of Sarbanes-Oxley compliance.
+
+ Our efficiency
+ ratio, which is the percentage of noninterest expense to net interest income plus
+ noninterest income, was 73.1% for the nine months ended June 30, 2007 compared to
+ 70.1% for the nine months ended June 30, 2006. The increase in efficiency ratio
+ was primarily attributable to a $1.2 million, or 7.1%, decrease in net interest
+ income. By definition, a lower efficiency ratio would be an indication that we are
+ more efficiently utilizing resources to generate net interest income and other fee
+ income.
+
+48
+
+ Income
+ Tax Expense. Income tax expense decreased $300,000, or 10.6%, to $2.5 million
+ for the nine months ended June 30, 2007 from $2.8 million for the same period a
+ year ago. Income before income taxes decreased $778,000, or 10.6%, to $6.6 million
+ for the nine months ended June 30, 2007 compared to $7.4 million for the nine months
+ ended June 30, 2006. Our combined federal and state effective income tax rate for
+ the current period was unchanged at 38.2% as compared to the same period of the
+ prior fiscal year. Additionally, as a result of the reclassification of our mortgage-backed
+ securities to available-for-sale, our deferred tax position changed from a net liability
+ of ($800,000) to a net asset of $1.7 million.
+
+Comparison of Financial Condition at
+ September 30, 2006 and September 30, 2005
+
+ General.
+ Total assets increased $71.7 million, or 10.4%, to $761.3 million at September
+ 30, 2006 from $689.6 million at September 30, 2005. Loans receivable, net, increased
+ $72.1 million, or 16.7%, to $503.1 million, and was the primary reason for the asset
+ growth during the fiscal year. The demand for loans was funded with increased deposits
+ of $34.0 million and Federal Home Loan Bank advances of $34.9 million.
+
+ Assets.
+ For the year ended September 30, 2006, total assets increased $71.7 million.
+ The increases and decreases were primarily concentrated in the following asset categories:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Increase/(Decrease)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+Balance at
+ 
+ 
+Balance at
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+September
+ 30,
+ 
+ 
+September
+ 30,
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+Amount
+ 
+ 
+Percent
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+Mortgage-backed
+ securities, available
+ for sale
+
+ 
+ 
+$
+ 12,182
+ 
+ 
+ 
+$
+ 14,830
+ 
+ 
+ 
+$
+(2,648
+)
+ 
+ 
+ 
+(17.9
+)%
+
+Mortgage-backed
+ securities, held
+ to maturity
+
+ 
+ 
+ 
+183,279
+ 
+ 
+ 
+ 
+180,974
+ 
+ 
+ 
+ 
+2,305
+ 
+ 
+ 
+ 
+1.3
+ 
+
+Loans
+ receivable, net of allowance
+ for loan losses
+
+ 
+ 
+ 
+503,065
+ 
+ 
+ 
+ 
+430,944
+ 
+ 
+ 
+ 
+72,121
+ 
+ 
+ 
+ 
+16.7
+ 
+
+Loans
+ held for sale
+
+ 
+ 
+ 
+4,119
+ 
+ 
+ 
+ 
+5,549
+ 
+ 
+ 
+ 
+(1,430
+)
+ 
+ 
+ 
+(25.8
+)
+
+ Mortgage-backed
+ securities decreased $343,000 to $195.5 million at September 30, 2006, from $195.8
+ million at September 30, 2005. For the year ended September 30, 2006, we purchased
+ $30.3 million of mortgage-backed securities that consisted primarily of hybrid adjustable
+ and fixed rate securities with terms of 15 years or less. Normal repayments of principal
+ totaled $30.7 million for the year ended September 30, 2006. We may purchase mortgage-backed
+ securities to manage interest rate sensitivity and to supplement loan originations
+ during periods when the we are not able to originate the desired type or volume
+ of portfolio loans.
+
+ Loans receivable,
+ net, increased $72.1 million to $503.1 million at September 30, 2006, from $430.9
+ million at September 30, 2005. One- to four-family residential loans and commercial
+ real estate loans increased $50.8 million and $17.8 million, respectively, during
+ the year ended September 30, 2006. During the 2006 fiscal year, we purchased $38.8
+ million of hybrid adjustable, one- to four-family mortgage loans located primarily
+ in the Western United States. Purchased mortgage loans allow us to increase interest-earning
+ assets, manage interest rate risk, and geographically diversify our mortgage loan
+ portfolio at a relatively low overhead cost. As of September 30, 2006, over 90%
+ of our loan portfolio was secured by real estate, either as primary or secondary
+ collateral.
+
+ Loans held
+ for sale decreased $1.4 million to $4.1 million at September 30, 2006, from $5.5
+ million at September 30, 2005. The balance of loans held for sale can vary significantly
+ from period to period reflecting loan demand by borrowers and the current interest
+ rate environment. We originate fixed-rate residential loans, the majority of which
+ are sold in the secondary market. Selling fixed-rate mortgage loans allows us to
+ reduce interest rate risk associated with long term, fixed-rate products and provides
+ funds to make new loans and diversify the loan portfolio.
+
+49
+
+ Deposits.
+ Deposits increased $34.0 million, or 8.6%, to $430.3 million at September 30,
+ 2006, from $396.3 million at September 30, 2005. Certificates of deposit accounted
+ for the majority of the increase in total deposits during the period with certificates
+ of six to 12-month terms having the largest increase in balances. Demand deposits
+ and savings accounts decreased $2.3 million, or 1.2%, as customers migrated towards
+ higher rate deposit products during the fiscal year. The following table details
+ the changes in deposit accounts:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Increase/(Decrease)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+Balance at
+
+ September 30,
+ 2006
+ 
+Balance at
+
+ September 30,
+2005
+ 
+Amount
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Noninterest-bearing
+ demand deposits
+
+ 
+ 
+$
+ 44,626
+ 
+ 
+ 
+$
+ 46,311
+ 
+ 
+ 
+$
+ (1,685
+)
+ 
+ 
+ 
+(3.6
+)%
+
+Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+128,276
+ 
+ 
+ 
+ 
+127,330
+ 
+ 
+ 
+ 
+946
+ 
+ 
+ 
+ 
+0.7
+ 
+
+Savings
+ deposits
+
+ 
+ 
+ 
+23,655
+ 
+ 
+ 
+ 
+25,219
+ 
+ 
+ 
+ 
+(1,564
+)
+ 
+ 
+ 
+(6.2
+)
+
+Certificates
+ of deposit
+
+ 
+ 
+ 
+233,724
+ 
+ 
+ 
+ 
+197,465
+ 
+ 
+ 
+ 
+36,259
+ 
+ 
+ 
+ 
+18.4
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ deposit accounts
+
+ 
+ 
+$
+430,281
+ 
+ 
+ 
+$
+396,325
+ 
+ 
+ 
+$
+33,956
+ 
+ 
+ 
+ 
+8.6
+%
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Borrowings. Advances from the Federal Home Loan Bank increased $34.9 million, or 19.8%,
+ to $210.8 million at September 30, 2006, from $175.9 million at September 30, 2005.
+
+ Equity. Stockholders equity increased $6.5 million, or 6.4%, to $107.9 million
+ at September 30, 2006, from $101.4 million at September 30, 2005. The increase was
+ primarily a result of the $6.2 million in net income and earned employee stock ownership
+ plan shares and equity compensation totaling $1.5 million, offset by $1.2 million
+ of cash dividends paid to stockholders. On September 15, 2006, we paid $0.055 per
+ share in cash dividends to stockholders of record as of September 1, 2006, excluding
+ shares held by Home Federal MHC.
+
+Comparison of Operating Results for the
+ Years ended September 30, 2006 and September 30, 2005
+
+ General.
+ Net income for the year ended September 30, 2006 was $6.2 million, or $0.43
+ per diluted share, compared to net income of $5.3 million, or $0.36 per diluted
+ share, for the year ended September 30, 2005. Results for the year ended September
+ 30, 2005 included the $386,000 pre-tax gain on the sale of a former branch and a
+ $1.8 million pre-tax expense for establishing the Home Federal Foundation, Inc.
+ a charitable foundation established in connection with the initial formation and
+ minority stock offering of Home Federal Bancorp. Excluding the gain on the sale
+ of the branch and the expense for establishing the Home Federal Foundation, we had
+ net income of $6.2 million, or $0.42 per diluted share, for the year ended September
+ 30, 2005.
+
+ The following
+ table reconciles our actual net income to pro forma net income for the fiscal year
+ ended September 30, 2006 and 2005, exclusive of the sale of the branch and the contribution
+ to the Home Federal Foundation, as adjusted for federal and state taxes:
+
+ 
+ 
+ 
+Year Ended September 30,
+
+ 
+ 
+ 
+ 
+ 2006
+ 
+ 
+ 
+ 
+2005
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in Thousands)
+
+Pro
+ forma disclosure
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net
+ income, as reported
+
+ 
+ 
+$
+6,212
+ 
+ 
+ 
+$
+5,283
+ 
+
+ Gain
+ on sale of branch
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(386
+)
+
+ Contribution
+ to Home Federal Foundation
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,825
+ 
+
+ Federal
+ and state income tax effect
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(561
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Pro
+ forma net income
+
+ 
+ 
+$
+6,212
+ 
+ 
+ 
+$
+6,161
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Earnings
+ per share
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Diluted
+ as reported
+
+ 
+ 
+$
+0.43
+ 
+ 
+ 
+$
+0.36
+ 
+
+ Pro
+ forma diluted
+
+ 
+ 
+$
+0.43
+ 
+ 
+ 
+$
+0.42
+ 
+
+50
+
+ Net Interest
+ Income. Net interest income increased $1.3 million, or 6.1%, to $23.0 million
+ for the year ended September 30, 2006, from $21.7 million for the year ended September
+ 30, 2005. Average total interest-earning assets increased $83.0 million, or 13.7%
+ to $689.7 million for the year ended September 30, 2006 from $606.7 million for
+ the same period last year. Average total interest-bearing liabilities increased
+ $62.7 million, or 12.5%, to $563.8 million for the year ended September 30, 2006
+ from $501.1 million for the same period last year.
+
+ Our net interest
+ margin decreased 24 basis points to 3.33% for the year ended September 30, 2006,
+ from 3.57% for the same period last year. The cost of deposits increased 58 basis
+ points to 2.39% for the fiscal year from 1.81% for the same period last year. The
+ decline in the net interest margin to 3.33% reflects competitive pricing pressures
+ and the relatively flat yield curve that currently exists, as the cost of shorter-term
+ deposits and borrowed funds increased more rapidly than the yield on longer-term
+ assets.
+
+ Interest
+ and Dividend Income. Total interest and dividend income for the year ended September
+ 30, 2006 increased $6.0 million, or 17.7%, to $39.9 million, from $33.9 million
+ for the year ended September 30, 2005. The increase was primarily attributable to
+ the $83.0 million, or 13.7%, increase in the average balance of interest-earning
+ assets and an increase in the yield on interest-earning assets to 5.79% as a result
+ of the general increase in interest rates.
+
+ The following
+ table compares detailed average earning asset balances, associated yields, and resulting
+ changes in interest and dividend income for the years ended September 30, 2006 and
+ 2005:
+
+ 
+ 
+ 
+ 
+Year Ended
+ September 30,
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+Increase/
+
+ (Decrease) in
+ Interest and
+ Dividend
+
+ 
+ 
+ 
+ 
+Average Balance
+ 
+ 
+ 
+Yield
+ 
+ 
+ 
+ 
+Average
+Balance
+ 
+ 
+Yield
+ 
+ 
+ 
+Income from
+2005
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Loans
+ receivable, net
+
+ 
+ 
+ 
+$
+471,291
+ 
+ 
+ 
+ 
+6.35
+%
+ 
+ 
+ 
+$
+419,940
+ 
+ 
+ 
+6.14
+%
+ 
+ 
+$
+4,155
+ 
+
+Loans
+ held for sale
+
+ 
+ 
+ 
+ 
+3,771
+ 
+ 
+ 
+ 
+6.15
+ 
+ 
+ 
+ 
+ 
+2,518
+ 
+ 
+ 
+5.80
+ 
+ 
+ 
+ 
+86
+ 
+
+Investment
+ securities available for sale,
+ including interest-bearing deposits
+ in other banks
+
+ 
+ 
+ 
+ 
+3,197
+ 
+ 
+ 
+ 
+4.38
+ 
+ 
+ 
+ 
+ 
+14,972
+ 
+ 
+ 
+2.09
+ 
+ 
+ 
+ 
+(173
+)
+
+Mortgage-backed
+ securities
+
+ 
+ 
+ 
+ 
+201,838
+ 
+ 
+ 
+ 
+4.76
+ 
+ 
+ 
+ 
+ 
+160,780
+ 
+ 
+ 
+4.75
+ 
+ 
+ 
+ 
+1,965
+ 
+
+Federal
+ Home Loan Bank stock
+
+ 
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,480
+ 
+ 
+ 
+0.35
+ 
+ 
+ 
+ 
+(30
+)
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ interest-earning assets
+
+ 
+ 
+ 
+$
+689,688
+ 
+ 
+ 
+ 
+5.79
+%
+ 
+ 
+ 
+$
+606,690
+ 
+ 
+ 
+5.59
+%
+ 
+ 
+$
+6,003
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ On May 18,
+ 2005, the Federal Home Loan Bank indefinitely suspended dividends on all classes
+ of its stock as part of its recapitalization plans.
+
+ Interest
+ Expense. Interest expense increased $4.7 million, or 38.3%, to $16.9 million
+ for the year ended September 30, 2006 from $12.2 million for the year ended September
+ 30, 2005. The average balance of total interest-bearing liabilities increased $62.7
+ million, or 12.5%, to $563.8 million for the year ended September 30, 2006 from
+ $501.1 million for the year ended September 30, 2005. The increase was primarily
+ a result of growth in certificates of deposit and additional Federal Home Loan Bank
+ advances. As a result of general market rate increases following the U.S. Federal
+ Reserve Board rate increases during the past several quarters, the average cost
+ of funds for total interest-bearing liabilities increased 56 basis points to 3.00%
+ for the year ended September 30, 2006 compared to 2.44% for the year ended September
+ 30, 2005.
+
+51
+
+ The following
+ table details average balances, cost of funds and the change in interest expense
+ for the year ended September 30, 2006 and 2005:
+
+ 
+ 
+ 
+Year Ended
+ September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+Increase/
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ (Decrease) in
+
+ 
+ 
+ 
+Average Balance
+ 
+ 
+Cost
+ 
+ 
+ 
+Average Balance
+ 
+ 
+Cost
+ 
+ 
+ 
+Interest
+Expense from
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+(Dollars in Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Savings
+ deposits
+
+ 
+ 
+$
+ 24,863
+ 
+ 
+ 
+0.21
+%
+ 
+ 
+$
+ 25,633 
+ 
+ 
+ 
+0.20
+%
+ 
+ 
+$
+ 
+
+Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+97,916
+ 
+ 
+ 
+0.48
+ 
+ 
+ 
+ 
+104,972 
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+ 
+168
+
+Money
+ market accounts
+
+ 
+ 
+ 
+31,875
+ 
+ 
+ 
+1.68
+ 
+ 
+ 
+ 
+36,061
+ 
+ 
+ 
+1.09
+ 
+ 
+ 
+ 
+140
+
+Certificates
+ of deposit
+
+ 
+ 
+ 
+218,496
+ 
+ 
+ 
+3.60
+ 
+ 
+ 
+ 
+181,015 
+ 
+ 
+ 
+3.06
+ 
+ 
+ 
+ 
+2,318
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+190,684
+ 
+ 
+ 
+4.20
+ 
+ 
+ 
+ 
+153,443 
+ 
+ 
+ 
+3.87
+ 
+ 
+ 
+ 
+2,060
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+Total
+ interest-bearing liabilities
+
+ 
+ 
+$
+563,834
+ 
+ 
+ 
+3.00
+%
+ 
+ 
+$
+501,124 
+ 
+ 
+ 
+2.44
+%
+ 
+ 
+$
+4,686
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ Provision
+ for Loan Losses. A provision for loan losses of $138,000 was established by
+ management in connection with its analysis of the loan portfolio for the year ended
+ September 30, 2006, compared to a provision for loan losses of $456,000 established
+ for the same period of 2005. The $318,000 decrease in the provision took into account
+ the increase in loans receivable during the fiscal year, offset by the loan portfolio s overall strong credit quality, reduction in classified assets, level of nonperforming
+ loans and net charge-offs. On an annual basis we also analyzes its historical loan
+ loss rates used in the calculation of the provision. As a result of the fiscal 2006
+ analysis, the allowance for loan losses was reduced $182,000 due to a decline in
+ three and five year average historical loss rates for certain loan categories.
+
+ The following
+ table details selected activity associated with the allowance for loan losses for
+ the year ended September 30, 2006 and 2005:
+
+ 
+ 
+ 
+ 
+At or For
+ the Year
+
+ 
+ 
+ 
+Ended September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+2006
+ 
+ 
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+(Dollars in Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Provision
+ for loan losses
+
+ 
+ 
+$
+138
+ 
+ 
+ 
+$
+456
+ 
+
+Net
+ charge-offs
+
+ 
+ 
+ 
+46
+ 
+ 
+ 
+ 
+211
+ 
+
+Allowance
+ for loan losses
+
+ 
+ 
+ 
+2,974
+ 
+ 
+ 
+ 
+2,882
+ 
+
+Allowance
+ for loan losses as a percentage of gross loans
+ receivable at the end of
+ the period
+
+ 
+ 
+ 
+0.59
+%
+ 
+ 
+ 
+0.67
+%
+
+Allowance
+ for loan losses as a percentage of nonperforming
+ loans at end of period
+
+ 
+ 
+ 
+766.49
+%
+ 
+ 
+ 
+602.97
+%
+
+Nonperforming
+ loans
+
+ 
+ 
+$
+388
+ 
+ 
+ 
+$
+478
+ 
+
+Nonaccrual
+ and 90 days or more past due loans as
+ a percentage of loans receivable at
+ the end of the period
+
+ 
+ 
+ 
+0.08
+%
+ 
+ 
+ 
+0.11
+%
+
+Loans
+ receivable, net
+
+ 
+ 
+$
+503,065
+ 
+ 
+ 
+$
+430,944
+ 
+
+ Noninterest
+ Income. Noninterest income increased $981,000, or 9.7%, to $11.1 million for
+ the year ended September 30, 2006 from $10.1 million for the year ended September
+ 30, 2005. The increase in noninterest income was primarily attributable to a $1.0
+ million increase in service charges as a result of enhancements to the retail 
+
+52
+
+checking
+ program related to the core processing conversion that took place in the first quarter
+ of the current fiscal year. Gains on sale of loans also increased to $1.1 million
+ for the year ended September 30, 2006 from $382,000 for the comparable period in
+ 2005 as loans sold to investors increased to $81.6 million for the year ended September
+ 30, 2006 from $57.6 million for the year ended September 30, 2005. We also recaptured
+ $137,000 of prior write-downs of the mortgage servicing rights for the 2006 fiscal
+ year compared to a $300,000 write-down for the prior fiscal year. Other noninterest
+ income for the year ended September 30, 2005 included a $386,000 gain on the sale
+ of a former branch and a $456,000 gain from life insurance proceeds, which were
+ not experienced in the 2006 fiscal year.
+
+ The following
+ table provides a detailed analysis of the changes in components of noninterest income:
+
+ 
+ 
+Year Ended September 30,
+ 
+ 
+Increase (Decrease)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+Amount
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Service
+ fees and charges
+
+ 
+ 
+$
+ 9,292
+ 
+ 
+ 
+$
+ 8,274
+ 
+ 
+ 
+$
+1,018
+ 
+ 
+ 
+12.3
+%
+
+Gain
+ on sale of loans
+
+ 
+ 
+ 
+1,056
+ 
+ 
+ 
+ 
+382
+ 
+ 
+ 
+ 
+674
+ 
+ 
+ 
+176.4
+ 
+
+Increase
+ in cash surrender value of
+ bank owned life insurance
+
+ 
+ 
+ 
+383
+ 
+ 
+ 
+ 
+343
+ 
+ 
+ 
+ 
+40
+ 
+ 
+ 
+11.7
+ 
+
+Loan
+ servicing fees
+
+ 
+ 
+ 
+620
+ 
+ 
+ 
+ 
+672
+ 
+ 
+ 
+ 
+(52
+)
+ 
+ 
+(7.7
+)
+
+Mortgage
+ servicing rights, net
+
+ 
+ 
+ 
+(179
+)
+ 
+ 
+ 
+(480
+)
+ 
+ 
+ 
+301
+ 
+ 
+ 
+(62.7
+)
+
+Other
+
+ 
+ 
+ 
+(63
+)
+ 
+ 
+ 
+937
+ 
+ 
+ 
+ 
+(1,000
+)
+ 
+ 
+(106.7
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ noninterest income
+
+ 
+ 
+$
+11,109
+ 
+ 
+ 
+$
+10,128
+ 
+ 
+ 
+$
+ 981
+ 
+ 
+ 
+9.7
+%
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ We perform
+ a quarterly review of mortgage servicing rights for potential increases or declines
+ in value. For the year ended September 30, 2006, we determined the value of the
+ mortgage servicing rights increased $137,000. In addition, amortization of the servicing
+ rights exceeded the servicing rights capitalized as the majority of loans were sold
+ with the servicing rights released, resulting in a net expense of $179,000 for the
+ year ended September 30, 2006. The mortgage servicing right was 1.15% of mortgage
+ loans serviced for others at September 30, 2006 compared to 1.10% at September 30,
+ 2005. Mortgage servicing rights is an accounting estimate of the present value of
+ the future servicing fees from the right to service mortgage loans for others. This
+ estimate is affected by prepayment speeds of the underlying mortgages and interest
+ rates. In general, during periods of rising interest rates, mortgage loans prepay
+ slower and the value of the mortgage-servicing asset increases.
+
+ Noninterest
+ Expense. Noninterest expense increased $787,000, or 3.4%, to $23.9 million for
+ the year ended September 30, 2006 from $23.2 million for the year ended September
+ 30, 2005.
+
+ The following
+ table provides a detailed analysis of the changes in components of noninterest expense:
+
+ 
+ 
+ 
+Year Ended September 30,
+ 
+ 
+Increase (Decrease)
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+Amount
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Compensation
+ and benefits
+
+ 
+ 
+ 
+$
+15,081
+ 
+ 
+ 
+$
+12,636
+ 
+ 
+ 
+$
+2,445
+ 
+ 
+ 
+19.3
+%
+
+Occupancy
+ and equipment
+
+ 
+ 
+ 
+ 
+2,759
+ 
+ 
+ 
+ 
+2,765
+ 
+ 
+ 
+ 
+(6
+)
+ 
+ 
+(0.2
+)
+
+Data
+ processing
+
+ 
+ 
+ 
+ 
+1,802
+ 
+ 
+ 
+ 
+1,616
+ 
+ 
+ 
+ 
+186
+ 
+ 
+ 
+11.5
+ 
+
+Advertising
+
+ 
+ 
+ 
+ 
+1,025
+ 
+ 
+ 
+ 
+1,147
+ 
+ 
+ 
+ 
+(122
+)
+ 
+ 
+(10.6
+)
+
+Contribution
+ to Home Federal Foundation
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,825
+ 
+ 
+ 
+ 
+(1,825
+)
+ 
+ 
+(100.0
+)
+
+Other
+
+ 
+ 
+ 
+ 
+3,278
+ 
+ 
+ 
+ 
+3,169
+ 
+ 
+ 
+ 
+109
+ 
+ 
+ 
+3.4
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ noninterest expense
+
+ 
+ 
+ 
+$
+23,945
+ 
+ 
+ 
+$
+23,158
+ 
+ 
+ 
+$
+ 787
+ 
+ 
+ 
+3.4
+%
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+53
+
+ During the
+ year ended September 30, 2005, we established the Home Federal Foundation by contributing
+ $1.8 million, consisting of 146,004 shares of our common stock and $365,010 in cash.
+ The Home Federal Foundation was formed for the purpose of supporting charitable
+ organizations and activities that enhance the quality of life for residents within
+ our market area.
+
+ Excluding
+ the contribution to the Home Federal Foundation, noninterest expense increased $2.6
+ million for the year ended September 30, 2006. Compensation and benefits accounted
+ for $2.4 million of the total increase, increasing to $15.1 million for the year
+ ended September 30, 2006 from $12.6 million for the same period a year ago. The
+ majority of the increase in compensation and benefits was attributable to the establishment
+ of our equity compensation plans, annual merit increases, and increases in employee
+ commissions and incentive plans. The equity compensation plans consist of our ESOP,
+ 2005 Recognition and Retention Plan, and the 2005 Stock Option and Incentive Plan.
+ See Note 9 of the Selected Notes to Consolidated Financial Statements contained
+ in this prospectus for further information. As of September 30, 2006, we employed
+ 240 full-time equivalent employees, compared to 237 at September 30, 2005. The 11.5%
+ increase in data processing was primarily attributable to the outsourcing of our
+ check processing function as part of the conversion of our core processing system
+ in November 2005. The outsourcing costs were offset by a corresponding reduction
+ in compensation, equipment expense and other costs.
+
+ The efficiency
+ ratio was 70.2% for the year ended September 30, 2006 compared to 72.8% for the
+ year ended September 30, 2005. Excluding the non-recurring contribution to the Home
+ Federal Foundation and the gain on the sale of a former branch, the efficiency ratio
+ was 67.9% for the year ended September 30, 2005.
+
+ Income
+ Tax Expense. Income tax expense increased $900,000, or 30.9%, to $3.8 million
+ for the year ended September 30, 2006 from $2.9 million for the same period a year
+ ago. Income before income taxes was $10.0 million for the year ended September 30,
+ 2006 compared to $8.2 million for the year ended September 30, 2005. Our combined
+ federal and state effective income tax rate for the current year was 38.0% compared
+ to 35.5% for the prior fiscal year. For the year ended September 30, 2005, the effective
+ tax rate was lower primarily as a result of the receipt of life insurance proceeds
+ that are not subject to income taxes.
+
+Comparison of Operating Results for the
+ Years ended September 30, 2005 and September 30, 2004
+
+ General.
+ Net income for the year ended September 30, 2005 was $5.3 million, or $0.36
+ per diluted share, compared to net income of $4.7 million for the year ended September
+ 30, 2004. On December 6, 2004, we completed our mutual holding company reorganization,
+ at which time Home Federal Bancorp was organized. As a result, comparisons to prior
+ periods refer to the results of Home Federal Bank as a federal mutual savings and
+ loan association, and per share data is not applicable. The per share data for the
+ year ended September 30, 2005 is being reported on shares outstanding from December
+ 6, 2004 through September 30, 2005, because we completed our reorganization on December
+ 6, 2004.
+
+ As part of
+ the reorganization and minority stock offering, we formed and capitalized the Home
+ Federal Foundation with a one-time contribution of $1.8 million, which consisted
+ of 146,004 shares of its common stock and $365,010 in cash. The Home Federal Foundation
+ was formed for the purpose of supporting charitable organizations and activities
+ that enhance the quality of life for residents within our market area. In addition,
+ during the second quarter ended March 31, 2005, we sold a former branch for a pre-tax
+ gain of $386,000.
+
+ Excluding
+ the contribution to the Home Federal Foundation and the sale of the branch, we had
+ net income of $6.2 million, or $0.42 per diluted share, for the year ended September
+ 30, 2005, compared to $4.7 million for the year ended September 30, 2004. The following
+ table reconciles our actual net income to pro forma net income, exclusive of the
+ contribution to the Home Federal Foundation and sale of the branch and as adjusted
+ for federal and state taxes:
+
+54
+
+ 
+ 
+ 
+Year Ended September 30,
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 2005
+ 
+ 
+ 
+ 
+2004
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+Pro
+ forma disclosure
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net
+ income, as reported
+
+ 
+ 
+$
+5,283
+ 
+ 
+ 
+ 
+$
+4,684
+ 
+
+ Gain
+ on sale of branch
+
+ 
+ 
+ 
+(386
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Contribution
+ to Home Federal Foundation
+
+ 
+ 
+ 
+1,825
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Federal
+ and state income tax effect
+
+ 
+ 
+ 
+(561
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ Pro
+ forma net income
+
+ 
+ 
+$
+6,161
+ 
+ 
+ 
+ 
+$
+4,684
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Earnings
+ per share
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Diluted
+ as reported
+
+ 
+ 
+$
+0.36
+ 
+ 
+ 
+ 
+ 
+nm
+(1)
+
+ Pro
+ forma diluted
+
+ 
+ 
+$
+0.42
+ 
+ 
+ 
+ 
+ 
+nm
+(1)
+
+________
+
+(1) Earnings
+ per share information is not meaningful. We did not complete our minority stock
+ offering until December 6, 2004.
+
+ Net Interest
+ Income. Net interest income increased $3.8 million, or 21.2%, to $21.7 million
+ for the year ended September 30, 2005, from $17.9 million for the year ended September
+ 30, 2004. Average total interest-earning assets increased $141.3 million to $606.7
+ million for the year ended September 30, 2005 primarily as a result of the purchase
+ of mortgage-backed securities with the net proceeds of the minority stock offering
+ and additional purchases throughout the past year to achieve a desired level of
+ interest-earning assets. Cash that was received from subscribers in the minority
+ stock offering and invested in lower-yielding overnight funds also contributed to
+ the increase in interest-earning assets. The additional mortgage-backed securities
+ and cash contributed to a 32 basis point decline in our average asset yields during
+ the year ended September 30, 2005. During that same period, our average cost of
+ funds increased 8 basis points, resulting in a 40 basis point decrease in the net
+ interest spread.
+
+ Interest
+ and Dividend Income. Total interest and dividend income for the year ended September
+ 30, 2005 increased $6.4 million, or 23.3%, to $33.9 million, from $27.5 million
+ for the year ended September 30, 2004. The increase was the result of the $141.3
+ million increase in the average balance of interest-earning assets. The increase
+ in average balance of interest-earning assets was partially offset by lower interest
+ rates on mortgage-backed securities purchased and the decision by the Federal Home
+ Loan Bank to indefinitely suspend dividend payments on Federal Home Loan Bank stock.
+
+55
+
+ The following
+ table compares detailed average earning asset balances, associated yields, and resulting
+ changes in interest and dividend income for the year ended September 30, 2005 and
+ 2004:
+
+ 
+ 
+ 
+Year Ended September 30,
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+2004
+ 
+ 
+ 
+Increase/
+
+ (Decrease) in
+ Interest and
+Dividend
+ 
+
+ 
+ 
+ 
+Average
+Balance
+ 
+ 
+Yield
+ 
+ 
+ 
+Average
+Balance
+ 
+ 
+Yield
+ 
+ 
+ 
+Income from
+2004
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Loans
+ receivable, net
+
+ 
+ 
+$
+419,940
+ 
+ 
+ 
+6.14
+%
+ 
+ 
+$
+382,947
+ 
+ 
+ 
+6.21
+%
+ 
+ 
+$
+36,993
+ 
+
+Loans
+ held for sale
+
+ 
+ 
+ 
+2,518
+ 
+ 
+ 
+5.80
+ 
+ 
+ 
+ 
+2,910
+ 
+ 
+ 
+5.79
+ 
+ 
+ 
+ 
+(392
+)
+
+Investment
+ securities available for sale,
+ including interest-bearing deposits
+ in other banks
+
+ 
+ 
+ 
+14,972
+ 
+ 
+ 
+2.09
+ 
+ 
+ 
+ 
+14,690
+ 
+ 
+ 
+1.77
+ 
+ 
+ 
+ 
+282
+ 
+
+Mortgage-backed
+ securities
+
+ 
+ 
+ 
+160,780
+ 
+ 
+ 
+4.75
+ 
+ 
+ 
+ 
+58,076
+ 
+ 
+ 
+5.23
+ 
+ 
+ 
+ 
+102,704
+ 
+
+Federal
+ Home Loan Bank stock
+
+ 
+ 
+ 
+8,480
+ 
+ 
+ 
+0.35
+ 
+ 
+ 
+ 
+6,761
+ 
+ 
+ 
+4.11
+ 
+ 
+ 
+ 
+1,719
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ interest-earning assets
+
+ 
+ 
+$
+606,690
+ 
+ 
+ 
+5.59
+%
+ 
+ 
+$
+465,384
+ 
+ 
+ 
+5.91
+%
+ 
+ 
+$
+141,306
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Interest
+ Expense. Interest expense increased $2.6 million, or 27.1%, to $12.2 million
+ for the year ended September 30, 2005 from $9.6 million for the year ended September
+ 30, 2004. The average balance of total interest-bearing liabilities was $501.1 million,
+ an increase of $91.5 million, for the year ended September 30, 2005 compared to
+ $409.6 million for the year ended September 30, 2004. The increase was primarily
+ a result of deposits received from stock subscription requests prior to the completion
+ of the minority stock offering, growth in certificates of deposits as general market
+ interest rates increased and additional Federal Home Loan Bank advances to leverage
+ the balance sheet and to achieve the desired level of interest-earning assets. The
+ average cost of funds for total interest-bearing liabilities was 2.44%, an increase
+ of 8 basis points for the year ended September 30, 2005 compared to 2.36% for the
+ year ended September 30, 2004.
+
+ The following
+ table details average balances, cost of funds and the change in interest expense
+ for the year ended September 30, 2005 and 2004:
+
+ 
+ 
+ 
+Year Ended September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+ 
+2004
+ 
+ 
+ 
+ 
+Increase/
+
+ (Decrease) in
+ Interest
+
+ 
+ 
+ 
+Average
+Balance
+ 
+ 
+ 
+Cost
+ 
+ 
+ 
+ 
+Average
+Balance
+ 
+ 
+ 
+Cost
+ 
+ 
+ 
+ 
+Expense from
+2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Savings
+ deposits
+
+ 
+ 
+$
+ 25,633
+ 
+ 
+ 
+ 
+0.20
+%
+ 
+ 
+ 
+$
+ 24,431
+ 
+ 
+ 
+ 
+0.25
+%
+ 
+ 
+ 
+$
+ 1,202
+
+Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+104,972
+ 
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+ 
+ 
+ 83,364
+ 
+ 
+ 
+ 
+0.27
+ 
+ 
+ 
+ 
+ 
+21,608
+
+Money
+ market deposits
+
+ 
+ 
+ 
+36,061
+ 
+ 
+ 
+ 
+1.09
+ 
+ 
+ 
+ 
+ 
+ 33,319
+ 
+ 
+ 
+ 
+0.70
+ 
+ 
+ 
+ 
+ 
+2,742
+
+Certificates
+ of deposit
+
+ 
+ 
+ 
+181,015
+ 
+ 
+ 
+ 
+3.06
+ 
+ 
+ 
+ 
+ 
+ 153,280
+ 
+ 
+ 
+ 
+2.89
+ 
+ 
+ 
+ 
+ 
+27,735
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+153,443
+ 
+ 
+ 
+ 
+3.87
+ 
+ 
+ 
+ 
+ 
+ 115,197
+ 
+ 
+ 
+ 
+4.08
+ 
+ 
+ 
+ 
+ 
+38,246
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+Total
+ interest-bearing liabilities
+
+ 
+ 
+$
+501,124
+ 
+ 
+ 
+ 
+2.44
+%
+ 
+ 
+ 
+$
+409,591
+ 
+ 
+ 
+ 
+2.36
+%
+ 
+ 
+ 
+$
+91,533
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+56
+
+ Provision
+ for Loan Losses. The provision for loan losses decreased $444,000, or 49.3%,
+ to $456,000 for the year ended September 30, 2005 from $900,000 for the year ended
+ September 30, 2004. The following table details selected activity associated with
+ the allowance for loan losses for the years ended September 30, 2005 and 2004:
+
+ 
+ 
+ 
+ 
+ 
+At or For the Year
+
+ 
+ 
+ 
+ 
+Ended September
+ 30,
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+2004
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Provision
+ for loan losses
+
+ 
+ 
+ 
+$
+456
+ 
+ 
+ 
+ 
+$
+900
+ 
+
+Net
+ charge-offs
+
+ 
+ 
+ 
+ 
+211
+ 
+ 
+ 
+ 
+ 
+116
+ 
+
+Allowance
+ for loan losses
+
+ 
+ 
+ 
+ 
+2,882
+ 
+ 
+ 
+ 
+ 
+2,637
+ 
+
+Allowance
+ for loan losses as a percentage of gross loans
+ receivable and loans held for sale at the end of
+ the period
+
+ 
+ 
+ 
+ 
+0.67
+%
+ 
+ 
+ 
+ 
+0.67
+%
+
+Allowance
+ for loan losses as a percentage of nonperforming
+ loans at end of period
+
+ 
+ 
+ 
+ 
+602.97
+%
+ 
+ 
+ 
+ 
+432.30
+%
+
+Nonperforming
+ loans
+
+ 
+ 
+ 
+$
+478
+ 
+ 
+ 
+ 
+$
+610
+ 
+
+Nonaccrual
+ and 90 days or more past due loans as
+ a percentage of loans receivable and loans held for sale
+ at the end of the period
+
+ 
+ 
+ 
+ 
+0.11
+%
+ 
+ 
+ 
+ 
+0.16
+%
+
+Loans
+ receivable, net
+
+ 
+ 
+ 
+$
+430,944
+ 
+ 
+ 
+ 
+$
+392,634
+ 
+
+ We increased
+ our provision for loan losses for the fiscal year ended September 30, 2004 due to
+ the then unseasoned nature of our loan portfolio that resulted from a record volume
+ of refinanced mortgage loans. In management s judgment, the increase in the
+ amount of refinanced mortgage loans resulted in an increase in the level of unseasoned
+ loans within the loan portfolio thereby increasing the inherent risk of loss to
+ us. In addition, during the prior fiscal year, management revised the estimated
+ loss ratios of certain loan categories to more accurately reflect our loss history.
+ Industry or peer loss rates were used if we did not have a meaningful history of
+ losses.
+
+ Noninterest
+ Income. Noninterest income increased $1.1 million, or 12.2%, to $10.1 million
+ for the year ended September 30, 2005 from $9.0 million for the year ended September
+ 30, 2004. Other noninterest income for the year ended September 30, 2005 included
+ a $386,000 gain on the sale of a branch and $456,000 in net life insurance proceeds
+ as a result of the death of a former bank officer.
+
+ We perform
+ a quarterly review of mortgage servicing rights for potential changes in value.
+ For the year ended September 30, 2005, we determined the value of the mortgage servicing
+ right had declined $300,000. In addition, amortization of the servicing right exceeded
+ the servicing rights capitalized as loans sold with servicing rights retained have
+ declined as compared to the prior year. The mortgage servicing right was 1.10% of
+ mortgage loans serviced for others at September 30, 2005 compared to 1.23% at September
+ 30, 2004.
+
+57
+
+ The following
+ table provides a detailed analysis of the changes in components of noninterest income:
+
+ 
+ 
+ 
+Year Ended September 30,
+ 
+ 
+ 
+Increase (Decrease)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+ 
+2004
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Service
+ fees and charges
+
+ 
+ 
+$
+ 8,274
+ 
+ 
+ 
+ 
+$
+7,401
+ 
+ 
+ 
+$
+ 873
+ 
+ 
+ 
+ 
+11.8
+%
+
+Gain
+ on sale of loans
+
+ 
+ 
+ 
+382
+ 
+ 
+ 
+ 
+ 
+375
+ 
+ 
+ 
+ 
+7
+ 
+ 
+ 
+ 
+1.9
+ 
+
+Increase
+ in cash surrender value of
+ bank owned life insurance
+
+ 
+ 
+ 
+343
+ 
+ 
+ 
+ 
+ 
+493
+ 
+ 
+ 
+ 
+(150
+)
+ 
+ 
+ 
+(30.4
+)
+
+Loan
+ servicing fees
+
+ 
+ 
+ 
+672
+ 
+ 
+ 
+ 
+ 
+671
+ 
+ 
+ 
+ 
+1
+ 
+ 
+ 
+ 
+0.1
+ 
+
+Mortgage
+ servicing rights, net
+
+ 
+ 
+ 
+(480
+)
+ 
+ 
+ 
+ 
+22
+ 
+ 
+ 
+ 
+(502
+)
+ 
+ 
+ 
+(2,281.8
+)
+
+Other
+
+ 
+ 
+ 
+937
+ 
+ 
+ 
+ 
+ 
+20
+ 
+ 
+ 
+ 
+917
+ 
+ 
+ 
+ 
+4,585.0
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ noninterest income
+
+ 
+ 
+$
+10,128
+ 
+ 
+ 
+ 
+$
+8,982
+ 
+ 
+ 
+$
+1,146
+ 
+ 
+ 
+ 
+12.8
+%
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Noninterest
+ Expense. Noninterest expense increased $4.6 million, or 24.7%, to $23.2 million
+ for the year ended September 30, 2005 from $18.6 million for the year ended September
+ 30, 2004. Excluding the $1.8 million one-time contribution to the Home Federal Foundation,
+ noninterest expense increased $2.8 million, or 15.1%.
+
+ The following
+ table provides a detailed analysis of the changes in components of noninterest expense:
+
+ 
+ 
+ 
+ 
+Year Ended September
+ 30,
+ 
+ 
+ 
+Increase (Decrease)
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+2005
+ 
+ 
+2004
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Percent
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Compensation
+ and benefits
+
+ 
+ 
+ 
+$
+12,636
+ 
+ 
+ 
+$
+10,553
+ 
+ 
+ 
+$
+2,083
+ 
+ 
+ 
+ 
+19.7
+%
+
+Occupancy
+ and equipment
+
+ 
+ 
+ 
+ 
+2,765
+ 
+ 
+ 
+ 
+2,778
+ 
+ 
+ 
+ 
+(13
+)
+ 
+ 
+ 
+(0.5
+)
+
+Data
+ processing
+
+ 
+ 
+ 
+ 
+1,616
+ 
+ 
+ 
+ 
+1,549
+ 
+ 
+ 
+ 
+67
+ 
+ 
+ 
+ 
+4.3
+ 
+
+Advertising
+
+ 
+ 
+ 
+ 
+1,147
+ 
+ 
+ 
+ 
+1,060
+ 
+ 
+ 
+ 
+87
+ 
+ 
+ 
+ 
+8.2
+ 
+
+Contribution
+ to Home Federal Foundation
+
+ 
+ 
+ 
+ 
+1,825
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,825
+ 
+ 
+ 
+ 
+100.0
+ 
+
+Other
+
+ 
+ 
+ 
+ 
+3,169
+ 
+ 
+ 
+ 
+2,636
+ 
+ 
+ 
+ 
+533
+ 
+ 
+ 
+ 
+20.2
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ noninterest expense
+
+ 
+ 
+ 
+$
+23,158
+ 
+ 
+ 
+$
+18,576
+ 
+ 
+ 
+$
+4,582
+ 
+ 
+ 
+ 
+24.7
+%
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Compensation
+ expense increased as a result of the establishment of the ESOP, annual merit pay
+ increases, incentive compensation and an increase in the number of employees. As
+ of September 30, 2005, Home Federal Bancorp employed 237 full-time equivalent employees,
+ compared to 228 at September 30, 2004. Other noninterest expenses increased primarily
+ as a result of a $206,000 accrued death benefit to the family of a former bank officer
+ pursuant to a nonqualified retirement plan and professional expenses related to
+ being a publicly held company. The efficiency ratio increased to 72.8% for the year
+ ended September 30, 2005 compared to 69.2% for the year ended September 30, 2004.
+ Excluding the non-recurring contribution to the Home Federal Foundation and the
+ gain on sale of the branch, the efficiency ratio was 67.9% for the year ended September
+ 30, 2005.
+
+ Income
+ Tax Expense. Income tax expense increased $226,000 to $2.9 million for the year
+ ended September 30, 2005 from $2.7 million for the year ended September 30, 2004.
+ Income before income taxes was $8.2 million for the year ended September 30, 2005
+ compared to $7.4 million for the year ended September 30, 2004. Our combined federal
+ and state effective income tax rate for the year ended September 30, 2005 was 35.5%
+ compared to 36.4% for the prior fiscal year. The decrease in the effective tax rate
+ was primarily as a result of the receipt of life insurance proceeds that are not
+ subject to income taxes.
+
+58
+
+Average Balances, Interest and Average
+ Yields/Cost
+
+ The following
+ table sets forth for the periods indicated, information regarding average balances
+ of assets and liabilities as well as the total dollar amounts of interest income
+ from average interest-earning assets and interest expense on average interest-bearing
+ liabilities, resultant yields, interest rate spread, net interest margin, and the
+ ratio of average interest-earning assets to average interest-bearing liabilities.
+ Average balances have been calculated using the average of daily balances during
+ the period. Interest and dividends are reported on a tax-equivalent basis. During
+ the time periods presented, we did not own any tax-exempt investment securities.
+
+59
+
+ 
+ 
+Nine Months
+ Ended
+ 
+ 
+Year Ended
+
+ 
+ 
+June 30,
+ 
+ 
+September 30,
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+2007
+ 
+ 
+2006
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+2004
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+Interest
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Interest
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Interest
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Interest
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Interest
+ 
+ 
+ 
+ 
+
+ 
+ 
+Average
+and
+Yield/
+ 
+ 
+Average
+and
+Yield/
+ 
+ 
+Average
+ 
+and
+ 
+Yield/
+ 
+ 
+Average
+and
+ 
+Yield/
+ 
+ 
+Average
+and
+ 
+Yield/
+
+ 
+ 
+Balance
+ 
+Dividends
+Cost
+ 
+ 
+Balance
+Dividends
+Cost
+ 
+ 
+Balance
+Dividends
+ 
+Cost
+ 
+ 
+Balance
+Dividends
+ 
+Cost
+ 
+ 
+Balance
+ Dividends
+ 
+Cost
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+(Dollars in
+ Thousands)
+
+Interest-earning
+ assets:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Loans
+ receivable, net (1)
+
+ 
+$
+508,732
+ 
+ 
+$
+25,151
+ 
+ 
+6.59
+%
+ 
+ 
+$
+461,185
+ 
+ 
+$
+21,782
+ 
+ 
+6.30
+%
+ 
+ 
+$
+471,291
+ 
+ 
+$
+29,943
+ 
+ 
+ 
+6.35
+%
+ 
+ 
+$
+419,940
+ 
+ 
+$
+25,788
+ 
+ 
+ 
+6.14
+%
+ 
+ 
+$
+382,947
+ 
+ 
+$
+23,768
+ 
+ 
+ 
+6.21
+%
+
+ Loans
+ held for sale
+
+ 
+ 
+3,675
+ 
+ 
+ 
+180
+ 
+ 
+6.54
+ 
+ 
+ 
+ 
+3,809
+ 
+ 
+ 
+177
+ 
+ 
+6.21
+ 
+ 
+ 
+ 
+3,771
+ 
+ 
+ 
+232
+ 
+ 
+ 
+6.15
+ 
+ 
+ 
+ 
+2,518
+ 
+ 
+ 
+146
+ 
+ 
+ 
+5.80
+ 
+ 
+ 
+ 
+2,910
+ 
+ 
+ 
+168
+ 
+ 
+ 
+5.79
+ 
+
+ Investment
+ securities including interest-bearing
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ deposits
+ in other banks
+
+ 
+ 
+5,713
+ 
+ 
+ 
+223
+ 
+ 
+5.20
+ 
+ 
+ 
+ 
+3,617
+ 
+ 
+ 
+114
+ 
+ 
+4.20
+ 
+ 
+ 
+ 
+3,197
+ 
+ 
+ 
+140
+ 
+ 
+ 
+4.38
+ 
+ 
+ 
+ 
+14,972
+ 
+ 
+ 
+313
+ 
+ 
+ 
+2.09
+ 
+ 
+ 
+ 
+14,690
+ 
+ 
+ 
+260
+ 
+ 
+ 
+1.77
+ 
+
+ Mortgage-backed
+ securities
+
+ 
+ 
+185,694
+ 
+ 
+ 
+6,673
+ 
+ 
+4.79
+ 
+ 
+ 
+ 
+202,692
+ 
+ 
+ 
+7,220
+ 
+ 
+4.75
+ 
+ 
+ 
+ 
+201,838
+ 
+ 
+ 
+9,598
+ 
+ 
+ 
+4.76
+ 
+ 
+ 
+ 
+160,780
+ 
+ 
+ 
+7,633
+ 
+ 
+ 
+4.75
+ 
+ 
+ 
+ 
+58,076
+ 
+ 
+ 
+3,038
+ 
+ 
+ 
+5.23
+ 
+
+ Federal
+ Home Loan Bank stock
+
+ 
+ 
+9,591
+ 
+ 
+ 
+33
+ 
+ 
+0.46
+ 
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8,480
+ 
+ 
+ 
+30
+ 
+ 
+ 
+0.35
+ 
+ 
+ 
+ 
+6,761
+ 
+ 
+ 
+278
+ 
+ 
+ 
+4.11
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ Total
+ interest-earning assets
+
+ 
+ 
+713,455
+ 
+ 
+$
+32,260
+ 
+ 
+6.03
+%
+ 
+ 
+ 
+680,894
+ 
+ 
+$
+29,293
+ 
+ 
+5.73
+%
+ 
+ 
+ 
+689,688
+ 
+ 
+$
+39,913
+ 
+ 
+ 
+5.79
+%
+ 
+ 
+ 
+606,690
+ 
+ 
+$
+33,910
+ 
+ 
+ 
+5.59
+ 
+ 
+ 
+ 
+465,384
+ 
+ 
+$
+27,512
+ 
+ 
+ 
+5.91
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Noninterest
+ earning assets
+
+ 
+ 
+38,825
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+37,039
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+38,015
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+39,101
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+39,418
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+ assets
+
+ 
+$
+752,280
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+717,933
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+727,703
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+645,791
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+504,802
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest-bearing
+ liabilities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Savings
+ deposits
+
+ 
+$
+ 23,457
+ 
+ 
+$
+ 68
+ 
+ 
+0.39
+%
+ 
+ 
+$
+ 25,285
+ 
+ 
+$
+ 38
+ 
+ 
+0.20
+%
+ 
+ 
+$
+ 24,863
+ 
+ 
+$
+ 51
+ 
+ 
+ 
+0.21
+%
+ 
+ 
+$
+ 25,633
+ 
+ 
+$
+ 51
+ 
+ 
+ 
+0.20
+%
+ 
+ 
+$
+ 24,431
+ 
+ 
+$
+ 60
+ 
+ 
+ 
+0.25
+%
+
+ Interest-bearing
+ demand deposits
+
+ 
+ 
+93,330
+ 
+ 
+ 
+420
+ 
+ 
+0.60
+ 
+ 
+ 
+ 
+98,405
+ 
+ 
+ 
+328
+ 
+ 
+0.44
+ 
+ 
+ 
+ 
+97,916
+ 
+ 
+ 
+466
+ 
+ 
+ 
+0.48
+ 
+ 
+ 
+ 
+104,972
+ 
+ 
+ 
+298
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+ 
+83,364
+ 
+ 
+ 
+228
+ 
+ 
+ 
+0.27
+ 
+
+ Money
+ market accounts
+
+ 
+ 
+37,852
+ 
+ 
+ 
+815
+ 
+ 
+2.87
+ 
+ 
+ 
+ 
+31,759
+ 
+ 
+ 
+370
+ 
+ 
+1.55
+ 
+ 
+ 
+ 
+31,875
+ 
+ 
+ 
+534
+ 
+ 
+ 
+1.68
+ 
+ 
+ 
+ 
+36,061
+ 
+ 
+ 
+394
+ 
+ 
+ 
+1.09
+ 
+ 
+ 
+ 
+33,319
+ 
+ 
+ 
+232
+ 
+ 
+ 
+0.70
+ 
+
+ Certificates
+ of deposit
+
+ 
+ 
+230,242
+ 
+ 
+ 
+7,843
+ 
+ 
+4.54
+ 
+ 
+ 
+ 
+214,558
+ 
+ 
+ 
+5,451
+ 
+ 
+3.39
+ 
+ 
+ 
+ 
+218,496
+ 
+ 
+ 
+7,863
+ 
+ 
+ 
+3.60
+ 
+ 
+ 
+ 
+181,015
+ 
+ 
+ 
+5,545
+ 
+ 
+ 
+3.06
+ 
+ 
+ 
+ 
+153,280
+ 
+ 
+ 
+4,435
+ 
+ 
+ 
+2.89
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ Total
+ deposits
+
+ 
+ 
+384,881
+ 
+ 
+ 
+9,146
+ 
+ 
+3.17
+ 
+ 
+ 
+ 
+370,007
+ 
+ 
+ 
+6,187
+ 
+ 
+2.23
+ 
+ 
+ 
+ 
+373,150
+ 
+ 
+ 
+8,914
+ 
+ 
+ 
+2.39
+ 
+ 
+ 
+ 
+347,681
+ 
+ 
+ 
+6,288
+ 
+ 
+ 
+1.81
+ 
+ 
+ 
+ 
+294,394
+ 
+ 
+ 
+4,955
+ 
+ 
+ 
+1.68
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Federal
+ Home Loan Bank advances
+
+ 
+ 
+207,517
+ 
+ 
+ 
+6,942
+ 
+ 
+4.46
+ 
+ 
+ 
+ 
+184,209
+ 
+ 
+ 
+5,696
+ 
+ 
+4.12
+ 
+ 
+ 
+ 
+190,684
+ 
+ 
+ 
+8,003
+ 
+ 
+ 
+4.20
+ 
+ 
+ 
+ 
+153,443
+ 
+ 
+ 
+5,943
+ 
+ 
+ 
+3.87
+ 
+ 
+ 
+ 
+115,197
+ 
+ 
+ 
+4,695
+ 
+ 
+ 
+4.08
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+ interest-bearing liabilities
+
+ 
+ 
+592,398
+ 
+ 
+$
+16,088
+ 
+ 
+3.62
+%
+ 
+ 
+ 
+554,216
+ 
+ 
+$
+11,883
+ 
+ 
+2.86
+%
+ 
+ 
+ 
+563,834
+ 
+ 
+$
+16,917
+ 
+ 
+ 
+3.00
+%
+ 
+ 
+ 
+501,124
+ 
+ 
+$
+12,231
+ 
+ 
+ 
+2.44
+%
+ 
+ 
+ 
+409,591
+ 
+ 
+$
+ 9,650
+ 
+ 
+ 
+2.36
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Noninterest-bearing
+ liabilities
+
+ 
+ 
+49,314
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+59,221
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+58,559
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+51,786
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+50,476
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+ liabilities
+
+ 
+ 
+641,712
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+613,437
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+622,393
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+552,910
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+460,067
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Stockholders equity
+
+ 
+ 
+110,568
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+104,496
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+105,310
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+92,881
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+44,735
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total
+ liabilities and equity
+
+ 
+$
+752,280
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+717,933
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+727,703
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+645,791
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+504,802
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ interest income
+
+ 
+ 
+ 
+ 
+ 
+$
+16,172
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+17,410
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+22,996
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+21,679
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+17,862
+ 
+ 
+ 
+ 
+ 
+
+Interest
+ rate spread
+
+ 
+ 
+ 
+ 
+ 
+ 
+2.41
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2.87
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2.79
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3.15
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3.55
+%
+ 
+ 
+ 
+ 
+
+Net
+ interest margin (2)
+
+ 
+ 
+ 
+ 
+ 
+ 
+3.02
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3.41
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3.33
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3.57
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3.84
+%
+ 
+ 
+ 
+ 
+
+Ratio
+ of average interest-earning
+ assets to average interest-bearing
+ liabilities
+
+ 
+ 
+ 
+ 
+ 
+ 
+120.44
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+122.86
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+122.32
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+121.07
+%
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+113.62
+%
+ 
+ 
+ 
+ 
+
+_________
+
+(1) Non-accrual
+ loans are included in the average balance. Loan fees are included in interest income
+ on loans and are insignificant.
+(2) Net interest margin, otherwise known as
+ yield on interest-earning assets, is calculated as net interest income divided by
+ average interest-earning assets.
+
+60
+
+ The following
+ table sets forth (on a consolidated basis) for the periods and at the dates indicated,
+ the weighted average yields earned on our assets, the weighted average interest
+ rates paid on our liabilities, together with the net yield on interest-earning assets.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+At
+June 30,
+ 
+ 
+June 30,
+ 
+ 
+ 
+Year Ended September 30,
+
+ 
+ 
+ 
+2007
+ 
+ 
+2007
+ 
+ 
+2006
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+2004
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Weighted
+ average yield on:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Loans
+ receivable, net
+
+ 
+ 
+ 
+6.59
+%
+ 
+ 
+ 
+6.59
+%
+ 
+ 
+ 
+6.30
+%
+ 
+ 
+ 
+6.35
+%
+ 
+ 
+ 
+6.14
+%
+ 
+ 
+ 
+6.21
+%
+
+ Loans
+ held for sale
+
+ 
+ 
+ 
+6.56
+ 
+ 
+ 
+ 
+6.54
+ 
+ 
+ 
+ 
+6.21
+ 
+ 
+ 
+ 
+6.15
+ 
+ 
+ 
+ 
+5.80
+ 
+ 
+ 
+ 
+5.79
+ 
+
+ Investment
+ securities, including interest-bearing
+ deposits in
+ other banks
+
+ 
+ 
+ 
+5.21
+ 
+ 
+ 
+ 
+5.20
+ 
+ 
+ 
+ 
+4.20
+ 
+ 
+ 
+ 
+4.38
+ 
+ 
+ 
+ 
+2.09
+ 
+ 
+ 
+ 
+1.77
+ 
+
+ Mortgage-backed
+ securities
+
+ 
+ 
+ 
+4.99
+ 
+ 
+ 
+ 
+4.79
+ 
+ 
+ 
+ 
+4.75
+ 
+ 
+ 
+ 
+4.76
+ 
+ 
+ 
+ 
+4.75
+ 
+ 
+ 
+ 
+5.23
+ 
+
+ Federal
+ Home Loan Bank stock
+
+ 
+ 
+ 
+0.58
+ 
+ 
+ 
+ 
+0.46
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+0.35
+ 
+ 
+ 
+ 
+4.11
+ 
+
+ Total
+ interest-earning assets
+
+ 
+ 
+ 
+6.09
+ 
+ 
+ 
+ 
+6.03
+ 
+ 
+ 
+ 
+5.73
+ 
+ 
+ 
+ 
+5.79
+ 
+ 
+ 
+ 
+5.59
+ 
+ 
+ 
+ 
+5.91
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Weighted
+ average rate paid on:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Savings
+ deposits
+
+ 
+ 
+ 
+0.58
+ 
+ 
+ 
+ 
+0.39
+ 
+ 
+ 
+ 
+0.20
+ 
+ 
+ 
+ 
+0.21
+ 
+ 
+ 
+ 
+0.20
+ 
+ 
+ 
+ 
+0.25
+ 
+
+ Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+0.61
+ 
+ 
+ 
+ 
+0.60
+ 
+ 
+ 
+ 
+0.44
+ 
+ 
+ 
+ 
+0.48
+ 
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+ 
+0.27
+ 
+
+ Money
+ market accounts
+
+ 
+ 
+ 
+3.26
+ 
+ 
+ 
+ 
+2.87
+ 
+ 
+ 
+ 
+1.55
+ 
+ 
+ 
+ 
+1.68
+ 
+ 
+ 
+ 
+1.09
+ 
+ 
+ 
+ 
+0.70
+ 
+
+ Certificates
+ of deposit
+
+ 
+ 
+ 
+4.77
+ 
+ 
+ 
+ 
+4.54
+ 
+ 
+ 
+ 
+3.39
+ 
+ 
+ 
+ 
+3.60
+ 
+ 
+ 
+ 
+3.06
+ 
+ 
+ 
+ 
+2.89
+ 
+
+ Total
+ deposits
+
+ 
+ 
+ 
+3.36
+ 
+ 
+ 
+ 
+3.17
+ 
+ 
+ 
+ 
+2.23
+ 
+ 
+ 
+ 
+2.39
+ 
+ 
+ 
+ 
+1.81
+ 
+ 
+ 
+ 
+1.68
+ 
+
+ Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+4.50
+ 
+ 
+ 
+ 
+4.46
+ 
+ 
+ 
+ 
+4.12
+ 
+ 
+ 
+ 
+4.20
+ 
+ 
+ 
+ 
+3.87
+ 
+ 
+ 
+ 
+4.08
+ 
+
+ Total
+ interest-bearing liabilities
+
+ 
+ 
+ 
+3.74
+ 
+ 
+ 
+ 
+3.62
+ 
+ 
+ 
+ 
+2.86
+ 
+ 
+ 
+ 
+3.00
+ 
+ 
+ 
+ 
+2.44
+ 
+ 
+ 
+ 
+2.36
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest
+ rate spread (spread between weighted
+ average rate on all interest-earning
+ assets and all interest-bearing
+ liabilities)
+
+ 
+ 
+ 
+2.35
+ 
+ 
+ 
+ 
+2.41
+ 
+ 
+ 
+ 
+2.87
+ 
+ 
+ 
+ 
+2.79
+ 
+ 
+ 
+ 
+3.15
+ 
+ 
+ 
+ 
+3.55
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ interest margin (net interest income
+ (expense) as a percentage of
+ average interest-earning assets)
+
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+ 
+3.02
+ 
+ 
+ 
+ 
+3.41
+ 
+ 
+ 
+ 
+3.33
+ 
+ 
+ 
+ 
+3.57
+ 
+ 
+ 
+ 
+3.84
+ 
+
+61
+
+Rate/Volume Analysis
+
+ The following
+ table sets forth the effects of changing rates and volumes on our net interest income.
+ Information is provided with respect to: (1) effects on interest income attributable
+ to changes in volume (changes in volume multiplied by prior rate); and (2) effects
+ on interest income attributable to changes in rate (changes in rate multiplied by
+ prior volume). Changes attributable to both rate and volume, which cannot be segregated,
+ are allocated proportionately to the changes in rate and volume.
+
+ 
+ 
+Nine Months
+ Ended June 30, 2007
+ 
+Year Ended
+ September 30, 2006
+ 
+Year Ended
+ September 30, 2005
+
+ 
+ 
+Compared to
+ Nine Months Ended June 30, 2006
+ 
+Compared to
+ Year Ended September 30, 2005
+ 
+ Compared
+ to Year Ended September 30, 2004
+
+ 
+ 
+Increase (Decrease)
+ Due to
+ 
+Increase (Decrease)
+ Due to
+ 
+Increase (Decrease)
+ Due to
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+Rate
+ 
+ 
+Volume
+ 
+ 
+ 
+Total
+ 
+ 
+Rate
+ 
+ 
+Volume
+ 
+ 
+ 
+Total
+ 
+ 
+Rate
+ 
+ 
+ 
+Volume
+ 
+ 
+ 
+Total
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+(In Thousands) 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest-earning
+ assets:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Loans
+ receivable, net
+
+ 
+$
+1,049
+ 
+ 
+$
+2,320
+ 
+ 
+ 
+$
+3,369
+ 
+ 
+$
+ 916
+ 
+ 
+$
+3,239
+ 
+ 
+ 
+$
+4,155
+ 
+ 
+$
+(248
+)
+ 
+ 
+$
+2,268
+ 
+ 
+ 
+$
+2,020
+ 
+
+ Loans
+ held for sale
+
+ 
+ 
+7
+ 
+ 
+ 
+(4
+)
+ 
+ 
+ 
+3
+ 
+ 
+ 
+10
+ 
+ 
+ 
+76
+ 
+ 
+ 
+ 
+86
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(22
+)
+ 
+ 
+ 
+(22
+)
+
+ Investment
+ securities, including interest-bearing
+ deposits in other
+ banks
+
+ 
+ 
+32
+ 
+ 
+ 
+77
+ 
+ 
+ 
+ 
+109
+ 
+ 
+ 
+186
+ 
+ 
+ 
+(359
+)
+ 
+ 
+ 
+(173
+)
+ 
+ 
+48
+ 
+ 
+ 
+ 
+5
+ 
+ 
+ 
+ 
+53
+ 
+
+ Mortgage-backed
+ securities
+
+ 
+ 
+25
+ 
+ 
+ 
+(572
+)
+ 
+ 
+ 
+(547
+)
+ 
+ 
+13
+ 
+ 
+ 
+1,952
+ 
+ 
+ 
+ 
+1,965
+ 
+ 
+ 
+(254
+)
+ 
+ 
+ 
+4,849
+ 
+ 
+ 
+ 
+4,595
+ 
+
+ Federal
+ Home Loan Bank stock
+
+ 
+ 
+33
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+33
+ 
+ 
+ 
+(34
+)
+ 
+ 
+4
+ 
+ 
+ 
+ 
+(30
+)
+ 
+ 
+(344
+)
+ 
+ 
+ 
+96
+ 
+ 
+ 
+ 
+(248
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total
+ net change in income on
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ interest-earning
+ assets
+
+ 
+$
+1,146
+ 
+ 
+$
+1,821
+ 
+ 
+ 
+$
+2,967
+ 
+ 
+$
+1,091
+ 
+ 
+$
+4,912
+ 
+ 
+ 
+$
+6,003
+ 
+ 
+$
+(798
+)
+ 
+ 
+$
+7,196
+ 
+ 
+ 
+$
+6,398
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest-bearing
+ liabilities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Savings
+ deposits
+
+ 
+$
+ 31
+ 
+ 
+$
+ (1
+)
+ 
+ 
+$
+ 30
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ (12
+)
+ 
+ 
+$
+ 3
+ 
+ 
+ 
+$
+ (9
+)
+
+ Interest-bearing
+ demand deposits
+
+ 
+ 
+100
+ 
+ 
+ 
+(8
+)
+ 
+ 
+ 
+92
+ 
+ 
+ 
+189
+ 
+ 
+ 
+(21
+)
+ 
+ 
+ 
+168
+ 
+ 
+ 
+9
+ 
+ 
+ 
+ 
+61
+ 
+ 
+ 
+ 
+70
+ 
+
+ Money
+ market accounts
+
+ 
+ 
+363
+ 
+ 
+ 
+82
+ 
+ 
+ 
+ 
+445
+ 
+ 
+ 
+190
+ 
+ 
+ 
+(50
+)
+ 
+ 
+ 
+140
+ 
+ 
+ 
+142
+ 
+ 
+ 
+ 
+20
+ 
+ 
+ 
+ 
+162
+ 
+
+ Certificates
+ of deposit
+
+ 
+ 
+1,969
+ 
+ 
+ 
+423
+ 
+ 
+ 
+ 
+2,392
+ 
+ 
+ 
+1,061
+ 
+ 
+ 
+1,257
+ 
+ 
+ 
+ 
+2,318
+ 
+ 
+ 
+272
+ 
+ 
+ 
+ 
+838
+ 
+ 
+ 
+ 
+1,110
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Total
+ deposits
+
+ 
+ 
+2,463
+ 
+ 
+ 
+496
+ 
+ 
+ 
+ 
+2,959
+ 
+ 
+ 
+1,440
+ 
+ 
+ 
+1,186
+ 
+ 
+ 
+ 
+2,626
+ 
+ 
+ 
+411
+ 
+ 
+ 
+ 
+922
+ 
+ 
+ 
+ 
+1,333
+ 
+
+ Federal
+ Home Loan Bank advances
+
+ 
+ 
+490
+ 
+ 
+ 
+756
+ 
+ 
+ 
+ 
+1,246
+ 
+ 
+ 
+528
+ 
+ 
+ 
+1,532
+ 
+ 
+ 
+ 
+2,060
+ 
+ 
+ 
+(219
+)
+ 
+ 
+ 
+1,467
+ 
+ 
+ 
+ 
+1,248
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total
+ net change in expense on
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ interest-bearing
+ liabilities
+
+ 
+$
+2,953
+ 
+ 
+$
+1,252
+ 
+ 
+ 
+$
+4,205
+ 
+ 
+$
+1,968
+ 
+ 
+$
+2,718
+ 
+ 
+ 
+$
+4,686
+ 
+ 
+$
+ 192
+ 
+ 
+ 
+$
+2,389
+ 
+ 
+ 
+$
+2,581
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total
+ change in net interest income
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+(1,238
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+1,317
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+3,817
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+62
+
+Asset and Liability Management and Market
+ Risk
+
+ General.
+ Our Board of Directors has established an asset and liability management policy
+ to guide management in maximizing net interest rate spread by managing the differences
+ in terms between interest-earning assets and interest-bearing liabilities while
+ maintaining acceptable levels of liquidity, capital adequacy, interest rate sensitivity,
+ changes in net interest income, credit risk and profitability. The policy includes
+ the use of an Asset Liability Management Committee whose members include certain
+ members of senior management. The Committee s purpose is to communicate, coordinate
+ and manage our asset/liability positions consistent with our business plan and Board-approved
+ policies, as well as to price savings and lending products, and to develop new products.
+ The Asset Liability Management Committee meets twice a month to review various areas
+ including:
+
+ 
+ 
+ 
+economic conditions;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+interest rate
+ outlook;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+asset/liability
+ mix;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+interest rate
+ risk sensitivity;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+change in
+ net interest income;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+current market
+ opportunities to promote specific products;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+historical
+ financial results;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+projected
+ financial results; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+capital position.
+
+ The Committee
+ also reviews current and projected liquidity needs twice a month. As part of its
+ procedures, the Asset Liability Management Committee regularly reviews interest
+ rate risk by forecasting the impact of alternative interest rate environments on
+ net interest income and market value of portfolio equity, which is defined as the
+ net present value of an institution s existing assets, liabilities and off-balance
+ sheet instruments, and evaluating such impacts against the maximum potential change
+ in market value of portfolio equity that is authorized by the Board of Directors.
+
+ Our Risk
+ When Interest Rates Change. The rates of interest we earn on assets and pay
+ on liabilities generally are established contractually for a period of time. Market
+ interest rates change over time. Our loans generally have longer maturities than
+ our deposits. Accordingly, our results of operations, like those of other financial
+ institutions, are impacted by changes in interest rates and the interest rate sensitivity
+ of our assets and liabilities. The risk associated with changes in interest rates
+ and our ability to adapt to these changes is known as interest rate risk and is
+ our most significant market risk.
+
+In recent years, we primarily have utilized the following strategies in our efforts
+ to manage interest rate risk:
+
+ 
+ 
+ 
+we have increased
+ our originations of shorter term loans and particularly, construction and land development
+ loans and home equity loans;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+we have structured
+ our borrowings with maturities that match fund our loan and investment portfolios;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+we have attempted,
+ where possible, to extend the maturities of our deposits which typically fund our
+ long-term assets; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+we have invested
+ in securities with relatively short anticipated lives, generally three to five years.
+
+63
+
+ How We
+ Measure the Risk of Interest Rate Changes. We measure our interest rate sensitivity
+ on a quarterly basis utilizing an internal model. Management uses various assumptions
+ to evaluate the sensitivity of our operations to changes in interest rates. Although
+ management believes these assumptions are reasonable, the interest rate sensitivity
+ of our assets and liabilities on net interest income and the market value of portfolio
+ equity could vary substantially if different assumptions were used or actual experience
+ differs from such assumptions. The assumptions we use are based upon proprietary
+ and market data and reflect historical results and current market conditions. These
+ assumptions relate to interest rates, prepayments, deposit decay rates and the market
+ value of certain assets under the various interest rate scenarios. An independent
+ service was used to provide market rates of interest and certain interest rate assumptions
+ to determine prepayments and maturities of loans, investments and borrowings. Time
+ deposits are modeled to reprice to market rates upon their stated maturities. We
+ assumed that non-maturity deposits can be maintained with rate adjustments not directly
+ proportionate to the change in market interest rates. Our historical deposit decay
+ rates were used, which are substantially lower than market decay rates. In the past,
+ we have demonstrated that the tiering structure of our deposit accounts during changing
+ rate environments results in relatively low volatility and less than market rate
+ changes in our interest expense for deposits. Our deposit accounts are tiered by
+ balance and rate, whereby higher balances within an account earn higher rates of
+ interest. Therefore, deposits that are not very rate sensitive (generally, lower
+ balance tiers) are separated from deposits that are rate sensitive (generally, higher
+ balance tiers).
+
+ When interest
+ rates rise, we do not have to raise interest rates proportionately on less rate
+ sensitive accounts to retain these deposits. These assumptions are based upon an
+ analysis of our customer base, competitive factors and historical experience. The
+ following table shows the change in our net portfolio value at June 30, 2007 that
+ would occur upon an immediate change in interest rates based on our assumptions,
+ but without giving effect to any steps that we might take to counteract that change.
+ The net portfolio value is calculated based upon the present value of the discounted
+ cash flows from assets and liabilities. The difference between the present value
+ of assets and liabilities is the net portfolio value and represents the market value
+ of equity for the given interest rate scenario. Net portfolio value is useful for
+ determining, on a market value basis, how much equity changes in response to various
+ interest rate scenarios. Large changes in net portfolio value reflect increased
+ interest rate sensitivity and generally more volatile earnings streams.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Net Portfolio
+ as % of
+
+ 
+Net Portfolio
+ Value ( NPV )
+ 
+Portfolio
+ Value of Assets
+
+ 
+
+ 
+
+Basis Point
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Asset Market
+
+Change in
+ Rates
+ 
+Amount
+ 
+$ Change (1)
+ 
+ 
+% Change
+ 
+ 
+NPV Ratio
+ (2)
+ 
+ 
+% Change (3)
+ 
+ 
+Value
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+300
+$
+ 84,350
+ 
+$(28,686
+)
+ 
+(25.38
+)%
+ 
+13.01
+%
+ 
+(3.16
+)%
+ 
+$648,200
+
+200
+ 
+96,423
+ 
+(16,613
+)
+ 
+(14.70
+)
+ 
+14.50
+ 
+ 
+(1.68
+)
+ 
+665,157
+
+100
+ 
+102,433
+ 
+(10,603
+)
+ 
+(9.38
+)
+ 
+15.01
+ 
+ 
+(1.17
+)
+ 
+682,362
+
+Base
+ 
+113,036
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+16.18
+ 
+ 
+Base
+ 
+ 
+698,765
+
+-100
+ 
+115,069
+ 
+2,033
+ 
+ 
+1.80
+ 
+ 
+16.13
+ 
+ 
+(0.04
+)
+ 
+713,280
+
+-200
+ 
+113,965
+ 
+929
+ 
+ 
+0.82
+ 
+ 
+15.75
+ 
+ 
+(0.42
+)
+ 
+723,421
+
+-300
+ 
+108,875
+ 
+ (4,161
+)
+ 
+(3.68
+)
+ 
+14.92
+ 
+ 
+(1.25
+)
+ 
+729,637
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Pre-Shock
+ NPV Ratio
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+16.18
+ 
+ 
+ 
+ 
+ 
+ 
+
+Post-Shock
+ NPV Ratio
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+14.50
+ 
+ 
+ 
+ 
+ 
+ 
+
+Static Sensitivity
+ Measure - decline in NPV Ratio
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1.68
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1)
+ 
+Represents
+ the increase (decrease) of the estimated net portfolio value at the indicated change
+ in interest rates compared to the base net portfolio value.
+
+(2)
+ 
+Calculated as
+ the estimated net portfolio value divided by the portfolio value of total assets.
+
+(3)
+ 
+Calculated as the increase (decrease) of the net portfolio value ratio assuming
+ the indicated change in interest rates over the base net portfolio value ratio.
+
+64
+
+ The following
+ table illustrates the change in net interest income at June 30, 2007 that would
+ occur in the event of an immediate change in interest rates, but without giving
+ effect to any steps that might be taken to counter the effect of that change in
+ interest rates.
+
+ 
+ 
+Net Interest
+ Income
+
+Basis Point
+ 
+
+Change in
+ Rates
+ 
+Amount
+ 
+$ Change (1)
+ 
+ 
+% Change
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+(Dollars in
+ Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+300
+ 
+$17,041
+ 
+$(1,862
+)
+ 
+(9.85
+)%
+
+200
+ 
+17,726
+ 
+(1,177
+)
+ 
+(6.23
+)
+
+100
+ 
+18,365
+ 
+(538
+)
+ 
+(2.85
+)
+
+Base
+ 
+18,903
+ 
+ 
+ 
+ 
+Base
+ 
+
+-100
+ 
+19,602
+ 
+699
+ 
+ 
+3.70
+ 
+
+-200
+ 
+19,607
+ 
+704
+ 
+ 
+3.72
+ 
+
+-300
+ 
+18,755
+ 
+ (148
+)
+ 
+(0.78
+)
+
+(1)
+ 
+Represents the increase (decrease) of the estimated net interest income at the
+ indicated change in interest rates compared to net interest income assuming no change
+ in interest rates.
+
+ We use certain
+ assumptions in assessing our interest rate risk. These assumptions relate to interest
+ rates, loan prepayment rates, deposit decay rates and the market values of certain
+ assets under differing interest rate scenarios, among others.
+
+ As with any
+ method of measuring interest rate risk, shortcomings are inherent in the method
+ of analysis presented in the foregoing tables. For example, although assets and
+ liabilities may have similar maturities or periods to repricing, they may react
+ in different degrees to changes in the market interest rates. Also, the interest
+ rates on certain types of assets and liabilities may fluctuate in advance of changes
+ in market interest rates, while interest rates on other types may lag behind changes
+ in market rates. Additionally, certain assets, such as adjustable rate mortgage
+ loans, have features that restrict changes in interest rates on a short-term basis
+ and over the life of the asset. Further, if interest rates change, expected rates
+ of prepayments on loans and early withdrawals from certificates of deposit could
+ deviate significantly from those assumed in calculating the table.
+
+Liquidity and Commitments
+
+ We are required
+ to have enough cash flow in order to maintain sufficient liquidity to ensure a safe
+ and sound operation. Historically, we have maintained cash flow above the minimum
+ level believed to be adequate to meet the requirements of normal operations, including
+ potential deposit outflows. On a quarterly basis, we review and update cash flow
+ projections to ensure that adequate liquidity is maintained.
+
+ Our primary
+ sources of funds are from customer deposits, loan repayments, loan sales, maturing
+ investment securities and advances from the Federal Home Loan Bank of Seattle. These
+ funds, together with retained earnings and equity, are used to make loans, acquire
+ investment securities and other assets, and fund continuing operations. While maturities
+ and the scheduled amortization of loans are a predictable source of funds, deposit
+ flows and mortgage prepayments are greatly influenced by the level of interest rates,
+ economic conditions and competition. We believe that our current liquidity position
+ is sufficient to fund all of our existing commitments.
+
+ Liquidity
+ management is both a daily and long-term function of business management. Excess
+ liquidity is generally invested in short-term investments such as overnight deposits
+ or mortgage-backed securities. On a longer-term basis, we maintain a strategy of
+ investing in various lending products as described in greater detail under Business
+ of Home Federal Bank Lending Activities. At June 30, 2007, the total
+ approved loan origination commitments outstanding amounted to $18.1 million. At
+ the same date, unused lines of credit were $35.6 million.
+
+65
+
+We use our sources of
+ funds primarily to meet ongoing commitments, to pay maturing certificates of deposit
+ and savings withdrawals, to fund loan commitments and to maintain our portfolio
+ of mortgage-backed securities and investment securities.
+
+ Certificates
+ of deposit scheduled to mature in one year or less at June 30, 2007 totaled $187.7
+ million. Management s policy is to generally maintain deposit rates at levels
+ that are competitive with other local financial institutions. Based on historical
+ experience, we believe that a significant portion of maturing deposits will remain
+ with Home Federal. In addition, we had the ability at June 30, 2007 to borrow an
+ additional $93.9 million from the Federal Home Loan Bank of Seattle as a funding
+ source to meet commitments and for liquidity purposes.
+
+ We measure
+ our liquidity based on our ability to fund our assets and to meet liability obligations
+ when they come due. Liquidity (and funding) risk occurs when funds cannot be raised
+ at reasonable prices, or in a reasonable time frame, to meet our normal or unanticipated
+ obligations. We regularly monitor the mix between our assets and our liabilities
+ to manage effectively our liquidity and funding requirements.
+
+ Our primary
+ source of funds is our deposits. When deposits are not available to provide the
+ funds for our assets, we use alternative funding sources. These sources include,
+ but are not limited to: cash management from the Federal Home Loan Bank of Seattle,
+ wholesale funding, brokered deposits, federal funds purchased and dealer repurchase
+ agreements, as well as other short-term alternatives. Alternatively, we may also
+ liquidate assets to meet our funding needs.
+
+ On a quarterly
+ basis, we estimate our liquidity sources and needs for the coming three-month, six-month,
+ and one-year time periods. Also, we determine funding concentrations and our need
+ for sources of funds other than deposits. This information is used by our Asset
+ Liability Management Committee in forecasting funding needs and investing opportunities.
+
+Contractual Obligations
+
+ Through the
+ normal course of operations, we have entered into certain contractual obligations.
+ Our obligations generally relate to funding of operations through deposits and borrowings
+ as well as leases for premises. Lease terms generally cover a five-year period,
+ with options to extend, and are non-cancelable.
+
+ At June 30,
+ 2007, scheduled maturities of contractual obligations were as follows:
+
+ 
+ 
+Within
+1 Year
+ 
+After 1 Year
+
+ Through
+3 Years
+ 
+After 3 Years
+
+ Through
+5 Years
+ 
+Beyond
+5 Years
+ 
+Total
+Balance
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+(In Thousands)
+
+Certificates
+ of deposit
+ 
+$
+187,672
+ 
+$
+ 29,762
+ 
+$
+ 9,467
+ 
+$
+ 194
+ 
+$
+227,095
+
+Federal Home
+ Loan Bank advances
+ 
+ 
+43,682
+ 
+ 
+92,032
+ 
+ 
+29,850
+ 
+ 
+23,700
+ 
+ 
+189,264
+
+Operating
+ leases
+ 
+ 
+464
+ 
+ 
+926
+ 
+ 
+257
+ 
+ 
+587
+ 
+ 
+2,234
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total contractual
+ obligations
+
+ 
+$
+231,818
+ 
+$
+122,720
+ 
+$
+39,574
+ 
+$
+24,481
+ 
+$
+418,593
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Off-Balance Sheet Arrangements
+
+ We are party
+ to financial instruments with off-balance sheet risk in the normal course of business
+ in order to meet the financing needs of our customers. These financial instruments
+ generally include commitments to originate mortgage, commercial and consumer loans,
+ and involve to varying degrees, elements of credit and interest rate risk in excess
+ of the amount recognized in the balance sheet. Our maximum exposure to credit loss
+ in the event of nonperformance by the borrower is represented by the contractual
+ amount of those instruments. Because some 
+
+66
+
+commitments may expire without being drawn
+ upon, the total commitment amounts do not necessarily represent future cash requirements.
+ We use the same credit policies in making commitments as we do for on-balance sheet
+ instruments. Collateral is not required to support commitments.
+
+ Undisbursed
+ balances of loans closed include funds not disbursed but committed for construction
+ projects. Unused lines of credit include funds not disbursed, but committed to,
+ home equity, commercial and consumer lines of credit.
+
+ Commercial
+ letters of credit are conditional commitments issued by us to guarantee the performance
+ of a customer to a third party. Those guarantees are primarily used to support public
+ and private borrowing arrangements. The credit risk involved in issuing letters
+ of credit is essentially the same as that involved in extending loan facilities
+ to customers. Collateral is required in instances where we deem it necessary.
+
+ The following
+ is a summary of commitments and contingent liabilities with off-balance sheet risks
+ as of June 30, 2007:
+
+ 
+ 
+Contract or
+ Notional Amount
+
+ 
+ 
+(In thousands)
+
+Commitments
+ to originate loans:
+ 
+ 
+ 
+
+ Fixed rate
+ 
+$
+10,933
+
+ Adjustable
+ rate
+ 
+ 
+ 7,175
+
+Undisbursed
+ balance of loans closed
+ 
+ 
+ 10,348
+
+Unused lines
+ of credit
+ 
+ 
+ 35,582
+
+ 
+ 
+
+Total
+ 
+$
+64,038
+
+ 
+ 
+
+Capital
+
+ Consistent
+ with our goal to operate a sound and profitable financial organization, we actively
+ seek to maintain a well capitalized institution in accordance with regulatory
+ standards. Home Federal Bank s total equity capital was $89.3 million at June
+ 30, 2007, or 12.6%, of total assets on that date. As of June 30, 2007, we exceeded
+ all regulatory capital requirements. Our regulatory capital ratios at June 30, 2007
+ were as follows: Tier 1 capital 13.0%; Tier 1 (core) risk-based capital 19.9%; and
+ total risk-based capital 20.6%. The regulatory capital requirements to be considered
+ well capitalized are 5%, 6% and 10%, respectively. See How We Are Regulated
+ Regulation and Supervision of Home Federal Bank Capital Requirements and Pro Forma Data. 
+
+Impact of Inflation
+
+ The Consolidated
+ Financial Statements and related financial data presented herein have been prepared
+ in accordance with accounting principles generally accepted in the United States
+ of America. These principles generally require the measurement of financial position
+ and operating results in terms of historical dollars, without considering changes
+ in the relative purchasing power of money over time due to inflation.
+
+ Unlike most
+ industrial companies, virtually all the assets and liabilities of a financial institution
+ are monetary in nature. The primary impact of inflation is reflected in the increased
+ cost of our operations. As a result, interest rates generally have a more significant
+ impact on a financial institution s performance than do general levels of inflation.
+ Interest rates do not necessarily move in the same direction or to the same extent
+ as the prices of goods and services. In a period of rapidly rising interest rates,
+ the liquidity and maturity structures of our assets and liabilities are critical
+ to the maintenance of acceptable performance levels.
+
+67
+
+ The principal
+ effect of inflation on earnings, as distinct from levels of interest rates, is in
+ the area of noninterest expense. Expense items such as employee compensation, employee
+ benefits and occupancy and equipment costs may be subject to increases as a result
+ of inflation. An additional effect of inflation is the possible increase in dollar
+ value of the collateral securing loans that we have made. Our management is unable
+ to determine the extent, if any, to which properties securing loans have appreciated
+ in dollar value due to inflation.
+
+Recent Accounting Pronouncements
+
+ In July 2006,
+ the Financial Accounting Standards Board issued Financial Accounting Standards Board
+ Interpretation No. 48, Accounting for Uncertainty in Income Taxes: an interpretation
+ of Statement of Financial Accounting Standard ( SFAS ) Statement No. 109. This interpretation clarifies Statement of Financial Accounting Standards
+ No. 109, Accounting for Income Taxes, to indicate a criterion that an
+ individual tax position would have to meet for some or all of the benefit of that
+ position to be recognized in an entity s financial statements. The interpretation
+ is effective for fiscal years beginning after December 15, 2006 and is not expected
+ to have a significant impact on our consolidated financial condition or results
+ of operations.
+
+ On February
+ 15, 2007, the Financial Accounting Standards Board issued SFAS No. 159, The
+ Fair Value Option for Financial Assets and Financial Liabilities. The statement
+ permits entities to choose to measure selected financial assets and liabilities
+ at fair value, with changes in fair value recorded in earnings. The objective is
+ to improve financial reporting by providing entities with the opportunity to mitigate
+ volatility in earnings caused by measuring related assets and liabilities differently
+ without having to apply complex hedge accounting provisions. The statement is effective
+ as of the beginning of an entity s first fiscal year beginning after November
+ 15, 2007. An entity may elect to early adopt as of the beginning of a fiscal year
+ that begins on or before November 15, 2007. We are in the process of evaluating
+ the impact of the statement on our consolidated financial position and results of
+ operations.
+
+ In September
+ 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value
+ Measurements. The statement provides enhanced guidance for measuring assets
+ and liabilities using fair value and applies whenever other standards require or
+ permit assets or liabilities to be measured at fair value. SFAS No. 157 also requires
+ expanded disclosure of items that are measured at fair value, the information used
+ to measure fair value, and the effect of fair value measurements on earnings. The
+ Statement is effective for financial statements issued for fiscal years beginning
+ after November 15, 2007 and is not expected to have a significant impact on our
+ consolidated financial condition or results of operations.
+
+ In March 2006,
+ the Financial Accounting Standards Board issued SFAS No. 156, Accounting for
+ Servicing of Financial Assets, an amendment of SFAS Statement No. 140, which
+ permits, but does not require, an entity to account for one or more classes of servicing
+ rights (i.e., mortgage servicing rights) at fair value, with the changes in fair
+ value recorded in the consolidated statement of income. We elected early adoption
+ of the statement as of September 30, 2006 to measure mortgage servicing rights using
+ the fair value method. The adoption of this statement did not have a material impact
+ on our financial condition and results of operations.
+
+68
+
+BUSINESS
+ OF HOME FEDERAL BANCORP, INC. AND HOME FEDERAL BANK
+
+General
+
+ Home Federal
+ Bancorp, Inc. was organized as a federally chartered stock corporation at the direction
+ of Home Federal Savings and Loan Association of Nampa in connection with its mutual
+ holding company reorganization. On December 6, 2004, Home Federal Savings and Loan
+ Association of Nampa completed the reorganization and minority stock offering. In
+ connection with the reorganization, Home Federal Savings and Loan Association of
+ Nampa converted to a federally chartered stock savings bank and changed its name
+ to Home Federal Bank. Home Federal Bancorp sold 40.06% of its outstanding shares
+ of common stock to the public and issued 59.04% of its outstanding shares of common
+ stock to Home Federal MHC, the mutual holding company parent of Home Federal Bancorp.
+ In connection with the reorganization, Home Federal Bancorp received $53.6 million
+ in net proceeds after deducting expenses, and issued an additional 146,004 shares
+ and $365,010 in cash to the Home Federal Foundation, Inc., a charitable foundation
+ established as part of the reorganization.
+
+ Regulations
+ of the Office of Thrift Supervision provide that so long as Home Federal MHC exists,
+ it will own at least a majority of Home Federal Bancorp s common stock. Home
+ Federal Bancorp s business activity is the ownership of the outstanding capital
+ stock of Home Federal Bank and management of the investment of offering proceeds
+ retained from the reorganization. Home Federal Bancorp neither owns nor leases any
+ property but instead uses the premises, equipment and other property of Home Federal
+ Bank with the payment of appropriate management fees, as required by applicable
+ law and regulations. In the future, Home Federal Bancorp may acquire or organize
+ other operating subsidiaries; however, there are no current plans to do so. Home
+ Federal Bancorp has no significant assets, other than mortgage-backed securities
+ and all of the outstanding shares of Home Federal Bank, and no significant liabilities.
+
+ Home Federal
+ Bank was founded in 1920 as a building and loan association and reorganized as a
+ federal mutual savings and loan association in 1936. Home Federal s deposits
+ are insured by the Federal Deposit Insurance Corporation up to applicable legal
+ limits under the Deposit Insurance Fund. Home Federal Bank has been a member of
+ the Federal Home Loan Bank system since 1937. Home Federal Bank is regulated by
+ the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
+
+ We are a community-oriented
+ financial institution dedicated to serving the financial service needs of consumers
+ and businesses within our market area. We engage primarily in the business of attracting
+ deposits from the general public and using these funds to originate loans. We emphasize
+ the origination of loans secured by first mortgages on owner-occupied, residential
+ real estate, residential development and construction, and commercial real estate.
+ To a lesser extent, we originate other types of real estate loans, commercial business
+ loans and consumer loans. See Lending Activities. 
+
+69
+
+Operating Lines
+
+ The following
+ reflects our management structure and responsibilities of each of our operating lines before and after the conversion:
+
+Market Area
+
+ We serve the
+ Boise, Idaho and surrounding metropolitan area known as the Treasure Valley region
+ of southwestern Idaho, which includes Ada, Canyon, Elmore and Gem counties, through
+ our 15 full-service banking offices, two loan centers, 16 automated teller machines
+ and Internet banking services. Included in our 15 full-service banking offices are
+ six Wal-Mart in-store branch locations, one of which was opened in October 2006.
+ For more information, see Properties. below.
+
+ Home Federal
+ Bank maintains its largest branch presence in Ada County with eight locations, followed
+ by Canyon County with five offices, including Home Federal Bank s corporate
+ headquarters in Nampa. As of June 30, 2006, we had a 5.45% market share of the Federal
+ Deposit Insurance Corporation-insured deposits in these two counties, ranking us
+ fifth among all insured depository institutions in these counties. The two remaining
+ branches are located in Elmore and Gem counties.
+
+ The local
+ economy is primarily urban with the City of Boise, the state capital of Idaho, being
+ the most populous of the markets that we serve, followed by Nampa, the state s
+ second largest city. Nearly 40% of the state s population lives and works in
+ the four counties of Ada, Canyon, Elmore and Gem that are served by Home Federal
+ Bank. Of the four counties, Ada County has the largest population with approximately
+ 370,738 residents, a median household income of $62,235 and per capita income of
+ $30,892, followed by Canyon County, which has a population of approximately 179,835
+ residents, a median household income of $46,117 and per capita income of 
+
+70
+
+$19,849. Population growth in Ada and Canyon counties in recent years has been stronger with
+ increases of 3.0% and 4.6%, respectively, compared to state and national growth
+ rates of 2.3% and 1.2%, respectively. Household incomes in Ada and Canyon counties
+ have experienced increases of 4.4% and 3.7%, respectively, in recent years that
+ are equal to, or better than, the increases of 3.7% and 3.4%, respectively, at the
+ state and national levels.
+
+ The counties
+ of Elmore and Gem, are more rural and less populated than Ada and Canyon counties. Elmore county has a population of approximately
+ 30,270 residents, a median household income of $43,808 and per capita income of
+ $18,823. Gem County has a population of approximately 17,190 residents, a median
+ household income of $42,707 and per capita income of $19,069. The population growth
+ in Elmore County in recent years remained below the population growth rate for Idaho
+ as well as the national growth rate. Gem County, however, has experienced a modest
+ increase in population during this same period, although remaining below the growth
+ rates at the state and national levels.
+
+ The regional
+ economy is well diversified with government, healthcare, manufacturing, high technology,
+ call centers and construction providing sources of employment. In addition, agriculture
+ and related industries continue to be key components of the economy in southwestern
+ Idaho. Generally, sources of employment are concentrated in Ada and Canyon counties
+ and include the headquarters of Micron Technology, Washington Group International,
+ J.R. Simplot Company and Boise Cascade, LLC. Other major employers include Hewlett-Packard,
+ two regional medical centers and Idaho state government agencies. The City of Boise
+ is also home to Boise State University, the state s largest and fastest growing
+ university. The unemployment rate for the month of May 2007 in the State of Idaho
+ was 2.3%, compared to the U.S. unemployment rate of 4.5%, and the unemployment rates
+ for Ada, Canyon, Elmore and Gem counties were 1.9%, 2.6%, 3.1% and 2.6%, respectively.
+ The unemployment rates in Elmore and Gem counties generally reflect areas that have
+ a small employment base and experience only modest rates of job growth. In addition,
+ Elmore County employment is generally influenced by the presence of Mountain Home
+ Air Force Base and the services needed to support this facility.
+
+Lending Activities
+
+ General. Historically, our principal lending activity has consisted of the origination of loans secured by
+first mortgages on owner-occupied, one- to four-family residences and loans for the construction of one- to
+four-family residences. We also originate consumer loans, with an emphasis on home equity loans and lines of
+credit. Since 1997, we have been aggressively offering commercial real estate loans and to a lesser extent,
+multi-family loans, primarily in the Treasure Valley. A substantial portion of our loan portfolio is secured by real
+estate, either as primary or secondary collateral, located in our primary market area. As of June 30, 2007, the net
+loan portfolio totaled $491.8 million and represented 67.5% of our total assets. As of June 30, 2007, our total loan
+portfolio was comprised of 56.7% single-family home loans, 8.1% home equity loans and lines of credit, 32.0%
+commercial real estate loans, 1.6% multi-family real estate loans, 0.8% commercial business loans, 0.5% secured
+consumer loans and 0.3% unsecured consumer loans.
+
+ 
+At June 30, 2007, the maximum amount that we could have loaned to any one borrower and the borrower s
+related entities under applicable regulations was $14.3 million. Our internal policy limits loans to one borrower and
+the borrower s related entities to 80% of the regulatory limit, or $11.4 million. At June 30, 2007, we had no
+borrowing relationship with outstanding balances in excess of this amount.
+
+ 
+Our largest single borrower relationship at June 30, 2007 was six commercial real estate loans totaling $5.4
+million in the aggregate made to a family partnership and secured by buildings housing a restaurant, office and retail
+space, a childcare facility and RV storage. The second largest lending relationship was five commercial real estate
+loans and one single-family residential loan totaling $5.2 million. One of the loans was made to a limited liability
+corporation secured by a retail center with multiple tenants. Four of loans were made to the family partnership for
+office buildings. The residential loan was made to an individual. Our third single borrower relationship was a
+commercial real estate loan for $4.2 million made to a limited liability corporation secured by a health club. The
+fourth largest lending relationship was four commercial real estate loans for $4.0 million made to a limited liability
+corporation. One of the loans is for a gas station and convenience store and three loans are for retail centers with
+
+71
+
+multiple tenants. The fifth largest lending relationship was three commercial real estate loans secured by office
+buildings and a home equity line of credit totaling $3.9 million made to a limited liability company. All of these
+loans, including those made to corporations, have personal guarantees in place as an additional source of repayment.
+All of the properties securing these loans are in our primary market area. These loans were performing according to
+their repayment terms at June 30, 2007.
+
+72
+
+ Loan Portfolio Analysis. The following
+ table sets forth the composition of our loan portfolio by type of loan at the dates
+ indicated.
+
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+
+At June 30,
+ 
+
+ 
+
+ 
+ 
+
+ 2007
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+Amount
+ 
+
+Percent
+ 
+
+Amount
+ 
+ 
+
+Percent
+ 
+
+Amount
+ 
+ 
+
+Percent
+ 
+
+Amount
+ 
+ 
+
+Percent
+ 
+
+Amount
+ 
+ 
+
+Percent
+ 
+
+Amount
+ 
+ 
+
+Percent
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential (1)
+
+ 
+ 
+$
+259,600
+ 
+ 
+ 
+52.38
+%
+ 
+$
+293,640
+ 
+ 
+ 
+57.88
+%
+ 
+$
+252,126
+ 
+ 
+ 
+58.00
+%
+ 
+$
+242,818
+ 
+ 
+ 
+61.27
+%
+ 
+$
+247,309
+ 
+ 
+ 
+65.81
+%
+ 
+$
+194,088
+ 
+ 
+ 
+60.27
+%
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+6,910
+ 
+ 
+ 
+1.39
+ 
+ 
+ 
+7,049
+ 
+ 
+ 
+1.39
+ 
+ 
+ 
+5,454
+ 
+ 
+ 
+1.25
+ 
+ 
+ 
+6,265
+ 
+ 
+ 
+1.58
+ 
+ 
+ 
+7,750
+ 
+ 
+ 
+2.06
+ 
+ 
+ 
+7,512
+ 
+ 
+ 
+2.34
+ 
+
+Commercial
+
+ 
+ 
+ 
+134,734
+ 
+ 
+ 
+27.18
+ 
+ 
+ 
+125,401
+ 
+ 
+ 
+24.72
+ 
+ 
+ 
+116,432
+ 
+ 
+ 
+26.78
+ 
+ 
+ 
+93,575
+ 
+ 
+ 
+23.61
+ 
+ 
+ 
+79,020
+ 
+ 
+ 
+21.02
+ 
+ 
+ 
+79,197
+ 
+ 
+ 
+24.59
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+ 
+401,244
+ 
+ 
+ 
+80.95
+ 
+ 
+ 
+426,090
+ 
+ 
+ 
+83.99
+ 
+ 
+ 
+374,012
+ 
+ 
+ 
+86.03
+ 
+ 
+ 
+342,658
+ 
+ 
+ 
+86.46
+ 
+ 
+ 
+334,079
+ 
+ 
+ 
+88.89
+ 
+ 
+ 
+280,797
+ 
+ 
+ 
+87.20
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+21,296
+ 
+ 
+ 
+4.30
+ 
+ 
+ 
+23,678
+ 
+ 
+ 
+4.67
+ 
+ 
+ 
+14,421
+ 
+ 
+ 
+3.32
+ 
+ 
+ 
+7,207
+ 
+ 
+ 
+1.82
+ 
+ 
+ 
+5,225
+ 
+ 
+ 
+1.39
+ 
+ 
+ 
+6,505
+ 
+ 
+ 
+2.02
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+997
+ 
+ 
+ 
+0.20
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,427
+ 
+ 
+ 
+0.33
+ 
+ 
+ 
+834
+ 
+ 
+ 
+0.21
+ 
+ 
+ 
+352
+ 
+ 
+ 
+0.09
+ 
+ 
+ 
+1,486
+ 
+ 
+ 
+0.46
+ 
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+23,895
+ 
+ 
+ 
+4.82
+ 
+ 
+ 
+16,344
+ 
+ 
+ 
+3.22
+ 
+ 
+ 
+7,470
+ 
+ 
+ 
+1.72
+ 
+ 
+ 
+11,151
+ 
+ 
+ 
+2.81
+ 
+ 
+ 
+9,128
+ 
+ 
+ 
+2.43
+ 
+ 
+ 
+6,579
+ 
+ 
+ 
+2.04
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+46,188
+ 
+ 
+ 
+9.32
+ 
+ 
+ 
+40,022
+ 
+ 
+ 
+7.89
+ 
+ 
+ 
+23,318
+ 
+ 
+ 
+5.37
+ 
+ 
+ 
+19,192
+ 
+ 
+ 
+4.84
+ 
+ 
+ 
+14,705
+ 
+ 
+ 
+3.91
+ 
+ 
+ 
+14,570
+ 
+ 
+ 
+4.52
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+40,328
+ 
+ 
+ 
+8.14
+ 
+ 
+ 
+34,143
+ 
+ 
+ 
+6.73
+ 
+ 
+ 
+28,558
+ 
+ 
+ 
+6.57
+ 
+ 
+ 
+27,351
+ 
+ 
+ 
+6.90
+ 
+ 
+ 
+20,640
+ 
+ 
+ 
+5.49
+ 
+ 
+ 
+18,069
+ 
+ 
+ 
+5.61
+ 
+
+Automobile
+
+ 
+ 
+ 
+2,433
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+3,245
+ 
+ 
+ 
+0.64
+ 
+ 
+ 
+4,576
+ 
+ 
+ 
+1.05
+ 
+ 
+ 
+3,838
+ 
+ 
+ 
+0.97
+ 
+ 
+ 
+1,939
+ 
+ 
+ 
+0.52
+ 
+ 
+ 
+2,297
+ 
+ 
+ 
+0.71
+ 
+
+Other
+ consumer
+
+ 
+ 
+ 
+1,393
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+1,300
+ 
+ 
+ 
+0.26
+ 
+ 
+ 
+1,530
+ 
+ 
+ 
+0.35
+ 
+ 
+ 
+1,949
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+2,827
+ 
+ 
+ 
+0.75
+ 
+ 
+ 
+3,666
+ 
+ 
+ 
+1.14
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+ 
+44,154
+ 
+ 
+ 
+8.91
+ 
+ 
+ 
+38,688
+ 
+ 
+ 
+7.63
+ 
+ 
+ 
+34,664
+ 
+ 
+ 
+7.97
+ 
+ 
+ 
+33,138
+ 
+ 
+ 
+8.36
+ 
+ 
+ 
+25,406
+ 
+ 
+ 
+6.76
+ 
+ 
+ 
+24,032
+ 
+ 
+ 
+7.46
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Commercial
+ business
+ 
+ 
+ 
+4,064
+ 
+ 
+ 
+0.82
+ 
+ 
+ 
+2,480
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+2,759
+ 
+ 
+ 
+0.63
+ 
+ 
+ 
+1,363
+ 
+ 
+ 
+0.34
+ 
+ 
+ 
+1,662
+ 
+ 
+ 
+0.44
+ 
+ 
+ 
+2,641
+ 
+ 
+ 
+0.82
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total loans
+ 
+ 
+ 
+495,650
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+507,280
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+434,753
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+396,351
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+375,852
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+322,040
+ 
+ 
+ 
+100.00
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Less:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred
+ loan fees
+
+ 
+ 
+ 
+1,134
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,241
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+927
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,080
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,370
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,358
+ 
+ 
+ 
+ 
+ 
+
+Allowance
+ for loan losses
+
+ 
+ 
+ 
+2,748
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,974
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,882
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,637
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,853
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,385
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+Loans receivable,
+ net
+
+ 
+ 
+$
+491,768
+ 
+ 
+ 
+ 
+ 
+ 
+$
+503,065
+ 
+ 
+ 
+ 
+ 
+ 
+$
+430,944
+ 
+ 
+ 
+ 
+ 
+ 
+$
+392,634
+ 
+ 
+ 
+ 
+ 
+ 
+$
+372,629
+ 
+ 
+ 
+ 
+ 
+ 
+$
+318,297
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+(1)
+ 
+Does not include
+ loans held for sale of $4.4 million, $4.1 million, $5.5 million, $3.6 million, $5.1 million
+ and $12.7 million at June 30, 2007, September 30, 2006, 2005, 2004, 2003 and 2002,
+ respectively.
+
+73
+
+ The following table shows the composition
+ of our loan portfolio, excluding loans held for sale, by fixed and adjustable rate
+ loans at the dates indicated.
+
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+
+At June 30,
+ 
+
+ 
+
+ 
+ 
+
+ 2007
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+Amount
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+FIXED RATE
+ LOANS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+$
+164,400
+ 
+ 
+ 
+33.17
+%
+ 
+$
+188,102
+ 
+ 
+ 
+37.08
+%
+ 
+$
+199,352
+ 
+ 
+ 
+45.86
+%
+ 
+$
+193,241
+ 
+ 
+ 
+48.76
+%
+ 
+$
+198,882
+ 
+ 
+ 
+52.91
+%
+ 
+$
+133,697
+ 
+ 
+ 
+41.52
+%
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+2,009
+ 
+ 
+ 
+0.40
+ 
+ 
+ 
+2,055
+ 
+ 
+ 
+0.41
+ 
+ 
+ 
+2,119
+ 
+ 
+ 
+0.48
+ 
+ 
+ 
+2,136
+ 
+ 
+ 
+0.54
+ 
+ 
+ 
+2,137
+ 
+ 
+ 
+0.57
+ 
+ 
+ 
+2,061
+ 
+ 
+ 
+0.64
+ 
+
+Commercial
+
+ 
+ 
+ 
+22,214
+ 
+ 
+ 
+4.48
+ 
+ 
+ 
+19,236
+ 
+ 
+ 
+3.79
+ 
+ 
+ 
+16,303
+ 
+ 
+ 
+3.74
+ 
+ 
+ 
+12,428
+ 
+ 
+ 
+3.13
+ 
+ 
+ 
+8,461
+ 
+ 
+ 
+2.25
+ 
+ 
+ 
+8,125
+ 
+ 
+ 
+2.52
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+ 
+188,623
+ 
+ 
+ 
+38.05
+ 
+ 
+ 
+209,393
+ 
+ 
+ 
+41.28
+ 
+ 
+ 
+217,774
+ 
+ 
+ 
+50.08
+ 
+ 
+ 
+207,805
+ 
+ 
+ 
+52.43
+ 
+ 
+ 
+209,480
+ 
+ 
+ 
+55.73
+ 
+ 
+ 
+143,883
+ 
+ 
+ 
+44.68
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+799
+ 
+ 
+ 
+0.16
+ 
+ 
+ 
+16,797
+ 
+ 
+ 
+3.31
+ 
+ 
+ 
+3,391
+ 
+ 
+ 
+0.78
+ 
+ 
+ 
+2,778
+ 
+ 
+ 
+0.70
+ 
+ 
+ 
+4,909
+ 
+ 
+ 
+1.31
+ 
+ 
+ 
+2,107
+ 
+ 
+ 
+0.66
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+7,361
+ 
+ 
+ 
+1.49
+ 
+ 
+ 
+5,967
+ 
+ 
+ 
+1.18
+ 
+ 
+ 
+1,838
+ 
+ 
+ 
+0.42
+ 
+ 
+ 
+312
+ 
+ 
+ 
+0.08
+ 
+ 
+ 
+2,478
+ 
+ 
+ 
+0.66
+ 
+ 
+ 
+359
+ 
+ 
+ 
+0.11
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+8,160
+ 
+ 
+ 
+1.65
+ 
+ 
+ 
+22,764
+ 
+ 
+ 
+4.49
+ 
+ 
+ 
+5,229
+ 
+ 
+ 
+1.20
+ 
+ 
+ 
+3,090
+ 
+ 
+ 
+0.78
+ 
+ 
+ 
+7,387
+ 
+ 
+ 
+1.97
+ 
+ 
+ 
+2,466
+ 
+ 
+ 
+0.77
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+13,173
+ 
+ 
+ 
+2.66
+ 
+ 
+ 
+9,723
+ 
+ 
+ 
+1.92
+ 
+ 
+ 
+4,903
+ 
+ 
+ 
+1.13
+ 
+ 
+ 
+4,393
+ 
+ 
+ 
+1.11
+ 
+ 
+ 
+2,906
+ 
+ 
+ 
+0.77
+ 
+ 
+ 
+129
+ 
+ 
+ 
+0.04
+ 
+
+Automobile
+
+ 
+ 
+ 
+2,433
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+3,245
+ 
+ 
+ 
+0.64
+ 
+ 
+ 
+4,576
+ 
+ 
+ 
+1.05
+ 
+ 
+ 
+3,838
+ 
+ 
+ 
+0.97
+ 
+ 
+ 
+1,939
+ 
+ 
+ 
+0.52
+ 
+ 
+ 
+2,297
+ 
+ 
+ 
+0.71
+ 
+
+Other
+ consumer
+
+ 
+ 
+ 
+1,393
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+1,300
+ 
+ 
+ 
+0.26
+ 
+ 
+ 
+1,530
+ 
+ 
+ 
+0.35
+ 
+ 
+ 
+1,949
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+2,827
+ 
+ 
+ 
+0.75
+ 
+ 
+ 
+3,666
+ 
+ 
+ 
+1.14
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+ 
+16,999
+ 
+ 
+ 
+3.43
+ 
+ 
+ 
+14,268
+ 
+ 
+ 
+2.82
+ 
+ 
+ 
+11,009
+ 
+ 
+ 
+2.53
+ 
+ 
+ 
+10,180
+ 
+ 
+ 
+2.57
+ 
+ 
+ 
+7,672
+ 
+ 
+ 
+2.04
+ 
+ 
+ 
+6,092
+ 
+ 
+ 
+1.89
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Commercial
+ business
+ 
+ 
+ 
+1,427
+ 
+ 
+ 
+0.29
+ 
+ 
+ 
+622
+ 
+ 
+ 
+0.12
+ 
+ 
+ 
+1,091
+ 
+ 
+ 
+0.25
+ 
+ 
+ 
+642
+ 
+ 
+ 
+0.16
+ 
+ 
+ 
+775
+ 
+ 
+ 
+0.21
+ 
+ 
+ 
+1,420
+ 
+ 
+ 
+0.44
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total fixed
+ rate loans
+ 
+ 
+ 
+215,209
+ 
+ 
+ 
+43.42
+ 
+ 
+ 
+247,047
+ 
+ 
+ 
+48.71
+ 
+ 
+ 
+235,103
+ 
+ 
+ 
+54.06
+ 
+ 
+ 
+221,717
+ 
+ 
+ 
+55.94
+ 
+ 
+ 
+225,314
+ 
+ 
+ 
+59.95
+ 
+ 
+ 
+153,861
+ 
+ 
+ 
+47.78
+ 
+
+(table continues on following page)
+
+74
+
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+
+At 
+ 
+
+ 
+
+ 
+ 
+
+ June 30, 2007
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+ 
+
+Amount
+ 
+ 
+ 
+
+Percent
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+ADJUSTABLE
+ RATE LOANS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+$
+ 95,200
+ 
+ 
+ 
+19.21
+%
+ 
+ 
+105,538
+ 
+ 
+ 
+20.80
+ 
+ 
+ 
+52,774
+ 
+ 
+ 
+12.14
+ 
+ 
+ 
+49,577
+ 
+ 
+ 
+12.51
+ 
+ 
+ 
+48,427
+ 
+ 
+ 
+12.89
+ 
+ 
+ 
+60,391
+ 
+ 
+ 
+18.75
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+4,901
+ 
+ 
+ 
+0.99
+ 
+ 
+ 
+4,994
+ 
+ 
+ 
+0.98
+ 
+ 
+ 
+3,335
+ 
+ 
+ 
+0.77
+ 
+ 
+ 
+4,129
+ 
+ 
+ 
+1.04
+ 
+ 
+ 
+5,613
+ 
+ 
+ 
+1.49
+ 
+ 
+ 
+5,451
+ 
+ 
+ 
+1.69
+ 
+
+Commercial
+
+ 
+ 
+ 
+112,520
+ 
+ 
+ 
+22.70
+ 
+ 
+ 
+106,165
+ 
+ 
+ 
+20.93
+ 
+ 
+ 
+100,129
+ 
+ 
+ 
+23.04
+ 
+ 
+ 
+81,147
+ 
+ 
+ 
+20.48
+ 
+ 
+ 
+70,559
+ 
+ 
+ 
+18.77
+ 
+ 
+ 
+71,072
+ 
+ 
+ 
+22.07
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+ 
+212,621
+ 
+ 
+ 
+42.90
+ 
+ 
+ 
+216,697
+ 
+ 
+ 
+42.71
+ 
+ 
+ 
+156,238
+ 
+ 
+ 
+35.95
+ 
+ 
+ 
+134,853
+ 
+ 
+ 
+34.03
+ 
+ 
+ 
+124,599
+ 
+ 
+ 
+33.15
+ 
+ 
+ 
+136,914
+ 
+ 
+ 
+42.51
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+20,497
+ 
+ 
+ 
+4.14
+ 
+ 
+ 
+6,881
+ 
+ 
+ 
+1.36
+ 
+ 
+ 
+11,030
+ 
+ 
+ 
+2.54
+ 
+ 
+ 
+4,429
+ 
+ 
+ 
+1.12
+ 
+ 
+ 
+316
+ 
+ 
+ 
+0.08
+ 
+ 
+ 
+4,398
+ 
+ 
+ 
+1.37
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+997
+ 
+ 
+ 
+0.20
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,427
+ 
+ 
+ 
+0.33
+ 
+ 
+ 
+834
+ 
+ 
+ 
+0.21
+ 
+ 
+ 
+352
+ 
+ 
+ 
+0.09
+ 
+ 
+ 
+1,486
+ 
+ 
+ 
+0.46
+ 
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+16,534
+ 
+ 
+ 
+3.33
+ 
+ 
+ 
+10,377
+ 
+ 
+ 
+2.04
+ 
+ 
+ 
+5,632
+ 
+ 
+ 
+1.30
+ 
+ 
+ 
+10,839
+ 
+ 
+ 
+2.73
+ 
+ 
+ 
+6,650
+ 
+ 
+ 
+1.77
+ 
+ 
+ 
+6,220
+ 
+ 
+ 
+1.93
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+38,028
+ 
+ 
+ 
+7.67
+ 
+ 
+ 
+17,258
+ 
+ 
+ 
+3.40
+ 
+ 
+ 
+18,089
+ 
+ 
+ 
+4.17
+ 
+ 
+ 
+16,102
+ 
+ 
+ 
+4.06
+ 
+ 
+ 
+7,318
+ 
+ 
+ 
+1.94
+ 
+ 
+ 
+12,104
+ 
+ 
+ 
+3.76
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+27,155
+ 
+ 
+ 
+5.48
+ 
+ 
+ 
+24,420
+ 
+ 
+ 
+4.81
+ 
+ 
+ 
+23,655
+ 
+ 
+ 
+5.44
+ 
+ 
+ 
+22,958
+ 
+ 
+ 
+5.79
+ 
+ 
+ 
+17,734
+ 
+ 
+ 
+4.72
+ 
+ 
+ 
+17,940
+ 
+ 
+ 
+5.57
+ 
+
+Automobile
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Other
+ consumer
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+ 
+27,155
+ 
+ 
+ 
+5.48
+ 
+ 
+ 
+24,420
+ 
+ 
+ 
+4.81
+ 
+ 
+ 
+23,655
+ 
+ 
+ 
+5.44
+ 
+ 
+ 
+22,958
+ 
+ 
+ 
+5.79
+ 
+ 
+ 
+17,734
+ 
+ 
+ 
+4.72
+ 
+ 
+ 
+17,940
+ 
+ 
+ 
+5.57
+ 
+
+Commercial
+ business
+
+ 
+ 
+ 
+2,637
+ 
+ 
+ 
+0.53
+ 
+ 
+ 
+1,858
+ 
+ 
+ 
+0.37
+ 
+ 
+ 
+1,668
+ 
+ 
+ 
+0.38
+ 
+ 
+ 
+721
+ 
+ 
+ 
+0.18
+ 
+ 
+ 
+887
+ 
+ 
+ 
+0.24
+ 
+ 
+ 
+1,221
+ 
+ 
+ 
+0.38
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total adjustable
+ rate loans
+
+ 
+ 
+ 
+280,441
+ 
+ 
+ 
+56.58
+ 
+ 
+ 
+260,233
+ 
+ 
+ 
+51.29
+ 
+ 
+ 
+199,650
+ 
+ 
+ 
+45.94
+ 
+ 
+ 
+174,634
+ 
+ 
+ 
+44.06
+ 
+ 
+ 
+150,538
+ 
+ 
+ 
+40.05
+ 
+ 
+ 
+168,179
+ 
+ 
+ 
+52.22
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total loans
+ 
+ 
+ 
+495,650
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+507,280
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+434,753
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+396,351
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+375,852
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+322,040
+ 
+ 
+ 
+100.00
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Less:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred
+ loan fees
+
+ 
+ 
+ 
+1,134
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,241
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+927
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,080
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,370
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,358
+ 
+ 
+ 
+ 
+ 
+
+Allowance
+ for loan losses
+
+ 
+ 
+ 
+2,748
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,974
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,882
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,637
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,853
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,385
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+Loans receivable,
+ net
+ 
+ 
+$
+491,768
+ 
+ 
+ 
+ 
+ 
+ 
+$
+503,065
+ 
+ 
+ 
+ 
+ 
+ 
+$
+430,944
+ 
+ 
+ 
+ 
+ 
+ 
+$
+392,634
+ 
+ 
+ 
+ 
+ 
+ 
+$
+372,629
+ 
+ 
+ 
+ 
+ 
+ 
+$
+318,297
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+75
+
+ One- to
+ Four-Family Residential Real Estate Lending. As of June 30, 2007, $259.6 million,
+ or 52.4%, of our total loan portfolio consisted of permanent loans secured by one- to four-family residences. We originate both fixed rate loans and adjustable rate
+ loans in our residential lending program. Generally, 30 year fixed rate loans are
+ originated to meet the requirements of Fannie Mae and Freddie Mac for sale in the
+ secondary market. We do from time to time, however, retain a portion of the fixed
+ rate loans that we originate, particularly loans with maturities of 20 years or
+ less, in our loan portfolio to meet asset and liability management objectives. At
+ June 30, 2007, $164.4 million, or 63.3% , of our permanent one- to four-family
+ loan portfolio consisted of fixed rate loans.
+
+ We also offer adjustable rate
+ mortgage loans at rates and terms competitive with market conditions. Presently, most of the adjustable rate mortgage
+ loans are originated for the purpose of selling them in the secondary market. We
+ offer several adjustable rate mortgage products that adjust annually after an initial
+ period ranging from one to ten years. Contractual annual adjustments are generally
+ limited to increases or decreases of no more than two percent, subject to a maximum increase of no more than six percent from the rate offered at the time of origination.
+ The adjustable rate mortgage loans held in our portfolio do not permit negative
+ amortization of principal and generally carry no prepayment restrictions. Borrower
+ demand for adjustable rate mortgage loans versus fixed rate mortgage loans is a
+ function of the level of interest rates, the expectations of changes in the level
+ of interest rates and the difference between the initial interest rates and fees
+ charged for each type of loan. The relative amount of fixed rate mortgage loans
+ and adjustable rate mortgage loans that can be originated at any time is largely
+ determined by the demand for each in a competitive environment. At June 30, 2007,
+ we had $95.2 million, or 36.7% , of our permanent one- to four-family mortgage
+ loans in adjustable rate loans.
+
+ Adjustable
+ rate mortgage loans in our loan portfolio helps us reduce our exposure to changes
+ in interest rates. There are, however, credit risks resulting from the potential
+ of increased interest to be paid by the borrower as a result of increases in interest
+ rates. It is possible that, during periods of rising interest rates, the risk of
+ default on adjustable rate mortgage loans may increase as a result of repricing
+ and the increased costs to the borrower. Furthermore, because adjustable rate mortgage
+ loans may be offered at initial rates of interest below the rates that would apply
+ were the adjustment index used for pricing initially, these loans may be subject
+ to increased risks of default or delinquency. Another consideration is that although
+ adjustable rate mortgage loans allow us to decrease the sensitivity of our asset
+ base as a result of changes in the interest rates, the extent of this interest sensitivity
+ is limited by the periodic and lifetime interest rate adjustment limits. Because
+ of these considerations, there is no assurance that yields on adjustable rate mortgage
+ loans will be sufficient to offset increases in our cost of funds, particularly
+ in today s interest rate environment.
+
+ We generally underwrite our one-
+ to four-family loans based on the applicant s employment and credit history
+ and the appraised value of the subject property. Generally, we lend up to 80% of
+ the lesser of the appraised value or purchase price for one- to four-family residential
+ loans. In situations where we grant a loan with a loan-to-value ratio in excess
+ of 80%, we generally require private mortgage insurance in order to reduce our exposure
+ to 80% or less. We also offer combination first and second mortgage loans which
+ do not require private mortgage insurance, however, these loans are generally
+ sold to the secondary market. Properties securing our one- to four-family loans
+ are generally appraised by independent fee appraisers that have been approved by
+ us. We require our borrowers to obtain title and hazard insurance, and flood insurance,
+ if necessary, in an amount not less than the value of the property improvements.
+
+ Our fixed rate, single family residential mortgage loans are normally originated
+ with 15 to 30 year terms, although these loans typically remain outstanding for
+ substantially shorter periods. In addition, substantially all residential mortgage
+ loans in our loan portfolio contain due-on-sale clauses, which allow us to declare
+ the unpaid amount of the loan due and payable upon the sale of the property securing
+ the loan. Typically, we enforce these due-on-sale clauses to the extent permitted
+ by law and as a standard course of business. The average loan maturity is a function
+ of, among other factors, the level of purchase and sale activity in the real estate
+ market, prevailing interest rates and the interest rates payable on outstanding
+ loans.
+
+ At June 30, 2007, $36.4 million, or 14.0%, of our one- to four-family
+ residential mortgages consisted of loans for non-owner occupied properties.
+ Loans secured by one to two units are generally made with loan-to-value
+
+76
+
+ratios of up to 90% and loans secured
+ by three units or more are generally made with loan-to-value ratios of up to
+ 75%.
+
+ In an effort
+ to provide financing for moderate income and first-time buyers, we participate in
+ the Idaho Housing and Finance Association s Single Family Mortgage Program.
+ The Idaho Housing and Finance Association is a non-profit organization that provides
+ housing resources to low-to-moderate-income families through various below market
+ housing programs. The program is designed to meet the needs of qualified borrowers
+ in the low-to moderate-income brackets. The program has established income limits
+ based on family size and sales price limits for both existing and new construction.
+ We offer residential mortgage loans through this program to qualified individuals
+ and originate the loans using modified underwriting guidelines. All of these loans
+ have private mortgage insurance on the portion of the principal amount that exceeds
+ 80% of the appraised value of the property. We sold loans of $9.6 million and
+ $9.5 million to the Idaho Housing and Finance Association in the year ended September
+ 30, 2006 and nine months ended June 30, 2007, respectively.
+
+ The Idaho Housing
+ and Finance Association has designed two programs to provide down payment and/or
+ closing cost assistance to qualified low-to-moderate income borrowers in Idaho.
+ The assistance consists of grant programs and a second mortgage for a maximum combined
+ loan-to-value (CLTV) of 102%. The grant program is open to first time homebuyers
+ whose total household income is equal to or less than eighty percent (80%) of the
+ Area Median Income based on the property location and the total number of household
+ members. The subsidy assistance can range up to a maximum of $10,000, based on need.
+
+ Real
+ Estate Construction. We have been an active originator of real estate construction
+ loans in our market area for many years. At June 30, 2007, our construction and
+ land development loans amounted to $46.2 million, or 9.3%, of the total loan portfolio.
+
+ The following table shows the composition of the construction loan portfolio
+ at the dates indicated:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+At
+ 
+ 
+
+At September 30,
+
+ 
+ 
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+2007
+ 
+ 
+
+2006
+ 
+ 
+
+2005
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(In Thousands)
+ 
+ 
+ 
+ 
+
+ 
+One- to four-family
+ residential:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Speculative
+
+ 
+ 
+$
+17,624
+ 
+ 
+$
+15,646
+ 
+ 
+$
+6,080
+
+ 
+Permanent
+
+ 
+ 
+ 
+2,110
+ 
+ 
+ 
+5,903
+ 
+ 
+ 
+5,045
+
+ 
+Custom
+
+ 
+ 
+ 
+1,562
+ 
+ 
+ 
+2,129
+ 
+ 
+ 
+3,296
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Multi-family
+ residential:
+ 
+ 
+ 
+997
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,427
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Commercial
+ real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Construction
+
+ 
+ 
+ 
+15,157
+ 
+ 
+ 
+6,402
+ 
+ 
+ 
+6,078
+
+ 
+Land
+ development loans
+
+ 
+ 
+ 
+8,738
+ 
+ 
+ 
+9,942
+ 
+ 
+ 
+1,392
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total construction
+ and land development
+ 
+ 
+$
+46,188
+ 
+ 
+$
+40,022
+ 
+ 
+$
+23,318
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ Our construction
+ loans to individuals to build their personal residences typically are structured
+ as construction/permanent loans whereby there is one closing for both the construction
+ loan and the permanent financing. During the construction phase, which typically
+ lasts for six months, our staff appraiser or an approved fee inspector makes periodic
+ inspections of the construction site and loan proceeds are disbursed directly to
+ the contractors or borrowers as construction progresses. Typically, disbursements
+ are made in five draws during the construction period. Construction loans require
+ payment of interest only during the construction phase and are structured to be converted to fixed or adjustable rate permanent loans at the end of the construction
+ phase. Prior to making a commitment to fund a construction loan, we require an appraisal
+ of the property by an independent fee appraiser or our in-house appraiser. Our staff
+ appraiser or an approved fee inspector also reviews and inspects each
+
+77
+
+project prior to each disbursement of funds
+ during the term of the construction loan. Loan proceeds are disbursed based on
+ a percentage of completion.
+
+ During the year ended September 30, 2006 and
+ the nine months ended June 30, 2007, we originated $42.5 million and $18.7 million, respectively, of short-term builder
+ construction loans to fund the construction of one- to four-family residential properties. Most loans are written
+ with maturities of one year, have interest rates that are tied to the prime rate plus a margin, and
+ are subject to monthly rate adjustments tied to the movement of the prime rate. All builder/borrowers are underwritten to
+ the same standards as other commercial loan credits, requiring minimum debt service coverage ratios
+ and established cash reserves to carry projects through construction completion and sale of the project. The maximum
+ loan-to-value ratio on both pre-sold and speculative projects is 80%. There was one
+ foreclosure action involving builder construction loans during the nine months ended June 30, 2007, with all
+ other loans performing according to their repayment terms.
+
+ We originate construction and site
+ development loans to contractors and builders primarily to finance the construction of single-family homes
+ and subdivisions, which homes typically have an average price ranging from $150,000 to $300,000. Loans to
+ finance the construction of single-family homes and subdivisions are generally offered to experienced builders
+ and builders in our primary market areas. The maximum loan-to-value limit applicable to these loans is generally up
+ to 80% of the appraised market value upon completion of the project. We generally do not require any cash
+ equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are
+ required from builders prior to making the loan. Our loan officers are required to personally visit the proposed site of the
+ development and the sites of competing developments. We require that builders maintain adequate insurance coverage. Maturity dates
+ for residential construction loans are largely a function of the estimated construction period of the project, and
+ generally do not exceed 36 months for residential subdivision development loans. Substantially all of our
+ residential construction loans have adjustable rates of interest based on The Wall Street Journal prime rate
+ and during the term of construction, the accumulated interest is added to the principal of the
+ loan through an interest reserve. Construction loan proceeds are disbursed periodically in increments as construction
+ progresses and as inspection by our approved inspectors warrant. At June 30, 2007, our largest
+ subdivision development loan had a commitment for $1.2 million and an outstanding principal
+ balance of $1.2 million. This loan was secured by a first mortgage lien and was performing
+ according to its original terms at June 30, 2007. At June 30, 2007, the average outstanding
+ principal balance of subdivision loans to contractors and developers was $542,000.
+
+ We also make
+ construction loans for commercial development
+ projects. These projects include multi-family, apartment, retail, office/warehouse
+ and office buildings. These loans generally have an interest-only phase during
+ construction, and generally convert to permanent financing when construction is
+ completed. Disbursement of funds is at our sole discretion and is based on the
+ progress of construction. The maximum loan-to-value limit applicable to these loans
+ is 80% of the appraised post-construction value.
+
+ We originate land loans to local
+ contractors and developers for the purpose of holding the land for future development.
+ These loans are secured by a first lien on the property, are limited to 65% of the
+ lower of the acquisition price or the appraised value of the land, and generally
+ have a term of up to two years with a fixed interest rate based on prime rate. Our
+ land loans are generally secured by property in our primary market area. We require
+ title insurance and, if applicable, a hazardous waste survey reporting that the
+ land is free of hazardous or toxic waste.
+
+ Our construction and land development
+ loans are based upon estimates of costs and value associated with the completed
+ project. These estimates may be inaccurate. Construction and land development lending
+ involves additional risks when compared with permanent residential lending because
+ funds are advanced upon the security of the project, which is of uncertain value
+ prior to its completion. Because of the uncertainties inherent in estimating construction
+ costs, as well as the market value of the completed project and the effects of governmental
+ regulation of real property, it is relatively difficult to evaluate accurately the
+ total funds required to complete a project and the related loan-to-value ratio.
+ This type of lending also typically involves higher loan principal amounts and is
+ often concentrated with a small number of builders. These loans often involve
+ the disbursement of substantial funds with repayment substantially dependent on
+ the success of the ultimate project and the ability of the borrower to sell or
+
+78
+
+lease the property or obtain permanent take-out financing, rather than
+ the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value
+ of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon
+ completion of construction, of the project and may incur a loss. Further, our ability to continue to originate a significant amount
+ of construction loans is dependent on the continued strength of the housing market in Ada, Canyon, Elmore and Gem counties, Idaho. If
+ we lost our relationship with one or more of our larger borrowers building in these counties or there is
+ a decline in the demand for new housing in these counties, it is expected that the demand for construction
+ loans would decline, our liquidity would substantially increase and our net income would be adversely affected. We have attempted to
+ minimize these risks by generally concentrating on residential construction loans in our market area to contractors with
+ whom we have established relationships. At June 30, 2007, no construction loans were delinquent in excess of
+ 90 days or in nonaccrual status. No construction loans were charged-off during the years
+ ended September 30, 2006 and 2005, or during the nine months ended June 30, 2007.
+
+ Commercial and Multi-Family Real
+ Estate Lending. As of June 30, 2007, $134.7 million, or 27.2% and $6.9 million, or 1.4% of our total loan
+ portfolio was secured by commercial and multi-family real estate property, respectively. These loans
+ generally are priced at a higher rate of interest than one- to four-family residential loans. Typically, these loans
+ have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than
+ one- to four-family residential loans. Often payments on loans secured by commercial or multi-family properties are
+ dependent on the successful operation and management of the property; therefore, repayment of these
+ loans may be affected by adverse conditions in the real estate market or the economy. We generally require
+ and obtain loan guarantees from financially capable parties based upon the review of personal financial
+ statements. If the borrower is a corporation, we generally require and obtain personal guarantees from
+ the corporate principals based upon a review of their personal financial statements and
+ individual credit reports.
+
+ The average size loan in our commercial and multi-family real estate loan portfolio
+ was $616,000 as of June 30, 2007. We target individual commercial and multi-family real estate
+ loans to small- and mid-size owner occupants and investors in our market area between $500,000 and $2.0 million; however, we
+ can, by policy, originate loans to one borrower up to 80% of our regulatory limit. As of June 30, 2007, the
+ maximum we could lend to any one borrower based on this limit was $11.4 million. The largest multi-family loan as
+ of June 30, 2007 was a 44-unit residential apartment complex with an outstanding principal balance of $1.6 million
+ located in Canyon County. This loan was performing according to its repayment
+ terms as of June 30, 2007.
+
+ We offer both fixed and adjustable rate loans on commercial and multi-family real
+ estate loans. Loans originated on a fixed rate basis generally are originated at fixed terms up
+ to ten years, with amortization terms up to 25 years. As of June 30, 2007, we had $2.0 million in
+ fixed rate multi-family residential loans and $22.2 million in fixed rate commercial
+ real estate loans.
+
+ Commercial and multi-family real estate loans are originated with
+ rates that generally adjust after an initial period ranging from three to ten years. Adjustable rate
+ multi-family residential and commercial real estate loans are generally priced utilizing the applicable Federal Home
+ Loan Bank Term Borrowing Rate plus an acceptable margin. These loans are generally amortized
+ for up to 25 years with prepayment penalty structures applied for each rate lock period. As of June 30, 2007, we had $4.9 million
+ in adjustable rate multi-family residential loans and $112.5 million in adjustable rate
+ commercial real estate loans. The maximum loan-to-value ratio for commercial and multi-family real estate loans
+ is generally 80% on purchases and refinances. We require appraisals of all properties securing commercial
+ and multi-family real estate loans. Appraisals are performed by independent appraisers designated by us
+ or by our staff appraiser. We require our commercial and multi-family real estate loan borrowers with
+ outstanding balances in excess of $500,000 to submit annual financial statements and
+ rent rolls on the subject property. We also inspect the subject property at least every three to five years
+ if the loan balance exceeds $250,000. We generally require a minimum pro forma debt coverage ratio of 1.2 times for
+ loans secured by commercial and multi-family properties.
+
+ We originate commercial real estate loans, including
+ loans secured by hotels, office space, office/warehouse, retail strip centers, recreational vehicle
+ dealerships, mini-storage facilities, medical and professional 
+
+79
+
+buildings, retail sites and churches located
+ in our Idaho market area. Commercial real estate loans totaled $134.7 million, or 27.2%, of
+ our total loan portfolio as of June 30, 2007.
+
+ Commercial
+ and multi-family real estate loans up to $750,000 can be approved by the Senior
+ Vice President and Chief Credit Officer, the Executive Vice President and Chief
+ Lending Officer, and the President or Chief Executive Officer. Loans up to $3.5
+ million can be approved by the combined authority of these four individuals. Our
+ Management Loan Committee, which presently consists of the President, the Chief
+ Executive Officer, the Executive Vice President and Chief Lending Officer and the
+ Senior Vice President and Chief Credit Officer, is authorized to approve loans
+ to one borrower or a group of related borrowers of up to $7.0 million in the aggregate,
+ with no single loan over $3.5 million. Loans over these amounts or outside our general
+ underwriting guidelines must be approved by the Board of Directors Loan Committee.
+
+ Consumer Lending. We offer a variety of consumer loans to our customers,
+ including home equity loans and lines of credit, savings account loans, automobile
+ loans, recreational vehicle loans and personal unsecured loans. Generally, consumer
+ loans have shorter terms to maturity and higher interest rates than mortgage loans.
+ The maximum term we offer on automobile loans is 72 months and is applicable to
+ new and one year old cars and light trucks. In addition, we offer loan terms of up to 120 months on motor homes and qualifying travel trailers and boats. All
+ automobile loans are risk priced based on the percentage of cost, or established
+ value, being financed. Consumer loans are made with both fixed and variable interest
+ rates and with varying terms. At June 30, 2007, consumer loans amounted to $44.2
+ million, or 8.9%, of the total loan portfolio.
+
+ At June 30, 2007, the largest
+ component of the consumer loan portfolio consisted of home equity loans and lines
+ of credit, which totaled $40.3 million, or 8.1%, of the total loan portfolio. Home equity loans are made for, among other purposes, the improvement of residential
+ properties, debt consolidation and education expenses. The majority of these loans
+ are secured by a first or second mortgage on residential property. The maximum loan-to-value
+ ratio is generally 89.9% or less, when taking into account both the balance of the
+ home equity loan and the first mortgage loan. Home equity lines of credit allow
+ for a ten-year draw period, plus an additional ten year repayment period, and the
+ interest rate is tied to the prime rate as published in The Wall Street Journal, and
+ may include a margin.
+
+ Consumer loans entail greater risk than do residential
+ mortgage loans, particularly in the case of consumer loans that are unsecured or
+ secured by rapidly depreciating assets such as automobiles. In these cases, any
+ repossessed collateral for a defaulted consumer loan may not provide an adequate
+ source of repayment of the outstanding loan balance as a result of the greater likelihood
+ of damage, loss or depreciation. The remaining deficiency often does not warrant
+ further substantial collection efforts against the borrower beyond obtaining a deficiency
+ judgment. In addition, consumer loan collections are dependent on the borrower s
+ continuing financial stability, and are more likely to be adversely affected by
+ job loss, divorce, illness or personal bankruptcy. Furthermore, the application
+ of various federal and state laws, including bankruptcy and insolvency laws, may
+ limit the amount that can be recovered on these loans. These risks are not as prevalent
+ with respect to our consumer loan portfolio because a large percentage of the portfolio
+ consists of home equity loans and lines of credit that are underwritten in a manner
+ such that they result in credit risk that is substantially similar to one- to four-family
+ residential mortgage loans. Nevertheless, home equity loans and lines of credit
+ have greater credit risk than one- to four-family residential mortgage loans because
+ they are secured by mortgages subordinated to the existing first mortgage on the
+ property, which we may or may not hold. In addition, we do not have private mortgage
+ insurance coverage for these loans. At June 30, 2007, there were no consumer loans
+ in nonaccrual status. During the years ended September 30, 2006 and 2005 and the
+ nine months ended June 30, 2007, we charged off $39,000, $92,000 and $25,000, respectively,
+ in consumer loans.
+
+ Commercial Business Lending. As part of our strategic
+ plan, we are focusing on increasing the commercial business loans that we originate,
+ including lines of credit, term loans and letters of credit. These loans are typically
+ secured by collateral and are used for general business purposes, including working
+ capital financing, equipment financing, capital investment and general investment.
+ Loan terms vary from one to seven years. The interest rates on such loans are generally
+ floating rates indexed to the Wall Street Journal Prime Rate plus a margin.
+
+80
+
+Commercial business loans typically have
+ shorter maturity terms and higher interest spreads than real estate loans, but
+ generally involve more credit risk because of the type and nature of the collateral.
+ We are focusing our efforts on small- to medium-sized, privately-held companies
+ with local or regional businesses that operate in our market area. At June 30, 2007,
+ commercial business loans totaled $4.1 million, or 0.8%, of our loan portfolio.
+ Our commercial business lending policy includes credit file documentation and analysis
+ of the borrower s background, capacity to repay the loan, the adequacy of the
+ borrower s capital and collateral, as well as an evaluation of other conditions
+ affecting the borrower. Analysis of the borrower s past, present and future
+ cash flows is also an important aspect of our credit analysis. We generally obtain
+ personal guarantees on our commercial business loans.
+
+ Repayment
+ of our commercial business loans is often dependent on the cash flows of the borrower,
+ which may be unpredictable, and the collateral securing these loans may fluctuate
+ in value. Our commercial business loans are originated primarily based on the identified
+ cash flow of the borrower and secondarily on the underlying collateral provided
+ by the borrower. Most often, this collateral consists of accounts receivable, inventory
+ or equipment. Cred it support provided by the borrower for most of these loans
+ and the probability of repayment is based on the liquidation of the pledged collateral
+ and enforcement of a personal guarantee, if any. As a result, in the case of loans
+ secured by accounts receivable, the availability of funds for the repayment of these
+ loans may be substantially dependent on the ability of the borrower to collect amounts
+ due from its customers. The collateral securing other loans may depreciate over
+ time, may be difficult to appraise and may fluctuate in value based on the success
+ of the business.
+
+ Loan Maturity and Repricing. The following table sets
+ forth certain information at June 30, 2007 regarding the dollar amount of loans
+ maturing or repricing in our portfolio based on their contractual terms to maturity
+ or next repricing date, but does not include scheduled payments or potential
+ prepayments. Demand loans, loans having no stated schedule of repayments and no
+ stated maturity are reported as due in one year or less. Loan balances do not include
+ undisbursed loan proceeds, unearned discounts, unearned income and allowance for
+ loan losses.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+After
+ 
+ 
+
+After
+ 
+ 
+
+After
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+1 Year
+ 
+ 
+
+3 Years
+ 
+ 
+
+5 Years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Within
+ 
+ 
+
+Through
+ 
+ 
+
+Through
+ 
+ 
+
+Through
+ 
+ 
+
+Beyond
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+1 Year
+ 
+ 
+
+3 Years
+ 
+ 
+
+5 Years
+ 
+ 
+
+10 Years
+ 
+ 
+
+10 Years
+ 
+ 
+
+Total
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+$
+10,800
+ 
+ 
+$
+21,805
+ 
+ 
+$
+54,729
+ 
+ 
+$
+30,751
+ 
+ 
+$
+141,515
+ 
+ 
+$
+259,600
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+1,174
+ 
+ 
+ 
+431
+ 
+ 
+ 
+2,830
+ 
+ 
+ 
+466
+ 
+ 
+ 
+2,009
+ 
+ 
+ 
+6,910
+
+Commercial
+
+ 
+ 
+ 
+10,321
+ 
+ 
+ 
+26,898
+ 
+ 
+ 
+59,994
+ 
+ 
+ 
+35,835
+ 
+ 
+ 
+1,686
+ 
+ 
+ 
+134,734
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ real estate
+
+ 
+ 
+ 
+22,295
+ 
+ 
+ 
+49,134
+ 
+ 
+ 
+117,553
+ 
+ 
+ 
+67,052
+ 
+ 
+ 
+145,210
+ 
+ 
+ 
+401,244
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+19,186
+ 
+ 
+ 
+589
+ 
+ 
+ 
+333
+ 
+ 
+ 
+573
+ 
+ 
+ 
+615
+ 
+ 
+ 
+21,296
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+147
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+850
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+997
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+9,051
+ 
+ 
+ 
+3,282
+ 
+ 
+ 
+783
+ 
+ 
+ 
+6,349
+ 
+ 
+ 
+4,430
+ 
+ 
+ 
+23,895
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+28,237
+ 
+ 
+ 
+4,018
+ 
+ 
+ 
+1,116
+ 
+ 
+ 
+7,772
+ 
+ 
+ 
+5,045
+ 
+ 
+ 
+46,188
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+27,458
+ 
+ 
+ 
+46
+ 
+ 
+ 
+186
+ 
+ 
+ 
+803
+ 
+ 
+ 
+11,835
+ 
+ 
+ 
+40,328
+
+Automobile
+
+ 
+ 
+ 
+21
+ 
+ 
+ 
+830
+ 
+ 
+ 
+1,273
+ 
+ 
+ 
+281
+ 
+ 
+ 
+28
+ 
+ 
+ 
+2,433
+
+Other
+ consumer
+
+ 
+ 
+ 
+978
+ 
+ 
+ 
+374
+ 
+ 
+ 
+31
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+10
+ 
+ 
+ 
+1,393
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ consumer
+
+ 
+ 
+ 
+28,457
+ 
+ 
+ 
+1,250
+ 
+ 
+ 
+1,490
+ 
+ 
+ 
+1,084
+ 
+ 
+ 
+11,873
+ 
+ 
+ 
+44,154
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial/Business
+ 
+ 
+ 
+2,965
+ 
+ 
+ 
+680
+ 
+ 
+ 
+272
+ 
+ 
+ 
+147
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,064
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total loans
+ receivable
+ 
+ 
+$
+81,954
+ 
+ 
+$
+55,082
+ 
+ 
+$
+120,431
+ 
+ 
+$
+76,055
+ 
+ 
+$
+162,128
+ 
+ 
+$
+495,650
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+81
+
+ The following
+ table sets forth the dollar amount of all loans due more than one year after June
+ 30, 2007, which have fixed interest rates and have
+ floating or adjustable interest rates.
+
+ 
+ 
+ 
+
+Floating or
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Adjustable
+ 
+ 
+
+Fixed
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Rate
+ 
+ 
+
+Rates
+ 
+ 
+
+Total
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+(In Thousands)
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+$
+ 84,419
+ 
+ 
+$
+164,381
+ 
+ 
+$
+248,800
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+3,727
+ 
+ 
+ 
+2,009
+ 
+ 
+ 
+5,736
+
+Commercial
+
+ 
+ 
+ 
+103,639
+ 
+ 
+ 
+20,774
+ 
+ 
+ 
+124,413
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ real estate
+
+ 
+ 
+ 
+191,785
+ 
+ 
+ 
+187,164
+ 
+ 
+ 
+378,949
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+1,495
+ 
+ 
+ 
+615
+ 
+ 
+ 
+2,110
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+997
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+997
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+9,414
+ 
+ 
+ 
+5,430
+ 
+ 
+ 
+14,844
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+11,906
+ 
+ 
+ 
+6,045
+ 
+ 
+ 
+17,951
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+12,870
+ 
+ 
+ 
+12,870
+
+Automobile
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2,412
+ 
+ 
+ 
+2,412
+
+Other
+ consumer
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+415
+ 
+ 
+ 
+415
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ consumer
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+15,697
+ 
+ 
+ 
+15,697
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+ business
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,099
+ 
+ 
+ 
+1,099
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ 
+ 
+$
+203,691
+ 
+ 
+$
+210,005
+ 
+ 
+$
+413,696
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ Loan Solicitation
+ and Processing. Loan originations are obtained from a variety of sources, including
+ walk-in customers, loan brokers for primarily commercial and multi-family real estate
+ loans, and referrals from builders and realtors. As part of our commercial banking
+ strategy, we are focusing our efforts in increasing the amount of our direct originations
+ of commercial and multi-family real estate loans, construction loans to builders
+ and commercial business loans. Residential real estate loans are solicited through media advertising, direct mail to existing customers and by realtor referrals.
+ Loan originations are further supported by lending services offered through our
+ internet website, advertising, cross-selling and through our employees community
+ service.
+
+ Upon receipt of a loan application from a prospective borrower, we
+ obtain a credit report and other data to verify specific information relating to
+ the applicant s employment, income and credit standing. An appraisal of the
+ real estate offered as collateral generally is undertaken by an appraiser we have
+ retained and approved, and who is licensed in the State of Idaho.
+
+ Mortgage loan
+ applications are initiated by loan officers and are required to be approved by
+ our underwriting staff who have Board-approved lending authority. Loans that exceed
+ the underwriter s lending authority must be approved by one or more members
+ of the Management Loan Committee. All loans up to and including $3.5 million may
+ be approved by the Management Loan Committee without Board approval; loans in
+ excess of $3.5 million must be approved by the Board of Directors Loan Committee.
+
+ We require title insurance on all real estate loans, fire and casualty insurance
+ on all secured loans and on home equity loans and lines of credit where
+ the property serves as collateral.
+
+82
+
+ Loan Originations, Servicing, Purchases and Sales. During the
+ year ended September 30, 2006 and the nine months ended June 30, 2007, our total
+ loan originations were $271.2 million and $175.0 million, respectively.
+
+ One- to four-family
+ home loans are generally originated in accordance with the guidelines established
+ by Freddie Mac and Fannie Mae, with the exception of our special community development
+ loans under the Community Reinvestment Act. We utilize the Freddie Mac Loan Prospector
+ and Fannie Mae Desktop Underwriter automated loan systems to underwrite the majority
+ of our residential first mortgage loans (excluding community development loans).
+ The remaining loans are underwritten by designated real estate loan underwriters
+ internally in accordance with standards as provided by our Board-approved loan policy.
+
+ We actively sell residential first mortgage loans to the secondary market. The
+ majority of all residential mortgages are sold to the secondary market at the time
+ of origination. During the years ended September 30, 2006 and the nine months ended
+ June 30, 2007 , we sold $81.6 million and $78.1 million, respectively, to the secondary
+ market. Our primary secondary market relationships have been with Freddie Mac, Fannie
+ Mae and major correspondent banks. In the past, we generally retained the servicing
+ on the majority of loans sold into the secondary market. Recently, the majority
+ of loans have been sold into the secondary market with servicing released. Loans
+ are generally sold on a non-recourse basis. As of June 30, 2007, our residential
+ loan servicing portfolio was $195.9 million.
+
+ Multi-family and commercial
+ real estate loans are underwritten by designated lending staff or our Management
+ Loan Committee depending on the size of the loan and are serviced by the commercial
+ loan department.
+
+83
+
+ The following table shows total loans originated,
+ purchased, sold and repaid during the periods indicated.
+
+ 
+ 
+
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+2004
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+(In Thousands)
+
+Loans originated:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential (1)
+
+ 
+$
+ 76,892
+ 
+ 
+$
+96,860
+ 
+ 
+$
+ 124,670
+ 
+ 
+$
+ 111,652
+ 
+ 
+$
+98,473
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+2,000
+ 
+ 
+ 
+345
+ 
+ 
+ 
+345
+ 
+ 
+ 
+47
+ 
+ 
+ 
+74
+ 
+
+Commercial
+
+ 
+ 
+17,451
+ 
+ 
+ 
+19,976
+ 
+ 
+ 
+26,152
+ 
+ 
+ 
+32,033
+ 
+ 
+ 
+28,055
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+96,343
+ 
+ 
+ 
+117,181
+ 
+ 
+ 
+151,167
+ 
+ 
+ 
+143,732
+ 
+ 
+ 
+126,602
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+31,699
+ 
+ 
+ 
+41,925
+ 
+ 
+ 
+58,233
+ 
+ 
+ 
+44,125
+ 
+ 
+ 
+27,484
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+998
+ 
+ 
+ 
+9
+ 
+ 
+ 
+9
+ 
+ 
+ 
+593
+ 
+ 
+ 
+838
+ 
+
+Commercial and land development
+
+ 
+ 
+16,657
+ 
+ 
+ 
+15,790
+ 
+ 
+ 
+19,623
+ 
+ 
+ 
+23,805
+ 
+ 
+ 
+13,094
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+49,354
+ 
+ 
+ 
+57,724
+ 
+ 
+ 
+77,865
+ 
+ 
+ 
+68,523
+ 
+ 
+ 
+41,416
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+22,350
+ 
+ 
+ 
+22,882
+ 
+ 
+ 
+33,454
+ 
+ 
+ 
+12,745
+ 
+ 
+ 
+17,017
+ 
+
+Automobile
+
+ 
+ 
+481
+ 
+ 
+ 
+542
+ 
+ 
+ 
+667
+ 
+ 
+ 
+2,500
+ 
+ 
+ 
+3,187
+ 
+
+Other
+ consumer
+
+ 
+ 
+2,434
+ 
+ 
+ 
+2,105
+ 
+ 
+ 
+2,876
+ 
+ 
+ 
+1,763
+ 
+ 
+ 
+1,048
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+25,265
+ 
+ 
+ 
+25,529
+ 
+ 
+ 
+36,997
+ 
+ 
+ 
+17,008
+ 
+ 
+ 
+21,252
+ 
+
+Commercial/Business
+ 
+ 
+4,030
+ 
+ 
+ 
+4,579
+ 
+ 
+ 
+5,164
+ 
+ 
+ 
+2,501
+ 
+ 
+ 
+1,106
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ loans originated
+
+ 
+ 
+174,992
+ 
+ 
+ 
+205,013
+ 
+ 
+ 
+271,193
+ 
+ 
+ 
+231,764
+ 
+ 
+ 
+190,376
+ 
+
+Loans purchased:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+38,782
+ 
+ 
+ 
+38,782
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Loans sold:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+(78,060
+)
+ 
+ 
+(58,596
+)
+ 
+ 
+(81,575
+)
+ 
+ 
+(57,597
+)
+ 
+ 
+(67,627
+)
+
+Participation
+ loans
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(1,377
+)
+ 
+ 
+(2,800
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ loans sold
+
+ 
+ 
+(78,060
+)
+ 
+ 
+(58,596
+)
+ 
+ 
+(81,575
+)
+ 
+ 
+(58,974
+)
+ 
+ 
+(70,427
+)
+
+Principal
+ repayments
+ 
+ 
+(108,130
+)
+ 
+ 
+(122,312
+)
+ 
+ 
+(157,581
+)
+ 
+ 
+(131,638
+)
+ 
+ 
+(100,453
+)
+
+Transfer to
+ real estate owned
+ 
+ 
+(153
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(777
+)
+ 
+ 
+(485
+)
+
+Increase (decrease)
+ in other items (net)
+ 
+ 
+298
+ 
+ 
+ 
+(299
+)
+ 
+ 
+(128
+)
+ 
+ 
+(92
+)
+ 
+ 
+(495
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net increase
+ in loans receivable and loans held for sale
+ 
+$
+ (11,053
+)
+ 
+$
+ 62,588
+ 
+ 
+$
+70,691
+ 
+ 
+$
+40,283
+ 
+ 
+$
+18,516
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+(1)
+ 
+ 
+Includes
+ originations of loans held for sale of $80.1 million, $60.9 million, $68.9 million, $78.3
+ and $58.1 million for the years ended September 30, 2006, 2005 and 2004, and the
+ nine months ended June 30, 2007 and 2006, respectively.
+
+ 
+ 
+ 
+ 
+
+Loan Origination and Other Fees. In some instances, we receive loan origination
+ fees on real estate related products. Loan fees generally represent a percentage
+ of the principal amount of the loan, and is paid by the borrower. Accounting standards
+ require that certain fees received, net of certain origination costs, be deferred
+ and amortized over the contractual life of the loan. Net deferred fees or costs
+ associated with loans that are prepaid or sold are recognized as income at the time
+ of prepayment. We had $1.1 million of net deferred loan fees and costs as of June
+ 30, 2007.
+
+84
+
+Asset Quality
+
+ 
+
+The objective
+ of our loan review process is to determine risk levels and exposure to loss. The
+ depth of review varies by asset types, depending on the nature of those assets.
+ While certain assets may represent a substantial investment and warrant individual reviews,
+ other assets may have less risk because the asset size is small,
+ the risk is spread over a large number of obligors or the obligations are well collateralized
+ and further analysis of individual assets would expand the review process without
+ measurable advantage to risk assessment. Asset types with these characteristics
+ may be reviewed as a total portfolio on the basis of risk indicators such as delinquency
+ (consumer and residential real estate loans) or credit rating. A formal review process
+ is conducted on individual assets that represent greater potential risk. A formal
+ review process is a total reevaluation of the risks associated with the asset and
+ is documented by completing an asset review report. Certain real estate-related
+ assets must be evaluated in terms of their fair market value or net realizable value
+ in order to determine the likelihood of loss exposure and, consequently, the adequacy
+ of valuation allowances.
+
+ 
+
+We define
+ a loan as being impaired when, based on current information and events, it is probable
+ that we will be unable to collect all amounts due under the contractual terms of
+ the loan agreement. Large groups of smaller balance homogenous loans such as consumer
+ secured loans, residential mortgage loans and consumer unsecured loans are collectively
+ evaluated for potential loss. All other loans are evaluated for impairment on an
+ individual basis.
+
+ 
+
+We generally
+ assess late fees or penalty charges on delinquent loans of five percent of the monthly
+ principal and interest amount. Substantially all fixed rate and adjustable rate
+ mortgage loan payments are due on the first day of the month, however, the borrower
+ is given a 10-day grace period to make the loan payment. When a mortgage loan borrower fails to make a required payment when
+ it is due, we institute collection
+ procedures. The first notice is mailed to the borrower on the 16th day requesting
+ payment and assessing a late charge. Attempts to contact the borrower by telephone
+ generally begin upon the 30th day of delinquency. If a satisfactory response is
+ not obtained, continual follow-up contacts are attempted until the loan has been
+ brought current. Before the 90th day of delinquency, attempts to interview the borrower
+ are made to establish the cause of the delinquency, whether the cause is temporary,
+ the attitude of the borrower toward the debt and a mutually satisfactory arrangement
+ for curing the default.
+
+ 
+
+When a consumer
+ loan borrower fails to make a required payment on a consumer loan by the payment
+ due date, we institute the same collection procedures as for our mortgage loan borrowers.
+
+ 
+
+The Board
+ of Directors is informed monthly as to the number and dollar amount of mortgage
+ and consumer loans that are delinquent by more than 30 days, and is given information regarding classified assets.
+
+ 
+
+If a borrower
+ is chronically delinquent and all reasonable means of obtaining payments have been
+ exercised, we will seek to recover any collateral securing the loan according to
+ the terms of the security instrument and applicable law. In the event of an unsecured
+ loan, we will either seek legal action against the borrower or refer the loan to
+ an outside collection agency.
+
+85
+
+The following
+ table shows our delinquent loans by the type of loan and number of days delinquent
+ as of June 30, 2007:
+
+ 
+
+ 
+ 
+
+Loans Delinquent For:
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+Total
+
+ 
+ 
+
+60-89 Days
+ 
+
+90 Days or More
+ 
+
+Delinquent Loans
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+Principal
+ 
+ 
+ 
+ 
+ 
+ 
+Principal
+ 
+ 
+ 
+ 
+ 
+ 
+Principal
+ 
+
+ 
+ 
+Number
+ 
+ 
+Balance
+ 
+ 
+Number
+ 
+ 
+Balance
+ 
+ 
+Number
+ 
+ 
+Balance
+ 
+
+ 
+ 
+of Loans
+ 
+ 
+Loans
+ 
+ 
+of Loans
+ 
+ 
+Loans
+ 
+ 
+of Loans
+ 
+ 
+Loans
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+2
+ 
+ 
+$
+522
+ 
+ 
+ 
+2
+ 
+ 
+$
+367
+ 
+ 
+ 
+4
+ 
+ 
+$
+889
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+
+ 
+ 
+1
+ 
+ 
+ 
+153
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1
+ 
+ 
+ 
+153
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+3
+ 
+ 
+ 
+675
+ 
+ 
+ 
+2
+ 
+ 
+ 
+367
+ 
+ 
+ 
+5
+ 
+ 
+ 
+1,042
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+3
+ 
+ 
+ 
+70
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3
+ 
+ 
+ 
+70
+ 
+
+Automotive
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Other
+ consumer
+
+ 
+ 
+1
+ 
+ 
+ 
+5
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1
+ 
+ 
+ 
+5
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+4
+ 
+ 
+ 
+75
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4
+ 
+ 
+ 
+75
+ 
+
+Commercial
+ business
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ 
+ 
+7
+ 
+ 
+$
+750
+ 
+ 
+ 
+2
+ 
+ 
+$
+367
+ 
+ 
+ 
+9
+ 
+ 
+$
+ 1,117
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+When a loan
+ becomes 90 days delinquent, we place the loan on nonaccrual status; accordingly,
+ we have no accruing loans that are contractually past due 90 days or more. As of
+ June 30, 2007, nonaccrual loans as a percentage of total loans was 0.07%, and
+ as a percentage of total assets it was 0.05%.
+
+86
+
+Nonperforming Assets. The following table sets forth information with respect to our nonperforming assets
+ and restructured loans within the meaning of Statement of Financial Accounting Standards
+ No. 15 for the periods indicated. During the periods presented, there were no accruing
+ loans that were contractually past due 90 days or more.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+At June
+ 30,
+ 
+
+ 
+
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+2004
+ 
+ 
+ 
+2003
+ 
+ 
+ 
+2002
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+Loans accounted
+ for on a non-accrual basis:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+$
+367
+ 
+ 
+$
+358
+ 
+ 
+$
+388
+ 
+ 
+$
+ 
+ 
+ 
+$
+69
+ 
+ 
+$
+70
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+560
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+367
+ 
+ 
+ 
+358
+ 
+ 
+ 
+388
+ 
+ 
+ 
+560
+ 
+ 
+ 
+69
+ 
+ 
+ 
+70
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+326
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+326
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+ 
+ 
+ 
+30
+ 
+ 
+ 
+79
+ 
+ 
+ 
+30
+ 
+ 
+ 
+41
+ 
+ 
+ 
+52
+ 
+
+Automotive
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5
+ 
+ 
+ 
+7
+ 
+ 
+ 
+9
+ 
+ 
+ 
+5
+ 
+
+Other
+ consumer
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6
+ 
+ 
+ 
+13
+ 
+ 
+ 
+14
+ 
+ 
+ 
+15
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+ 
+ 
+ 
+ 
+30
+ 
+ 
+ 
+90
+ 
+ 
+ 
+50
+ 
+ 
+ 
+64
+ 
+ 
+ 
+72
+ 
+
+Commercial
+ business
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total loans
+ 
+ 
+367
+ 
+ 
+ 
+388
+ 
+ 
+ 
+478
+ 
+ 
+ 
+610
+ 
+ 
+ 
+133
+ 
+ 
+ 
+468
+ 
+
+Accruing loans
+ which are contractually past due 90 days or more
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total of nonaccrual
+ and 90 days past due loans
+ 
+ 
+367
+ 
+ 
+ 
+388
+ 
+ 
+ 
+478
+ 
+ 
+ 
+610
+ 
+ 
+ 
+133
+ 
+ 
+ 
+468
+ 
+
+Repossessed
+ assets
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6
+ 
+
+Real estate
+ owned
+ 
+ 
+153
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+534
+ 
+ 
+ 
+113
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+248
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ nonperforming assets
+
+ 
+$
+520
+ 
+ 
+$
+388
+ 
+ 
+$
+1,012
+ 
+ 
+$
+723
+ 
+ 
+$
+133
+ 
+ 
+$
+722
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Restructured
+ loans
+ 
+$
+10
+ 
+ 
+$
+11
+ 
+ 
+$
+322
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+
+Allowance
+ for loan loss on nonperforming loans
+ 
+ 
+1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+7
+ 
+ 
+ 
+92
+ 
+ 
+ 
+9
+ 
+ 
+ 
+42
+ 
+
+Classified
+ assets included in nonperforming assets
+ 
+ 
+520
+ 
+ 
+ 
+388
+ 
+ 
+ 
+1,000
+ 
+ 
+ 
+704
+ 
+ 
+ 
+133
+ 
+ 
+ 
+722
+ 
+
+Allowance
+ for loan losses on classified assets
+ 
+ 
+50
+ 
+ 
+ 
+46
+ 
+ 
+ 
+64
+ 
+ 
+ 
+225
+ 
+ 
+ 
+9
+ 
+ 
+ 
+42
+ 
+
+Nonaccrual
+ and 90 days or more past due
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+loans
+ as a percentage of loans receivable
+
+ 
+ 
+0.07
+%
+ 
+ 
+0.08
+%
+ 
+ 
+0.11
+%
+ 
+ 
+0.16
+%
+ 
+ 
+0.04
+%
+ 
+ 
+0.14
+%
+
+Nonaccrual
+ and 90 days or more past due
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+loans
+ as a percentage of total assets
+
+ 
+ 
+0.05
+%
+ 
+ 
+0.05
+%
+ 
+ 
+0.07
+%
+ 
+ 
+0.08
+%
+ 
+ 
+0.03
+%
+ 
+ 
+0.11
+%
+
+Nonperforming assets as a percentage of total assets
+
+ 
+ 
+0.07
+%
+ 
+ 
+0.05
+%
+ 
+ 
+0.15
+%
+ 
+ 
+0.10
+%
+ 
+ 
+0.03
+%
+ 
+ 
+0.17
+%
+
+Loans receivable,
+ net
+ 
+$
+491,768
+ 
+ 
+$
+503,065
+ 
+ 
+$
+430,944
+ 
+ 
+$
+392,634
+ 
+ 
+$
+372,629
+ 
+ 
+$
+318,297
+ 
+
+Nonaccrued
+ interest (1)
+ 
+$
+12
+ 
+ 
+$
+11
+ 
+ 
+$
+5
+ 
+ 
+$
+12
+ 
+ 
+$
+1
+ 
+ 
+$
+3
+ 
+
+Total assets
+ 
+$
+728,315
+ 
+ 
+$
+761,292
+ 
+ 
+$
+689,577
+ 
+ 
+$
+743,867
+ 
+ 
+$
+450,196
+ 
+ 
+$
+416,543
+ 
+
+(1
+)
+ 
+If interest
+ on the loans classified as nonaccrual had been accrued, interest income in these
+ amounts would have been recorded on nonaccrual loans.
+
+87
+
+Real Estate
+ Owned and Other Repossessed Assets. Real estate we acquire as a result of foreclosure
+ or by deed-in-lieu of foreclosure is classified as real estate owned until it is
+ sold. When the property is acquired, it is recorded at the lower of its cost,
+ which is the unpaid principal balance of the related loan plus foreclosure costs,
+ or the fair market value of the property less selling costs. Other repossessed
+ collateral, including autos, are also recorded at the lower of cost (i.e., the unpaid
+ principal balance plus repossession costs) or fair market value. As of June 30,
+ 2007, we had four town homes under construction with a cumulative fair market value
+ of $153,000.
+
+ 
+
+Restructured
+ Loans. According to generally accepted accounting principles, we are required
+ to account for certain loan modifications or restructuring as a troubled debt
+ restructuring. In general, the modification or restructuring of a debt is
+ considered a troubled debt restructuring if we, for economic or legal reasons related
+ to a borrower s financial difficulties, grant a concession to the borrower
+ that we would not otherwise consider. As of June 30, 2007, we had one restructured
+ loan with a loan balance of $10,000.
+
+ 
+
+Classified
+ Assets. Federal regulations provide for the classification of lower quality
+ loans and other assets, such as debt and equity securities, as substandard, doubtful
+ or loss. An asset is considered substandard if it is inadequately protected by
+ the current net worth and paying capacity of the borrower or any collateral pledged.
+ Substandard assets include those characterized by the distinct possibility that
+ we will sustain some loss if the deficiencies are not corrected. Assets classified
+ as doubtful have all the weaknesses inherent in those classified substandard with
+ the added characteristic that the weaknesses present make collection or liquidation
+ in full highly questionable and improbable on the basis of currently existing facts,
+ conditions and values. Assets classified as loss are those considered uncollectible
+ and of such little value that their continuance as assets without the establishment
+ of a specific loss reserve is not warranted.
+
+ 
+
+When we classify
+ problem assets as either substandard or doubtful, we may establish a specific allowance
+ in an amount we deem prudent and approved by the Classified Asset Committee to address
+ the risk specifically or we may allow the loss to be addressed in the general allowance.
+ General allowances represent loss allowances which have been established to recognize
+ the inherent risk associated with lending activities, but which, unlike specific
+ allowances, have not been specifically allocated to particular problem assets. When
+ an insured institution classifies problem assets as a loss, it is required to charge
+ off such assets in the period in which they are deemed uncollectible. Assets that
+ do not currently expose us to sufficient risk to warrant classification in one of
+ the aforementioned categories but possess weaknesses are required to be designated
+ as special mention. Our determination as to the classification of our assets and
+ the amount of our valuation allowances is subject to review by the Office of Thrift
+ Supervision, which can order the establishment of additional loss allowances.
+
+ 
+
+In connection
+ with the filing of periodic reports with the Office of Thrift Supervision and in
+ accordance with our classification of assets policy, we regularly review the problem
+ assets in our portfolio to determine whether any assets require classification in
+ accordance with applicable regulations. On the basis of our review of our assets,
+ as of June 30, 2007, we had classified assets of $3.5 million. The total amount
+ classified represented 3.2% of equity capital and 0.48% of total assets as of June
+ 30, 2007.
+
+88
+
+The aggregate amounts of classified assets and special mention loans at the dates indicated were as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+At September 30,
+
+ 
+ 
+
+At June 30,
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(In Thousands)
+
+Classified
+ assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Loss
+
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+
+Doubtful
+
+ 
+ 
+10
+ 
+ 
+ 
+10
+ 
+ 
+ 
+11
+ 
+
+Substandard
+
+ 
+ 
+1,484
+ 
+ 
+ 
+911
+ 
+ 
+ 
+2,693
+ 
+
+Special mention
+ 
+ 
+2,023
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+
+ 
+$
+3,517
+ 
+ 
+$
+921
+ 
+ 
+$
+2,704
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Classified
+ assets included in nonperforming loans
+ 
+$
+ 367
+ 
+ 
+$
+388
+ 
+ 
+$
+ 467
+ 
+
+Allowance
+ for loan loss on classified assets
+ 
+ 
+50
+ 
+ 
+ 
+46
+ 
+ 
+ 
+64
+ 
+
+Classified assets, including special mention loans, increased $2.6 million to $3.5 million at June 30, 2007
+from $921,000 at September 30, 2006. The increase in classified assets and special mention loans is primarily due to
+one commercial real estate loan that is classified as special mention. We currently believe the loan is fully secured
+and no loss is anticipated. As of June 30, 2007, we did not have any impaired loans included in classified assets.
+
+Potential Problem Loans. Potential problem loans are loans that do not yet meet the criteria for placement
+on non-accrual status, but where known information about possible credit problems of the borrowers causes
+management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms.
+This may result in the future inclusion of such loans in the non-accrual loan category. As of June 30, 2007, the
+aggregate amount of potential problem loans was $3.8 million.
+
+89
+
+The
+ following table summarizes the distribution of the allowance for loan losses by loan category.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+At September 30,
+ 
+
+ 
+ 
+At June 30,
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Percent
+ of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Percent
+ of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Percent
+ of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Loans
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+in Loan
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+in Loan
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+in Loan
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Category
+ to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Category
+ to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Category
+ to
+ 
+
+ 
+ 
+ 
+Loan
+ 
+ 
+ 
+by Loan
+ 
+ 
+ 
+Total
+ 
+ 
+ 
+Loan
+ 
+ 
+ 
+by Loan
+ 
+ 
+ 
+Total
+ 
+ 
+ 
+Loan
+ 
+ 
+ 
+by Loan
+ 
+ 
+ 
+Total
+ 
+
+ 
+ 
+ 
+Balance
+ 
+ 
+ 
+Category
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+Balance
+ 
+ 
+ 
+Category
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+Balance
+ 
+ 
+ 
+Category
+ 
+ 
+ 
+Loans
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+(Dollars in Thousands)
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One- to four-family residential
+
+ 
+ 
+$259,600
+ 
+ 
+ 
+$ 706
+ 
+ 
+ 
+52.38
+%
+ 
+ 
+$293,640
+ 
+ 
+ 
+$ 873
+ 
+ 
+ 
+57.88
+%
+ 
+ 
+$252,126
+ 
+ 
+ 
+$ 784
+ 
+ 
+ 
+58.00
+%
+
+ Multi-family
+ residential
+
+ 
+ 
+6,910
+ 
+ 
+ 
+58
+ 
+ 
+ 
+1.39
+ 
+ 
+ 
+7,049
+ 
+ 
+ 
+61
+ 
+ 
+ 
+1.39
+ 
+ 
+ 
+5,454
+ 
+ 
+ 
+61
+ 
+ 
+ 
+1.25
+ 
+
+Commercial
+
+ 
+ 
+134,734
+ 
+ 
+ 
+1,139
+ 
+ 
+ 
+27.18
+ 
+ 
+ 
+125,401
+ 
+ 
+ 
+1,087
+ 
+ 
+ 
+24.72
+ 
+ 
+ 
+116,432
+ 
+ 
+ 
+1,297
+ 
+ 
+ 
+26.78
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+401,244
+ 
+ 
+ 
+1,903
+ 
+ 
+ 
+80.95
+ 
+ 
+ 
+426,090
+ 
+ 
+ 
+2,021
+ 
+ 
+ 
+83.99
+ 
+ 
+ 
+374,012
+ 
+ 
+ 
+2,142
+ 
+ 
+ 
+86.03
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ One-
+ to four-family residential
+
+ 
+ 
+21,296
+ 
+ 
+ 
+168
+ 
+ 
+ 
+4.30
+ 
+ 
+ 
+23,678
+ 
+ 
+ 
+290
+ 
+ 
+ 
+4.67
+ 
+ 
+ 
+14,421
+ 
+ 
+ 
+241
+ 
+ 
+ 
+3.32
+ 
+
+Multi-family residential
+
+ 
+ 
+997
+ 
+ 
+ 
+12
+ 
+ 
+ 
+0.20
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,427
+ 
+ 
+ 
+18
+ 
+ 
+ 
+0.33
+ 
+
+ Commercial
+ and land development
+
+ 
+ 
+23,895
+ 
+ 
+ 
+260
+ 
+ 
+ 
+4.82
+ 
+ 
+ 
+16,344
+ 
+ 
+ 
+294
+ 
+ 
+ 
+3.22
+ 
+ 
+ 
+7,470
+ 
+ 
+ 
+132
+ 
+ 
+ 
+1.72
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total real estate
+
+ 
+ 
+46,188
+ 
+ 
+ 
+440
+ 
+ 
+ 
+9.32
+ 
+ 
+ 
+40,022
+ 
+ 
+ 
+584
+ 
+ 
+ 
+7.89
+ 
+ 
+ 
+23,318
+ 
+ 
+ 
+391
+ 
+ 
+ 
+5.37
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home equity
+
+ 
+ 
+40,328
+ 
+ 
+ 
+273
+ 
+ 
+ 
+8.14
+ 
+ 
+ 
+34,143
+ 
+ 
+ 
+243
+ 
+ 
+ 
+6.73
+ 
+ 
+ 
+28,558
+ 
+ 
+ 
+192
+ 
+ 
+ 
+6.57
+ 
+
+Automotive
+
+ 
+ 
+2,433
+ 
+ 
+ 
+43
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+3,245
+ 
+ 
+ 
+58
+ 
+ 
+ 
+0.64
+ 
+ 
+ 
+4,576
+ 
+ 
+ 
+79
+ 
+ 
+ 
+1.05
+ 
+
+Other
+ consumer
+
+ 
+ 
+1,393
+ 
+ 
+ 
+32
+ 
+ 
+ 
+0.28
+ 
+ 
+ 
+1,300
+ 
+ 
+ 
+32
+ 
+ 
+ 
+0.26
+ 
+ 
+ 
+1,530
+ 
+ 
+ 
+39
+ 
+ 
+ 
+0.35
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total consumer
+
+ 
+ 
+44,154
+ 
+ 
+ 
+348
+ 
+ 
+ 
+8.91
+ 
+ 
+ 
+38,688
+ 
+ 
+ 
+333
+ 
+ 
+ 
+7.63
+ 
+ 
+ 
+34,664
+ 
+ 
+ 
+310
+ 
+ 
+ 
+7.97
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial/business
+ 
+ 
+4,064
+ 
+ 
+ 
+57
+ 
+ 
+ 
+0.82
+ 
+ 
+ 
+2,480
+ 
+ 
+ 
+36
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+2,759
+ 
+ 
+ 
+39
+ 
+ 
+ 
+0.63
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total loans
+ 
+ 
+$495,650
+ 
+ 
+ 
+$2,748
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+$507,280
+ 
+ 
+ 
+$2,974
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+$434,753
+ 
+ 
+ 
+$2,882
+ 
+ 
+ 
+100.00
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+At September 30,
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+2004
+ 
+2003
+ 
+2002
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Percent of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Percent
+ of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Percent
+ of
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Loans
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+in Loan
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+in Loan
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+in Loan
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Category
+ to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Category
+ to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Amount
+ 
+ 
+ 
+Category
+ to
+ 
+
+ 
+ 
+ 
+Loan
+ 
+ 
+ 
+by Loan
+ 
+ 
+ 
+Total
+ 
+ 
+ 
+Loan
+ 
+ 
+ 
+by Loan
+ 
+ 
+ 
+Total
+ 
+ 
+ 
+Loan
+ 
+ 
+ 
+by Loan
+ 
+ 
+ 
+Total
+ 
+
+ 
+ 
+ 
+Balance
+ 
+ 
+ 
+Category
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+Balance
+ 
+ 
+ 
+Category
+ 
+ 
+ 
+Loans
+ 
+ 
+ 
+Balance
+ 
+ 
+ 
+Category
+ 
+ 
+ 
+Loans
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+(Dollars in Thousands)
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One- to four-family residential
+
+ 
+ 
+$242,818
+ 
+ 
+ 
+$ 704
+ 
+ 
+ 
+61.27
+%
+ 
+ 
+$247,309
+ 
+ 
+ 
+$ 635
+ 
+ 
+ 
+65.81
+%
+ 
+ 
+$194,088
+ 
+ 
+ 
+$ 348
+ 
+ 
+ 
+60.27
+%
+
+ Multi-family residential
+
+ 
+ 
+6,265
+ 
+ 
+ 
+75
+ 
+ 
+ 
+1.58
+ 
+ 
+ 
+7,750
+ 
+ 
+ 
+20
+ 
+ 
+ 
+2.06
+ 
+ 
+ 
+7,512
+ 
+ 
+ 
+14
+ 
+ 
+ 
+2.33
+ 
+
+Commercial
+
+ 
+ 
+93,575
+ 
+ 
+ 
+1,281
+ 
+ 
+ 
+23.61
+ 
+ 
+ 
+79,020
+ 
+ 
+ 
+697
+ 
+ 
+ 
+21.02
+ 
+ 
+ 
+79,197
+ 
+ 
+ 
+714
+ 
+ 
+ 
+24.59
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+342,658
+ 
+ 
+ 
+2,060
+ 
+ 
+ 
+86.46
+ 
+ 
+ 
+334,079
+ 
+ 
+ 
+1,352
+ 
+ 
+ 
+88.89
+ 
+ 
+ 
+280,797
+ 
+ 
+ 
+1,076
+ 
+ 
+ 
+87.19
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ One- to four-family residential
+
+ 
+ 
+7,207
+ 
+ 
+ 
+69
+ 
+ 
+ 
+1.82
+ 
+ 
+ 
+5,225
+ 
+ 
+ 
+13
+ 
+ 
+ 
+1.39
+ 
+ 
+ 
+6,505
+ 
+ 
+ 
+12
+ 
+ 
+ 
+2.02
+ 
+
+Multi-family residential
+
+ 
+ 
+834
+ 
+ 
+ 
+11
+ 
+ 
+ 
+0.21
+ 
+ 
+ 
+352
+ 
+ 
+ 
+1
+ 
+ 
+ 
+0.09
+ 
+ 
+ 
+1,486
+ 
+ 
+ 
+3
+ 
+ 
+ 
+0.46
+ 
+
+ Commercial and land development
+
+ 
+ 
+11,151
+ 
+ 
+ 
+148
+ 
+ 
+ 
+2.81
+ 
+ 
+ 
+9,128
+ 
+ 
+ 
+70
+ 
+ 
+ 
+2.43
+ 
+ 
+ 
+6,579
+ 
+ 
+ 
+58
+ 
+ 
+ 
+2.04
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total real estate
+
+ 
+ 
+19,192
+ 
+ 
+ 
+228
+ 
+ 
+ 
+4.84
+ 
+ 
+ 
+14,705
+ 
+ 
+ 
+84
+ 
+ 
+ 
+3.91
+ 
+ 
+ 
+14,570
+ 
+ 
+ 
+73
+ 
+ 
+ 
+4.52
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home equity
+
+ 
+ 
+27,351
+ 
+ 
+ 
+204
+ 
+ 
+ 
+6.90
+ 
+ 
+ 
+20,640
+ 
+ 
+ 
+99
+ 
+ 
+ 
+5.49
+ 
+ 
+ 
+18,069
+ 
+ 
+ 
+86
+ 
+ 
+ 
+5.61
+ 
+
+Automotive
+
+ 
+ 
+3,838
+ 
+ 
+ 
+79
+ 
+ 
+ 
+0.97
+ 
+ 
+ 
+1,939
+ 
+ 
+ 
+40
+ 
+ 
+ 
+0.52
+ 
+ 
+ 
+2,297
+ 
+ 
+ 
+30
+ 
+ 
+ 
+0.71
+ 
+
+Other
+ consumer
+
+ 
+ 
+1,949
+ 
+ 
+ 
+45
+ 
+ 
+ 
+0.49
+ 
+ 
+ 
+2,827
+ 
+ 
+ 
+244
+ 
+ 
+ 
+0.75
+ 
+ 
+ 
+3,666
+ 
+ 
+ 
+79
+ 
+ 
+ 
+1.14
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total consumer
+
+ 
+ 
+33,138
+ 
+ 
+ 
+328
+ 
+ 
+ 
+8.36
+ 
+ 
+ 
+25,406
+ 
+ 
+ 
+383
+ 
+ 
+ 
+6.76
+ 
+ 
+ 
+24,032
+ 
+ 
+ 
+195
+ 
+ 
+ 
+7.46
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial/business
+ 
+ 
+1,363
+ 
+ 
+ 
+21
+ 
+ 
+ 
+0.34
+ 
+ 
+ 
+1,662
+ 
+ 
+ 
+34
+ 
+ 
+ 
+0.44
+ 
+ 
+ 
+2,641
+ 
+ 
+ 
+41
+ 
+ 
+ 
+0.83
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total loans
+ 
+ 
+$396,351
+ 
+ 
+ 
+$2,637
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+$375,852
+ 
+ 
+ 
+$1,853
+ 
+ 
+ 
+100.00
+%
+ 
+ 
+$322,040
+ 
+ 
+ 
+$1,385
+ 
+ 
+ 
+100.00
+%
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+90
+
+The
+following table sets forth an analysis of our allowance for loan losses at the dates and for the periods
+indicated.
+
+ 
+ 
+
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(Dollars In
+ Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Allowance
+ at beginning of period
+ 
+$
+2,974
+ 
+ 
+$
+2,882
+ 
+$
+2,882
+ 
+$
+2,637
+ 
+$
+1,853
+ 
+$
+1,385
+ 
+$
+1,431
+ 
+
+Provisions
+ for loan losses
+ 
+ 
+71
+ 
+ 
+ 
+320
+ 
+ 
+138
+ 
+ 
+456
+ 
+ 
+900
+ 
+ 
+615
+ 
+ 
+277
+ 
+
+Transfer to
+ specific allowance
+ 
+ 
+(192
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Recoveries:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2
+ 
+ 
+1
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+12
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Automobile
+
+ 
+ 
+3
+ 
+ 
+ 
+11
+ 
+ 
+12
+ 
+ 
+ 
+ 
+ 
+12
+ 
+ 
+ 
+ 
+ 
+1
+ 
+
+Other
+ consumer
+
+ 
+ 
+7
+ 
+ 
+ 
+10
+ 
+ 
+12
+ 
+ 
+9
+ 
+ 
+7
+ 
+ 
+7
+ 
+ 
+3
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+10
+ 
+ 
+ 
+21
+ 
+ 
+24
+ 
+ 
+21
+ 
+ 
+19
+ 
+ 
+7
+ 
+ 
+4
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial/business
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total recoveries
+ 
+ 
+10
+ 
+ 
+ 
+21
+ 
+ 
+24
+ 
+ 
+23
+ 
+ 
+20
+ 
+ 
+7
+ 
+ 
+8
+ 
+
+Charge-offs:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+60
+ 
+ 
+7
+ 
+ 
+145
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+90
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+56
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ real estate
+
+ 
+ 
+90
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+56
+ 
+ 
+60
+ 
+ 
+7
+ 
+ 
+145
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One-
+ to four-family residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+72
+ 
+
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial
+ and land development
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ real estate construction
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+72
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ equity
+
+ 
+ 
+ 
+ 
+ 
+ 
+3
+ 
+ 
+3
+ 
+ 
+19
+ 
+ 
+ 
+ 
+ 
+37
+ 
+ 
+39
+ 
+
+Automobile
+
+ 
+ 
+ 
+ 
+ 
+ 
+3
+ 
+ 
+3
+ 
+ 
+22
+ 
+ 
+23
+ 
+ 
+40
+ 
+ 
+6
+ 
+
+Other
+ consumer
+
+ 
+ 
+25
+ 
+ 
+ 
+26
+ 
+ 
+33
+ 
+ 
+51
+ 
+ 
+53
+ 
+ 
+70
+ 
+ 
+69
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ consumer
+
+ 
+ 
+25
+ 
+ 
+ 
+32
+ 
+ 
+39
+ 
+ 
+92
+ 
+ 
+76
+ 
+ 
+147
+ 
+ 
+114
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Commercial/business
+ 
+ 
+ 
+ 
+ 
+ 
+31
+ 
+ 
+31
+ 
+ 
+86
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total charge-offs
+ 
+ 
+115
+ 
+ 
+ 
+64
+ 
+ 
+70
+ 
+ 
+234
+ 
+ 
+136
+ 
+ 
+154
+ 
+ 
+331
+ 
+
+Net charge-offs
+ 
+ 
+105
+ 
+ 
+ 
+42
+ 
+ 
+46
+ 
+ 
+211
+ 
+ 
+116
+ 
+ 
+147
+ 
+ 
+323
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance at
+ end of period
+ 
+$
+2,748
+ 
+ 
+$
+3,160
+ 
+$
+2,974
+ 
+$
+2,882
+ 
+$
+2,637
+ 
+$
+1,853
+ 
+$
+1,385
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(table continues on the following page)
+
+91
+
+ 
+
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(Dollars In Thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Allowance
+ for loan losses as a percentage of total loans outstanding at the end of the period
+
+ 
+ 
+0.56
+%
+ 
+ 
+0.64
+%
+ 
+ 
+0.59
+%
+ 
+ 
+0.67
+%
+ 
+ 
+0.67
+%
+ 
+ 
+0.49
+%
+ 
+ 
+0.41
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ charge-offs as a percentage of average loans outstanding during the period
+
+ 
+ 
+0.02
+%
+ 
+ 
+0.01
+%
+ 
+ 
+0.01
+%
+ 
+ 
+0.05
+%
+ 
+ 
+0.03
+%
+ 
+ 
+0.04
+%
+ 
+ 
+0.10
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Allowance
+ for loan losses as a percentage of nonaccrual and 90 days or more past due loans
+ loans at end of period
+
+ 
+ 
+748.77
+%
+ 
+ 
+10,533.33
+%
+ 
+ 
+766.49
+%
+ 
+ 
+602.97
+%
+ 
+ 
+432.30
+%
+ 
+ 
+1,393.23
+%
+ 
+ 
+295.94
+%
+
+Our Asset Liability Management Committee reviews the appropriate level of the allowance for loan losses
+on a quarterly basis and establishes the provision for loan losses based on the risk composition of our loan portfolio,
+delinquency levels, loss experience, economic conditions, bank regulatory examination results, seasoning of the loan
+portfolios and other factors related to the collectibility of the loan portfolio as detailed further under Management s
+Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies -
+Allowance for Loan Losses. The allowance is increased by the provision for loan losses, which is charged against
+current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.
+
+Management believes that our allowance for loan losses as of June 30, 2007 was adequate to absorb the
+known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and
+assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that
+such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future
+provisions will not exceed the amount of past provisions or that any increased provision that may be required will not
+adversely impact our financial condition and results of operations. In addition, the determination of the amount of
+Home Federal Bank s allowance for loan losses is subject to review by bank regulators, as part of the routine
+examination process, which may result in the establishment of additional reserves based upon their judgment of
+information available to them at the time of their examination.
+
+92
+
+The following table provides certain information with respect to our allowance for loan losses, including
+charge-offs, recoveries and selected ratios for the periods indicated.
+
+ 
+
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+2003
+ 
+
+2002
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(Dollars in Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Provisions
+ for loan losses
+
+ 
+$
+71
+ 
+ 
+$
+320
+ 
+ 
+$
+138
+ 
+ 
+$
+456
+ 
+ 
+$
+900
+ 
+ 
+$
+615
+ 
+ 
+$
+277
+ 
+
+Allowance
+ for loan losses
+
+ 
+ 
+2,748
+ 
+ 
+ 
+3,160
+ 
+ 
+ 
+2,974
+ 
+ 
+ 
+2,882
+ 
+ 
+ 
+2,637
+ 
+ 
+ 
+1,853
+ 
+ 
+ 
+1,385
+ 
+
+Allowance
+ for loan losses as a percentage of total loans outstanding at the end of the period
+
+ 
+ 
+0.56
+%
+ 
+ 
+0.64
+%
+ 
+ 
+0.59
+%
+ 
+ 
+0.67
+%
+ 
+ 
+0.67
+%
+ 
+ 
+0.49
+%
+ 
+ 
+0.41
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ charge-offs
+
+ 
+$
+105
+ 
+ 
+$
+42
+ 
+ 
+$
+46
+ 
+ 
+$
+211
+ 
+ 
+$
+116
+ 
+ 
+$
+147
+ 
+ 
+$
+323
+ 
+
+Total of nonaccrual and 90 days past due loans
+
+ 
+ 
+367
+ 
+ 
+ 
+30
+ 
+ 
+ 
+388
+ 
+ 
+ 
+478
+ 
+ 
+ 
+610
+ 
+ 
+ 
+133
+ 
+ 
+ 
+468
+ 
+
+Nonaccrual and 90 days or or more past due loans as a percentage of loans receivable
+
+ 
+ 
+0.07
+%
+ 
+ 
+0.01
+%
+ 
+ 
+0.08
+%
+ 
+ 
+0.11
+%
+ 
+ 
+0.16
+%
+ 
+ 
+0.04
+%
+ 
+ 
+0.14
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Loans
+ receivable, net
+
+ 
+$
+491,768
+ 
+ 
+$
+494,016
+ 
+ 
+$
+503,065
+ 
+ 
+$
+430,944
+ 
+ 
+$
+392,634
+ 
+ 
+$
+372,629
+ 
+ 
+$
+318,297
+ 
+
+Investment Activities
+
+General. Office of Thrift Supervision regulations permit Home Federal Bank to invest in various types of
+liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of
+deposit of federally insured banks and savings institutions, banker s acceptances, repurchase agreements and federal
+funds. Subject to various restrictions, we also m ay invest a portion of our assets in commercial paper and corporate
+debt securities.
+
+Our investment policies are designed to provide and maintain adequate liquidity and to generate favorable
+rates of return without incurring undue interest rate or credit risk. The investment policies generally limit
+investments to mortgage-backed securities, U.S. Government and agency securities, municipal bonds, certificates of
+deposit and marketable corporate debt obligations. Investment in mortgage-backed securities includes those issued
+or guaranteed by Fannie Mae, Freddie Mac and Ginnie M ae. W e may purchase mortgage-backed securities to
+supplement loan originations for portfolio during periods when we are not able to originate the desired level of
+portfolio loans.
+
+At June 30, 2007, our consolidated investment portfolio totaled $176.3 million and consisted principally of
+mortgage-backed securities and Federal Home Loan Bank stock. From time to time, investment levels may be
+increased or decreased depending upon yields available on investment alternatives and management s projections as
+to the demand for funds to be used in loan originations, deposits and other activities.
+
+Mortgage-Backed Securities. Our mortgage-backed securities had a fair value of $166.8 million and a
+$172.6 million amortized cost at June 30, 2007. The mortgage-backed securities were primarily comprised of
+Fannie Mae and Freddie Mac mortgage-backed securities. At June 30, 2007, the portfolio had a weighted-average
+coupon rate of 4.77% and an estimated weighted-average yield of 4.99%. These securities had an estimated average
+maturity of 19.5 years and an estimated average life of 4.4 years at June 30, 2007.
+
+93
+
+The following table sets forth the composition of our investment securities portfolios at the dates indicated. The amortized cost of the available for sale
+investments and mortgage backed-securities is their net book value before the mark-to-market fair value adjustment.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+
+At June 30
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+Amortized
+ 
+
+Fair
+ 
+
+Amortized
+ 
+
+Fair
+ 
+
+Amortized
+ 
+
+Fair
+ 
+
+Amortized
+ 
+
+Fair
+
+ 
+ 
+
+Cost
+ 
+
+Value
+ 
+
+Cost
+ 
+
+Value
+ 
+
+Cost
+ 
+
+Value
+ 
+
+Cost
+ 
+
+Value
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+(In Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Available
+ for sale:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mortgage-backed
+ securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fannie
+ Mae
+
+ 
+$
+70,556
+ 
+$
+68,144
+ 
+$
+12,476
+ 
+$
+12,182
+ 
+$
+15,105
+ 
+$
+ 14,830
+ 
+$
+874
+ 
+$
+871
+
+Freddie
+ Mac
+
+ 
+ 
+98,520
+ 
+ 
+95,261
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Non-Agency
+
+ 
+ 
+3,475
+ 
+ 
+3,350
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ availab le for sale
+
+ 
+$
+172,551
+ 
+$
+166,755
+ 
+$
+12,476
+ 
+$
+12,182
+ 
+$
+15,105
+ 
+$
+ 14,830
+ 
+$
+874
+ 
+$
+871
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Held to
+ maturity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mortgage-backed
+ securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fannie
+ Mae
+
+ 
+$
+ 
+ 
+$
+ 
+ 
+$
+65,234
+ 
+$
+63,452
+ 
+$
+72,028
+ 
+$
+ 71,067
+ 
+$
+53,336
+ 
+$
+53,708
+
+Freddie
+ Mac
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+114,505
+ 
+ 
+111,954
+ 
+ 
+105,308
+ 
+ 
+103,985
+ 
+ 
+43,259
+ 
+ 
+43,818
+
+Non-Agency
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,540
+ 
+ 
+3,436
+ 
+ 
+3,638
+ 
+ 
+3,561
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total
+ held to maturity
+
+ 
+$
+ 
+ 
+$
+ 
+ 
+$
+183,279
+ 
+$
+178,842
+ 
+$
+180,974
+ 
+$
+178,613
+ 
+$
+96,595
+ 
+$
+97,526
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+94
+
+The table below sets forth information regarding the amortized cost, weighted average yields and maturities or periods to repricing of our investment
+portfolio at June 30, 2007.
+
+ 
+ 
+
+Amount Due or Repricing within:
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+1 Year or Less
+ 
+
+Over 1 to 5 Years
+ 
+
+Over 5 to 10 Years
+ 
+
+Over 10 Years
+ 
+
+Totals
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+Weighted
+ 
+ 
+ 
+ 
+ 
+
+Weighted
+ 
+ 
+ 
+ 
+ 
+
+Weighted
+ 
+ 
+ 
+ 
+ 
+
+Weighted
+ 
+ 
+ 
+ 
+ 
+
+Weighted
+ 
+
+ 
+ 
+
+Amortized
+ 
+
+Average
+ 
+ 
+
+Amortized
+ 
+
+Average
+ 
+ 
+
+Amortized
+ 
+
+Average
+ 
+ 
+
+Amortized
+ 
+
+Average
+ 
+ 
+
+Amortized
+ 
+
+Average
+ 
+
+ 
+ 
+
+Cost
+ 
+
+Yield (1)
+ 
+ 
+
+Cost
+ 
+
+Yield (1)
+ 
+ 
+
+Cost
+ 
+
+Yield (1)
+ 
+ 
+
+Cost
+ 
+
+Yield (1)
+ 
+ 
+
+Cost
+ 
+
+Yield (1)
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Available
+ for sale:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mortgage-backed
+ securities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fannie
+ Mae
+
+ 
+$
+ 4,529
+ 
+5.44
+%
+ 
+$
+19,631
+ 
+5.21
+%
+ 
+$
+6,298
+ 
+4.07
+%
+ 
+$
+ 40,098
+ 
+4.93
+%
+ 
+$
+ 70,556
+ 
+4.96
+%
+
+Freddie
+ Mac
+
+ 
+ 
+3,297
+ 
+5.52
+ 
+ 
+ 
+29,884
+ 
+5.32
+ 
+ 
+ 
+626
+ 
+7.07
+ 
+ 
+ 
+64,713
+ 
+4.85
+ 
+ 
+ 
+98,520
+ 
+5.03
+ 
+
+Non-Agency
+
+ 
+ 
+3,475
+ 
+4.61
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,475
+ 
+4.61
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Total
+ available for sale
+
+ 
+ 
+11,301
+ 
+5.21
+ 
+ 
+ 
+49,515
+ 
+5.28
+ 
+ 
+ 
+6,924
+ 
+4.34
+ 
+ 
+ 
+104,811
+ 
+4.88
+ 
+ 
+ 
+172,551
+ 
+4.99
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Held to
+ maturity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mortgage-backed
+ securities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fannie
+ Mae
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Freddie
+ Mac
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Non-Agency
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Total held to maturity
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total investment
+ securities
+ 
+$
+11,301
+ 
+5.21
+%
+ 
+$
+49,515
+ 
+5.28
+%
+ 
+$
+6,924
+ 
+4.34
+%
+ 
+$
+104,811
+ 
+4.88
+%
+ 
+$
+172,551
+ 
+4.99
+%
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+(1)
+ 
+Interest and dividends are reported on a tax-equivalent basis. During the time period presented, we did not own any tax exempt investment securities. For available for
+sale securities carried at fair value, the weighted average yield is computed using amortized cost.
+
+95
+
+The following table sets forth certain information with respect to each category which had an aggregate
+book value in excess of 10% of our total equity at the date indicated.
+
+ 
+ 
+ 
+
+At June 30, 2007
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Amortized
+ 
+
+Market
+
+ 
+ 
+ 
+
+Cost
+ 
+
+Value
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+(In Thousands)
+
+Available
+ for sale:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mortgage-backed
+ securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fannie
+ Mae
+
+ 
+ 
+$
+70,556
+ 
+$
+ 68,144
+
+Freddie
+ Mac
+
+ 
+ 
+ 
+98,520
+ 
+ 
+95,261
+
+ 
+ 
+ 
+
+ 
+
+Total
+ availab le for sale
+
+ 
+ 
+ 
+169,076
+ 
+ 
+163,405
+
+ 
+ 
+ 
+
+ 
+
+Held to
+ maturity:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mortgage-backed
+ securities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fannie
+ Mae
+
+ 
+ 
+$
+ 
+ 
+$
+ 
+
+Freddie
+ Mac
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ held to maturity
+
+ 
+ 
+$
+ 
+ 
+$
+ 
+
+ 
+ 
+ 
+
+ 
+
+Federal Home Loan Bank Stock. As a member of the Federal Home Loan Bank of Seattle, Home Federal
+Bank is required to own its capital stock. The amount of stock Home Federal Bank holds is based on percentages
+specified by the Federal Home Loan Bank of Seattle on outstanding advances. The redemption of any excess stock
+Home Federal Bank holds is at the discretion of the Federal Home Loan Bank of Seattle. At June 30, 2007, the
+carrying value of Federal Home Loan Bank stock totaled $9.6 million.
+
+Bank-Owned Life Insurance. We purchased bank-owned life insurance policies to offset future employee
+benefit costs. At June 30, 2007, we had a $11.1 million investment in life insurance contracts. The purchase of
+BOLI policies, and its increase in cash surrender value, is classified as Bank owned life insurance in the
+Consolidated Balance Sheet. The income related to the bank owned life insurance, which is generated by the
+increase in the cash surrender value of the policy, is classified in Increase in cash surrender value of bank owned
+life insurance in the Consolidated Statements of Income. The potential death benefits as of June 30, 2007 were
+$22.7 million.
+
+Deposit Activities and Other Sources of Funds
+
+General. Deposits and loan repayments are the major sources of our funds for lending and other
+investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and
+outflows and loan prepayments are influenced significantly by general interest rates and market conditions.
+Borrowings from the Federal Home Loan Bank of Seattle are used to supplement the availability of funds from other
+sources and also as a source of term funds to assist in the management of interest rate risk.
+
+Our deposit composition reflects a mixture with certificates of deposit accounting for approximately
+one-half of the total deposits while interest and noninterest-bearing checking, savings and money market accounts
+comprise the balance of total deposits. We rely on marketing activities, convenience, customer service and the
+availability of a broad range of competitively priced deposit products and services to attract and retain customer
+deposits.
+
+Deposits. With the exception of our Health Savings Accounts, substantially all of our depositors are
+residents of the State of Idaho. We occasionally supplement our deposits through brokered certificates of deposit
+and, to a lesser extent, municipal deposits. Deposits are attracted from within our market area through the offering of
+a broad selection of deposit instruments, including checking accounts, money market deposit accounts, savings
+accounts and certificates of deposit with a variety of rates and terms to maturity. Deposit account terms vary
+
+96
+
+according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate,
+among other factors. We offer a number of different deposit programs including our High Performance Checking,
+Wall Street Select Checking, Money Market Accounts, Health Savings Accounts and Escalator Certificates of
+Deposit. Our High Performance Checking program is comprised of several different transaction account products
+with varying minimum balance requirements, number of checks permitted and interest rate options. Our Wall Street
+Select Checking and Money Market Account products offer significantly higher rates of interest on larger deposit
+balances while maintaining the availability of the customer s funds. Our Health Savings Accounts are offered
+directly or through unaffiliated third parties including insurance agents and third-party benefits administrators to
+qualified individuals and employers. The program is offered on a nationwide basis and participants in the plan
+receive a debit card to facilitate account access. Our Escalator Certificate of Deposit has a guaranteed blended rate
+for its four-year term with fixed rate increases occurring every six months from the date of the original deposit, and
+also offers the customer the opportunity to withdraw the entire balance at any six-month anniversary without a
+pre-payment penalty. In determining the terms of our deposit accounts, we consider the development of long term
+profitable customer relationships, current market interest rates, current maturity structure and deposit mix, our
+customer preferences and the profitability of acquiring customer deposits compared to alternative sources.
+
+At June 30, 2007, we had $67.5 million of jumbo ($100,000 or more) certificates of deposit, which are
+primarily from local customers, representing 16.1% of total deposits at that date.
+
+Deposit Activities. The following table sets forth our total deposit activities for the periods indicated.
+
+ 
+ 
+
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In Thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning
+ balance
+ 
+$
+430,281
+ 
+ 
+$
+396,325
+ 
+$
+396,325
+ 
+$
+343,087
+ 
+$
+301,273
+
+Net deposits
+ before interest credited
+ 
+ 
+(20,789
+)
+ 
+ 
+36,195
+ 
+ 
+24,203
+ 
+ 
+47,690
+ 
+ 
+37,731
+
+Interest credited
+ 
+ 
+9,206
+ 
+ 
+ 
+6,950
+ 
+ 
+9,753
+ 
+ 
+5,548
+ 
+ 
+4,083
+
+Net increase
+ (decrease) in deposits
+ 
+ 
+(11,583
+)
+ 
+ 
+43,145
+ 
+ 
+33,956
+ 
+ 
+53,238
+ 
+ 
+41,814
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Ending balance
+ 
+$
+418,698
+ 
+ 
+$
+439,470
+ 
+$
+430,281
+ 
+$
+396,325
+ 
+$
+343,087
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Time Deposits by Rates. The following table sets forth our time deposits classified by rates as of the dates
+indicated.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+At September 30,
+ 
+
+ 
+ 
+ 
+ 
+
+At June 30,
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+2007
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+(In Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+0.00 - 0.99
+%
+ 
+$
+385
+ 
+$
+268
+ 
+$
+1,803
+ 
+$
+19,880
+ 
+
+ 
+1.00 - 1.99
+%
+ 
+ 
+30
+ 
+ 
+341
+ 
+ 
+10,286
+ 
+ 
+28,083
+ 
+
+ 
+2.00 - 2.99
+%
+ 
+ 
+3,096
+ 
+ 
+17,924
+ 
+ 
+56,344
+ 
+ 
+47,906
+ 
+
+ 
+3.00 - 3.99
+%
+ 
+ 
+40,003
+ 
+ 
+57,055
+ 
+ 
+89,955
+ 
+ 
+48,835
+ 
+
+ 
+4.00 - 4.99
+%
+ 
+ 
+56,398
+ 
+ 
+75,300
+ 
+ 
+20,437
+ 
+ 
+17,247
+ 
+
+ 
+5.00 - 5.99
+%
+ 
+ 
+126,443
+ 
+ 
+74,728
+ 
+ 
+18,412
+ 
+ 
+1,184
+ 
+
+ 
+6.00 - 6.99
+%
+ 
+ 
+740
+ 
+ 
+8,108
+ 
+ 
+228
+ 
+ 
+1,090
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+Total
+
+ 
+ 
+$
+227,095
+ 
+$
+233,724
+ 
+$
+197,465
+ 
+$
+164,225
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+97
+
+ 
+ Time Deposits by Maturities. The following table sets forth the amount and maturities of our time deposits at
+ June 30, 2007.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Amounts Due
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+Less Than
+ 
+ 
+1-2
+ 
+ 
+
+2-3
+ 
+ 
+3-4
+ 
+ 
+After
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+1 Year
+ 
+ 
+
+Years
+ 
+ 
+Years
+ 
+ 
+Years
+ 
+ 
+4 Years
+ 
+ 
+Total
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+0.00 - 0.99%
+ 
+ 
+ 
+$
+371
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+14
+ 
+ 
+$
+ 
+ 
+ 
+$
+385
+
+1.00 - 1.99%
+ 
+ 
+ 
+ 
+30
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+30
+
+2.00 - 2.99%
+ 
+ 
+ 
+ 
+2,864
+ 
+ 
+ 
+149
+ 
+ 
+ 
+50
+ 
+ 
+ 
+33
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,096
+
+3.00 - 3.99%
+ 
+ 
+ 
+ 
+30,860
+ 
+ 
+ 
+7,501
+ 
+ 
+ 
+1,433
+ 
+ 
+ 
+167
+ 
+ 
+ 
+42
+ 
+ 
+ 
+40,003
+
+4.00 - 4.99%
+ 
+ 
+ 
+ 
+37,572
+ 
+ 
+ 
+9,096
+ 
+ 
+ 
+4,722
+ 
+ 
+ 
+4,127
+ 
+ 
+ 
+881
+ 
+ 
+ 
+56,398
+
+5.00 - 5.99%
+ 
+ 
+ 
+ 
+115,510
+ 
+ 
+ 
+4,570
+ 
+ 
+ 
+2,239
+ 
+ 
+ 
+3,293
+ 
+ 
+ 
+831
+ 
+ 
+ 
+126,443
+
+6.00 - 6.99%
+ 
+ 
+ 
+ 
+465
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2
+ 
+ 
+ 
+273
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+740
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+
+ 
+ 
+ 
+$
+187,672
+ 
+ 
+$
+21,316
+ 
+ 
+$
+8,446
+ 
+ 
+$
+7,907
+ 
+ 
+$
+1,754
+ 
+ 
+$
+227,095
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+The following table sets forth information concerning our time deposits and other
+ deposits at June 30, 2007.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Weighted
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Average
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Percentage
+ 
+
+Interest
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Minimum
+ 
+
+of Total
+ 
+
+Rate
+ 
+Original
+ Term
+ 
+Category
+ 
+
+Amount
+ 
+Balance
+ 
+
+Deposits
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(Dollars in Thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+0.58
+%
+ 
+N/A
+ 
+Savings deposits
+ 
+$
+23,465
+ 
+ 
+$ 10
+ 
+5.60
+%
+
+0.86
+ 
+ 
+N/A
+ 
+Interest-bearing
+ demand deposits
+ 
+ 
+60,923
+ 
+ 
+50
+ 
+14.55
+ 
+
+ 
+ 
+ 
+N/A
+ 
+Noninterest-bearing
+ demand deposits
+ 
+ 
+34,368
+ 
+ 
+50
+ 
+8.21
+ 
+
+3.26
+ 
+ 
+N/A
+ 
+Money market
+ accounts
+ 
+ 
+42,729
+ 
+ 
+1,000
+ 
+10.21
+ 
+
+0.70
+ 
+ 
+N/A
+ 
+Health savings
+ accounts
+ 
+ 
+30,118
+ 
+ 
+25
+ 
+7.19
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+Certificates
+ of Deposit
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+4.82
+ 
+ 
+1-12 months
+ 
+Fixed term,
+ fixed rate
+ 
+ 
+97,227
+ 
+ 
+500
+ 
+23.22
+ 
+
+4.72
+ 
+ 
+13-24 months
+ 
+Fixed term,
+ fixed rate
+ 
+ 
+95,299
+ 
+ 
+500
+ 
+22.76
+ 
+
+3.81
+ 
+ 
+25-36 months
+ 
+Fixed term,
+ fixed rate
+ 
+ 
+11,905
+ 
+ 
+500
+ 
+2.84
+ 
+
+4.69
+ 
+ 
+37-60 months
+ 
+Fixed term,
+ fixed rate
+ 
+ 
+22,463
+ 
+ 
+500
+ 
+5.37
+ 
+
+4.68
+ 
+ 
+Over 60 months
+ 
+Fixed term,
+ fixed rate
+ 
+ 
+201
+ 
+ 
+500
+ 
+0.05
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+Total
+
+ 
+$
+418,698
+ 
+ 
+ 
+ 
+100.00
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ The following table indicates the amount of our jumbo certificates of deposit by
+ time remaining until maturity as of June 30, 2007. Jumbo certificates of deposit are certificates in amounts
+ of $100,000 or more.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Certificates of
+
+ 
+ 
+
+Deposit of
+
+Maturity
+ Period
+ 
+
+$100,000 or More
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(In Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+Three months
+ or less
+ 
+ 
+$
+23,342
+ 
+
+Over three
+ through six months
+ 
+ 
+ 
+14,996
+ 
+
+Over six through
+ twelve months
+ 
+ 
+ 
+18,227
+ 
+
+Over twelve
+ months
+ 
+ 
+ 
+10,888
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+
+ 
+ 
+$
+67,453
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+98
+
+Deposit Flow. The following table sets forth the balances of deposits in the various types of accounts offered by us at the dates indicated.
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+At September
+ 30,
+
+ 
+ 
+ 
+ 
+ 
+ At June 30,
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+2007
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2006
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2005
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+2004
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+Percent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Percent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Percent
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Percent
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+of
+ 
+ 
+
+Increase/
+ 
+ 
+ 
+ 
+ 
+of
+ 
+ 
+
+Increase/
+ 
+ 
+ 
+ 
+ 
+of
+ 
+ 
+
+Increase/
+ 
+ 
+ 
+ 
+ 
+of
+ 
+ 
+
+Increase/
+ 
+ 
+
+ 
+ 
+
+Amount
+ 
+Total
+ 
+ 
+
+(Decrease)
+ 
+ 
+
+Amount
+ 
+Total
+ 
+ 
+
+(Decrease)
+ 
+ 
+
+Amount
+ 
+Total
+ 
+ 
+
+(Decrease)
+ 
+ 
+
+Amount
+ 
+Total
+ 
+ 
+
+(Decrease)
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+(Dollars in Thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Savings deposits
+ 
+$
+ 23,465
+ 
+5.60
+%
+ 
+$
+(190
+)
+ 
+$
+ 23,655
+ 
+5.50
+%
+ 
+$
+(1,564
+)
+ 
+$
+ 25,219
+ 
+6.36
+%
+ 
+$
+(234
+)
+ 
+$
+ 25,453
+ 
+7.42
+%
+ 
+$
+ 1,030
+ 
+ 
+
+Demand deposits
+ 
+ 
+95,291
+ 
+22.76
+ 
+ 
+ 
+(13,251
+)
+ 
+ 
+108,542
+ 
+25.22
+ 
+ 
+ 
+(247
+)
+ 
+ 
+108,789
+ 
+27.46
+ 
+ 
+ 
+23,002
+ 
+ 
+ 
+85,787
+ 
+25.01
+ 
+ 
+ 
+13,621
+ 
+ 
+
+Money market
+ accounts
+ 
+ 
+42,729
+ 
+10.21
+ 
+ 
+ 
+9,306
+ 
+ 
+ 
+33,423
+ 
+7.77
+ 
+ 
+ 
+1,902
+ 
+ 
+ 
+31,521
+ 
+7.95
+ 
+ 
+ 
+(3,871
+)
+ 
+ 
+35,392
+ 
+10.32
+ 
+ 
+ 
+3,264
+ 
+ 
+
+Health savings
+ accounts
+ 
+ 
+30,118
+ 
+7.19
+ 
+ 
+ 
+(819
+)
+ 
+ 
+30,937
+ 
+7.19
+ 
+ 
+ 
+(2,394
+)
+ 
+ 
+33,331
+ 
+8.41
+ 
+ 
+ 
+1,101
+ 
+ 
+ 
+32,230
+ 
+9.39
+ 
+ 
+ 
+4,746
+ 
+ 
+
+Fixed rate
+ certificates that mature
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+in the year
+ ending:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Within 1 year
+
+ 
+ 
+187,672
+ 
+ 
+ 
+ 
+ 
+(789
+)
+ 
+ 
+188,461
+ 
+43.80
+ 
+ 
+ 
+81,444
+ 
+ 
+ 
+107,017
+ 
+27.00
+ 
+ 
+ 
+38,821
+ 
+ 
+ 
+68,196
+ 
+19.88
+ 
+ 
+ 
+10,622
+ 
+ 
+
+After 1 year,
+ but within 2 years
+
+ 
+ 
+21,316
+ 
+44.82
+ 
+ 
+ 
+(7,091
+)
+ 
+ 
+28,407
+ 
+6.60
+ 
+ 
+ 
+(34,295
+)
+ 
+ 
+62,702
+ 
+15.82
+ 
+ 
+ 
+3,784
+ 
+ 
+ 
+58,918
+ 
+17.17
+ 
+ 
+ 
+20,175
+ 
+ 
+
+After 2 years,
+ but within 5 years
+
+ 
+ 
+17,913
+ 
+5.09
+ 
+ 
+ 
+1,316
+ 
+ 
+ 
+16,597
+ 
+3.86
+ 
+ 
+ 
+(10,346
+)
+ 
+ 
+26,943
+ 
+6.80
+ 
+ 
+ 
+(9,472
+)
+ 
+ 
+36,415
+ 
+10.61
+ 
+ 
+ 
+(11,364
+)
+ 
+
+After 5 years
+
+ 
+ 
+194
+ 
+4.28
+ 
+ 
+ 
+(65
+)
+ 
+ 
+259
+ 
+0.06
+ 
+ 
+ 
+5
+ 
+ 
+ 
+254
+ 
+0.06
+ 
+ 
+ 
+191
+ 
+ 
+ 
+63
+ 
+0.02
+ 
+ 
+ 
+(54
+)
+ 
+
+Other certificates
+ of deposit
+ 
+ 
+ 
+ 
+0.05
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(549
+)
+ 
+ 
+549
+ 
+0.14
+ 
+ 
+ 
+(84
+)
+ 
+ 
+633
+ 
+0.18
+ 
+ 
+ 
+(226
+)
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+Total
+ 
+$
+418,698
+ 
+100.00
+%
+ 
+$
+(11,583
+)
+ 
+$
+430,281
+ 
+100.00
+%
+ 
+$
+33,956
+ 
+ 
+$
+396,325
+ 
+100.00
+%
+ 
+$
+53,238
+ 
+ 
+$
+343,087
+ 
+100.00
+%
+ 
+$
+41,814
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+99
+
+Borrowings. Customer deposits are the primary source of funds for our lending and investment
+ activities. We use advances from the Federal Home Loan Bank of Seattle to supplement
+ our supply of lendable funds to meet short-term deposit withdrawal requirements
+ and also to provide longer term funding to better match the duration of selected
+ loan and investment maturities. As one of our capital management strategies, we
+ also use borrowings from the Federal Home Loan Bank of Seattle to fund the purchase
+ of investment securities and origination of loans in order to increase our net
+ interest income when attractive opportunities exist.
+
+ 
+
+As a member
+ of the Federal Home Loan Bank of Seattle, we are required to own its capital stock
+ and are authorized to apply for advances on the security of the stock and certain
+ of our mortgage loans and mortgage-backed securities provided certain creditworthiness
+ standards have been met. Advances are made individually under various terms pursuant
+ to several different credit programs, each with its own interest rate and range
+ of maturities. We maintain a committed credit facility with the Federal Home Loan
+ Bank of Seattle that provides for immediately available advances up to an aggregate
+ of 40% of Home Federal Bank s total assets, or $283.2 million as of June 30,
+ 2007. At June 30, 2007, our outstanding advances from the Federal Home Loan Bank
+ of Seattle totaled $189.3 million.
+
+ 
+
+The following
+ table sets forth information regarding our borrowings at the end of and during the
+ periods indicated. The table includes both long- and short-term borrowings.
+
+ 
+
+ 
+ 
+
+Nine Months Ended
+ 
+
+Year Ended
+
+ 
+ 
+
+June 30,
+ 
+
+September 30,
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+(Dollars in Thousands)
+
+Maximum amount
+ of borrowing outstanding at any month end:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ Home Loan Bank advances
+
+ 
+$
+223,000
+ 
+ 
+$
+198,000
+ 
+ 
+$
+214,000
+ 
+ 
+$
+182,000
+ 
+ 
+$
+136,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Approximate
+ average borrowings outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+208,000
+ 
+ 
+ 
+184,000
+ 
+ 
+ 
+191,000
+ 
+ 
+ 
+153,000
+ 
+ 
+ 
+115,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Approximate
+ weighted average rate paid on:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+4.46
+%
+ 
+ 
+4.12
+%
+ 
+ 
+4.20
+%
+ 
+ 
+3.87
+%
+ 
+ 
+4.08
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+At June 30,
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+(Dollars in
+ Thousands)
+
+Balance outstanding
+ at end of period:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+ 
+ 
+$
+189,264
+ 
+ 
+$
+210,759
+ 
+ 
+$
+175,932
+ 
+ 
+$
+122,797
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Weighted average
+ rate paid on:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ Home Loan Bank advances
+
+ 
+ 
+ 
+ 
+ 
+ 
+4.50
+%
+ 
+ 
+4.36
+%
+ 
+ 
+3.96
+%
+ 
+ 
+3.96
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Competition
+
+ 
+
+We face intense
+ competition in originating loans and in attracting deposits within our targeted
+ geographic market. We compete by leveraging our full service delivery capability
+ comprised of convenient branch locations, including six branches located inside
+ Wal-Mart Superstores offering extended banking hours, call center and Internet banking,
+ and consistently delivering high-quality, individualized service to our customers
+ that result in a high level of customer satisfaction. According to data published
+ by the Federal Deposit Insurance Corporation, as of June 30, 2006, we ranked fifth
+ in terms of deposits, among the 20 federally-insured depository institutions in
+ Ada and Canyon
+
+100
+
+counties,
+ our primary market area. Our key competitors are U.S. Bank, Wells Fargo, Washington
+ Mutual, Bank of America, Key Bank, Washington Federal and Farmers & Merchants.
+ According to data from the Federal Deposit Insurance Corporation, these competitors
+ controlled approximately 74% of the deposit market with $5.4 billion of the $7.3 billion
+ total deposits in Ada and Canyon counties as of June 30, 2006. Aside from these
+ traditional competitors, credit unions, insurance companies and brokerage firms
+ are an increasingly competing challenge for consumer deposit relationships. We
+ also compete for loans and deposits through our two branch offices in Gem and Elmore
+ counties.
+
+ 
+
+Our competition
+ for loans comes principally from mortgage bankers, commercial banks, thrift institutions,
+ credit unions and finance companies. Several other financial institutions, including
+ those previously mentioned, have greater resources than we do and compete with us
+ for lending business in our targeted market area. Among the advantages of some of
+ these institutions are their ability to make larger loans, finance extensive advertising
+ campaigns, access lower cost funding sources and allocate their investment assets
+ to regions of highest yield and demand. This competition for the origination of
+ loans may limit our future growth and earnings prospects.
+
+ 
+
+Subsidiaries
+ and Other Activities
+
+ 
+
+Home Federal
+ Bank has one wholly-owned subsidiary, Idaho Home Service Corporation, which was
+ established in 1981 as Home Service Corporation for the purpose of facilitating
+ various business activities. Since 2000, Idaho Home Service Corporation has been
+ inactive.
+
+ 
+
+Personnel
+
+ 
+
+At June 30, 2007, we had 208 full-time employees and 17 part-time employees. Our employees are
+ not represented by any collective bargaining group. We believe our relationship
+ with our employees is good.
+
+ 
+
+Properties
+
+ 
+
+At June 30, 2007, we had 15 full service banking offices and two loan centers. Seven of the
+ locations are owned, seven locations are leased and two locations are owned with
+ the land being leased. At June 30, 2007, the net book value of our investment in
+ premises, equipment and leaseholds was approximately $12.3 million. The net book
+ value of the data processing and computer equipment utilized by us at June 30,
+ 2007 was approximately $561,000.
+
+ 
+
+The following
+ table provides a list of our main and branch offices and indicates whether the properties
+ are owned or leased:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+Lease
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Leased or
+ 
+
+Expiration
+ 
+
+Square
+
+Location
+
+ 
+
+Owned
+ 
+
+Date
+ 
+
+Footage
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ADMINISTRATIVE
+ OFFICE
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+500 12th
+ Avenue South
+ 
+ 
+Owned
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+34,014
+ 
+
+Nampa,
+ Idaho 83651 (1)(2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+BRANCH OFFICES:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Downtown Boise (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+800 West
+ State Street
+ 
+ 
+Leased
+ 
+ 
+August 2010
+ 
+ 
+3,500
+ 
+
+Boise,
+ Idaho 83702
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+101
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+Lease
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Leased or
+ 
+
+Expiration
+ 
+
+Square
+
+Location
+
+ 
+
+Owned
+ 
+
+Date
+ 
+
+Footage
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Parkcenter
+ (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+871 East Parkcenter
+ Boulevard
+ 
+ 
+Owned
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+4,500
+ 
+
+Boise, Idaho
+ 83706
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fairview
+ (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+10443 Fairview
+ Avenue
+ 
+
+Building owned
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Boise, Idaho 83704
+ 
+Land leased
+ 
+June 2070
+ 
+ 
+2,500
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Meridian
+ (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+55 East Franklin
+ Road
+ 
+ 
+Owned
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+4,000
+ 
+
+Meridian,
+ Idaho 83642
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Caldwell
+ (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+923 Dearborn
+ 
+ 
+Owned
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+4,500
+ 
+
+Caldwell,
+ Idaho 83605
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Mountain
+ Home (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+400 North
+ 3rd East
+ 
+ 
+Owned
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+2,600
+ 
+
+Mountain Home,
+ Idaho 83647
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Emmett
+ (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+250 South
+ Washington Avenue
+ 
+ 
+Owned
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+2,600
+ 
+
+Emmett, Idaho
+ 83617
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Boise
+ (3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+8300 West
+ Overland Road
+ 
+ 
+Leased
+ 
+ 
+March 2011
+ 
+ 
+695
+ 
+
+Boise, Idaho
+ 83709
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Meridian
+ (3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+4051 East
+ Fairview Avenue
+ 
+ 
+Leased
+ 
+ 
+
+February 2011
+ 
+ 
+695
+ 
+
+Meridian,
+ Idaho 83642
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Nampa
+ (3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2100 12th
+ Avenue Road
+ 
+ 
+Leased
+ 
+ 
+August 2010
+ 
+ 
+695
+ 
+
+Nampa, Idaho
+ 83651
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Caldwell
+ (3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+5108 East
+ Cleveland Boulevard
+ 
+ 
+Leased
+ 
+ 
+August 2010
+ 
+ 
+695
+ 
+
+Caldwell,
+ Idaho 83605
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Garden
+ City (3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+7319 West
+ State Street
+ 
+ 
+Leased
+ 
+ 
+August 2012
+ 
+ 
+695
+ 
+
+Boise, Idaho
+ 83714
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Idaho Center
+ (3)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+5785 E. Franklin
+ Road
+ 
+ 
+Leased
+ 
+ 
+
+December 2011
+ 
+ 
+710
+ 
+
+Nampa, Idaho
+ 83687
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+102
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+Lease
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Leased or
+ 
+
+Expiration
+ 
+
+Square
+
+Location
+
+ 
+
+Owned
+ 
+
+Date
+ 
+
+Footage
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Eagle
+ (2)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+100 E. Riverside
+ Drive
+ 
+ 
+Owned
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+4,500
+ 
+
+Eagle, Idaho
+ 83616
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+LOAN OFFICES:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Blackeagle
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+1307 Maplegrove
+ 
+ 
+Leased
+ 
+ 
+August 2010
+ 
+ 
+4,310
+ 
+
+Boise, Idaho
+ 83709
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Meridian
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+111 East 1st
+ Street
+ 
+ 
+Leased
+ 
+ 
+
+December 2009
+ 
+ 
+2,600
+ 
+
+Meridian,
+ Idaho 83642
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1) Includes
+ home branch
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(2) Drive-up
+ ATM available.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(3) Wal-Mart
+ locations
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Legal Proceedings
+
+ 
+
+From time
+ to time we are involved as plaintiff or defendant in various legal actions arising
+ in the normal course of business. We do not anticipate incurring any material liability
+ as a result of such litigation, nor do we expect any material impact on our financial
+ position, results of operations or cash flows.
+
+ 
+
+In April 2006,
+ the State of Idaho Department of Finance issued a cease and desist order to a former
+ investment representative of Home Federal Bank with respect to marketing and selling
+ unregistered securities in 2005. The investment representative was subsequently
+ indicted and a civil action was brought against him by the Department of Finance.
+ In February 2007, the investment representative pleaded guilty as part of a plea
+ agreement that requires repayment of $173,000 to the victims by August 30, 2007.
+ Home Federal Bank was not named as a party in that action and no other actions
+ have been filed against Home Federal Bank to date. Home Federal Bank s contract
+ with its third-party broker-dealer includes an indemnity clause protecting Home
+ Federal Bank against losses attributable to any non-deposit investment product transaction.
+ The broker-dealer has been actively engaged in the investigation and in direct contact
+ with the affected customers throughout the process. At this time, we do not believe
+ the plea agreement will materially affect our financial position or results of operations.
+
+103
+
+MANAGEMENT
+
+Board of Directors and Management of
+ New Home Federal Bancorp
+
+The board
+ of directors of new Home Federal Bancorp initially will consist of the same individuals
+ who currently serve as directors of Home Federal Bancorp and Home Federal Bank.
+ Like the board of directors of Home Federal Bancorp, the board of directors of new
+ Home Federal Bancorp will be divided into three classes, each containing approximately
+ one-third of the directors. The directors will be elected by the stockholders of
+ new Home Federal Bancorp, for three-year terms, or until their successors are elected.
+
+The following
+ individuals initially will be the executive officers of new Home Federal Bancorp
+ and hold the offices set forth opposite their names.
+
+Name
+ 
+Position Held
+ With Home Federal Bancorp
+
+ 
+
+Daniel L.
+ Stevens
+ 
+Chairman of
+ the Board, President and Chief Executive Officer
+
+ 
+ 
+ 
+
+Robert A.
+ Schoelkoph
+ 
+Senior Vice
+ President, Treasurer, Secretary and Chief Financial Officer
+
+ 
+ 
+ 
+
+The executive
+ officers of new Home Federal Bancorp will be elected annually and hold office until
+ their respective successors have been elected or until death, resignation or removal
+ by the Board of directors.
+
+Information concerning the principal occupations,
+ employment and compensation of the directors and executive officers of new Home
+ Federal Bancorp is set forth under Executive Officers Who Are Not Directors. Like the directors of Home Federal Bancorp, the directors of new Home Federal
+ Bancorp initially will not be compensated by new Home Federal Bancorp but will serve
+ and be compensated by Home Federal Bank. It is not anticipated that separate directors fees will be paid to directors of new Home Federal Bancorp until such time
+ as these persons devote significant time to the separate management of Home Federal
+ Bancorp s affairs, which is not expected to occur until new Home Federal Bancorp
+ becomes actively engaged in businesses other than holding the stock of Home Federal
+ Bank. The board of directors of new Home Federal Bancorp may determine that such
+ compensation is appropriate in the future.
+
+The following table sets forth certain
+ information regarding the board of directors of Home Federal Bancorp all of whom
+ currently serve as directors of Home Federal Bancorp and Home Federal Bank.
+
+ 
+ 
+
+Age as of
+ 
+Position Held
+ With Home Federal
+ 
+
+Director
+ 
+
+Current Term of
+
+Name
+ 
+
+June 30, 2007
+ 
+Bancorp
+ 
+
+Since
+ 
+
+Office Expires
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L.
+ Stevens
+ 
+ 
+63
+ 
+ 
+Chairman of
+ the Board, President and Chief Executive Officer
+ 
+ 
+1996
+ 
+ 
+ 
+2009
+ 
+
+Fred H. Helpenstell,
+ M.D.
+ 
+ 
+76
+ 
+ 
+Director
+ 
+ 
+1991
+ 
+ 
+ 
+2009
+ 
+
+Thomas W.
+ Malson
+ 
+ 
+77
+ 
+ 
+Director
+ 
+ 
+1986
+ 
+ 
+ 
+2008
+ 
+
+N. Charles
+ Hedemark
+ 
+ 
+65
+ 
+ 
+Director
+ 
+ 
+1983
+ 
+ 
+ 
+2008
+ 
+
+James R. Stamey
+ 
+ 
+63
+ 
+ 
+Director
+ 
+ 
+2001
+ 
+ 
+ 
+2010
+ 
+
+Robert A.
+ Tinstman
+ 
+ 
+61
+ 
+ 
+Director
+ 
+ 
+1999
+ 
+ 
+ 
+2010
+ 
+
+Richard J.
+ Navarro
+ 
+ 
+55
+ 
+ 
+Director
+ 
+ 
+2005
+ 
+ 
+ 
+2009
+ 
+
+Len E. Williams
+ 
+ 
+48
+ 
+ 
+Director
+ 
+ 
+2007
+ 
+ 
+ 
+2008
+ 
+
+104
+
+The business
+ experience of each director for at least the past five years is set forth below.
+
+Daniel
+ L. Stevens is Chairman of the Board, President and Chief Executive Officer of
+ Home Federal Bancorp, positions he has held since 2004, and Chairman of the Board
+ and Chief Executive Officer of Home Federal Bank. He has served as Chief Executive
+ Officer since 1995. Mr. Stevens served as President of Home Federal Bank until September
+ 2006, when he announced his plans for retirement in 2008 and a successor, Len E.
+ Williams, was appointed President of Home Federal Bank. Mr. Stevens became a director
+ in 1996 and has served as Chairman of the Board of Home Federal Bank since 1999.
+ He has been in the financial services industry for over 35 years and has served
+ as an executive officer or chief executive officer for four other mutual and stock
+ thrifts during his career. He is past Vice Chairman of the Board of Directors of
+ the Federal Home Loan Bank of Seattle. He served as the Chairman of the Audit Committee
+ and a member of the Financial Operations Committee of the Federal Home Loan Bank
+ of Seattle. Mr. Stevens was a director of the Federal Home Loan Bank of Seattle
+ from 1996 until 2004. He is a director of America s Community Bankers, serves
+ on America s Community Bankers Federal Home Loan Bank System Committee,
+ chairs the America s Community Bankers Credit Union Committee, and is First
+ Vice Chair of America s Community Bankers COMPAC Board of Governors. He currently
+ serves as Chairman of the Board of the Idaho Bankers Association, is a past Chairman
+ of the Board of Directors and Executive Committee of the Boise Metro Chamber of
+ Commerce, and is a director of the Midwest Conference of Community Bankers. He is
+ the former director of the Boise State University Foundation, and past Chairman
+ of the United Way of Treasure Valley and the Nampa Neighborhood Housing Services
+ Board of Directors.
+
+Fred H.
+ Helpenstell, M.D. is a retired physician. Dr. Helpenstell earned his medical
+ degree from the University of Illinois Medical School in 1956. He was certified
+ by the American Board of Orthopaedic Surgery in 1966 and opened his practice in
+ Nampa, Idaho. He served on the Idaho State Board of Medical Examiners from 1968
+ until 1975 and was President of the Board of Directors of Mercy Medical Center in
+ Nampa. After volunteering his orthopedic skills in Nepal, he spent seven years as
+ chair of the Nepal Program for Health Volunteers Overseas. Dr. Helpenstell is a
+ director of MedNow, Inc., a medical equipment provider, Terry Reilly Health Services,
+ the Boise Philharmonic Association and the Boise Philharmonic Foundation.
+
+Thomas
+ W. Malson has been the owner and Chief Executive Officer of Robertson Supply,
+ Inc. since 1968. Robertson Supply, Inc. Located in Nampa, Idaho since 1948, is a
+ wholesale distributor of plumbing and related products with outlets in seven Southern
+ Idaho and Eastern Oregon cities.
+
+N. Charles
+ Hedemark retired as Executive Vice President and Chief Operating Officer of
+ Intermountain Gas Company, a natural gas utility company in July 2005, after serving
+ as an employee since 1965. Mr. Hedemark is a graduate of The College of Idaho
+ and the Executive Program at Stanford University. He is a director and past Chairman
+ of Blue Cross of Idaho. Mr. Hedemark is also a director of the Capital City Development
+ Corporation and is a past President of the Northwest Gas Association.
+
+James R.
+ Stamey is a retired banker, having been employed by U.S. Bank from 1985 until
+ 2001, where he last served as President of U.S. Bank, Idaho and Executive Vice President
+ and Manager of Corporate Banking of the Intermountain Region. Mr. Stamey is President
+ of the Library Foundation. He also served as President of the Idaho Association
+ of Commerce and Industry and served on the Board of Directors for the Boise Philharmonic,
+ the Idaho Bankers Association and the Boise Rotary Club.
+
+Robert
+ A. Tinstman is a consultant for Tinstman and Associates, LLC, a construction
+ consulting company. From May 2002 until May 2007, he was Executive Chairman of the
+ James Construction Group, LLC, Baton Rouge, Louisiana, a construction company. Prior
+ to that, Mr. Tinstman was the sole owner and a consultant of Tinstman Associates,
+ Boise, Idaho, a construction consulting company, from May 1999 until May 2002. He
+ served as President and Chief Executive Officer of the Morrison-Knudsen Company,
+ Boise, Idaho, an engineering, construction and mining company, from 1995 until February
+ 1999, where he had been employed since May 1974. Mr. Tinstman is also a director
+ of IDACORP, Inc., Boise, Idaho, and CNA Surety Corporation, a Chicago, Illinois
+ insurance agency, both of which are public companies.
+
+105
+
+Richard
+ J. Navarro is the Chief Financial Officer of Albertsons LLC, a retail food and
+ drug company, and has over 29 years of experience in the industry. Mr. Navarro is
+ a Certified Public Accountant and from 2004 until 2006, was a consultant providing
+ financial management services to various business. Prior to that, Mr. Navarro was
+ employed by Albertsons, Inc. and held several management positions including Senior
+ Vice President and Controller from 1999 to 2003. He currently serves on the Board
+ of Directors of TitleOne Corporation and the Boise State University Foundation.
+ He is also the past Chairman of the Associated Taxpayers of Idaho. Mr. Navarro is
+ a graduate of Boise State University and the Executive Financial Management Program
+ at Stanford University, Graduate School of Business.
+
+Len E.
+ Williams joined Home Federal Bank as President in September 2006 and was appointed
+ as a director of Home Federal Bank and Home Federal Bancorp in April, 2007. Mr.
+ Williams has 30 years of commercial banking experience serving in many regional
+ and national leadership roles. Prior to joining Home Federal Bank, Mr. Williams
+ was Senior Vice President and Head of Business Banking with Fifth Third Bank. He
+ was charged with creating and growing the business line and providing leadership
+ over the company s business banking personnel, processes and products. Form
+ 1987 to 2005, he held several management positions with Key Bank, including President
+ of Business Banking from 2003 to 2005 and President of the Colorado District from
+ 1999 to 2003. His prior experience includes regional corporate and commercial banking
+ leadership responsibility. Mr. Williams is a member of the Board of Directors of
+ the Boise Metro Chamber of Commerce and has served as chairman of Junior Achievement
+ and Boys and Girsl Clubs. Mr. Williams holds an M.B.A. from the University of Washington
+ and is a graduate of the Pacific Coast Banking School.
+
+Executive Officers Who Are Not Directors
+
+Each of the
+ executive officers of Home Federal Bancorp will retain his or her office with new
+ Home Federal Bancorp following the reorganization. Officers are elected annually
+ by the board of directors of Home Federal Bancorp. The business experience for at
+ least the past five years for each of the five executive officers of Home Federal
+ Bancorp who do not serve as directors is set forth below.
+
+Robert
+ A. Schoelkoph is Senior Vice President, Treasurer, Secretary and Chief Financial
+ Officer of Home Federal Bancorp and Home Federal Bank and is 54 years of age. Mr.
+ Schoelkoph joined Home Federal Bank in 1980. Mr. Schoelkoph was controller of Home
+ Federal Bank from 1980 until 1983, Vice President and Treasurer from 1983 to 1994,
+ and has served as Senior Vice President, Chief Financial Officer and Treasurer since
+ 1983. The title of Secretary was added in 2007. He is a past member and Chairman
+ of the Idaho Employers Council and a member of the Board of Directors of the Nampa
+ Shelter Foundation. Mr. Schoelkoph is a certified public accountant.
+
+Lynn A.
+ Sander is Executive Vice President/Consumer Banking of Home Federal Bank and
+ is 54 years of age. Ms. Sander joined Home Federal Bank in May 2000 as Vice President/Sales
+ Management. She was appointed to the position of Senior Vice President/Retail Banking
+ in July 2001 and served in that position until she was appointed to her current
+ position in April 2007. Immediately prior to joining Home Federal Bank, she was
+ Senior Vice President, Account Manager for Fairmont/Aspen Performance Group, a sales
+ and service consulting company, from June 1999 to May 2000. From 1987 until December
+ 1998, Ms. Sander was employed by KeyBank of Idaho and its affiliate KeyCorp Management
+ Company, where her last position was Vice President/Core Banking Territory Manager
+ covering the states of Alaska, Idaho, Utah, and Colorado. She began her banking
+ career in 1973 with Bank of Idaho. She currently serves on the Board of Directors
+ of the Women and Children s Alliance, and is the Chair of the Board of the
+ United Way of Treasure Valley. Ms. Sander served as Fundraising Chairman for the
+ Idaho Anne Frank Human Rights Memorial and was chairman of the 2005 Treasure Valley
+ United Way Campaign.
+
+Denis J.
+ Trom is Senior Vice President/Human Resources of Home Federal Bank and is 60
+ years of age. Mr. Trom joined Home Federal Bank in April 2002. Mr. Trom was previously
+ employed by U.S. Bancorp, Minneapolis, Minnesota from 1978 until 2002. He held various
+ human resource, training and organizational development positions with U.S. Bancorp
+ during his 23 years of employment, most recently serving as Vice President/Senior
+ Regional Human Resources Consulting Manager from 1999 until 2002. Mr. Trom is active
+ in the 
+
+106
+
+ Society
+ for Human Resource Management, American Society for Training 
+ Development, the Professional Association for Compensation, Benefits and Total Rewards,
+ and church activities.
+
+Steven
+ D. Emerson is Executive Vice President and Chief Lending Officer of Home Federal
+ Bank. Mr. Emerson joined Home Federal Bank as Senior Vice President and Chief Lending
+ Officer on December 1, 2006. Mr. Emerson has over 15 years of experience in commercial
+ banking and previously served as Vice President and Senior Commercial Lender for
+ Farmers and Merchants Bank, a local community bank, during 2006. Prior to his employment
+ with Farmers and Merchants Bank, Mr. Emerson served in several positions with Key
+ Bank from 2000 to 2006, including President of the Cincinnati, Ohio market. Mr.
+ Emerson holds an M.B.A. from Northwest Nazarene University.
+
+Cindy L.
+ Bateman is Senior Vice President and Commercial Banking Team Lead of Home Federal
+ Bank. Ms. Bateman joined Home Federal Bank in March 2007. Ms Bateman was previously
+ employed by Key Bank from 2002 until 2007 having served as Senior Vice President
+ and District Business Leader. Having started her career with First Security Bank
+ of Idaho in 1983 in the Management Training program, she has held various positions
+ in Credit Administration and Commercial and Business Banking. Ms. Bateman holds
+ a B.B.A. in Finance from Idaho State University and an M.B.A. from the University
+ of Washington. She currently serves on the Boards of Directors of Financial Women
+ International and as Treasurer for the Idaho Shakespeare Festival.
+
+Sean P.
+ Watt is Senior Vice President and Retail Branch Administration Manager of Home Federal Bank.
+ Mr. Watt joined Home Federal Bank in May 2000. Mr. Watt served as the Consumer Loan
+ Manager from May 2000 until he was appointed to his current position in Branch Administration
+ in August 2001. Mr. Watt was previously employed by Key Bank as a Senior Consumer
+ Loan Officer. Mr. Watt serves on the Board of Directors for the Boys and Girls Club
+ of Nampa and Junior Achievement of Idaho. Mr. Watt graduated with honors from Pacific
+ Coast Banking School in 2005.
+
+Meetings and Committees of the Board
+ of Directors
+
+In connection
+ with the completion of the conversion, new Home Federal Bancorp will establish a
+ nominating and corporate governance committee, a compensation committee and an audit
+ committee that will be substantially the same as the committees of Home Federal
+ Bancorp. All of the members of these committees will be independent directors as
+ defined in the listing standards of The Nasdaq Stock Market. We plan to have written
+ charters for each committee available on our website at www.myhomefed.com
+.
+
+The following
+ is a summary of the current committees of the boards of directors of Home Federal
+ Bancorp and Home Federal Bank.
+
+Board of Directors
+
+The boards of directors of Home Federal
+ Bancorp and Home Federal Bank conduct their business through meetings of the boards
+ and through board and committee meetings. For the year ended September 30, 2007, both boards
+ generally met in person on a bi-monthly basis, holding additional special meetings as needed.
+ During the 2007 fiscal year, the board of directors of Home Federal Bancorp held
+ six regular meetings and one special meeting and the board of directors of Home Federal Bank held six regular
+ meetings and no special meetings. No director of Home Federal Bancorp or Home Federal
+ Bank attended fewer than 75% of the total meetings of the boards and committees
+ on which he served during this period.
+
+Committees and Committee Charters
+
+The board
+ of directors of Home Federal Bancorp has standing Audit, Loan, Compensation, and
+ Nominating Committees. The board has adopted written charters for its Audit, Compensation and
+ Nominating Committees copies of which are available on our website at www.myhomefed.com.
+
+107
+
+Audit Committee
+
+The Audit
+ Committee consists of Directors Tinstman (Chairman), Hedemark, Navarro and Stamey.
+ The Committee meets quarterly and on an as needed basis to evaluate the effectiveness
+ of Home Federal Bancorp s internal controls for safeguarding its assets and
+ ensuring the integrity of the financial reporting. The Audit Committee also meets quarterly to review
+ and approve the earnings releases and the quarterly reports on Form 10-Q and annual report
+ on Form 10-K. The Committee also appoints the
+ independent auditor and reviews the audit report prepared by the independent auditor.
+ The Audit Committee met 12 times during the year ended September 30, 2007.
+
+Each member of the Audit Committee is independent in accordance with
+ the requirements for companies quoted on The Nasdaq Stock Market. Director Navarro
+ has been designated by the board of directors as the audit committee financial
+ expert, as defined by the SEC. Director Navarro is a certified public accountant
+ and is the Chief Financial Officer of Albertsons LLC.
+
+Nominating Committee
+
+The Nominating
+ Committee consists of Directors Helpenstell (Chairman), Malson, and Hedemark. The
+ Nominating Committee and its Chair are appointed annually by the board of directors.
+ Members of this Committee are selected from the pool of directors who are not up
+ for election during the appointment year. The Nominating Committee meets annually
+ and on an as needed basis, and is responsible for selecting qualified individuals
+ to fill expiring director s terms and openings on the board of directors. Final
+ approval of director nominees is determined by the full board, based on the recommendations
+ of the Nominating Committee. This Committee met twice during the year ended September
+ 30, 2007. Nominating Committee members receive no additional fees for serving
+ on the Committee.
+
+Compensation Committee
+
+The Compensation
+ Committee is comprised of Directors Hedemark (Chairman), Helpenstell, Malson and
+ Navarro. The Compensation Committee meets annually and on an as needed basis regarding
+ the personnel, compensation and benefits related matters of Home Federal Bancorp.
+
+The Committee also meets, outside of the presence of Mr. Stevens and Mr. Williams, to discuss their compensation and make its
+recommendations to the full board. Mr. Stevens and Mr. Williams make recommendations to the Compensation Committee regarding the
+compensation of the executive officers who report to them. The Committee considers these recommendations and makes its
+recommendation to the full board, which then votes on executive compensation. Mr. Stevens and Mr. Williams do not vote on their own
+compensation and only vote on the compensation of other executive officers in case of a tie. The Compensation Committee met four
+times during the year ended September 30, 2007.
+
+Corporate Governance
+
+Director Independence. The common stock of Home Federal Bancorp is listed on the Nasdaq Global Market. In accordance with
+Nasdaq requirements, at least a majority of Home Federal Bancorp s directors must be independent directors. The Board has determined
+that six of its eight directors are independent, as defined by Nasdaq. Directors Helpenstell, Hedemark, Malson, Stamey, Tinstman and
+Navarro are all independent. Only Daniel L. Stevens and Len E. Williams are not independent.
+
+Stockholder Communication with the Board of Directors.
+The board
+ of directors maintains a process for stockholders to communicate with the board
+ of directors. Stockholders wishing to communicate with the board of directors should
+ send any communication to Daniel L. Stevens, Chairman of the board, Home Federal
+ Bancorp, Inc., 500 12th Avenue South, Nampa, Idaho 83651. Any such communication
+ should state the number of shares beneficially owned by the stockholder making the
+ communication.
+
+108
+
+Annual Meeting Attendance by Directors.
+We do
+ not have a policy regarding board member attendance at annual
+ meetings of stockholders. All of the members of the board of directors attended
+ the 2007 Annual Meeting of Stockholders.
+
+Directors Compensation
+
+ The following table shows the compensation paid to our non-employee directors for the fiscal year ended September 30, 2007.
+Compensation for Daniel L. Stevens, who is the Chairman, President and Chief Executive Officer of Home Federal Bancorp and the
+Chairman and Chief Executive Officer of Home Federal Bank, and Len E. Williams, who is the President of Home Federal Bank, is
+included in the section below entitled Executive Compensation. 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name 
+
+ 
+
+ 
+
+Fees
+
+Earned
+
+or Paid
+
+in Cash
+
+($) 
+
+ 
+
+Stock
+
+Awards
+
+($)(1)(2) 
+
+ 
+
+Option
+
+Awards
+
+($)(1)(3) 
+
+ 
+
+Non-Equity
+
+Incentive
+
+Plan
+
+Compensation
+
+($)(4) 
+
+ 
+
+Change in
+
+Pension
+
+Value
+
+and Non-
+
+qualified
+
+Deferred
+
+Compensation
+
+Earnings
+
+($)(5) 
+
+ 
+
+All
+
+Other
+
+Compensation
+
+($)(6) 
+
+ 
+
+Total
+
+($) 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Fred H. Helpenstell, M.D.
+
+ 
+
+ 
+
+26,500
+
+ 
+
+ 
+
+30,287
+
+ 
+
+ 
+
+9,301
+
+ 
+
+ 
+
+5,382
+
+ 
+
+ 
+
+21,514
+
+ 
+
+ 
+
+2,099
+
+ 
+
+ 
+
+95,083
+
+ 
+
+Thomas W. Malson
+
+ 
+
+ 
+
+26,500
+
+ 
+
+ 
+
+30,287
+
+ 
+
+ 
+
+7,750
+
+ 
+
+ 
+
+5,349
+
+ 
+
+ 
+
+21,040
+
+ 
+
+ 
+
+2,099
+
+ 
+
+ 
+
+93,025
+
+ 
+
+N. Charles Hedemark
+
+ 
+
+ 
+
+27,950
+
+ 
+
+ 
+
+30,287
+
+ 
+
+ 
+
+9,301
+
+ 
+
+ 
+
+5,671
+
+ 
+
+ 
+
+3,827
+
+ 
+
+ 
+
+2,099
+
+ 
+
+ 
+
+79,135
+
+ 
+
+James R. Stamey
+
+ 
+
+ 
+
+26,750
+
+ 
+
+ 
+
+30,287
+
+ 
+
+ 
+
+9,301
+
+ 
+
+ 
+
+16,316
+
+ 
+
+ 
+
+10,097
+
+ 
+
+ 
+
+2,099
+
+ 
+
+ 
+
+94,850
+
+ 
+
+Robert A. Tinstman
+
+ 
+
+ 
+
+27,000
+
+ 
+
+ 
+
+30,287
+
+ 
+
+ 
+
+9,301
+
+ 
+
+ 
+
+19,787
+
+ 
+
+ 
+
+7,375
+
+ 
+
+ 
+
+2,099
+
+ 
+
+ 
+
+95,849
+
+ 
+
+Richard J. Navarro
+
+ 
+
+ 
+
+25,500
+
+ 
+
+ 
+
+5,140
+
+ 
+
+ 
+
+11,440
+
+ 
+
+ 
+
+2,452
+
+ 
+
+ 
+
+5,117
+
+ 
+
+ 
+
+374
+
+ 
+
+ 
+
+50,023
+
+ 
+
+ 
+
+ 
+
+(1)
+
+The directors did not
+ receive any equity awards in the year ended September 30, 2007. Represents
+ the dollar amount of expense recognized for financial statement reporting
+ purposes in fiscal 2007 for awards made in prior years and being earned by
+ the director ratably over the five-year period from the date of the award.
+ Amounts are calculated pursuant to the provisions of Financial Accounting
+ Standards Board Statement of Financial Accounting Standards No. 123 (revised
+ 2004), Share-Based Payment ( FAS 123R ). For a discussion of valuation
+ assumptions, see Note 9 of the Notes to Consolidated Financial Statements in
+ Home Federal Bancorp s Annual Report on Form 10-K for the year ended December
+ 31, 2006.
+
+(2)
+
+For Directors Helpenstell,
+ Malson, Hedemark, Stamey and Tinstman, represents an award of 11,924 shares
+ of restricted stock with a grant date fair value of $151,435. For Director
+ Navarro, represents an award of 2,000 shares of restricted stock with a grant
+ date fair value of $25,700. As of September 30, 2007, Directors Helpenstell,
+ Malson, Hedemark, Stamey and Tinstman each had 7,154 shares of restricted
+ stock outstanding and Director Navarro had 1,600 shares of restricted stock
+ outstanding.
+
+(3)
+
+For Directors Helpenstell,
+ Malson, Hedemark, Stamey and Tinstman, represents a grant of options to
+ purchase 22,357 shares of common stock with a grant date fair value of
+ $46,503. For Director Navarro, represents a grant of options to purchase
+ 20,000 shares of common stock with a grant date fair value of $57,200. As of
+ September 30, 2007, Directors Helpenstell, Malson, Hedemark, Stamey and
+ Tinstman each had 8,943 vested and 13,414 unvested options outstanding and
+ Director Navarro had 4,000 vested and 16,000 unvested options outstanding.
+
+(4)
+
+Represents the expense to
+ accrue the estimated present value of future benefits for the director
+ deferred incentive plan.
+
+(5)
+
+Represents the aggregate change in actuarial present value of each director s
+accumulated benefit under the director retirement plan.
+
+(6)
+
+Represents dividends
+ received on unvested restricted stock.
+
+Fees.
+Directors
+ of Home Federal Bancorp are currently not compensated, but serve and are compensated
+ by Home Federal Bank. For the year ended September 30, 2007, board members received
+ an annual retainer of $15,000 and $750 for each board meeting attended and $250
+ for each committee meeting attended ($300 for the chair of each committee).
+It is not anticipated that separate directors fees will be paid to directors of
+ Home Federal
+
+109
+
+Bancorp or new Home Federal Bancorp until such time as these persons
+ devote significant time to the separate management of the affairs of Home Federal
+ Bancorp or new Home Federal Bancorp, which is not expected to occur until we become
+ actively engaged in additional businesses other than holding the stock of Home Federal
+ Bank. We may determine that such compensation is appropriate in the future.
+
+Director Deferred
+ Incentive Plan. Home Federal Bank maintains a nonqualified deferred incentive
+ plan for directors, which was last amended effective September 14, 2007. All members
+ of the board of directors participate in the plan. Until October 1, 2006, the
+plan provided an incentive award percentage determined by reference to Home Federal Bancorp s return on
+ assets and return on equity for the year. Each year, the percentage was determined
+ and multiplied by the participant s directors fees for the year. The
+ resulting amount was set aside in an unfunded deferral account for that participant.
+Although the incentive award has been discontinued, Participants may also elect to defer all or a part of their directors fees
+ into the deferral account under the plan. The deferral accounts are credited annually
+ with an interest credit that is based on the growth rate of Home Federal Bank s
+ net worth in Home Federal Bancorp, subject to a maximum of 12% per year. Upon the
+ participant s termination of service, the value of the participant s combined
+ deferral accounts will begin to be paid. Hardship distributions are permitted, as
+ well as certain limited in-service distributions as permitted by law. The plan also
+ provides a death benefit equal to the director deferrals and interest credit on
+ such amounts plus the greater of the value of the participant s deferral accounts,
+ or a fixed death benefit of $202,000. All benefits are paid over 120 months, and
+ during that period, the deferral account is adjusted for interest. The director
+ may elect to change the form of benefit, subject to the approval of Home Federal
+ Bank and compliance with legal restrictions.
+
+Director
+ Retirement Plan. Home Federal Bancorp adopted a director retirement plan, effective
+ January 1, 2005, that replaced prior plans. The plan is an unfunded nonqualified
+ retirement plan for directors. All members of the board of directors participate
+ in the plan. Upon the later of attaining age 72 or termination of service, the director
+ will receive an annual benefit equal to 50 percent of the fees paid to the director
+ for the preceding year, payable in monthly installments over 15 years. If the director
+ retires before attaining age 72, his vested accrual benefit will be paid in monthly
+ installments, with interest at a rate of 7.5 percent per year, over 180 months.
+ The accrued benefit vests at a rate of 10 percent per year, except in the event
+ of disability, in which case the vested percentage is 100 percent. If the director
+ terminates service within 24 months following a change in control, he will receive
+ 100 percent of his accrued benefit, plus a change in control benefit equal to 2.99
+ times his prior years directors fees. Change in control payments are subject to
+ reduction to avoid excise taxes under Section 280G of the Internal Revenue Code.
+ In the event a director dies
+before termination of service, his beneficiary would receive his projected
+benefit, which is the final benefit the director would have received had he
+attained age 72, assuming a 4% annual increase in the directors fees. In the event the director dies after separation
+ from service, but before receiving the full 15 years of annual benefits, the remaining
+ payments shall be paid to his or her beneficiaries. In-service distributions are
+ permitted in limited circumstances. 
+
+Executive Compensation
+
+ Compensation
+Discussion and Analysis.
+This Compensation Discussion and Analysis describes the compensation philosophy
+and policies for the year ended September 30, 2007 that applied to the
+executives named in the summary compensation table below (known as the named
+executive officers ). It explains the structure and rationale associated with
+each material element of each named executive officer s total compensation, and
+it provides important context for the more detailed disclosure tables and
+specific compensation amounts provided following the discussion and analysis.
+
+ Role
+of the Compensation Committee. The Compensation Committee is composed entirely of independent
+directors. The Committee sets and administers the policies that govern our executive
+compensation programs, and various incentive and stock option programs. All
+decisions relating to the compensation of the named executive officers are
+shared with and approved by the full board of directors.
+
+110
+
+ Compensation
+Philosophy and Objectives. The Compensation Committee believes that a compensation program for
+executive officers should take into account management skills, long-term
+performance results, and stockholder returns. The principles underlying our
+compensation policies are:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+to attract and retain key
+ executives who are highly qualified and are vital to our long-term success;
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+to provide levels of
+ compensation commensurate with those offered in the Treasure Valley as
+ measured by local regional, and national financial industry compensation
+ surveys; 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+to align the interests of
+ executives with stockholders by having a significant portion of total
+ compensation based on meeting or exceeding defined performance measures;
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+to motivate executives to
+ enhance long-term stockholder value and thereby helping them build their own
+ personal ownership in Home Federal Bancorp; and 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+to integrate the
+ compensation program with our long-term strategic planning and management
+ process.
+
+ We
+seek to target executive compensation at levels that we believe to be
+consistent with others in the banking industry. The named executive officers 
+compensation is weighted toward programs contingent upon our level of annual
+and long-term performance. In general, for senior management positions,
+including the named executive officers, we will pay base salaries that target
+the market median and above of other banks of similar asset size, growth
+strategy and complexity, and with similar products and markets. Goals for
+specific components include:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Base salaries for
+ executives generally are targeted between the 50th and 75th
+ percentiles. 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+The Annual Incentive Plan
+ will provide cash compensation at the 50th percentile when target
+ performance- based goals are achieved and between the 50th and 75th
+ percentiles if annual goals are exceeded. 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Performance-based
+ Long-Term Incentive Plan was not offered last year; however, it is being
+ researched for future consideration. No equity awards would be made if
+ long-term performance goals are not met.
+
+ Elements
+of Compensation.
+We use the pay components listed below to balance various objectives. The
+compensation framework helps encourage achievement of strategic objectives and
+creation of stockholder value, recognize and reward individual initiative and
+achievements, maintain an appropriate balance between base salary and annual
+and long-term incentive opportunity, and allows us to compete for, retain and
+motivate talented executives critical to our success.
+
+ Salary. We pay our executives cash salaries
+intended
+to be competitive and to take into account the individual s experience,
+performance, responsibilities, and past and potential contribution to Home
+Federal Bancorp and Home Federal Bank. There is no specific weighting applied
+to the factors considered, and the Committee uses its own judgment and
+expertise in determining appropriate salaries within the parameters of the
+compensation philosophy. We target salaries between the 50th and 75th
+percentiles of competitive practice. This is described in greater detail below,
+under Pay Level and Benchmarking 
+
+ Salary
+decisions also take into account the positioning of projected total
+compensation with target-level performance incentives. Because incentive
+opportunities are defined as a percentage of salary, changes in salary have an
+effect on total compensation. Prior to recommending salary increases to the
+board of directors, the Compensation Committee reviews the projected total
+compensation based on the proposed salaries. No executive cash salary increases
+were approved in 2007, with the exception of a five percent increase for Ms.
+Sander in
+
+111
+
+connection with her promotion to Executive Vice President and a
+$10,000 increase for Mr. Williams for additional duties that he has assumed.
+
+ Annual
+Cash Incentive. We
+use annual incentives to focus attention on current strategic priorities and
+drive achievement of short-term corporate objectives. Awards are provided under
+the terms of the annual cash incentive plan. Our named executives are eligible to
+receive annual cash incentive compensation at the end of each year if
+performance targets are achieved.
+
+ In the year ended
+September 30, 2007, the incentive portion of total cash compensation for the named executive officers was tied
+ directly to our overall results. The threshold for these performance-based cash incentive payments for
+ the year ended September 30, 2007 was based on Home Federal Bank s before tax net income for the year ended
+ September 30, 2006 or $9.5 million. The board of directors of Home Federal Bank also set a target for
+ these performance- based cash incentive payments based on the projected before tax net income in its
+ business plan for the year ended September 30, 2007 which was $10.1 million or 6.3% greater than
+ the before tax net income for the year ended September 30, 2006. If the target were reached, the
+ total cash compensation received by each named executive officer would approximate the 50th
+ percentile of combined base pay and cash incentive pay of other banks of similar asset size, growth
+ strategy and complexity, and with similar products and markets as determined through third party professional
+ executive compensation surveys of the industry. If the targeted net income were exceeded, total cash
+ compensation would fall between the 50th and 75th percentile of the total cash compensation reflected
+ in these surveys. The surveys used were the America s Community Bankers Compensation Survey, the
+ Watson Wyatt Financial Institutions Compensation Survey, the Bank Administration Institute (two surveys: (i)
+ the Bank Cash Compensation Survey and (ii) the Key Executive Compensation Survey), and
+ the Northwest Financial Industry Salary Survey. 
+
+ We
+engaged Clark Consulting to design this executive incentive program for our key
+officers based on overall performance. The program is prospective in design
+with the utilization of a defined payout formula that is based upon the
+achievement of pre-determined overall criteria. The purpose of this alternative
+executive incentive plan is to maximize accomplishment of our objectives by
+providing additional monetary incentives to select key executives and officers
+responsible for directing activities that have a significant and direct bearing
+on our success. This executive incentive plan is designed to reward
+participants based on the
+achievement of pre-established annual and long-term
+financial and strategic goals. The plan is further intended to reward these key
+executives for higher performance, to provide motivation, to achieve annual
+goals, and to achieve long-term performance and growth.
+
+ The
+table below shows the award opportunities at threshold, target and maximum, as
+well as each named executive officer s actual award as a percentage of salary.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ 
+
+Threshold
+
+ 
+
+Target
+
+ 
+
+Maximum
+
+ 
+
+Actual
+
+ Award ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+25
+
+%
+
+ 
+
+50
+
+%
+
+ 
+
+100
+
+%
+
+ 
+
+ 
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+ 
+
+20
+
+%
+
+ 
+
+40
+
+%
+
+ 
+
+80
+
+%
+
+ 
+
+ 
+
+ 
+
+Len E. Williams
+
+ 
+
+ 
+
+25
+
+%
+
+ 
+
+50
+
+%
+
+ 
+
+100
+
+%
+
+ 
+
+ 
+
+ 
+
+Lynn A. Sander
+
+ 
+
+ 
+
+20
+
+%
+
+ 
+
+40
+
+%
+
+ 
+
+80
+
+%
+
+ 
+
+ 
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+ 
+
+20
+
+%
+
+ 
+
+40
+
+%
+
+ 
+
+80
+
+%
+
+ 
+
+ 
+
+ 
+
+The annual cash incentive
+objectives for the fiscal year ended September 30, 2007 were not achieved;
+therefore, no year-end cash incentives were paid to executives.
+
+ On
+October 19, 2007, the Compensation Committee amended the 2008 annual incentive
+targets for certain of the named executive officers. The new award
+opportunities are threshold (90%), target (100%), target plus (120%) and
+stretch (140%). The following table shows potential awards at threshold,
+target, target plus and stretch, expressed as a percentage of the executive s
+salary.
+
+112
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ 
+
+Threshold
+
+ 
+
+Target
+
+ 
+
+Target Plus
+
+ 
+
+Stretch
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+25
+
+%
+
+ 
+
+50
+
+%
+
+ 
+
+100
+
+%
+
+ 
+
+150
+
+%
+
+Robert A. Schoelkoph (1)
+
+ 
+
+ 
+
+7.5
+
+%
+
+ 
+
+15
+
+%
+
+ 
+
+30
+
+%
+
+ 
+
+45
+
+%
+
+Len E. Williams
+
+ 
+
+ 
+
+25
+
+%
+
+ 
+
+50
+
+%
+
+ 
+
+100
+
+%
+
+ 
+
+150
+
+%
+
+Lynn A. Sander
+
+ 
+
+ 
+
+20
+
+%
+
+ 
+
+40
+
+%
+
+ 
+
+80
+
+%
+
+ 
+
+120
+
+%
+
+ 
+
+ 
+
+(1)
+
+It is expected the Mr.
+ Schoelkoph will move into a new position as Treasurer of Home Federal Bank in
+ the coming year and we will be hiring a new Chief Financial Officer. 
+
+ Long-Term
+Incentives. Equity-based compensation is intended to attract and retain qualified
+executives, to provide these persons with a proprietary interest in Home
+Federal Bancorp as an incentive to contribute to our success, and to reward
+executives for outstanding performance. Equity-based compensation functions as
+a long-term incentive because awards are generally made with a five-year
+gradual vesting schedule or a three year cliff vesting schedule. Awards are
+made either in the form of stock options, stock appreciation rights or
+restricted stock. Currently, we have in place the 2005 Recognition and
+Retention Plan and the 2005 Stock Option and Incentive plan, each of which was
+approved by our Board of Directors and stockholders. Awards remain available
+for grant under these two plans.
+
+ The
+equity-based plans are administered and interpreted by the Compensation
+Committee of the board of directors. Under the plans, the Committee receives
+recommendations from the President and approves which officers and key employees
+will receive awards, the number of shares subject to each option or shares of
+restricted stock awarded, and the vesting of the awards. The per share exercise
+price of an option will equal at least 100% of the fair market value of a share
+of common stock on the date the option is granted. In addition, newly hired
+executives may receive awards at the time of their employment. In determining
+whether to make option or restricted stock awards, the Compensation Committee
+may take into account historical awards and then-current competitive
+conditions.
+
+ 401(k)
+and Employee Stock Ownership Plan. Home Federal Bank sponsors both a 401(k) plan and an employee stock
+ownership plan. The purpose of these plans is to provide participating
+employees with an opportunity to obtain beneficial interests in the stock of
+Home Federal Bancorp and to accumulate capital for their future economic security. The trustees of the plans include the President, Chief Financial
+Officer and the Director of Human Resources.
+
+ Executive
+Retirement Benefits. We have entered into salary continuation agreements with each of the named
+executive officers. These agreements help support the objective of maintaining
+a stable, committed and qualified team of key executives through the inclusion
+of retention and non-competition provisions. Under the agreement, an executive
+will be entitled to a stated annual benefit for a period of 15 years upon
+retirement from Home Federal Bancorp after attaining age 65, or upon attaining
+age 65, if his or her employment had been previously terminated due to
+disability. There are also benefits for early retirement and involuntary
+termination after a change in control.
+
+ Other
+Compensation. The
+named executive officers participate in our broad-based employee benefit plans,
+such as medical, vision, dental, long-term and short-term disability, and term
+life insurance programs. For each of the named executive officers, we also
+provide the following perquisites: auto allowance for business and personal use
+for transportation for the executive, customers and employees; social and civic
+club dues for networking and entertaining; and business and personal use of a
+cell phone for accessibility to the executive. 
+
+ Pay
+Level and Benchmarking. As noted earlier, our compensation structure is designed to position
+an executive s compensation between the 50th and 75th
+percentiles of a competitive practice. In 2006, the Compensation Committee
+worked with Clark Consulting to review total compensation levels for the named
+executive officers. This
+
+113
+
+review included base salary, annual cash incentives,
+all forms of equity compensation and all other forms of compensation. The
+primary data source used in setting competitive market levels for the
+executives is the information publicly disclosed by a 2006 Peer Group of the
+17 companies listed below, which include companies include banks of similar
+size and geographic location.
+
+ 
+
+ 
+
+ 
+
+2006
+ Peer Group
+
+ 
+
+ 
+
+ 
+
+Horizon Financial Corp.
+ (HRZB)
+
+ 
+
+Team Financial Inc. (TFIN)
+
+Columbia Bancorp (CBBO)
+
+ 
+
+Bank Holdings (TBHS)
+
+Pacific Continental Group
+ (PCBK)
+
+ 
+
+Pacific Financial Group
+ (PFLC)
+
+Riverview Bancorp, Inc.
+ (RVSB)
+
+ 
+
+PremierWest Bancorp (PRWT)
+
+Blue Valley Ban Corp.
+ (BVBC)
+
+ 
+
+Rainier Pacific Financial
+ Group (RPFG)
+
+Landmark Bancorp, Inc.
+ (LARK)
+
+ 
+
+Washington Banking Group
+ (WBCO)
+
+First Mutual Bancshares,
+ Inc. (FMSB)
+
+ 
+
+BNCCORP Inc. (BNCC)
+
+HF Financial Corp. (HFFC)
+
+ 
+
+Idaho Independent Bank
+ (IIBK)
+
+Heritage Financial Group
+ (HFWA)
+
+ 
+
+ 
+
+ After
+consideration of the data collected on external competitive levels of
+compensation and internal relationships within the executive group, the
+Compensation Committee makes decisions regarding individual executives target
+total compensation opportunities based on the need to attract, motivate and
+retain an experienced and effective management team.
+
+ Review
+of Prior Amounts Granted and Realized. We desire to motivate and reward executives
+relative to driving superior future performance, so we do not currently
+consider prior stock compensation gains as a factor in determining future
+compensation levels.
+
+ Adjustment
+or Recovery of Awards. We have not adopted a formal policy or any employment agreement
+provisions that enable recovery, or clawback , of incentive awards in the
+event of misstated or restated financial results. However, Section 304 of the
+Sarbanes-Oxley Act does provide some ability to recover incentive awards in
+certain circumstances. If we are required to restate our financials due to
+noncompliance with any financial reporting requirements as a result of
+misconduct, the Chief Executive Officer and Chief Financial Officer must
+reimburse us for (1) any bonus or other incentive- or equity-based compensation
+received during the 12 months following the first public issuance of the
+non-complying document, and (2) any profits realized from the sale of
+securities of Home Federal Bancorp during those 12 months.
+
+ Timing
+of Equity Grants. The Compensation Committee does not have a formal written policy guiding the
+timing of equity grants. All equity grants were made after formal Compensation
+Committee approval and subject to full board approval. We have reviewed our
+equity grant practices and have confirmed that all past equity grants have been
+consistent with SEC guidelines.
+
+ Tax
+and Accounting Considerations. We take into account tax and accounting implications in the design of
+our compensation programs. For example, in the selection of long-term incentive
+instruments, the Compensation Committee reviews the projected expense amounts
+and expense timing associated with alternative types of awards. Under current
+accounting rules, Home Federal Bancorp must expense the grant-date fair value
+of share-based grants such as restricted stock and stock options. The
+grant-date value is amortized and expensed over the service period or vesting
+period of the grant. In selecting appropriate incentive devices, the
+Compensation Committee reviews extensive modeling analyses and considers the
+related tax and accounting issues. 
+
+ Compensation
+Consultants. Over
+the past five years, the Compensation Committee has engaged the Compensation
+Group of Clark Consulting to assist it in several executive compensation
+initiatives, including salary data, equity plan designs and deferred
+compensation plans. Because Clark Consulting is knowledgeable in our
+
+114
+
+executive compensation plans, it is an ongoing working relationship. Periodically, the
+Committee will engage Clark Consulting on an as needed basis. 
+
+ Role
+of Executives in Compensation Committee Deliberations. The Compensation Committee frequently
+requests the Chief Executive Officer and President to be present at Committee
+meetings to discuss executive compensation and evaluate company and individual
+performance. Occasionally other executives may attend a Committee meeting to
+provide pertinent human resources, financial and/or legal information.
+Executives in attendance may provide their insights and suggestions, but only
+Compensation Committee members may vote on decisions regarding changes in
+executive compensation to recommend to the full board. The Chief Executive
+Officer and President do not provide the recommendations for changes in their
+own compensation. The Compensation Committee discusses the compensation of the
+Chief Executive Officer and the President with each of them, but final
+deliberations and all votes regarding his compensation for recommendation to
+the full board are made in executive session, without the Chief Executive
+Officer or President present, as appropriate. The Committee initiates any
+changes in these officers compensation based on periodic market reviews and
+recommendations from outside consultants. Relative to executives other than the
+Chief Executive Officer and the President, the Committee uses their proposals
+and input from Clark Consulting in making its recommendations to the full
+board. Although the Chief Executive Officer and President are members of the
+board of directors, they only vote on executive compensation in the event of a
+tie.
+
+ Compensation
+of the Chief Executive Officer. Mr. Stevens is the Chairman and Chief Executive Officer of Home
+Federal Bank and Chairman, President and Chief Executive Officer of Home
+Federal Bancorp. As the Chief Executive Officer of the Bank and the Company, he
+is responsible for the overall supervision of these entities. He oversees
+management and has responsibility for all policy development and
+implementation, he is responsible for the completion of the transition of
+authority and responsibility of executive leadership from himself to the new
+President of Home Federal Bank, he coordinates investor relations with
+stockholders, he is responsible for coordinating the activities and focus of
+the board of directors, he has ultimate responsibility for the overall
+consolidated performance of the related corporate entities, and has final
+responsibility for the change and the growth of Home Federal Bank and expansion
+of the business model of Home Federal Bank. Finally, it is his ultimate
+responsibility to see that this reorganization and conversion results in a
+positive outcome on behalf of the stockholders, the employees and the
+communities served by Home Federal and Home Federal Bank.
+While Mr. Stevens compensation exceeds that of all of the other named executive
+ officers, the Compensation Committee believes it is commensurate with his experience
+ and level of responsibility.
+
+ Conclusion. We believe its compensation
+program is reasonable
+and competitive with compensation paid by other financial institutions of
+similar size. The program is designed to reward managers for strong personal,
+company and share-value performance. The Compensation Committee monitors the
+various guidelines that constitute the program and reserves the right to adjust
+them as necessary to continue to meet company and stockholder objectives.
+
+115
+
+ Summary
+Compensation Table. The following table shows information regarding compensation earned during the
+fiscal year ended September 30, 2007 by our named executive officers: (1)
+Daniel L. Stevens, our principal executive officer; (2) Robert A.
+Schoelkoph, our principal financial officer; (3) our three other most highly
+compensated officers, who are Len E. Williams, Lynn A. Sander and Roger D.
+Eisenbarth.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name and
+ Principal Position
+
+ 
+
+ 
+
+Year
+
+ 
+
+ 
+
+Salary
+ ($)
+
+ 
+
+ 
+
+Bonus
+
+ ($)
+
+ 
+
+ 
+
+Stock
+
+ Awards
+
+ ($)(1)
+
+ 
+
+ 
+
+Option
+
+ Awards
+
+ ($)(1)
+
+ 
+
+ 
+
+Non-Equity
+
+ Incentive
+
+ Plan
+
+ Compensation
+
+ ($)(2)
+
+ 
+
+ 
+
+Change in
+
+ Pension
+Value and
+Non-qualified
+
+ Deferred
+
+ Compensation 
+
+ Earnings
+
+ ($)(3)
+
+ 
+
+ 
+
+All
+
+ Other
+
+ Compensation
+
+ ($)(4)
+
+ 
+
+ 
+
+Total
+
+ ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+2007
+
+ 
+
+ 
+
+244,400
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+189,288
+
+ 
+
+ 
+
+83,623
+
+ 
+
+ 
+
+83,656
+
+ 
+
+ 
+
+181,473
+
+ 
+
+ 
+
+76,457
+
+ 
+
+ 
+
+858,897
+
+ 
+
+Chairman, President and
+ Chief Executive Officer of Home Federal Bancorp and Chairman and Chief
+ Executive Officer of Home Federal Bank
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+ 
+
+2007
+
+ 
+
+ 
+
+125,096
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+75,715
+
+ 
+
+ 
+
+31,002
+
+ 
+
+ 
+
+24,996
+
+ 
+
+ 
+
+38,337
+
+ 
+
+ 
+
+29,714
+
+ 
+
+ 
+
+324,860
+
+ 
+
+Treasurer and Chief
+ Financial Officer of Home Federal Bancorp and Senior Vice President and Chief
+ Financial Officer of Home Federal Bank
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Len E. Williams
+
+ 
+
+ 
+
+2007
+
+ 
+
+ 
+
+204,583
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+45,900
+
+ 
+
+ 
+
+54,099
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+50,434
+
+ 
+
+ 
+
+34,375
+
+ 
+
+ 
+
+389,391
+
+ 
+
+President of Home Federal
+ Bank
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Lynn A. Sander
+
+ 
+
+ 
+
+2007
+
+ 
+
+ 
+
+117,212
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+60,571
+
+ 
+
+ 
+
+24,801
+
+ 
+
+ 
+
+14,243
+
+ 
+
+ 
+
+38,268
+
+ 
+
+ 
+
+29,310
+
+ 
+
+ 
+
+284,406
+
+ 
+
+Executive Vice President of
+ Consumer Banking of Home Federal Bank
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+ 
+
+2007
+
+ 
+
+ 
+
+116,999
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+60,571
+
+ 
+
+ 
+
+20,668
+
+ 
+
+ 
+
+27,228
+
+ 
+
+ 
+
+53,563
+
+ 
+
+ 
+
+32,120
+
+ 
+
+ 
+
+311,149
+
+ 
+
+Senior Vice President and
+ Chief Credit Officer of Home Federal Bank
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(1)
+
+The named executive
+ officers did not receive any equity awards in the year ended September 30,
+ 2007. Represents the dollar amount of expense recognized for financial statement
+ reporting purposes in fiscal 2007 for awards made in prior years and being
+ earned by the officer ratably over the five-year period from the date of the
+ award. Amounts are calculated pursuant to the provisions of FAS 123R. For a
+ discussion of valuation assumptions, see Note 9 of the Notes to Consolidated
+ Financial Statements in Home Federal Bancorp s Annual Report on Form 10-K for
+ the year ended December 31, 2006. 
+
+(2)
+
+Represents the
+ expense to accrue the estimated present value of future benefits for the
+ executive deferred incentive agreements.
+
+(3)
+
+Represents the aggregate change in
+ actuarial present value of each named executive officer s accumulated benefit under
+ his or her salary continuation agreement.
+
+(4)
+
+Please see the table below
+ for more information on the other compensation paid to our executive officers
+ in the year ended September 30, 2007.
+
+116
+
+ All
+Other Compensation. The following table sets forth details of All Other Compensation, as
+presented above in the Summary Compensation Table.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ 
+
+401(k)
+
+ Matching
+
+ Contribution ($)
+
+ 
+
+ESOP
+
+ Contribution ($)
+
+ 
+
+Company Car/Car Allowance
+
+ ($)
+
+ 
+
+Restricted
+
+ Stock Dividends
+ ($)(2)
+
+ 
+
+Board
+
+ Fees
+
+ 
+
+Other
+
+ Miscel-laneous
+
+ 
+
+Club
+Dues
+($)(1)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+9,977
+
+ 
+
+ 
+
+15,138
+
+ 
+
+ 
+
+4,715
+
+ 
+
+ 
+
+13,116
+
+ 
+
+ 
+
+25,500
+
+ 
+
+ 
+
+1,375
+
+ 
+
+ 
+
+6,636
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+ 
+
+3,308
+
+ 
+
+ 
+
+11,935
+
+ 
+
+ 
+
+8,100
+
+ 
+
+ 
+
+5,246
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+1,125
+
+ 
+
+ 
+
+ 
+
+ 
+
+Len E. Williams
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+1,052
+
+ 
+
+ 
+
+2,475
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+6,491
+
+ 
+
+ 
+
+24,357
+
+(1)
+
+Lynn A. Sander
+
+ 
+
+ 
+
+4,526
+
+ 
+
+ 
+
+11,112
+
+ 
+
+ 
+
+8,100
+
+ 
+
+ 
+
+4,197
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+1,375
+
+ 
+
+ 
+
+ 
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+ 
+
+6,020
+
+ 
+
+ 
+
+11,335
+
+ 
+
+ 
+
+8,100
+
+ 
+
+ 
+
+4,197
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+2,468
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(1)
+
+Primarily represents a one-time initiation fee.
+
+ 
+Employment Agreements. Home Federal Bancorp and Home Federal Bank
+have entered into separate three-year employment agreements with Daniel L.
+Stevens. On each anniversary of the initial date of the employment agreement,
+the term will be extended for an additional year unless notice is given by the
+board to Mr. Stevens, or vice versa, at least 90 days prior to the anniversary
+date. Home Federal Bank has entered into an employment agreement with Len E.
+Williams. The agreement provided for an initial one-year term, a two-year term
+that commenced on September 11, 2007 and a three year term commencing on
+September 11, 2009, provided the agreement has not been terminated earlier by
+either party. On each anniversary beginning on September 11, 2012, the term of
+the agreement will be extended for an additional year unless notice is given by
+the Board to Mr. Williams, or vice versa, at least 90 days prior to the
+anniversary date. Under the employment agreements, the aggregate base salary
+level for Mr. Stevens is $244,400 and the base salary level for Mr. Williams is
+$210,000, which may be increased at the discretion of the board of directors or
+an authorized committee of the board. The agreements provide that compensation
+may be paid in the event of disability, death, involuntary termination or a
+change in control, as described below under Potential Payments Upon
+Termination. 
+
+ Transition Agreement. On August 21, 2006, Home Federal Bancorp, Home Federal Bank and Home Federal MHC entered into a
+Transition Agreement with Daniel L. Stevens in connection with his proposed retirement on September 30, 2008. The purpose of the
+agreement is to facilitate the executive succession at Home Federal Bancorp and Home Federal Bank with the transition of M r. Stevens to retirement and the employment of a successor executive.
+The agreement defines Mr. Stevens responsibilities and compensation during the transition period. The agreement also identifies Mr.
+Stevens transition schedule beginning in September 2006 with the employment of a successor executive, Len E. Williams, and
+concluding with a retirement date of September 30, 2008. At the time of his retirement, Mr. Stevens will resign as President and
+Chief Executive Officer of Home Federal Bancorp and Home Federal M HC and will resign as Chief Executive Officer of Home Federal Bank.
+Following his retirement, Mr. Stevens will continue
+ to serve as a director of, and Chairman of
+ the boards of, Home Federal Bancorp, Home Federal Bank and Home Federal MHC.
+
+Under the
+ terms of the agreement, Mr. Stevens resigned as President of Home Federal Bank upon
+ Mr. Williams appointment by the board of directors
+ as his successor. The agreement provides that Mr. Stevens will mentor and train
+ Mr. Williams on all aspects of the chief executive officer and president functions
+ until Mr. Stevens retires. Under the agreement, on January 1, 2008, Mr. Stevens will
+ begin a less demanding work schedule that will be coordinated with management and
+ the boards of directors of Home Federal Bancorp and Home Federal Bank.
+
+During the
+ transition period, Mr. Stevens will be compensated in the same manner as he is currently
+ compensated, however, he will not accrue any vacation in calendar year 2008. Under
+ the terms of the agreement, Mr. Stevens forfeited 65,580 incentive stock options
+ that were exercisable on July 19, 2009 and 2010, which were replaced by a grant
+ of 65,580 non-qualified stock options. In connection with the forfeiture of his
+ incentive stock options, Mr. Stevens will also receive incentive payments on July 19, 2009 and 2010 for the options that become
+
+117
+
+exercisable on each date.
+The value he will receive on each date will be based on
+ the difference in the
+aggregate value of the shares that would have been received if
+ the incentive stock options were
+exercised as of the date of the agreement less the cost to exercise the incentive stock options on the dates they became
+ exercisable. The incentive
+ payments, however, may be forfeited if Mr. Stevens is not a director of Home Federal
+ Bancorp and Home Federal Bank under certain circumstances on July 19, 2009 and 2010.
+ The benefits Mr. Stevens is entitled to receive during calendar year 2008 from other
+ compensation plans will be determined pursuant to the terms of each plan. However,
+ if Mr. Stevens is employed on September 30, 2008, he shall be entitled to his fully
+ accrued benefit under his Home Federal Salary Continuation Agreement and Executive
+ Deferred Incentive Agreement.
+
+The agreement
+ may be terminated: (1) by the consent of Mr. Stevens and Home Federal Bancorp; (2) upon Mr.
+ Stevens death; (3) upon Mr. Stevens disability that gives Home Federal Bancorp
+ the right to terminate his employment pursuant to Home Federal Bank s current
+ employment policies; (4) by Home Federal Bancorp if it were required to comply with
+ any law or instruction of any governmental authority; (5) by Home Federal Bancorp if
+ Mr. Stevens ceases to be an employee of Home Federal Bancorp for any reason prior
+ to September 30, 2008; (6) and by either party if the other party violates any provision
+ of the agreement and the violation is not cured within 30 days of notice of such
+ violation.
+
+Severance
+ Agreements. On December 6, 2004, Home Federal Bank entered
+ into three-year change in control severance agreements with each of Robert A. Schoelkoph,
+ Lynn A. Sander and Roger D. Eisenbarth. On each anniversary of
+ the initial date of the severance agreements, the term of each agreement may be
+ extended for an additional year at the discretion of the board or an authorized
+ committee of the board. The severance agreements also provide for a severance payment
+ and other benefits if the executive is involuntarily terminated within 12 months
+ after a change in control of Home Federal Bancorp as described below under Potential Payments Upon Termination. 
+
+ 
+Grants of Plan-Based Awards. The following table shows information
+regarding grants of plan-based awards made to our named executive officers for
+the fiscal year ended September 30, 2007. The named executive officers did not
+receive any equity awards in this period.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Estimated Possible Payouts Under
+
+ 
+
+ 
+
+ 
+
+Non-Equity Incentive Plan Awards (1)
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ 
+
+Threshold
+ ($)
+
+ 
+
+Target
+ ($)
+
+ 
+
+Maximum
+ ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+61,100
+
+ 
+
+ 
+
+122,200
+
+ 
+
+ 
+
+244,400
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+ 
+
+25,019
+
+ 
+
+ 
+
+50,038
+
+ 
+
+ 
+
+100,077
+
+ 
+
+Len E. Williams
+
+ 
+
+ 
+
+51,146
+
+ 
+
+ 
+
+102,292
+
+ 
+
+ 
+
+204,583
+
+ 
+
+Lynn A Sander
+
+ 
+
+ 
+
+23,442
+
+ 
+
+ 
+
+46,885
+
+ 
+
+ 
+
+93,770
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+ 
+
+23,400
+
+ 
+
+ 
+
+46,800
+
+ 
+
+ 
+
+93,599
+
+ 
+
+ 
+
+ 
+
+(1)
+
+Represents the incentives
+ that could have been earned under the annual incentive plan. No incentives
+ were paid to the named executive officers because the relevant performance
+ criteria were not met, as described earlier under Compensation Discussion
+ and Analysis. 
+
+118
+
+ Outstanding
+Equity Awards. The
+following information with respect to outstanding equity awards as of September
+30, 2007 is presented for the named executive officers. The named executive
+officers do not have outstanding any equity incentive plan awards, as defined
+by the SEC.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Option Awards (1)
+
+ 
+
+ 
+
+Stock Awards (1)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ 
+
+Grant
+
+ Date
+
+ 
+
+ 
+
+Number of
+
+ Securities
+
+ Underlying
+
+ Unexercised
+
+ Options (#)
+
+ Exer-
+
+ cisable
+
+ 
+
+ 
+
+Number of
+
+ Securities
+
+ Underlying
+
+ Unexercised
+ Options (#)
+
+ Unexer-
+
+ cisable
+
+ 
+
+ 
+
+Option
+
+ Exercise
+
+ Price
+
+ ($)
+
+ 
+
+ 
+
+Option
+
+ Expiration
+
+ Date
+
+ 
+
+ 
+
+Number of
+
+ Shares or
+
+ Units of Stock
+That Have
+
+ Not Vested 
+
+ (#)
+
+ 
+
+ 
+
+Market Value
+
+of Shares or
+
+ Units of Stock
+That Have
+
+ Not Vested
+
+ ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+07/19/05
+
+ 
+
+ 
+
+32,790
+
+ 
+
+ 
+
+32,790
+
+ 
+
+ 
+
+12.20
+
+ 
+
+ 
+
+07/19/15
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+08/21/06
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 65,580(2)
+
+ 
+
+ 
+
+15.13
+
+ 
+
+ 
+
+08/21/16
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+10/03/05
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+59,618
+
+ 
+
+ 
+
+793,516
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+ 
+
+07/19/05
+
+ 
+
+ 
+
+14,905
+
+ 
+
+ 
+
+44,714
+
+ 
+
+ 
+
+12.20
+
+ 
+
+ 
+
+07/19/15
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+10/03/05
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+23,847
+
+ 
+
+ 
+
+317,404
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Len E. Williams
+
+ 
+
+ 
+
+09/18/06
+
+ 
+
+ 
+
+14,986
+
+ 
+
+ 
+
+59,944
+
+ 
+
+ 
+
+15.30
+
+ 
+
+ 
+
+09/18/16
+
+ 
+
+ 
+
+12,000
+
+ 
+
+ 
+
+159,720
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Lynn A. Sander
+
+ 
+
+ 
+
+07/19/05
+
+ 
+
+ 
+
+23,847
+
+ 
+
+ 
+
+35,771
+
+ 
+
+ 
+
+12.20
+
+ 
+
+ 
+
+07/19/15
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+10/03/05
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+19,078
+
+ 
+
+ 
+
+253,928
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+ 
+
+07/19/05
+
+ 
+
+ 
+
+11,924
+
+ 
+
+ 
+
+35,771
+
+ 
+
+ 
+
+12.20
+
+ 
+
+ 
+
+07/19/15
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+10/03/05
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+19,078
+
+ 
+
+ 
+
+253,928
+
+ 
+
+ 
+
+ 
+
+(1)
+
+Option and stock awards
+ vest ratably over the five-year period from the grant date, with the first
+ 20% vesting one year after the grant date.
+
+ 
+
+ 
+
+(2)
+
+On August 21, 2006, Mr.
+ Stevens forfeited 65,580 incentive stock options,
+half of which were exercisable on July 19, 2009 and half of which
+ were exercisable on July 19, 2010. These were replaced by a grant
+ of 65,580 non-qualified stock options with the same exercise dates,
+ in connection with his transition agreement described above.
+ 
+
+ 
+Option Exercised and Stock Vested. The following table shows the value realized
+upon exercise of stock options and vesting of stock awards for our named
+executive officers in the year ended September 30, 2007.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Option Awards
+
+ 
+
+Stock Awards
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ 
+
+Number of
+
+ Shares
+
+ Acquired on
+
+ Exercise
+
+ (#)
+
+ 
+
+Value
+
+ Realized on
+
+ Exercise
+
+ ($)
+
+ 
+
+Number of 
+
+ Shares
+
+ Acquired on
+
+ Vesting
+
+ (#)
+
+ 
+
+Value
+
+ Realized on
+
+ Vesting
+
+ ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+32,790
+
+ 
+
+ 
+
+157,113
+
+ 
+
+ 
+
+14,905
+
+ 
+
+ 
+
+231,177
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+ 
+
+14,905
+
+ 
+
+ 
+
+77,705
+
+ 
+
+ 
+
+5,962
+
+ 
+
+ 
+
+92,471
+
+ 
+
+Len E. Williams
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+3,000
+
+ 
+
+ 
+
+41,250
+
+ 
+
+Lynn A. Sander
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+4,769
+
+ 
+
+ 
+
+73,967
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+ 
+
+11,924
+
+ 
+
+ 
+
+59,349
+
+ 
+
+ 
+
+4,769
+
+ 
+
+ 
+
+73,967
+
+ 
+
+119
+
+ Pension
+Benefits. The
+following information is presented with respect to the nature and value of
+pension benefits for our named executive officers at September 30, 2007.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ Plan Name
+
+ 
+
+ 
+
+Number of Years
+
+ Credited
+
+ Service (#)
+
+ 
+
+ 
+
+Present Value
+
+ of Accumulated
+
+ Benefit ($)
+
+ 
+
+ 
+
+Payments
+
+ During Last
+
+ Fiscal Year ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+Salary Continuation
+ Agreement
+
+ 
+
+ 
+
+10
+
+ 
+
+ 
+
+919,548
+
+ 
+
+ 
+
+ 
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+Salary Continuation
+ Agreement
+
+ 
+
+ 
+
+10
+
+ 
+
+ 
+
+220,345
+
+ 
+
+ 
+
+ 
+
+ 
+
+Len E. Williams
+
+ 
+
+Salary Continuation
+ Agreement
+
+ 
+
+ 
+
+1
+
+ 
+
+ 
+
+ 50,434
+
+ 
+
+ 
+
+ 
+
+ 
+
+Lynn A. Sander
+
+ 
+
+Salary Continuation
+ Agreement
+
+ 
+
+ 
+
+6
+
+ 
+
+ 
+
+184,259
+
+ 
+
+ 
+
+ 
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+Salary Continuation
+ Agreement
+
+ 
+
+ 
+
+10
+
+ 
+
+ 
+
+323,092
+
+ 
+
+ 
+
+ 
+
+ 
+
+ We
+have entered into salary continuation agreements with each of the named
+executive officers. Under these agreements, if the participant makes the
+required contributions, then upon the participant s normal retirement date (age
+65), Home Federal Bank will pay a monthly benefit equal to 50% of the average
+of the participant s final 36 months of base salary (the final salary benefit),
+plus the participant s deferral account balance. The participant s deferral
+account balance is the sum of the participant s elective deferrals plus
+interest credited. The final benefit paid in connection with a participant s
+normal retirement will be paid in monthly payments over 180 months and other
+payments based on accrual balances will be paid over 180 months, with interest
+credited on unpaid amounts at 7.5% per year. In addition, the agreements
+provide for benefits upon early retirement, disability, death or change in
+control, as described below under Potential Payments Upon Termination. 
+
+ Nonqualified
+Deferred Compensation. The following information is presented with respect to plans that provide for
+the deferral of compensation on a basis that is not tax-qualified in which the
+named executive officers participated in the year ended September 30,
+2007.
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+ 
+
+Executive
+
+ Contributions
+
+ in Last FY ($)
+
+ 
+
+Registrant
+
+ Contributions
+
+ in Last FY ($)
+
+ 
+
+Aggregate
+
+ Earnings in
+
+ Last FY ($)
+
+ 
+
+Aggregate
+
+ Withdrawals/
+
+ Distributions ($)
+
+ 
+
+Aggregate
+
+ Balance at
+
+ Last FYE ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L. Stevens
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+83,656
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+732,619
+
+ 
+
+Robert A. Schoelkoph
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+24,996
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+233,304
+
+ 
+
+Len E. Williams
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Lynn A. Sander
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+132,932
+
+ 
+
+Roger D. Eisenbarth
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+27,228
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+305,633
+
+ 
+
+ 
+
+We have entered into executive deferred incentive agreements with each of the
+ named executive officers, except Mr. Williams. Until October 1, 2006,
+ the agreements provided an incentive award percentage determined by reference
+ to Home Federal Bank s return on assets for the year.
+Each year, the percentage was determined and multiplied by the
+ participant s base salary for the year.
+The resulting amount was set aside in an unfunded deferral account for
+ that participant. Although the incentive award has been
+ discontinued, the deferral account is credited annually with
+ an interest credit equal to the percentage that is based on the
+ growth rate in Home Federal Bancorp s retained earnings, subject
+ to a maximum of 12% per year. Upon the participant s termination
+ of employment after his or her normal retirement date (age 65), Home
+ Federal Bank will pay the value of the
+ participant s deferral account in 180 equal monthly installments.
+During the payment period, the deferral account is adjusted for
+ interest. The agreements also provide for benefits upon early retirement, early
+ termination, disability, death or change in control, as
+ described below under Potential Payments Upon Termination. 
+
+ Potential
+Payments Upon Termination. We have entered into agreements with the named executive officers that
+provide for potential payments upon disability, termination and death. In
+addition, our equity plans also provide for potential payments upon
+termination. The following discussion addresses the potential payments that the
+named executive officers could receive under a variety of scenarios.
+
+120
+
+ Employment
+Agreements. Home
+Federal Bancorp and Home Federal Bank have entered into separate employment
+agreements with Daniel L. Stevens and Home Federal Bank has entered into an
+employment agreement with Len E. Williams. The agreements provide for potential
+payments upon the executive s termination in a variety of scenarios. The
+agreements may be terminated by Home Federal Bancorp or Home Federal Bank, as
+appropriate, at any time, by the executives if they are assigned duties
+inconsistent with their initial positions, duties and responsibilities, or upon
+the occurrence of certain events. If the executives employment is terminated
+without cause or upon voluntary termination following the occurrence of an
+event described in the preceding sentence, Home Federal Bancorp or Home Federal
+Bank, as appropriate, would be required to honor the terms of the agreement
+through the expiration of the then current term, including payment of salary at
+the rate in effect immediately prior to the termination and provision of
+substantially the same group life insurance, hospitalization, medical, dental,
+prescription drug and other health benefits, and long-term disability insurance
+(if any) for the benefit of the executive and his dependents and beneficiaries
+who would have been eligible for such benefits if the executive had not been
+terminated. If the employment of Messrs. Stevens and Williams had been
+terminated as of September 30, 2007 for any of the reasons described in this
+paragraph, they would have been entitled to the following:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+Continuation 
+
+ of Salary ($)
+
+ 
+
+Continuation of 
+
+ Employee Benefits ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L.
+ Stevens
+
+ 
+
+529,533
+
+ 
+
+ 
+
+12,729
+
+ 
+
+ 
+
+Len E.
+ Williams
+
+ 
+
+409,167
+
+ 
+
+ 
+
+11,750
+
+ 
+
+ 
+
+ The
+employment agreements also provide for a severance payment and other benefits
+if the executives are involuntarily terminated within 12 months following a
+change in control of Home Federal Bancorp. The agreements authorize severance
+payments on a similar basis if the executive voluntarily terminates his
+employment following a change in control because he is assigned duties
+inconsistent with his position, duties and responsibilities immediately prior
+to the change in control. In the event of the executive s involuntary
+termination within 12 months after a change in control, Home Federal Bank must
+(1) pay to the executive in a lump sum an amount equal to 299% of the
+executive s base amount, which is his average annual compensation during the
+five-year period prior to the effective date of the change in control (known as
+the base amount); and (2) provide to the executive during the remaining term of
+his agreement substantially the same group life insurance, hospitalization,
+medical, dental, prescription drug and other health benefits, and long-term
+disability insurance (if any) for the benefit of the executive and his
+dependents and beneficiaries who would have been eligible for such benefits if
+the executive had not been terminated. In the event that a change in
+control had occurred and the employment of Messrs. Stevens and Williams had been
+terminated as of September 30, 2007, they would have been entitled to
+the following:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+Lump Sum 
+
+ Payment ($)
+
+ 
+
+Continuation of 
+
+ Employee Benefits ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L.
+ Stevens
+
+ 
+
+881,823
+
+ 
+
+ 
+
+12,729
+
+ 
+
+ 
+
+Len E.
+ Williams
+
+ 
+
+615,315
+
+ 
+
+ 
+
+16,750
+
+ 
+
+ 
+
+ Section
+280G of the Internal Revenue Code provides that severance payments (either
+separately or in conjunction with other payments made on account of a change in
+control) that equal or exceed three times an individual s base amount will
+result in the individual receiving excess parachute payments if the payments
+are conditioned upon a change in control. Individuals receiving parachute
+payments in excess of 2.99 times of their base amount are subject to a 20%
+excise tax on the amount by which the value of the individual s change in
+control benefits exceed one times the individual s base amount (the excess
+parachute payment). If excess parachute payments are made, we would not be
+entitled to deduct the amount of these excess payments. The employment agreements
+provide that severance and other payments that are subject to a change in
+control will be reduced as much as necessary to ensure that no amounts payable
+to the executives will be considered excess parachute payments.
+
+121
+
+ In
+the event of the death of Mr. Stevens or Mr. Williams while employed under his
+employment agreement and prior to any termination of employment, Home Federal
+Bank shall pay to his estate, or such person as he may have previously
+designated, the salary which was not previously paid to him and which he would
+have earned if he had continued to be employed under the agreement through the
+last day of the calendar month in which he died, together with the benefits
+provided under the employment agreement through that date.
+
+ If
+Mr. Stevens or Mr. Williams becomes entitled to benefits under the terms of the
+then-current disability plan, if any, of Home Federal Bancorp or Home Federal
+Bank or becomes otherwise unable to fulfill his duties under his employment
+agreement, he shall be entitled to receive such group and other disability
+benefits, if any, as are then provided by us for executive employees. In the
+event of such disability, the employment agreement shall not be suspended,
+except that (1) the obligation to pay salary will be reduced in accordance with
+the amount of disability income benefits received by the executive, if any,
+such that, on an after-tax basis, the executive shall realize from the sum of
+disability income benefits and the salary the same amount as he would realize
+on an after-tax basis from the salary if the obligation to pay the salary were
+not reduced; and (2) upon a resolution adopted by a majority of the
+disinterested members of the board of directors or the committee of the board,
+we may discontinue payment of the salary beginning six months following a
+determination that the executive has become entitled to benefits under the
+disability plan or otherwise unable to fulfill his duties under the employment
+agreement.
+
+ Severance
+Agreements. On December 6, 2004, Home Federal Bank
+entered into three-year change in control severance agreements with each of
+Robert A. Schoelkoph, Lynn A. Sander and Roger D. Eisenbarth. On each
+anniversary of the initial date of the severance agreements, the term of each
+agreement may be extended for an additional year at the discretion of the board
+or an authorized committee of the board. The severance agreements provide for a
+severance payment and other benefits if the executive is involuntarily
+terminated within 12 months after a change in control of Home Federal
+Bancorp. Each agreement also authorizes severance payments if the executive
+voluntarily terminates employment within 12 months following a change in
+control because of being assigned duties inconsistent with the executive s
+position, duties, responsibilities and status immediately prior to the change
+in control. The severance benefit is equal to 2.99 times the executive s average
+annual compensation during the five-year period prior to the effective date of
+the change in control (known as the base amount). This amount will be paid to
+the executive by Home Federal Bank in a cash lump sum within 25 days after the
+later of the date of the change in control or the date of the executive s
+termination. Home Federal Bank also will continue to pay, for the remaining term
+of the executive s agreement, the life, health and disability coverage of the
+executive and his/her eligible dependents. In the event that a change in control had occurred and the
+employment of Mr. Schoelkoph, Ms. Sander and Mr. Eisenbarth had been terminated as of
+September 30, 2007, they would have been entitled to the following:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+Lump Sum
+
+ Payment ($)
+
+ 
+
+Continuation of 
+
+ Employee Benefits ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Robert A.
+ Schoelkoph
+
+ 
+
+440,125
+
+ 
+
+ 
+
+12,729
+
+ 
+
+ 
+
+Lynn A. Sander
+
+ 
+
+407,806
+
+ 
+
+ 
+
+12,729
+
+ 
+
+ 
+
+Roger D.
+ Eisenbarth
+
+ 
+
+421,295
+
+ 
+
+ 
+
+12,729
+
+ 
+
+ 
+
+Plan benefits are reduced to
+the extent necessary to avoid the payment of an excise tax under Section 280G
+of the Internal Revenue Code.
+
+ Salary
+Continuation Agreements. As described above, we
+have entered into salary continuation agreements with each of the named
+executive officers. Under these agreements, if the participant makes the
+required contributions, then upon the participant s normal retirement date (age
+65), Home Federal Bank will pay a monthly benefit equal to 50% of the average
+of the participant s final 36 months of base salary (the final salary benefit),
+plus the participant s deferral account balance. The participant s deferral
+account balance is the sum of the participant s elective deferrals plus
+interest credited. The plan provides a reduced monthly benefit if the
+participant terminates employment as a result of early retirement (before age
+65). The early retirement benefit is the participant s vested accrual balance plus
+the deferral account balance. Vesting occurs at a rate of ten percent per plan
+year. The plan
+
+122
+
+also provides a disability benefit, which is the same as the
+early retirement benefit except that the accrual balance is fully vested. There
+is also a change in control benefit (if the participant is involuntarily
+terminated within 24 months following the change in control) equal to (1) the
+participant s accrual balance determined as of the end of the month preceding
+the change in control, (2) the participant s deferral account balance as
+defined above, and (3) 2.99 times the participant s base annual salary as of
+the change in control. Plan benefits are reduced to the extent necessary to
+avoid the payment of an excise tax under Section 280G of the Internal Revenue Code. In
+the event of the participant s death, the participant s beneficiary would
+receive the sum of the participant s projected benefit and the participant s
+deferral account balance as defined above. The participant s projected account
+is the final benefit the participant would have received had the participant
+attained age 65, assuming a 4% annual increase in the participant s base
+salary. The final benefit paid in connection with a participant s normal
+retirement will be paid in monthly payments over 180 months and other payments
+based on accrual balances will be paid over 180 months, with interest credited
+on unpaid amounts at 7.5% per year. Final benefits begin upon the participant s
+termination of service after the participant s death or disability. Final salary
+benefits paid on account of early retirement begin upon the participant s
+attainment of age 65.The participant s deferral account balance will be paid in
+a lump sum within 60 days of the participant s termination of employment.
+
+ If
+the named executive officers had their employment terminated as of September
+30, 2007 as a result of death, disability, early retirement or change in
+control, they would have been entitled to the following annual payments under
+the salary continuation agreements:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+Disability ($)
+
+ 
+
+Death ($)
+
+ 
+
+Early 
+
+ Retirement or
+Termination
+
+ ($)
+
+ 
+
+Change in 
+
+ Control ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L.
+ Stevens
+
+ 
+
+ 101,657 
+
+ 
+
+ 
+
+ 122,263 
+
+ 
+
+ 
+
+ 109,548 
+
+ 
+
+ 
+
+ 101,657 
+
+ 
+
+ 
+
+Robert A.
+ Schoelkoph
+
+ 
+
+24,359
+
+ 
+
+ 
+
+89,011
+
+ 
+
+ 
+
+51,129
+
+ 
+
+ 
+
+24,359
+
+ 
+
+ 
+
+Len E.
+ Williams
+
+ 
+
+5,576
+
+ 
+
+ 
+
+187,394
+
+ 
+
+ 
+
+1,867
+
+ 
+
+ 
+
+18,674
+
+ 
+
+ 
+
+Lynn A.
+ Sander
+
+ 
+
+20,370
+
+ 
+
+ 
+
+84,906
+
+ 
+
+ 
+
+25,653
+
+ 
+
+ 
+
+20,370
+
+ 
+
+ 
+
+Roger D.
+ Eisenbarth
+
+ 
+
+35,718
+
+ 
+
+ 
+
+66,463
+
+ 
+
+ 
+
+49,078
+
+ 
+
+ 
+
+35,718
+
+ 
+
+ 
+
+ Executive Deferred Incentive Agreements.
+
+As described above, we have entered into executive deferred incentive
+agreements with each of the named executive officers, except Mr. Williams.
+Until October 1, 2006, the agreements provided an incentive award percentage
+determined by reference to our return on assets for the year. Although the
+incentive award has been discontinued, the deferral account is credited
+annually with an interest credit equal to the percentage that is based on the
+growth rate in our retained earnings, subject to a maximum of 12% per year.
+Upon the participant s termination of employment after disability, death or an
+involuntary termination within 24 months following a change in control of Home
+Federal Bancorp, the value of the participant s deferred account will begin to
+be paid. Upon the participant s early retirement on or after age 62, but before
+age 65, the value of the participant s deferral account, plus the value of his
+incentive award (reduced to reflect either the early commencement of benefits,
+or a ten percent reduction for each year of service less than ten), will begin
+to be paid. Upon the participant s termination of employment prior to the
+participant s early retirement date, the value of the participant s deferral
+account, plus the value of his incentive award (reduced by ten percent for each
+year of service less than ten), will be paid beginning on the participant s
+normal retirement date. Hardship distributions are permitted, as are certain
+limited in-service distributions, as permitted by law. All benefits are paid
+over 180 months, and during that period, the deferral account is adjusted for
+interest. Benefits are reduced to the extent necessary to avoid the payment of
+an excise tax under Section 280G of the Internal Revenue Code. 
+
+ If
+the named executive officers had their employment terminated as of September
+30, 2007 as a result of death, disability, early retirement, termination prior
+to early retirement or change in control, they would have been entitled to the
+following annual payments under the executive deferred incentive agreements:
+
+123
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+Disability ($)
+
+ 
+
+Death ($)(1)
+
+ 
+
+Early
+
+ Retirement
+
+ ($)
+
+ 
+
+Termination
+
+ Prior to Early
+
+ Retirement
+
+ ($)
+
+ 
+
+Change in
+
+ Control ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L.
+ Stevens
+
+ 
+
+ 81,498 
+
+ 
+
+ 
+
+ 76,000 
+
+ 
+
+ 
+
+74,638
+
+ 
+
+ 
+
+81,498
+
+ 
+
+ 
+
+ 81,498 
+
+ 
+
+ 
+
+Robert A.
+ Schoelkoph
+
+ 
+
+25,953
+
+ 
+
+ 
+
+68,150
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+25,953
+
+ 
+
+ 
+
+25,953
+
+ 
+
+ 
+
+Len E.
+ Williams
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Lynn A.
+ Sander
+
+ 
+
+14,788
+
+ 
+
+ 
+
+78,666
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+8,876
+
+ 
+
+ 
+
+14,788
+
+ 
+
+ 
+
+Roger D.
+ Eisenbarth
+
+ 
+
+33,999
+
+ 
+
+ 
+
+54,547
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+33,999
+
+ 
+
+ 
+
+33,999
+
+ 
+
+ 
+
+ 
+
+ 
+
+(1)
+
+A death benefit also is
+ provided under the agreements equal to the greater of the value of the
+ participant s deferral account, or approximately $683,000, $613,000, $490,000
+ and $707,000 for Messrs. Stevens, Schoelkoph and Eisenbarth and Ms. Sander,
+ respectively.
+
+ Director Plans.
+Mr. Stevens also participates in the director deferred incentive plan and
+director retirement plan, as described above under Directors Compensation. 
+These plans provide for payments upon termination under a variety of scenarios
+as described above. The following table presents the annual payments to which
+Mr. Stevens would have been entitled had he incurred a termination of service
+as of September 30, 2007 under each of the scenarios covered by each agreement:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Plan
+
+ 
+
+Disability ($)
+
+ 
+
+Death ($)(1)
+
+ 
+
+Early
+
+ Retirement or
+
+ Termination 
+
+ ($)
+
+ 
+
+Change in
+
+ Control ($)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Director
+ Deferred Incentive Plan
+
+ 
+
+6,860
+
+ 
+
+ 
+
+16,338
+
+ 
+
+ 
+
+6,860
+
+ 
+
+ 
+
+6,860
+
+ 
+
+ 
+
+Director
+ Retirement Plan
+
+ 
+
+5,474
+
+ 
+
+ 
+
+16,127
+
+ 
+
+ 
+
+5,474
+
+ 
+
+ 
+
+5,474
+
+ 
+
+ 
+
+ Equity Plans. The Home
+Federal Bancorp 2005 Stock Option and Incentive Plan and 2005 Recognition and
+Retention Plan provide for accelerated vesting of awards in the event of a
+change in control. If a tender offer or exchange offer (other than such an
+offer by Home Federal Bancorp) is commenced, or if a change in control has
+occurred, unless the award agreement provides otherwise, all awards granted and
+not fully exercisable shall become exercisable in full upon the happening of
+such event. If a tender offer or exchange offer had been commenced or a change
+in control had occurred as of September 30, 2007, the named executive officers
+would have received the following benefits:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Name
+
+ 
+
+Accelerated Vesting of
+
+ Stock Options ($)(1)
+
+ 
+
+Accelerated Vesting of 
+
+ Restricted Stock Awards ($)(2)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Daniel L.
+ Stevens
+
+ 
+
+228,546
+
+ 
+
+ 
+
+793,516
+
+ 
+
+ 
+
+Robert A.
+ Schoelkoph
+
+ 
+
+49,632
+
+ 
+
+ 
+
+317,404
+
+ 
+
+ 
+
+Len W.
+ Williams
+
+ 
+
+ 
+
+ 
+
+ 
+
+159,720
+
+ 
+
+ 
+
+Lynn A.
+ Sander
+
+ 
+
+39,706
+
+ 
+
+ 
+
+253,928
+
+ 
+
+ 
+
+Roger D.
+ Eisenbarth
+
+ 
+
+39,706
+
+ 
+
+ 
+
+253,928
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(1)
+
+Reflects the excess of the
+ fair market value of the underlying shares as of September 30, 2007 over the
+ exercise price of all unvested options.
+
+(2)
+
+Reflects the fair market
+ value as of September 30, 2007 of all unvested restricted stock.
+
+The plans also
+provide for accelerated vesting of awards in the event of a participant s death
+or disability. If the employment of any of our named executive officers had
+been terminated as of September 30, 2007 by reason of
+
+124
+
+either death or disability, the value of accelerated vesting of restricted stock awards would
+be as shown in the table above.
+
+Compensation Committee Interlocks and Insider
+Participation
+
+ The
+members of the Compensation Committee are Directors Hedemark, Helpenstell,
+Malson and Navarro. No members of this Committee were officers or employees of
+Home Federal Bancorp or any of its subsidiaries during the year ended September
+30, 2007, nor were they formerly officers or had any relationships otherwise
+requiring disclosure.
+
+Compensation Committee Report
+
+ The
+Compensation Committee of the Board of Directors of Home Federal Bancorp has
+submitted the following report for inclusion in this proxy statement:
+
+ We
+have reviewed and discussed the Compensation Discussion and Analysis contained
+in this prospectus with management. Based on the Committee s review of and the
+discussion with management with respect to the Compensation Discussion and
+Analysis, we recommended to the Board of Directors that the Compensation
+Discussion and Analysis be included in this prospectus.
+
+ The
+foregoing report is provided by the following directors, who constitute the
+Compensation Committee:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Compensation Committee:
+
+ 
+
+N. Charles
+ Hedemark, Chairman
+
+ 
+
+ 
+
+ 
+
+Fred H.
+ Helpenstell, M.D.
+
+ 
+
+ 
+
+ 
+
+Thomas W.
+ Malson
+
+ 
+
+ 
+
+ 
+
+Richard J.
+ Navarro
+
+This report shall not be deemed to be
+incorporated by reference by any general statement incorporating by reference
+this prospectus into any filing under the Securities Act of 1933 or the
+Securities Exchange Act of 1934, and shall not otherwise be deemed filed under
+such acts.
+
+Employee
+ Severance Compensation Plan
+
+Home Federal Bancorp s board of directors
+ has established the Home Federal Employee Severance Compensation Plan which will
+ provide eligible employees with severance pay benefits in the event of a change
+ in control of new Home Federal Bancorp or Home Federal Bank following the stock
+ offering. The severance plan will define the term change in control 
+ in the same manner as Mr. Stevens employment agreement.
+
+Management
+ personnel with employment agreements or severance agreements will not be eligible
+ to participate in the severance plan. Generally, eligible employees will be eligible
+ to participate in the severance plan if they have completed at least one year of
+ service with Home Federal Bank. Employees will be credited with service prior to
+ adoption of the plan. The severance plan will vest in each participant a contractual
+ right to the benefits the participant is entitled to thereunder. Under the plan,
+ in the event of a change in control of new Home Federal Bancorp or Home Federal,
+ eligible employees who are terminated or who terminate their employment within one
+ year for reasons specified under the severance plan will be entitled to receive
+ a severance payment. If a participant whose employment has terminated has completed
+ at least one year of service, the participant will be entitled to a cash severance
+ payment equal to three months for service of one to two years, six months for service
+ of two to three years, and six months plus one month for each year of continuous
+ employment over three years up to a maximum of one and one-half times the participant s annual compensation. A participant who is a middle manager of Home Federal
+ Bank prior to the change in control will receive a minimum payment equal to one-half
+ of the participant s annual compensation. Individuals who are vice presidents
+ and above of Home Federal Bank prior to the change in control will receive a minimum
+ payment equal to one times the participant s annual compensation. These payments
+ may tend to discourage takeover attempts by increasing costs to be incurred by Home
+ Federal Bank in the event of a
+
+125
+
+takeover. If the provisions of the severance plan
+ are triggered as of September 30, 2006, the total amount of payments that would
+ be due thereunder, based solely upon current salary levels, would be approximately
+ $5.4 million. It is management s belief, however, that substantially all of
+ Home Federal Bank s employees would be retained in their current positions
+ in the event of a change in control, and that any amount payable under the severance
+ plan would be considerably less than the total amount that could possibly be paid
+ under the severance plan.
+
+Benefits to Be Considered Following Completion
+ of the Conversion
+
+We intend
+ to adopt and request stockholder approval of one or more stock-based incentive plans,
+ including a new stock option plan and a new stock recognition and retention plan,
+ no earlier than six months after the completion of the conversion. The stock option
+ plan and stock recognition and retention plan may be established as separate plans
+ or as part of a single plan.
+
+Employee
+ Stock Ownership Plan. It is intended that the employee stock ownership plan
+ will purchase 8% of the shares sold in the offering. This would range between 816,000
+ shares, assuming 10,200,000 shares are sold in the offering and 1,104,000 shares,
+ assuming 13,800,000 shares are sold in the offering. We anticipate that the employee
+ stock ownership plan will borrow funds from new Home Federal Bancorp to purchase
+ the shares. This loan will equal 100% of the aggregate purchase price of the common
+ stock purchased by the employee stock ownership plan. The employee stock ownership
+ plan will repay the loan principally from the cash contributions from Home Federal
+ Bank and from dividends payable on the common stock held by the plan over the anticipated
+ 15-year term of the loan. The interest rate for the plan loan is expected to be
+ the prime rate as published in The Wall Street Journal on the closing date
+ of the conversion or some other reasonable rate. See Pro Forma Data. 
+ To the extent that the employee stock ownership plan is unable to acquire 8% of
+ the common stock sold in the offering, it is anticipated that it may acquire the
+ shares following the conversion through open market purchases.
+
+In any plan
+ year, Home Federal Bank may make additional discretionary contributions to the employee
+ stock ownership plan for the benefit of participants. These contributions may be
+ used to acquire shares of common stock through the purchase of outstanding shares
+ in the market, from individual stockholders, or from shares which constitute authorized
+ but unissued shares or shares held in trust by Home Federal Bancorp. Several factors
+ will affect the timing, amount and manner of any such discretionary contributions,
+ including applicable regulatory policies, the requirements of applicable laws and
+ regulations, and market conditions.
+
+The shares
+ purchased by the employee stock ownership plan with the proceeds of the loan will
+ be held in a suspense account, and released for allocation among eligible participants
+ as the loan is repaid. Discretionary contributions to the employee stock ownership
+ plan and shares released from the suspense account will be allocated among participants
+ on the basis of each eligible participant s proportional share of total compensation.
+ Forfeitures will be reallocated among the remaining plan participants.
+
+Participants
+ will vest in their employee stock ownership plan account at the rate of 20% per
+ year, beginning upon the completion of one year of service, with full vesting occurring
+ after five years of service. Employees will be credited for service prior to adoption
+ of the employee stock ownership plan. A participant is fully vested at normal retirement
+ (which is the attainment of age 65), in the event of death or disability while actively
+ employed, or upon termination of the employee stock ownership plan. Benefits are
+ distributable upon a participants normal retirement, death, disability or
+ termination of employment. Contributions to the employee stock ownership plan are
+ not fixed, so benefits payable under the employee stock ownership plan cannot be
+ estimated.
+
+The trustees of the employee stock ownership plan are Messrs. Williams,
+ Schoelkoph and Trom. The trustee must vote all allocated shares held in the employee
+ stock ownership plan in accordance with the instructions of plan participants and
+ unallocated shares must be voted in the same ratio on any matter as those shares
+ for which instructions are given. The trustee will vote the allocated shares for
+ which no instructions are received as directed by the plan administrator.
+
+126
+
+Under
+ applicable accounting requirements, compensation expense for a leveraged employee
+ stock ownership plan is recorded at the fair market value of the employee stock
+ ownership plan shares when committed to be released to participants accounts.
+ See Pro Forma Data. 
+
+Stock Option
+ Plan. We intend to adopt an additional stock option plan for our directors,
+ officers and employees after the conversion and offering, subject to stockholder
+ approval. Federal regulations prohibit us from implementing this plan until six
+ months after the conversion and offering.
+
+Our proposed
+ stock option plan will authorize a committee of non-employee directors or the full
+ board of directors, to grant options to purchase up to 10% of the shares sold in
+ the offering. The stock option plan will have a term of ten years. The committee
+ or the board will decide which directors, officers and employees will receive options
+ and the terms of those options. Generally, no stock option will permit its recipient
+ to purchase shares at a price that is less than the fair market value of a share
+ on the date the option is granted, and no option will have a term that is longer
+ than ten years. In addition, executive officers and directors would be required
+ to exercise or forfeit 
+
+their options if Home Federal Bank becomes critically undercapitalized,
+ is subject to enforcement action or receives a capital directive.
+
+If we implement
+ a stock option plan before the first anniversary of the conversion, current regulations
+ will require that:
+
+ 
+ 
+ 
+the total
+ number of options available for grant to non-employee directors be limited to 30%
+ of the options authorized under the plan;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the number
+ of options that may be granted to any one non-employee director be limited to 5%
+ of the options authorized under the plan;
+
+ 
+ 
+ 
+the number
+ of options that may be granted to any officer or employee be limited to 25% of the
+ options authorized for the plan;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the options
+ may not vest more rapidly than 20% per year, beginning on the first anniversary
+ of stockholder approval of the plan; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+accelerated
+ vesting not be permitted except for death, disability or upon a change in control
+ of new Home Federal Bancorp or Home Federal Bank.
+
+ 
+ 
+ 
+ 
+
+We may obtain
+ the shares needed for this plan by issuing additional shares or through stock repurchases.
+
+Stock Recognition
+ and Retention Plan. We also expect to implement a new stock recognition and
+ retention plan for our directors, officers and employees after the conversion. Federal
+ regulations prohibit us from implementing this plan until six months after the conversion.
+ We expect the recognition plan will be implemented within the first 12 months after
+ the conversion. Federal regulations require that the plan be approved by a majority
+ of the outstanding shares of common stock of new Home Federal Bancorp.
+
+Our proposed
+ stock recognition and retention plan will authorize a committee of non-employee
+ directors or the full board of directors to make restricted stock awards equal to
+ 3.5% of the shares sold in the offering. The committee of the board will decide
+ which directors, officers and employees will receive restricted stock and the terms
+ of those awards. New Home Federal Bancorp may obtain the shares needed for this
+ plan by issuing additional shares or through stock repurchases. If we implement
+ a restricted stock plan before the first anniversary of the conversion and offering,
+ current regulations will require that:
+
+ 
+ 
+ 
+the total
+ number of shares that are awarded to non-employee directors be limited to 30% of
+ the shares authorized under the plan;
+
+127
+
+ 
+ 
+ 
+the number
+ of shares that are awarded to any one non-employee director be limited to 5% of
+ the shares authorized under the plan;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the number
+ of shares that are awarded to any officer or employee be limited to 25% of the shares authorized
+ under the plan;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the awards
+ may not vest more rapidly than 20% per year, beginning on the first anniversary
+ of stockholder approval of the plan; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+accelerated
+ vesting not be permitted except for death, disability or upon a change in control
+ of Home Federal Bank or new Home Federal Bancorp.
+
+Restricted
+ stock awards under this plan may feature employment restrictions that require continued
+ employment for a period of time for the award to be vested. Awards would not be
+ vested unless the specified employment restrictions are met. However, pending vesting,
+ the award recipient may have voting and dividend 
+
+rights. Executive officers and
+ directors would be required to forfeit the unvested portion of their restricted
+ stock if Home Federal Bank becomes critically undercapitalized, is subject to enforcement
+ action or receives a capital directive.
+
+Transactions with Management
+
+ We
+have followed a policy of granting loans to our officers and directors, which
+fully complies with all applicable federal regulations, including those
+governing loans and other transaction with affiliated persons of Home Federal
+Bank. Loans to our directors and executive officers are made in the ordinary
+course of business and on the substantially the same terms, including interest
+rates and collateral, as those prevailing at the time for comparable loans with
+all customers, and do not involve more than the normal risk of collectibility
+or present other unfavorable features.
+
+ All
+loans and aggregate loans to individual directors and executive officers,
+without regard to loan amount, are completely documented and underwritten using
+the same underwriting policies, procedures, guidelines and documentation
+requirements as are used for non-director and non-executive customers of Home
+Federal Bank. Following the normal underwriting approvals by underwriting
+personnel, all such loans are then presented for review and approval by the
+board of directors of Home Federal Bank, pursuant to Regulation O of the
+Federal Reserve Board and the requirements of the Office of Thrift Supervision. There are no exceptions to these procedures and all
+approvals are documented in the board meeting minutes. All loans to directors
+and executive officers were performing in accordance with their terms at
+September 30, 2007.
+
+128
+
+PROPOSED
+ PURCHASES BY MANAGEMENT
+
+The following
+ table set forth, for each of our directors and for all of our directors and executive
+ officers as a group, (1) the number of exchange shares to be held upon consummation
+ of the conversion, based upon their beneficial ownership of shares of common stock
+ of Home Federal Bancorp as of the date of this prospectus, (2) the proposed purchases
+ of subscription shares, assuming sufficient shares are available to satisfy their
+ subscriptions, and (3) the total amount and percentage of new Home Federal Bancorp common stock
+ to be held upon consummation of the conversion, in each case assuming that 12,000,000
+ shares of our stock are sold, and 18,592,672 total shares are outstanding based on the midpoint of the offering range. The shares
+ being acquired by these directors and executive officers are being acquired for
+ investment and not for re-sale. Directors, officers, their associates and employees
+ will pay the same price as all other subscribers for the shares for which they subscribe.
+
+ 
+ 
+
+Number of
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+New Home
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Federal Bancorp
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Shares To Be
+ 
+
+Proposed Purchase of New
+ 
+
+Total Shares of New Home
+ 
+ 
+
+ 
+ 
+
+Received in
+ 
+
+Home Federal Bancorp
+ 
+
+Federal Bancorp Common
+
+ 
+ 
+
+ 
+ 
+
+Exchange For
+ 
+
+Common Stock
+ 
+
+Stock To Be Held
+ 
+Percent of
+
+ 
+ 
+
+Shares of
+ 
+
+ 
+
+ 
+Common
+
+ 
+ 
+
+Home Federal
+ 
+ 
+ 
+ 
+ 
+Number of
+ 
+ 
+ 
+ 
+ 
+
+Number of
+ 
+Stock
+
+ Name
+ 
+
+Bancorp (1) (2) (3)
+ 
+Amount
+ 
+Shares
+ 
+Amount
+ 
+
+Shares
+ 
+Outstanding
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Directors:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Daniel L.
+ Stevens
+ 
+ 
+95,000
+ 
+ 
+$
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+ 950,000
+ 
+ 
+ 
+95,000
+ 
+ 
+*
+
+N. Charles
+ Hedemark
+ 
+ 
+36,597
+ 
+ 
+ 
+5,000
+ 
+ 
+ 
+500
+ 
+ 
+ 
+370,970
+ 
+ 
+ 
+37,097
+ 
+ 
+*
+
+Fred H. Helpenstell,
+ M.D.
+ 
+ 
+43,279
+ 
+ 
+ 
+100,000
+ 
+ 
+ 
+10,000
+ 
+ 
+ 
+532,790
+ 
+ 
+ 
+53,279
+ 
+ 
+*
+
+Thomas W.
+ Malson
+ 
+ 
+36,597
+ 
+ 
+ 
+100,000
+ 
+ 
+ 
+10,000
+ 
+ 
+ 
+465,970
+ 
+ 
+ 
+46,597
+ 
+ 
+*
+
+Richard J.
+ Navarro
+ 
+ 
+1,871
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+18,710
+ 
+ 
+ 
+1,871
+ 
+ 
+*
+
+James R. Stamey
+ 
+ 
+13,878
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+138,780
+ 
+ 
+ 
+13,878
+ 
+ 
+*
+
+Robert A.
+ Tinstman
+ 
+ 
+36,597
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+365,970
+ 
+ 
+ 
+36,597
+ 
+ 
+*
+
+Len E. Williams
+ 
+ 
+ 
+ 
+ 
+ 
+250,000
+ 
+ 
+ 
+25,000
+ 
+ 
+ 
+250,000
+ 
+ 
+ 
+25,000
+ 
+ 
+*
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Named
+ Executive Officers 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Who Are
+ Not Directors:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Robert A.
+ Schoelkoph
+ 
+ 
+40,860
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+408,600
+ 
+ 
+ 
+40,860
+ 
+ 
+*
+
+Lynn A. Sander
+ 
+ 
+29,202
+ 
+ 
+ 
+100,000
+ 
+ 
+ 
+10,000
+ 
+ 
+ 
+392,020
+ 
+ 
+ 
+39,202
+ 
+ 
+*
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+All directors
+ and executive
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+officers as
+ a group (15 persons)
+ 
+ 
+430,347
+ 
+ 
+$
+625,000
+ 
+ 
+ 
+62,500
+ 
+ 
+$
+4,928,470
+ 
+ 
+ 
+492,847
+ 
+ 
+2.65%
+
+*
+ 
+
+Less than one percent of outstanding shares.
+
+(1)
+ 
+Excludes shares
+ which may be received upon the exercise of outstanding and exercisable stock options.
+ Based upon the exchange ratio of 1.3364 of new Home Federal Bancorp shares for each
+ share of Home Federal Bancorp common stock at the midpoint of the estimated valuation
+ range, the persons named in the table would have options to purchase our common
+ stock as follows: 5,976 shares for each of Messrs. Hedemark, Helpenstell, Malson,
+ Stamey and Tinstman, 5,346 shares for Mr. Navarro, 15,935 shares for Ms. Sander,
+ and for all directors and executive officers as a group, 65,790 shares.
+
+(2)
+ 
+Excludes unvested
+ shares awarded under the recognition and retention plan, based upon the exchange
+ ratio, in the following amounts: 79,674 shares for Mr. Stevens, 12,748 shares for
+ Messrs. Hedemark, Helpenstell, Malson, Stamey and Tinstman, 2,138 shares for Mr.
+ Navarro, 20,046 shares for Mr. Williams, 31,869
+
+129
+
+ 
+ 
+
+shares for Mr. Schoelkoph, 25,495
+ shares for Ms. Sander, and for all directors and executive officers as a group,
+ 271,076 shares.
+
+ 
+ 
+ 
+
+(3)
+ 
+Excludes stock
+ options and awards that may be granted under the proposed new stock option plan
+ and recognition and retention plan if such plans are approved by stockholders at
+ an annual or special meeting of stockholders at least six months following the conversion
+ and reorganization. See Management Benefits to Be Considered Following
+ Completion of the Conversion. 
+
+ 
+ 
+ 
+
+ 
+SECURITY
+ OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+
+ 
+ 
+ 
+ 
+
+ 
+
+The following table sets forth, as of June 30, 2007, information regarding share
+ ownership of:
+
+ 
+ 
+ 
+ 
+
+ 
+1.
+ 
+those persons
+ or entities (or groups of affiliated person or entities) known by management to
+ beneficially own more than five percent of Home Federal Bancorp s common stock
+ other than directors and executive officers;
+
+ 
+ 
+ 
+ 
+
+ 
+2.
+ 
+each director
+ of Home Federal Bancorp;
+
+ 
+ 
+ 
+ 
+
+ 
+3.
+ 
+each executive
+ officer of Home Federal or Home Federal Bank named in the Summary Compensation Table
+ appearing under Executive Compensation below (known as named executive
+ officers ); and
+
+ 
+ 
+ 
+ 
+
+ 
+4.
+ 
+all current
+ directors and executive officers of Home Federal Bancorp and Home Federal Bank as
+ a group.
+
+Persons and
+ groups who beneficially own in excess of five percent of Home Federal Bancorp s
+ common stock are required to file with the Securities and Exchange Commission, and
+ provide a copy to Home Federal Bancorp, reports disclosing their ownership pursuant
+ to the Securities Exchange Act of 1934. To our knowledge, no other person or entity,
+ other than the one set forth below, beneficially owned more than five percent of
+ the outstanding shares of Home Federal Bancorp s common stock as of the close
+ of business on the voting record date.
+
+Beneficial
+ ownership is determined in accordance with the rules and regulations of the Securities
+ and Exchange Commission. In accordance with Rule 13d-3 of the Securities Exchange
+ Act, a person is deemed to be the beneficial owner of any shares of common stock
+ if he or she has voting and/or investment power with respect to those shares. Therefore,
+ the table below includes shares owned by spouses, other immediate family members
+ in trust, shares held in retirement accounts or funds for the benefit of the named
+ individuals, and other forms of ownership, over which shares the persons named in
+ the table may possess voting and/or investment power. In addition, in computing
+ the number of shares beneficially owned by a person and the percentage ownership
+ of that person, shares of common stock subject to outstanding options that are currently
+ exercisable or exercisable within 60 days after the June 30, 2007 are included in
+ the number of shares beneficially owned by the person and are deemed outstanding
+ for the purpose of calculating the person s percentage ownership. These shares,
+ however, are not deemed outstanding for the purpose of computing the percentage
+ ownership of any other person.
+
+As of June
+ 30, 2007, there were 15,232,243 shares of Home Federal common stock outstanding.
+
+130
+
+ 
+ 
+
+Number of Shares
+ 
+
+Percent of Common
+
+Name
+ 
+
+Beneficially Owned
+ 
+
+Stock Outstanding
+
+ 
+
+ 
+
+Beneficial
+ Owners of More Than 5% Other than Directors and Named Executive Officers
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home Federal
+ MHC
+ 
+ 
+8,979,246
+ 
+ 
+ 
+58.90
+%
+
+500 12th Avenue South
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Nampa, Idaho
+ 83651
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Directors
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Daniel L.
+ Stevens(1)
+ 
+ 
+163,495
+ 
+ 
+ 
+*
+ 
+
+N. Charles
+ Hedemark
+ 
+ 
+45,867
+ 
+ 
+ 
+*
+ 
+
+Fred H. Helpenstell,
+ M.D.
+ 
+ 
+50,867
+ 
+ 
+ 
+*
+ 
+
+Thomas W.
+ Malson
+ 
+ 
+45,867
+ 
+ 
+ 
+*
+ 
+
+Richard J.
+ Navarro
+ 
+ 
+7,000
+ 
+ 
+ 
+*
+ 
+
+James R. Stamey
+ 
+ 
+28,867
+ 
+ 
+ 
+*
+ 
+
+Robert A.
+ Tinstman
+ 
+ 
+45,867
+ 
+ 
+ 
+*
+ 
+
+Len E. Williams(1)
+ 
+ 
+15,000
+ 
+ 
+ 
+*
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Named Executive
+ Officers Who Are Not Directors
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Robert A.
+ Schoelkoph
+ 
+ 
+69,327
+ 
+ 
+ 
+*
+ 
+
+Lynn A. Sander
+ 
+ 
+64,776
+ 
+ 
+ 
+*
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Directors
+ and Executive Officers of Home Federal Bancorp and Home Federal Bank as a group (15 persons)
+
+ 
+ 
+673,945
+ 
+ 
+ 
+4.42
+%
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+*
+ 
+Less than
+ one percent of shares outstanding.
+
+(1)
+ 
+Mr. Stevens
+ and Mr. Williams are also executive officers.
+
+131
+
+HOW WE
+ ARE REGULATED
+
+The following
+ is a brief description of certain laws and regulations which are applicable to new
+ Home Federal Bancorp and Home Federal Bank. The description of these laws and regulations,
+ as well as descriptions of laws and regulations contained elsewhere in this prospectus,
+ does not purport to be complete and is qualified in its entirety by reference to
+ the applicable laws and regulations. We believe, however, that we have included
+ all descriptions of laws and regulations applicable to new Home Federal Bancorp
+ and Home Federal Bank that an investor needs to consider in making an investment
+ decision. Legislation is introduced from time to time in the United States Congress
+ that may affect the operations of new Home Federal Bancorp and Home Federal Bank.
+ In addition, the regulations governing us may be amended from time to time by the
+ respective regulators. Any such legislation or regulatory changes in the future
+ could adversely affect us. We cannot predict whether any such changes may occur.
+
+New Home Federal Bancorp like Home Federal Bancorp, will be registered as a savings
+ and loan holding company under the Savings and Loan Holding Company Act and be subject
+ to regulation and supervision by the Office of Thrift Supervision. New Home Federal
+ Bancorp will be required to file annually a report of operations with, and is subject
+ to examination by, the Office of Thrift Supervision. This regulation and oversight
+ is generally intended to ensure that new Home Federal Bancorp limits activities
+ to those allowed by law and that it operate in a safe and sound manner without endangering
+ the financial health of Home Federal Bank.
+
+Regulation and Supervision of Home Federal
+ Bank
+
+General.
+Home Federal Bank, as a federally chartered savings institution, is subject
+ to extensive regulation, examination and supervision by the Office of Thrift Supervision,
+ as its primary federal regulator, and the Federal Deposit Insurance Corporation,
+ as its deposits insurer. Home Federal Bank is a member of the Federal Home Loan
+ Bank System and its deposit accounts are insured up to applicable limits by the
+ Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation.
+ Home Federal Bank must file reports with the Office of Thrift Supervision and the
+ Federal Deposit Insurance Corporation concerning its activities and financial condition
+ in addition to obtaining regulatory approvals prior to entering into certain transactions
+ such as mergers with, or acquisitions of, other financial institutions. There are
+ periodic examinations by the Office of Thrift Supervision and, under certain circumstances,
+ the Federal Deposit Insurance Corporation to evaluate Home Federal Bank s safety
+ and soundness and compliance with various regulatory requirements. This regulatory
+ structure is intended primarily for the protection of the insurance fund and depositors.
+ The regulatory structure also gives the regulatory authorities extensive discretion
+ in connection with their supervisory and enforcement activities and examination
+ policies, including policies with respect to the classification of assets and the
+ establishment of adequate loan loss reserves for regulatory purposes. Any change
+ in such policies, whether by the Office of Thrift Supervision, the Federal Deposit
+ Insurance Corporation or Congress, could have a material adverse impact on new Home
+ Federal Bancorp and Home Federal Bank and their operations. New Home Federal Bancorp,
+ like Home Federal Bancorp, will, as a savings and loan holding company, be required
+ to file certain reports with, and be subject to examination by, and otherwise must
+ comply with the rules and regulations of the Office of Thrift Supervision. Like
+ Home Federal Bancorp, new Home Federal Bancorp is also subject to the rules and
+ regulations of the Securities and Exchange Commission under the federal securities
+ laws. See Savings and Loan Holding Company Regulations. 
+
+Office
+ of Thrift Supervision. The Office of Thrift Supervision has extensive authority
+ over the operations of savings institutions. As part of this authority, Home Federal
+ Bank is required to file periodic reports with the Office of Thrift Supervision
+ and is subject to periodic examinations by the Office of Thrift Supervision and
+ the Federal Deposit Insurance Corporation. The Office of Thrift Supervision also
+ has extensive enforcement authority over all savings institutions and their holding
+ companies, including Home Federal Bank and new Home Federal Bancorp. This enforcement
+ authority includes, among other things, the ability to assess civil money penalties,
+ issue cease-and-desist or removal orders and initiate injunctive actions. In general,
+ these enforcement actions may be initiated for violations of laws and regulations
+ and unsafe or unsound practices. Other actions or inactions may provide the basis
+ for enforcement action, including misleading or untimely reports filed with the
+ Office of Thrift
+
+132
+
+Supervision. Except under certain circumstances, public disclosure
+ of final enforcement actions by the Office of Thrift Supervision is required.
+
+In addition,
+ the investment, lending and branching authority of Home Federal Bank also are prescribed
+ by federal laws, which prohibit Home Federal Bank from engaging in any activities
+ not permitted by these laws. For example, no savings institution may invest in non-investment
+ grade corporate debt securities. In addition, the permissible level of investment
+ by federal institutions in loans secured by non-residential real property may not
+ exceed 400% of total capital, except with approval of the Office of Thrift Supervision.
+ Federal savings institutions are also generally authorized to branch nationwide.
+ Home Federal Bank is in compliance with the noted restrictions.
+
+All savings
+ institutions are required to pay assessments to the Office of Thrift Supervision
+ to fund the agency s operations. The general assessments, paid on a semi-annual
+ basis, are determined based on the savings institution s total assets, including
+ consolidated subsidiaries. Home Federal Bank s Office of Thrift Supervision
+ assessment for the fiscal year ended September 30, 2006 was $147,000.
+
+Home Federal
+ Bank s general permissible lending limit for loans-to-one-borrower is equal
+ to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
+ loans fully secured by certain readily marketable collateral, in which case this
+ limit is increased to 25% of unimpaired capital and surplus). At June 30, 2007,
+ Home Federal Bank s lending limit under this restriction was $14.3 million
+ and, at that date, Home Federal Bank s largest single loan to one borrower
+ was $4.2 million, which was performing according to its original terms.
+
+The Office
+ of Thrift Supervision, as well as the other federal banking agencies, has adopted
+ guidelines establishing safety and soundness standards on such matters as loan underwriting
+ and documentation, asset quality, earnings standards, internal controls and audit
+ systems, interest rate risk exposure and compensation and other employee benefits.
+ Any institution that fails to comply with these standards must submit a compliance
+ plan.
+
+Federal
+ Home Loan Bank System. Home Federal Bank is a member of the Federal Home Loan
+ Bank of Seattle, which is one of 12 regional Federal Home Loan Banks that administer
+ the home financing credit function of savings institutions. Each Federal Home Loan
+ Bank serves as a reserve or central bank for its members within its assigned region.
+ It is funded primarily from proceeds derived from the sale of consolidated obligations
+ of the Federal Home Loan Bank System. It makes loans or advances to members in accordance
+ with policies and procedures, established by the board of directors of the Federal
+ Home Loan Bank, which are subject to the oversight of the Federal Housing Finance
+ Board. All advances from the Federal Home Loan Bank are required to be fully secured
+ by sufficient collateral as determined by the Federal Home Loan Bank. In addition,
+ all long-term advances are required to provide funds for residential home financing.
+ At June 30, 2007, Home Federal Bank had $189.3 million of outstanding advances from
+ the Federal Home Loan Bank of Seattle under an available credit facility of $283.2
+ million, which is limited to available collateral. See Business Sources of
+ Funds Borrowings.
+
+As a member,
+ Home Federal Bank is required to purchase and maintain stock in the Federal Home
+ Loan Bank of Seattle. At June 30, 2007, Home Federal Bank had $9.6 million in Federal
+ Home Loan Bank stock, which was in compliance with this requirement.
+
+Under federal
+ law, the Federal Home Loan Banks are required to provide funds for the resolution
+ of troubled savings institutions and to contribute to low- and moderately-priced
+ housing programs through direct loans or interest subsidies on advances targeted
+ for community investment and low- and moderate-income housing projects. These contributions
+ have affected adversely the level of Federal Home Loan Bank dividends paid and could
+ continue to do so in the future. These contributions could also have an adverse
+ effect on the value of Federal Home Loan Bank stock in the future. A reduction in
+ value of Home Federal Bank s Federal Home Loan Bank stock may result in a corresponding
+ reduction in Home Federal Bank s capital.
+
+Federal
+ Deposit Insurance Corporation. Home Federal Bank s deposits are insured
+ up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance
+ Corporation. The Deposit Insurance Fund is the successor to the Bank Insurance Fund
+ and the Savings Association Insurance Fund, which were merged effective 
+
+133
+
+March 31,
+ 2006. As insurer, the Federal Deposit Insurance Corporation imposes deposit insurance
+ premiums and is authorized to conduct examinations of and to require
+ reporting by Federal Deposit Insurance Corporation-insured institutions. It also
+ may prohibit any Federal Deposit Insurance Corporation-insured institution from
+ engaging in any activity the Federal Deposit Insurance Corporation determines by
+ regulation or order to pose a serious risk to the insurance fund. The Federal Deposit
+ Insurance Corporation also has the authority to initiate enforcement actions against
+ savings institutions, after giving the Office of Thrift Supervision an opportunity
+ to take such action, and may terminate the deposit insurance if it determines that
+ the institution has engaged in unsafe or unsound practices or is in an unsafe or
+ unsound condition.
+
+The Federal
+ Deposit Insurance Corporation recently amended its risk-based assessment system
+ for 2007 to implement authority granted by the Federal Deposit Insurance Reform
+ Act of 2005, which was enacted in 2006 ( Reform Act ). Under the revised
+ system, insured institutions are assigned to one of four risk categories based on
+ supervisory evaluations, regulatory capital levels and certain other factors. An
+ institution s assessment rate depends upon the category to which it is assigned.
+ Risk category I, which contains the least risky depository institutions, is expected
+ to include more than 90% of all institutions. Unlike the other categories, Risk
+ Category I contains further risk differentiation based on the Federal Deposit Insurance
+ Corporation s analysis of financial ratios, examination component ratings and
+ other information. Assessment rates are determined by the Federal Deposit Insurance
+ Corporation and currently range from five to seven basis points for the healthiest
+ institutions (Risk Category I) to 43 basis points of assessable deposits for the
+ riskiest (Risk Category IV). The Federal Deposit Insurance Corporation may adjust
+ rates uniformly from one quarter to the next, except that no single adjustment can
+ exceed three basis points. No institution may pay a dividend if in default of the
+ Federal Deposit Insurance Corporation assessment.
+
+The Reform
+ Act also provided for a one-time credit for eligible institutions based on their
+ assessment base as of December 31, 1996. Subject to certain limitations with respect
+ to institutions that are exhibiting weaknesses, credits can be used to offset assessments
+ until exhausted. Home Federal Bank s one-time credit is expected to be approximately
+ $240,000. The Reform Act also provided for the possibility that the Federal Deposit
+ Insurance Corporation may pay dividends to insured institutions once the Deposit
+ Insurance Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.
+
+In addition
+ to the assessment for deposit insurance, institutions are required to make payments
+ on bonds issued in the late 1980s by the Financing Corporation to recapitalize a
+ predecessor deposit insurance fund. This payment is established quarterly and during
+ the calendar year ended June 30, 2007 averaged 1.22 basis points of assessable deposits.
+
+The Reform
+ Act provided the Federal Deposit Insurance Corporation with authority to adjust
+ the Deposit Insurance Fund ratio to insured deposits within a range of 1.15% and
+ 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which
+ is viewed by the Federal Deposit Insurance Corporation as the level that the fund
+ should achieve, was established by the agency at 1.25% for 2007.
+
+The Federal
+ Deposit Insurance Corporation has authority to increase insurance assessments. A
+ significant increase in insurance premiums would likely have an adverse effect on
+ the operating expenses and results of operations of Home Federal Bank. There can
+ be no prediction as to what insurance assessment rates will be in the future. Insurance
+ of deposits may be terminated by the Federal Deposit Insurance Corporation upon
+ a finding 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 Federal Deposit Insurance
+ Corporation or the Office of Thrift Supervision. Management of Home Federal Bank
+ is not aware of any practice, condition or violation that might lead to termination
+ of Home Federal Bank s deposit insurance.
+
+Capital
+ Requirements. The Office of Thrift Supervision s capital regulations require
+ federal savings institutions to meet three minimum capital standards: a 1.5% tangible
+ capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving
+ the highest rating on the CAMELS examination rating system) and an 8% risk-based
+ capital ratio. In addition, the prompt corrective action standards discussed below
+ also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
+ ratio (3% for institutions receiving the highest rating on the CAMELS
+
+134
+
+system) and, together with the risk-based
+ capital standard itself, a 4% Tier I risk-based capital standard. The Office of
+ Thrift Supervision regulations also require that, in meeting the tangible, leverage
+ and risk-based capital standards, institutions must generally deduct investments
+ in and loans to subsidiaries engaged in activities as principal that are not permissible
+ for a national bank.
+
+The risk-based
+ capital standard requires federal savings institutions to maintain Tier I (core)
+ and total capital (which is defined as core capital and supplementary capital) to
+ risk-weighted assets of at least 4% and 8%, respectively. In determining the amount
+ of risk-weighted assets, all assets, including certain off-balance sheet assets,
+ recourse obligations, residual interests and direct credit substitutes, are multiplied
+ by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
+ capital regulation based on the risks believed inherent in the type of asset. Core
+ (Tier I) capital is defined as common stockholders equity (including retained
+ earnings), certain noncumulative perpetual preferred stock and related surplus and
+ minority interests in equity accounts of consolidated subsidiaries, less intangibles
+ other than certain mortgage servicing rights and credit card relationships. The
+ components of supplementary capital currently include cumulative preferred stock,
+ long-term perpetual preferred stock, mandatory convertible securities, subordinated
+ debt and intermediate preferred stock, the allowance for loan and lease losses limited
+ to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains
+ on available-for-sale equity securities with readily determinable fair market values.
+ Overall, the amount of supplementary capital included as part of total capital cannot
+ exceed 100% of core capital.
+
+The Office
+ of Thrift Supervision also has authority to establish individual minimum capital
+ requirements in appropriate cases upon a determination that an institution s
+ capital level is or may become inadequate in light of the particular circumstances.
+ At June 30, 2007, Home Federal Bank met each of these capital requirements.
+
+Prompt
+ Corrective Action. The Office of Thrift Supervision is required to take certain
+ supervisory actions against undercapitalized savings institutions, the severity
+ of which depends upon the institution s degree of undercapitalization. Generally,
+ an institution that has a ratio of total capital to risk-weighted assets of less
+ than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4%,
+ or a ratio of core capital to total assets of less than 4% (3% or less for institutions
+ with the highest examination rating) is considered to be undercapitalized. An institution that has a total risk-based capital ratio less than 6%, a Tier
+ I capital ratio of less than 3% or a leverage ratio that is less than 3% is considered
+ to be significantly undercapitalized and an institution that has a tangible
+ capital to assets ratio equal to or less than 2% is deemed to be critically
+ undercapitalized. Subject to a narrow exception, the Office of Thrift Supervision
+ is required to appoint a receiver or conservator for a savings institution that
+ is critically undercapitalized. Office of Thrift Supervision regulations
+ also require that a capital restoration plan be filed with the Office of Thrift
+ Supervision within 45 days of the date a savings institution receives notice that
+ it is undercapitalized, significantly undercapitalized or
+ critically undercapitalized. In addition, numerous mandatory supervisory
+ actions become immediately applicable to an undercapitalized institution, including,
+ but not limited to, increased monitoring by regulators and restrictions on growth,
+ capital distributions and expansion. Significantly undercapitalized 
+ and critically undercapitalized institutions are subject to more extensive
+ mandatory regulatory actions. The Office of Thrift Supervision also could take any
+ one of a number of discretionary supervisory actions, including the issuance of
+ a capital directive and the replacement of senior executive officers and directors.
+
+At June 30,
+ 2007, Home Federal Bank was categorized as well capitalized under the
+ prompt corrective action regulations of the Office of Thrift Supervision.
+
+Qualified
+ Thrift Lender Test. All savings institutions, including Home Federal Bank, are
+ required to meet a qualified thrift lender ( QTL ) test to avoid certain
+ restrictions on their operations. This test requires a savings institution to have
+ at least 65% of its total assets, as defined by regulation, in qualified thrift
+ investments on a monthly average for nine out of every 12 months on a rolling basis.
+ As an alternative, the savings institution may maintain 60% of its assets in those
+ assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either
+ test, such assets primarily consist of residential housing related loans and investments.
+
+135
+
+A savings
+ institution that fails to meet the QTL is subject to certain operating restrictions
+ and may be required to convert to a national bank charter. Recent legislation has
+ expanded the extent to which education loans, credit card loans and small business
+ loans may be considered qualified thrift investments. As of June 30,
+ 2007, Home Federal Bank maintained 86.25% of its portfolio assets in qualified thrift
+ investments and, therefore, met the qualified thrift lender test.
+
+Limitations
+ on Capital Distributions. Office of Thrift Supervision regulations impose various
+ restrictions on savings institutions with respect to their ability to make distributions
+ of capital, which include dividends, stock redemptions or repurchases, cash-out
+ mergers and other transactions charged to the capital account. Generally, savings
+ institutions, such as Home Federal Bank, that before and after the proposed distribution
+ are well-capitalized, may make capital distributions during any calendar year equal
+ to up to 100% of net income for the year-to-date plus retained net income for the
+ two preceding years. However, an institution deemed to be in need of more than normal
+ supervision by the Office of Thrift Supervision may have its dividend authority
+ restricted by the Office of Thrift Supervision. Home Federal Bank may pay dividends
+ to new Home Federal Bancorp in accordance with this general authority.
+
+Savings institutions
+ proposing to make any capital distribution need not submit written notice to the
+ Office of Thrift Supervision prior to such distribution unless they are a subsidiary
+ of a holding company or would not remain well-capitalized following the distribution.
+ Savings institutions that do not, or would not meet their current minimum capital
+ requirements following a proposed capital distribution or propose to exceed these
+ net income limitations, must obtain Office of Thrift Supervision approval prior
+ to making such distribution. The Office of Thrift Supervision may object to the
+ distribution during that 30-day period based on safety and soundness concerns. See
+ Capital Requirements. 
+
+Activities
+ of Savings Institutions and their Subsidiaries. When a savings institution establishes
+ or acquires a subsidiary or elects to conduct any new activity through a subsidiary
+ that it controls, the savings institution must notify the Federal Deposit Insurance
+ Corporation and the Office of Thrift Supervision 30 days in advance and provide
+ the information each agency may, by regulation, require. Savings institutions also
+ must conduct the activities of subsidiaries in accordance with existing regulations
+ and orders.
+
+The Office
+ of Thrift Supervision may determine that the continuation by a savings institution
+ of its ownership control of, or its relationship to, the subsidiary constitutes
+ a serious risk to the safety, soundness or stability of the institution or is inconsistent
+ with sound banking practices or with the purposes of the Federal Deposit Insurance
+ Act. Based upon that determination, the Federal Deposit Insurance Corporation or
+ the Office of Thrift Supervision has the authority to order the savings institution
+ to divest itself of control of the subsidiary. The Federal Deposit Insurance Corporation
+ also may determine by regulation or order that any specific activity poses a serious
+ threat to the Deposit Insurance Fund. If so, it may require that no member of the
+ Deposit Insurance Fund engage in that activity directly.
+
+Transactions
+ with Affiliates. Home Federal Bank s authority to engage in transactions
+ with affiliates is limited by Office of Thrift Supervision regulations
+ and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal
+ Reserve Board s Regulation W. The term affiliates for these purposes
+ generally means any company that controls or is under common control with an institution.
+ Home Federal Bancorp and its non-savings institution subsidiaries are affiliates
+ of Home Federal Bank. In general, transactions with affiliates must be on terms
+ that are as favorable to the institution as comparable transactions with non-affiliates.
+ In addition, certain types of transactions are restricted to an aggregate percentage
+ of the institution s capital. Collateral in specified amounts must usually
+ be provided by affiliates in order to receive loans from an institution. In addition,
+ savings institutions are prohibited from lending to any affiliate that is engaged
+ in activities that are not permissible for bank holding companies and no savings
+ institution may purchase the securities of any affiliate other than a subsidiary.
+
+The Sarbanes-Oxley
+ Act of 2002 generally prohibits a company from making loans to its executive officers
+ and directors. However, there is a specific exception for loans by a depository
+ institution to its executive officers and directors in compliance with federal banking
+ laws. Under such laws, Home Federal Bank s authority to extend
+
+136
+
+ credit to executive
+ officers, directors and 10% stockholders ( insiders ), as well as entities
+ such persons control, is limited. The law restricts both the individual and aggregate
+ amount of loans Home Federal Bank may make to insiders based, in part, on Home Federal
+ Bank s capital position and requires certain board approval procedures to be
+ followed. Such loans must be made on terms substantially the same as those offered
+ to unaffiliated individuals and not involve more than the normal risk of repayment.
+ There is an exception for loans made pursuant to a benefit or compensation program
+ that is widely available to all employees of the institution and does not give preference
+ to insiders over other employees. There are additional restrictions applicable to
+ loans to executive officers.
+
+Community
+ Reinvestment Act. Under the Community Reinvestment Act, every Federal Deposit
+ Insurance Corporation-insured institution has a continuing and affirmative obligation
+ consistent with safe and sound banking practices to help meet the credit needs of
+ its entire community, including low and moderate income neighborhoods. The Community
+ Reinvestment Act does not establish specific lending requirements or programs for
+ financial institutions nor does it limit an institution s discretion to develop
+ the types of products and services that it believes are best suited to its particular
+ community, consistent with the Community Reinvestment Act. The Community Reinvestment
+ Act requires the Office of Thrift Supervision, in connection with its examination
+ of Home Federal Bank, to assess the institution s record of meeting the credit
+ needs of its community and to take such record into account in its evaluation of
+ certain applications, such as a merger or the establishment of a branch, by Home
+ Federal Bank. An unsatisfactory rating may be used as the basis for the denial of
+ an application by the Office of Thrift Supervision. Due to the heightened attention
+ being given to the Community Reinvestment Act in the past few years, Home Federal
+ Bank may be required to devote additional funds for investment and lending in its
+ local community. Home Federal Bank was examined for Community Reinvestment Act compliance
+ and received a rating of outstanding in its latest examination.
+
+Affiliate
+ Transactions. New Home Federal Bancorp and Home Federal Bank are separate and
+ distinct legal entities. Various legal limitations restrict Home Federal Bank from
+ lending or otherwise supplying funds to Home Federal Bancorp, generally limiting
+ any single transaction to 10% of Home Federal Bank s capital and surplus and
+ limiting all such transactions to 20% of Home Federal Bank s capital and surplus.
+ These transactions also must be on terms and conditions consistent with safe and
+ sound banking practices that are substantially the same as those prevailing at the
+ time for transactions with unaffiliated companies.
+
+Federally
+ insured savings institutions are subject, with certain exceptions, to certain restrictions
+ on extensions of credit to their parent holding companies or other affiliates, on
+ investments in the stock or other securities of affiliates and on the taking of
+ such stock or securities as collateral from any borrower. In addition, these institutions
+ are prohibited from engaging in certain tie-in arrangements in connection with any
+ extension of credit or the providing of any property or service.
+
+Enforcement.
+ The Office of Thrift Supervision has primary enforcement responsibility over
+ savings institutions and has the authority to bring action against all institution-affiliated
+ parties, including stockholders, and any attorneys, appraisers and accountants
+ who knowingly or recklessly participate in wrongful action likely to have an adverse
+ effect on an insured institution. Formal enforcement action may range from the issuance
+ of a capital directive or cease and desist order to removal of officers or directors,
+ receivership, conservatorship or termination of deposit insurance. Civil penalties
+ cover a wide range of violations and can amount to $25,000 per day, or $1.1 million
+ per day in especially egregious cases. The Federal Deposit Insurance Corporation
+ has the authority to recommend to the Director of the Office of Thrift Supervision
+ that enforcement action be taken with respect to a particular savings institution.
+ If action is not taken by the Director, the Federal Deposit Insurance Corporation
+ has authority to take such action under certain circumstances. Federal law also
+ establishes criminal penalties for certain violations.
+
+Standards
+ for Safety and Soundness. As required by statute, the federal banking agencies
+ have adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
+ The guidelines set forth the safety and soundness standards that the federal banking
+ agencies use to identify and address problems at insured depository institutions
+ before capital becomes impaired. If the Office of Thrift Supervision determines
+ that a savings institution
+
+137
+
+fails to meet any standard prescribed by the guidelines,
+ it may require the institution to submit an acceptable plan to achieve compliance
+ with the standard.
+
+Environmental
+ Issues Associated with Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act
+ ( CERCLA ), a federal statute, generally imposes strict liability on all
+ prior and present owners and operators of sites containing hazardous
+ waste. However, Congress asked to protect secured creditors by providing that the
+ term owner and operator excludes a person whose ownership is limited
+ to protecting its security interest in the site. Since the enactment of the CERCLA,
+ this secured creditor exemption has been the subject of judicial interpretations
+ which have left open the possibility that lenders could be liable for cleanup costs
+ on contaminated property that they hold as collateral for a loan.
+
+To the extent
+ that legal uncertainty exists in this area, all creditors, including Home Federal
+ Bank, that have made loans secured by properties with potential hazardous waste
+ contamination (such as petroleum contamination) could be subject to liability for
+ cleanup costs, which costs often substantially exceed the value of the collateral
+ property.
+
+Privacy
+ Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
+ ( GLBA ), modernized the financial services industry by establishing a
+ comprehensive framework to permit affiliations among commercial banks, insurance
+ companies, securities firms and other financial service providers. Home Federal
+ Bank is subject to Office of Thrift Supervision regulations implementing the privacy
+ protection provisions of the GLBA. These regulations require Home Federal Bank to
+ disclose its privacy policy, including identifying with whom it shares non-public
+ personal information, to customers at the time of establishing the customer
+ relationship and annually thereafter.
+
+Anti-Money
+ Laundering and Customer Identification. Congress enacted the Uniting and Strengthening
+ America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
+ Act of 2001 (the USA Patriot Act ) in response to the terrorist events
+ of September 11, 2001. The USA Patriot Act gives the federal government new powers
+ to address terrorist threats through enhanced domestic security measures, expanded
+ surveillance powers, increased information sharing, and broadened anti-money laundering
+ requirements. Since its enactment, Congress has refined certain expiring provisions
+ of the USA Patriot Act.
+
+Regulation and Supervision of New Home
+ Federal Bancorp
+
+General.
+ Upon consummation of the reorganization, new Home Federal Bancorp will be subject
+ to regulation as a savings and loan holding company under the Home Owners 
+ Loan Act, as amended. As a result, new Home Federal Bancorp will register with the
+ Office of Thrift Supervision and will be subject to Office of Thrift Supervision
+ regulations, examinations, supervision and reporting requirements relating to savings
+ and loan holding companies. New Home Federal Bancorp will also be required to file
+ certain reports with, and otherwise comply with the rules and regulations of the
+ Securities and Exchange Commission. As a subsidiary of a savings and loan holding
+ company, Home Federal Bank will be subject to certain restrictions in its dealings
+ with new Home Federal Bancorp and affiliates thereof.
+
+New Home Federal
+ Bancorp will be a nondiversified unitary savings and loan holding company within
+ the meaning of federal law. Generally, companies that become savings and loan holding
+ companies following the May 4, 1999 grandfather date in the Gramm-Leach-Bliley Act
+ of 1999 may engage only in the activities permitted for financial institution holding
+ companies under the law for multiple savings and loan holding companies.
+
+Although savings
+ and loan holding companies are not currently subject to specific capital requirements
+ or specific restrictions on the payment of dividends or other capital distributions,
+ federal regulations do prescribe such restrictions on subsidiary savings institutions
+ as described below. Home Federal Bank must notify the Office of Thrift Supervision
+ 30 days before declaring any dividend to new Home Federal Bancorp. In addition,
+ the financial impact of a holding company on its subsidiary institution is a matter
+ that is evaluated by the Office of Thrift
+
+138
+
+ Supervision and the Office of Thrift Supervision
+ has authority to order cessation of activities or divestiture of subsidiaries deemed
+ to pose a threat to the safety and soundness of the institution.
+
+Acquisition
+ of Control. Under the federal Change in Bank Control Act, a notice must be submitted
+ to the Office of Thrift Supervision if any person (including a company), or group
+ acting in concert, seeks to acquire control of a savings and loan holding company or
+ savings association. An acquisition of control can occur upon the acquisition of
+ 10% or more of the voting stock of a savings and loan holding company or savings
+ institution or as otherwise defined by the Office of Thrift Supervision. Under the
+ Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the
+ filing of a complete notice to act, taking into consideration certain factors, including
+ the financial and managerial resources of the acquiror and the anti-trust effects
+ of the acquisition. Any company that so acquires control would then be subject to
+ regulation as a savings and loan holding company.
+
+Qualified
+ Thrift Lender Test. Under Section 2303 of the Economic Growth and Regulatory
+ Paperwork Reduction Act of 1996, a savings association can comply with the Qualified
+ Thrift Lender test by either meeting the Qualified Thrift Lender test set forth
+ in the Home Owners Loan Act and implementing regulations or qualifying as
+ a domestic building and loan association as defined in Section 7701(a)(19) of the
+ Internal Revenue Code of 1986. A savings bank subsidiary of a savings and loan holding
+ company that does not comply with the Qualified Thrift Lender test must comply with
+ the following restrictions on its operations:
+
+ 
+ 
+ 
+the institution
+ may not engage in any new activity or make any new investment, directly or indirectly,
+ unless the activity or investment is permissible for a national bank;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the branching
+ powers of the institution are restricted to those of a national bank; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+payment of
+ dividends by the institution are subject to the rules regarding payment of dividends
+ by a national bank.
+
+Upon the expiration
+ of three years from the date the institution ceases to meet the Qualified Thrift
+ Lender test, it must cease any activity and not retain any investment not permissible
+ for a national bank (subject to safety and soundness considerations).
+
+As of June
+ 30, 2007, Home Federal Bank maintained 86.25% of its portfolio assets in qualified
+ thrift investments and, therefore, met the Qualified Thrift Lender test.
+
+Limitations
+ on Transactions with Affiliates. Transactions between savings institutions and
+ any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An
+ affiliate of a savings institution is any company or entity which controls, is controlled
+ by or is under common control with the savings institution. In a mutual holding
+ company context, the mutual holding company and mid-tier holding company of a savings
+ institution (such as Home Federal Bancorp) and any companies which are controlled
+ by such holding companies are affiliates of the savings institution. Generally,
+ Section 23A limits the extent to which the savings institution or its subsidiaries
+ may engage in covered transactions with any one affiliate to an amount
+ equal to 10% of the institution s capital stock and surplus, and contain an
+ aggregate limit on all such transactions with all affiliates to an amount equal
+ to 20% of such capital stock and surplus. Section 23B applies to covered transactions as well as certain other transactions and requires that all transactions be
+ on terms substantially the same, or at least as favorable, to the savings institution
+ as those provided to a non-affiliate. The term covered transaction includes
+ the making of loans to, purchase of assets from and issuance of a guarantee to an
+ affiliate and similar transactions. Section 23B transactions also include the provision
+ of services and the sale of assets by a savings institution to an affiliate. In
+ addition to the restrictions imposed by Sections 23A and 23B, Section 11 of the
+ Home Owners Loan Act prohibits a savings institution from (1) making a loan
+ or other extension of credit to an affiliate, except for any affiliate which engages
+ only in certain activities which are permissible for bank holding companies or (2)
+ purchasing or investing in any stocks, bonds, debentures, notes or similar obligations
+ of any affiliate, except for affiliates which are subsidiaries of the savings institution.
+
+139
+
+In addition, Sections 22(g) and (h) of the
+ Federal Reserve Act place restrictions on loans to executive officers, directors
+ and principal stockholders. Under Section 22(h), loans to a director, executive
+ officer or greater than 10% stockholder of a savings institution, and certain affiliated
+ interests, may not exceed, together with all other outstanding loans to such person
+ and affiliated interests, the savings institution s loans to one borrower limit
+ (generally equal to 15% of the institution s unimpaired capital and surplus).
+ Section 22(h) also requires that loans to directors, executive officers and principal
+ stockholders be made on terms substantially the same as offered in comparable transactions
+ to other persons unless the loans are made pursuant to a benefit or compensation
+ program that (1) is widely available to employees of the institution, and (2) does
+ not give preference to any director, executive officer or principal stockholder,
+ or certain affiliated interests, over other employees of the savings institution.
+ Section 22(h) also requires prior board approval for certain loans. In addition,
+ the aggregate amount of extensions of credit by a savings institution to all insiders
+ cannot exceed the institution s unimpaired capital and surplus. Furthermore,
+ Section 22(g) places additional restrictions on loans to executive officers. At
+ June 30, 2007, Home Federal Bank was in compliance with these restrictions.
+
+Restrictions
+ on Acquisitions. Except under limited circumstances, savings and loan holding
+ companies are prohibited from acquiring, without prior approval of the Director
+ of the Office of Thrift Supervision, (1) control of any other savings institution
+ or savings and loan holding company or substantially all the assets thereof or (2)
+ more than 5% of the voting shares of a savings institution or holding company thereof
+ which is not a subsidiary. Except with the prior approval of the Director, no director
+ or officer of a savings and loan holding company or person owning or controlling
+ by proxy or otherwise more than 25% of such company s stock, may acquire control
+ of any savings institution, other than a subsidiary savings institution, or of any
+ other savings and loan holding company.
+
+The Director
+ of the Office of Thrift Supervision may only approve acquisitions resulting in the
+ formation of a multiple savings and loan holding company which controls savings
+ institutions in more than one state if: (1) the multiple savings and loan holding
+ company involved controls a savings institution which operated a home or branch
+ office located in the state of the institution to be acquired as of March 5, 1987;
+ (2) the acquiror is authorized to acquire control of the savings institution pursuant
+ to the emergency acquisition provisions of the Federal Deposit Insurance Act; or
+ (3) the statutes of the state in which the institution to be acquired is located
+ specifically permit institutions to be acquired by the state-chartered institutions
+ or savings and loan holding companies located in the state where the acquiring entity
+ is located (or by a holding company that controls such state-chartered savings institutions).
+
+Federal
+ Securities Laws. Upon completion of the offering, new Home Federal Bancorp s
+ common stock will be registered with the Securities and Exchange Commission under
+ Section 12(b) of the Securities Exchange Act of 1934, as amended. We will be subject
+ to information, proxy solicitation, insider trading restrictions and other requirements
+ under the Securities Exchange Act of 1934.
+
+Sarbanes-Oxley
+ Act of 2002. Following completion of the conversion, new Home Federal Bancorp,
+ as a public company, will be subject to the Sarbanes-Oxley Act of 2002, which implements
+ a broad range of corporate governance and accounting measures for public companies
+ designed to promote honesty and transparency in corporate America and better protect
+ investors from corporate wrongdoing. The Sarbanes-Oxley Act of 2002 was signed into
+ law by President Bush on July 30, 2002 in response to public concerns regarding
+ corporate accountability in connection with several accounting scandals. The stated
+ goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide
+ for enhanced penalties for accounting and auditing improprieties at publicly traded
+ companies and to protect investors by improving the accuracy and reliability of
+ corporate disclosures pursuant to the securities laws.
+
+The Sarbanes-Oxley
+ Act includes very specific additional disclosure requirements and new corporate
+ governance rules, requires the Securities and Exchange Commission and securities
+ exchanges to adopt extensive additional disclosure, corporate governance and other
+ related rules and mandates further studies of certain issues by the Securities and
+ Exchange Commission and the Comptroller General.
+
+140
+
+TAXATION
+
+Material Income Tax Consequence of the
+Conversion and Share Exchange
+
+ Although
+the conversion may be effected in any manner approved by the Office of Thrift
+Supervision that is consistent with the purposes of the plan of conversion and
+applicable law, regulations and policies, it is intended that the conversion
+will be effected through various mergers. Completion of the conversion and
+offering is conditioned upon prior receipt of either a ruling or an opinion of
+counsel with respect to federal tax laws, and either a ruling or an opinion
+with respect to Idaho tax laws, that no gain or loss will be recognized by Home
+Federal MHC, Home Federal Bancorp or Home Federal Bank as a result of the
+conversion or by account holders receiving subscription rights, except to the
+extent, if any, that subscription rights are deemed to have fair market value
+on the date such rights are issued. We believe that the tax opinions summarized
+below address all material federal income tax consequences that are generally
+applicable to Home Federal MHC, Home Federal Bancorp, Home Federal Bank, and
+new Home Federal Bancorp, persons receiving subscription rights and
+shareholders of Home Federal Bancorp.
+
+ Silver
+Freedman & Taff LLP has issued an opinion to Home Federal MHC, Home Federal
+Bancorp, Home Federal Bank and new Home Federal Bank that, for federal income
+tax purposes:
+
+ 1. 
+The conversion of Home Federal MHC from a federal mutual holding company to a
+federal interim stock savings institution ( Interim Two ) will qualify as a
+ reorganization under Section 368(a)(1)(F) of the Internal Revenue Code, and
+no gain or loss will be reorganized by Home Federal MHC or Interim Two by
+reason of such conversion.
+
+ 2. 
+The
+conversion of Home Federal Bancorp from a federal stock holding company to a
+federal interim stock savings institution ( Interim One ) will qualify as a reorganization 
+under Section 368(a)(1)(F) of the Internal Revenue Code, and no gain or loss
+will be recognized by Home Federal Bancorp or Interim One by reason of such
+conversion.
+
+ 3. 
+The merger of Interim Two with and into Home Federal Bank (the Mid-Tier
+Holding Company Merger ) and the merger of Interim One with and into Home
+Federal Bank (the MHC Merger ) will qualify as a reorganization under
+Section 368(a)(1)(A) of the Internal Revenue Code; Interim One (formerly Home
+Federal Bancorp) or Interim Two (formerly Home Federal MHC), as applicable, and
+Home Federal Bank will be a party to a reorganization as described in Section
+368(b) of the Internal Revenue Code; and no gain or loss will be recognized by
+any party to the Mid-Tier Holding Company Merger or the MHC Merger or any of
+their respective stockholders and equity holders by reason of such merger,
+including the receipt of an interest in the liquidation account of Home Federal
+Bank by Eligible Account Holders and Supplemental Eligible Account Holders. 
+
+ 4. 
+The federal interim stock savings institution formed by new Home Federal
+Bancorp ( Interim Three ) and the merger of Interim Three with and into Home
+Federal Bank (the Holding Company Merger ) will qualify as a reorganization 
+under 368(a)(1)(A) of the Internal Revenue Code by virtue of Section
+368(a)(2)(E) of the Internal Revenue Code; each of Interim Three, Home Federal
+Bank and new Home Federal Bancorp will be a party to a reorganization as
+described in Section 368(b) of the Internal Revenue Code; and no gain or loss
+will be recognized by Interim Three, Home Federal Bank, new Home Federal
+Bancorp, or the shareholders of Home Federal Bancorp (the Minority
+Stockholders ) by reason of such merger.
+
+ 5. 
+Each Minority Stockholder s aggregate tax basis in the shares of new Home
+Federal Bancorp common stock received in the Holding Company Merger will be the
+same as the aggregate tax basis of his shares of Home Federal Bancorp common
+stock constructively surrendered and exchanged in the Mid-Tier Holding Company
+Merger, before giving effect to any payment of cash in lieu of a fractional
+share interest in new Home Federal Bancorp Common Stock.
+
+141
+
+ 6. 
+No income will be recognized by new Home Federal Bancorp on the distribution of
+subscription rights unless the issuance of the subscription rights results in
+gain to recipients thereof. It is more likely than not that no income will be
+recognized by new Home Federal Bancorp on the distribution of subscription
+rights.
+
+ 7. 
+It is more likely than not that the fair market value of the subscription
+rights is zero. Thus, it is more likely than not that no gain will be
+recognized by eligible account holders, supplemental account holders or other
+members upon their receipt of subscription rights. Gain, if any, realized by
+the aforesaid account holders and members will not exceed the fair market value
+of the subscription rights received. If gain is recognized by account holders
+and members upon the distribution to them of subscription rights, new Home
+Federal Bancorp could also recognize income on the distribution of subscription
+rights. No gain will be recognized by the recipients of subscription rights or
+new Home Federal Bancorp upon the exercise of subscription rights. 
+
+ 8. 
+No gain will be recognized by new Home Federal Bancorp upon the issuance of
+conversion stock in exchange for cash in the offerings.
+
+ 9. 
+The holding period for shares of conversion stock purchased pursuant to the
+exercise of subscription rights shall begin on the date of completion of the
+offerings; and the holding period for other shares of conversion stock
+purchased in the offerings will begin on the date of purchase.
+
+ The
+statements set forth in paragraphs (6) and (7) above are based on the position
+that the subscription rights do not have any market value at the time of
+distribution or at the time they are exercised. Whether subscription rights
+have a market value for federal income tax purposes is a question of fact, depending
+upon all relevant facts and circumstances. According to our counsel, the
+Internal Revenue Service will not issue rulings on whether subscription rights
+have a market value. Counsel has also advised us that they are unaware of any
+instance in which the Internal Revenue Service has taken the position that
+nontransferable subscription rights have a market value. Counsel also noted
+that the subscription rights will be granted at no cost to the recipients, will
+be nontransferable and of short duration, and will afford the recipients the
+right only to purchase our common stock at a price equal to its estimated fair
+market value, which will be the same price as the purchase price for the
+unsubscribed shares of common stock.
+
+ Munther
+Goodrum Sperry, Chartered, Boise, Idaho has issued an opinion to us to the
+effect that, more likely than not, the income tax consequences under Idaho law
+of the conversion are not materially different than for federal tax purposes.
+
+ Unlike
+a private letter ruling issued by the Internal Revenue Service, an opinion of
+counsel is not binding on the Internal Revenue Service and the Internal Revenue
+Service could disagree with the conclusions reached in the opinion. If there is
+a disagreement, no assurance can be given that the conclusions reached in an
+opinion of counsel would be sustained by a court if contested by the Internal
+Revenue Service.
+
+Federal Taxation
+
+General.
+ Home Federal MHC, Home Federal Bancorp, new Home Federal Bancorp and Home Federal
+ Bank are subject to federal income taxation in the same general manner as other
+ corporations, with some exceptions discussed below. The following discussion of
+ federal taxation is intended only to summarize certain pertinent federal income
+ tax matters and is not a comprehensive description of the tax rules applicable to
+ Home Federal MHC, Home Federal Bancorp or Home Federal Bank. The income
+ tax returns of Home Federal MHC, Home Federal Bancorp and Home Federal Bank have
+ not been audited in the past seven years.
+
+New Home Federal
+ Bancorp anticipates that it will file a consolidated federal income tax return with
+ Home Federal Bank commencing with the first taxable year after completion of the
+ conversion. Accordingly, it is anticipated that any cash distributions made by new
+ Home Federal Bancorp to its stockholders would be considered to be taxable dividends
+ and not as a non-taxable return of capital to stockholders for federal and state
+ tax purposes.
+
+142
+
+Method
+ of Accounting. For federal income tax purposes, new Home Federal Bancorp will
+ report its income and expenses on the accrual method of accounting and use a fiscal
+ year ending on September 30 for filing its federal income tax return.
+
+Minimum
+ Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate
+ of 20% on a base of regular taxable income plus certain tax preferences, called
+ alternative minimum taxable income. The alternative minimum tax is payable to the
+ extent such alternative minimum taxable income is in excess of an exemption amount.
+ Net operating losses can offset no more than 90% of alternative minimum taxable
+ income. Certain payments of alternative minimum tax may be used as credits against
+ regular tax liabilities in future years. Home Federal Bank has not been subject
+ to the alternative minimum tax, nor does it have any such amounts available as credits
+ for carryover.
+
+Net Operating
+ Loss Carryovers. A financial institution may carry back net operating losses
+ to the preceding two taxable years and forward to the succeeding 20 taxable years.
+ This provision applies to losses incurred in taxable years beginning after August
+ 6, 1997. At June 30, 2007, Home Federal Bank had no net operating loss carryforwards
+ for federal income tax purposes.
+
+Corporate
+ Dividends-Received Deduction. New Home Federal Bancorp may eliminate from its
+ income dividends received from Home Federal Bank as a wholly-owned subsidiary of
+ new Home Federal Bancorp if it elects to file a consolidated return with Home Federal
+ Bank. The corporate dividends-received deduction is 100%, or 80%, in the case of
+ dividends received from corporations with which a corporate recipient does not file
+ a consolidated tax return, depending on the level of stock ownership of the payor
+ of the dividend. Corporations which own less than 20% of the stock of a corporation
+ distributing a dividend may deduct 70% of dividends received or accrued on their
+ behalf.
+
+State Taxation
+
+Idaho.
+New Home Federal Bancorp and Home Federal Bank are subject to the general corporate
+ tax provisions of the State of Idaho. Idaho s state corporate income taxes
+ are generally determined under federal tax law with some modifications. Idaho taxable
+ income is taxed at a rate of 7.6%. These taxes are reduced by certain credits, primarily
+ the Idaho investment tax credit in the case of Home Federal Bank.
+
+143
+
+THE CONVERSION
+ AND STOCK OFFERING
+
+The boards
+ of directors of Home Federal MHC, Home Federal Bancorp, new Home Federal Bancorp
+ and Home Federal Bank have adopted the plan of conversion and reorganization, and
+ an application for approval of the plan has been filed with the Office of Thrift
+ Supervision. The Office of Thrift Supervision has approved our application with
+ the condition that the plan of conversion and reorganization is approved by our
+ members and stockholders and that certain other conditions imposed are satisfied.
+ The Office of Thrift Supervision s approval does not constitute a recommendation
+ or endorsement of the plan of conversion and reorganization.
+
+General
+
+On May 11,
+ 2007, we adopted, and on September 14, 2007 we amended, a plan of conversion and
+ reorganization, pursuant to which we will convert from the mutual holding company
+ form of ownership to the stock form of ownership and we will sell shares of common
+ stock to the public in our offering. On December 6, 2004, Home Federal Bank reorganized
+ into the mutual holding company form of organization by becoming the wholly-owned
+ subsidiary of Home Federal Bancorp. At the same time, Home Federal Bancorp became
+ the 58.9% owned subsidiary of Home Federal MHC.
+
+The plan of
+ conversion and reorganization will result in the elimination of the mutual holding
+ company, the creation of a new stock form holding company, new Home Federal Bancorp,
+ which will own all of the outstanding shares of Home Federal Bank, and the issuance
+ and sale of shares in new Home Federal Bancorp to depositors of Home Federal Bank
+ and others in the offering. The conversion and reorganization will be accomplished
+ through a series of substantially simultaneous and interdependent transactions as
+ follows:
+
+ 
+ 
+ 
+Home Federal
+ Bancorp will convert to a federal interim stock savings institution and simultaneously
+ merge with and into Home Federal Bank with Home Federal Bank being the survivor;
+ and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+Home Federal
+ MHC will convert from mutual form to a federal interim stock savings institution
+ and simultaneously merge with and into Home Federal Bank, pursuant to which the
+ mutual holding company will cease to exist and the shares of Home Federal Bancorp
+ common stock held by the mutual holding company will be canceled; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+an interim
+ federal savings association will be formed as a wholly owned subsidiary of the newly
+ formed Maryland corporation, new Home Federal Bancorp, and then will merge with
+ and into Home Federal Bank.
+
+As a result
+ of the above transactions, Home Federal Bank will become a wholly-owned subsidiary
+ of the new holding company, new Home Federal Bancorp.
+
+When the conversion
+ and reorganization are completed, all of the capital stock of Home Federal Bank
+ will be owned by new Home Federal Bancorp and all of the outstanding common stock
+ of new Home Federal Bancorp will be owned by public stockholders. Under the plan,
+ new Home Federal Bancorp common stock is being offered to our eligible depositors,
+ the employee stock ownership plan, other depositors and borrowers, and then to the
+ public. The conversion will be accounted for at historical cost in accordance with
+ Statement of Financial Accounting Standards No. 141, Business Combinations. 
+
+We intend
+ to contribute 50% of the net proceeds of the offering to Home Federal Bank and lend
+ our employee stock ownership plan cash to enable the plan to buy up to 8% of the
+ shares sold in the offering. We will retain the balance of the net proceeds. The
+ conversion will be completed only upon completion of the issuance of at least 10,200,000
+ shares of our common stock offered pursuant to the plan of conversion and reorganization.
+
+144
+
+The shares
+ of new Home Federal Bancorp common stock are first being offered in a subscription
+ offering to holders of subscription rights. To the extent shares of common stock
+ remain available after the subscription offering, shares may be offered in a direct
+ community offering on a best efforts basis through Keefe, Bruyette Woods
+ in such a manner as to promote a wide distribution of the shares. Shares not subscribed
+ for in the subscription offering and direct community offering may be offered for
+ sale on a best efforts basis in a syndicated community offering conducted by Keefe,
+ Bruyette Woods. We have the right, in our sole discretion, to accept or reject,
+ in whole or in part, any orders to purchase shares of common stock received in the
+ direct community offering and the syndicated community offering. See 
+ Direct Community Offering and Syndicated Community Offering. 
+
+Subscriptions
+ for shares will be subject to the maximum and minimum purchase limitations set forth
+ in the plan of conversion and reorganization. See Limitations on Stock
+ Purchases. 
+
+We determined
+ the number of shares of common stock to be offered in the offering based upon an
+ independent valuation of the estimated consolidated pro forma market value of new
+ Home Federal Bancorp. All shares of common stock to be sold in the offering will
+ be sold at $10.00 per share. No commission will be charged to purchasers. The independent
+ valuation will be updated and the final number of shares of our common stock to
+ be issued in the offering will be determined at the completion of the offering.
+ See How We Determined Our Price and the Number of Shares to Be Issued
+ in the Stock Offering. 
+
+The completion
+ of the offering is subject to market conditions and other factors beyond our control.
+ No assurance can be given as to the length of time following approval of the plan
+ of conversion and reorganization by our members that will be required to complete
+ the sale of shares. If we experience delays, significant changes may occur in the
+ estimated offering range with corresponding changes in the offering price and the
+ net proceeds to be realized by us from the sale of the shares. If the conversion
+ is terminated, we will charge all related expenses against current income and any
+ funds collected by us in the offering will be promptly returned, with interest,
+ to each subscriber.
+
+The following
+ is a brief summary of the conversion and is qualified in its entirety by reference
+ to the applicable provision of the plan of conversion and reorganization. A copy
+ of the plan of conversion and reorganization is available for inspection at any
+ office of Home Federal Bank and at the Office of Thrift Supervision. The plan of
+ conversion and reorganization is also filed as an exhibit to the application to
+ convert from mutual to stock form of which this prospectus is a part, copes of which
+ may be obtained from the Office of Thrift Supervision. See Where You Can Find
+ More Information. 
+
+Our Reasons for the Conversion
+
+Because it
+ is a mutual holding company, Home Federal MHC has no authority to issue shares of
+ capital stock and consequently has no access to market sources of equity capital.
+ Home Federal Bancorp may issue shares but only to a limited extent, as Home Federal
+ MHC must own a majority of its shares of common stock. This conversion is another
+ step in our strategic plan to increase our capital and expand our operations.
+
+Upon completion
+ of the conversion, we will no longer be in the mutual holding company form of organization
+ and Home Federal Bank will be organized in the form used by commercial banks, most
+ major corporations and a majority of savings institutions. The ability to raise
+ new equity capital through the issuance and sale of capital stock of new Home Federal
+ Bancorp will allow Home Federal Bank the flexibility to increase its capital position
+ more rapidly than by accumulating earnings and at times deemed advantageous by the
+ board of directors. It will also support future growth and expanded operations,
+ including increased lending and investment activities, as business and regulatory
+ needs require. The ability to attract new capital also will help better address
+ the needs of the communities we serve and enhance our ability to make acquisitions
+ or expand into new businesses. The acquisition alternatives available to Home Federal
+ MHC are limited as a mutual holding company. However, after the conversion, we will
+ have increased ability to merge with other institutions. Finally, the ability to
+ issue additional capital stock will enable us to establish additional stock compensation
+ plans for directors, officers and employees, giving them equity interests in new
+ Home Federal Bancorp and greater incentive to improve its performance. For a
+
+145
+
+description
+ of the stock compensation plans which will be adopted by us in connection with the
+ conversion, see Management Benefits to Be Considered Following Completion
+ of the Conversion and Reorganization. 
+
+The disadvantages
+ of the offering considered the fact that operating in the stock holding company
+ form of organization could subject Home Federal Bancorp to contests for corporate
+ control, including the possibility that a director could be elected that advocates
+ the particular position of the group which elected him or her, rather than positions
+ that are in the best interests of new Home Federal Bancorp and all stockholders.
+
+After considering
+ the advantages and disadvantages of the conversion, as well as applicable fiduciary
+ duties and alternative transactions, including remaining as a mutual holding company,
+ the boards of directors of Home Federal MHC, Home Federal Bancorp and Home Federal
+ Bank approved the conversion as being in the best interests of our companies and
+ equitable to the members of Home Federal MHC.
+
+Effect of the Conversion on Current Stockholders
+
+Effect
+ on Outstanding Shares of Home Federal Bancorp. Federal regulations provide that
+ in a conversion of a mutual holding company to stock form, the public stockholders
+ of Home Federal Bancorp will be entitled to exchange their shares of common stock
+ for common stock of the converted holding company, provided that the federal savings
+ bank and the mutual holding company demonstrate to the satisfaction of the Office
+ of Thrift Supervision that the basis for the exchange is fair and reasonable. Each
+ publicly held share of Home Federal Bancorp common stock will, on the date of completion
+ of the conversion, be automatically converted into and become the right to receive
+ a number of shares of common stock of new Home Federal Bancorp determined pursuant
+ to the exchange ratio (we refer to these shares as the exchange shares ).
+ The public stockholders of Home Federal Bancorp common stock will own the same percentage
+ of common stock in new Home Federal Bancorp after the conversion as they hold in
+ Home Federal Bancorp subject to additional purchases, or the receipt of cash in
+ lieu of fractional shares. The total number of shares of new Home Federal Bancorp
+ held by the former public stockholders of Home Federal Bancorp common stock after
+ the conversion will also be affected by any purchases by these persons in the offering.
+
+Based on the
+ independent valuation, the 58.9% of the outstanding shares of Home Federal Bancorp
+ common stock held by Home Federal MHC as of the date of the independent valuation
+ and the 41.1% public ownership interest of Home Federal Bancorp, the following table
+ sets forth, at the minimum, mid-point, maximum, and adjusted maximum of the offering
+ range:
+
+ 
+ 
+ 
+the total
+ number of shares of common stock to be issued in the conversion;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the total
+ shares of common stock outstanding after the conversion;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the exchange
+ ratio; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the number
+ of shares an owner of 100 shares of Home Federal Bancorp common stock will receive
+ in the exchange, adjusted for the number of shares sold in the offering.
+
+146
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+100
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+shares of
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Home
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ 
+
+Value of
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Bancorp
+ 
+
+new Home
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+common
+ 
+
+Federal
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+stock
+ 
+
+Bancorp shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total shares
+ 
+ 
+ 
+ 
+ 
+
+would be
+ 
+
+to be received
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+of new
+ 
+ 
+ 
+ 
+ 
+
+exchanged
+ 
+
+in exchange for
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Shares of new Home
+ 
+
+Home
+ 
+ 
+ 
+ 
+ 
+
+for the
+ 
+
+100 shares of
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal Bancorp stock
+ 
+
+Federal
+ 
+ 
+ 
+ 
+ 
+
+following
+ 
+
+Home Federal
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+to be exchanged for
+ 
+
+Bancorp
+ 
+ 
+ 
+ 
+ 
+
+number of
+ 
+
+Bancorp
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+current Home Federal
+ 
+
+common
+ 
+ 
+ 
+ 
+ 
+
+shares of
+ 
+
+common stock
+
+ 
+ 
+
+Shares to be sold in
+ 
+
+Bancorp common
+ 
+
+stock to be
+ 
+ 
+ 
+ 
+ 
+
+new
+ 
+
+assuming
+
+ 
+ 
+
+the offering
+ 
+
+stock
+ 
+
+outstanding
+ 
+ 
+ 
+ 
+ 
+
+Home
+ 
+
+Value at
+
+ 
+ 
+
+ 
+
+ 
+
+after the
+ 
+
+Exchange
+ 
+
+Federal
+ 
+
+$10.00 per
+
+ 
+ 
+
+Amount
+ 
+
+Percent
+ 
+Amount
+ 
+Percent
+ 
+
+conversion
+ 
+
+ratio
+ 
+
+Bancorp
+ 
+
+share
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Minimum
+ 
+ 
+10,200,000
+ 
+ 
+ 
+58.9
+%
+ 
+ 
+7,103,110
+ 
+ 
+ 
+41.1
+%
+ 
+ 
+17,303,110
+ 
+ 
+ 
+1.1360
+ 
+ 
+ 
+113
+ 
+ 
+$
+1,130
+ 
+
+Midpoint
+ 
+ 
+12,000,000
+ 
+ 
+ 
+58.9
+ 
+ 
+ 
+8,356,600
+ 
+ 
+ 
+41.1
+ 
+ 
+ 
+20,356,600
+ 
+ 
+ 
+1.3364
+ 
+ 
+ 
+133
+ 
+ 
+ 
+1,330
+ 
+
+Maximum
+ 
+ 
+13,800,000
+ 
+ 
+ 
+58.9
+ 
+ 
+ 
+9,610,090
+ 
+ 
+ 
+41.1
+ 
+ 
+ 
+23,410,090
+ 
+ 
+ 
+1.5369
+ 
+ 
+ 
+153
+ 
+ 
+ 
+1,530
+ 
+
+15% above
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+the maximum
+ 
+ 
+15,870,000
+ 
+ 
+ 
+58.9
+ 
+ 
+ 
+11,051,604
+ 
+ 
+ 
+41.1
+ 
+ 
+ 
+26,921,604
+ 
+ 
+ 
+1.7674
+ 
+ 
+ 
+176
+ 
+ 
+ 
+1,760
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+If you currently
+ own shares of Home Federal Bancorp which are held in street name, they
+ will be exchanged without any action on your part. If you currently are the record
+ owner of shares of Home Federal Bancorp and hold certificates for these shares you
+ will receive, after the conversion and offering is completed, a transmittal form
+ with instructions to surrender your stock certificates. New certificates of our
+ common stock will be mailed within five business days after the exchange agent receives
+ properly executed transmittal forms and stock certificates. You should not submit
+ a stock certificate for exchange until you receive a transmittal form.
+
+No fractional
+ shares of our common stock will be issued to any public stockholder of Home Federal
+ Bancorp upon consummation of the conversion. For each fractional share that would
+ otherwise be issued, we will pay an amount equal to the product obtained by multiplying
+ the fractional share interest to which the holder would otherwise be entitled by
+ the $10.00 per share subscription price.
+
+Under federal
+ law and regulations, current public stockholders of Home Federal Bancorp do not
+ have dissenters rights or appraisal rights.
+
+Outstanding
+ options to purchase shares of Home Federal Bancorp common stock also will convert
+ into and become options to purchase new shares of new Home Federal Bancorp, Inc.
+ common stock. The number of shares of common stock to be received upon exercise
+ of these options will be determined pursuant to the exchange ratio. The aggregate
+ exercise price, duration and vesting schedule of these options will not be affected
+ by the conversion. At June 30, 2007, there were 559,228 outstanding options to purchase
+ shares of Home Federal Bancorp common stock, 49,233 of which have vested. Such options
+ will be converted into options to purchase 635,283 shares of common stock at the
+ minimum of the offering range and 859,478 shares of common stock at the maximum
+ of the offering range. Because Office of Thrift Supervision regulations prohibit
+ us from repurchasing our common stock during the first year following the conversion
+ unless compelling business reasons exist for such repurchases, we may use authorized
+ but unissued shares to fund option exercises that occur during the first year following
+ the conversion. If all existing options were exercised for authorized, but unissued
+ shares of common stock following the conversion, stockholders would experience dilution
+ of approximately 3.5%.
+
+Effect
+ on Stockholders Equity per Share of the Shares Exchanged. As adjusted
+ for exchange ratio, the conversion will increase the stockholders equity share
+ of the current stockholder of Home Federal Bancorp common stock. At June 30, 2007,
+ the stockholders equity per share of Home Federal Bancorp common stock including
+ shares held by Home Federal MHC was $7.22. Based on the pro forma information set
+ forth for June 30, 2007, in
+
+147
+
+ Pro Forma Data, pro forma stockholders 
+ equity per share following the conversion will be $11.33, $10.38, $9.69 and $9.08
+ at the minimum, midpoint, maximum and adjusted maximum, respectively, of the offering
+ range. As adjusted at that date for the exchange ratio, the effective stockholders equity per share of current stockholder would be $8.20, $9.65, $11.0 and $12.76
+ at the minimum, midpoint, maximum and adjusted maximum, respectively, of the offering
+ range.
+
+Effect
+ on Earnings per Share of the Shares Exchanged. As adjusted for exchange ratio,
+ the conversion will also increase the pro forma earnings per share. For the year
+ ended September 30, 2006, basic earnings per share of Home Federal Bancorp common
+ stock was $0.28, including shares held by Home Federal MHC. Based on the pro forma
+ information set forth for the year ended September 30, 2006, in Pro Forma
+ Data, earnings per share of common stock following the conversion will range
+ from $0.32 to $.023, respectively, for the minimum to the adjusted maximum of the
+ offering range. As adjusted at that date for the exchange ratio, the effective annualized
+ earnings per share for current stockholders would range from $0.32 to $0.49, respectively,
+ for the minimum to the adjusted maximum of the offering range.
+
+Dissenters and Appraisal Rights. The public stockholders of Home Federal Bancorp
+ common stock will not have dissenters rights or appraisal rights in connection
+ with the exchange of publicly held shares of Home Federal Bancorp common stock as
+ part of the conversion.
+
+Effects of the Conversion on Depositors
+ and Borrowers
+
+General.
+ The conversion will have no effect on Home Federal Bank s present business
+ of accepting deposits and investing its funds in loans and other investments permitted
+ by law. Following completion of the conversion, Home Federal Bank will continue
+ to be subject to regulation by the Office of Thrift Supervision, and its accounts
+ will continue to be insured by the Federal Deposit Insurance Corporation, up to
+ applicable limits, without interruption. After the conversion, Home Federal Bank
+ will continue to provide services for depositors and borrowers under current policies
+ and by its present management and staff.
+
+Deposits
+ and Loans. Each holder of a deposit account in Home Federal Bank at the time
+ of the conversion will continue as an account holder in Home Federal Bank after
+ the conversion, and the conversion will not affect the deposit balance, interest
+ rate or other terms of the depositor s accounts. Each account will be insured
+ by the Federal Deposit Insurance Corporation to the same extent as before the conversion.
+ Depositors in Home Federal Bank will continue to hold their existing certificates,
+ passbooks and other evidence of their accounts. The conversion will not affect the
+ loan terms of any borrower from Home Federal Bank. The amount, interest rate, maturity,
+ security for and obligations under each loan will remain as they existed prior to
+ the conversion. See Voting Rights and Depositors Rights if We Liquidate below for a discussion of the effects of the
+ conversion on the voting and liquidation rights of the depositors of Home Federal
+ Bank.
+
+Continuity.
+ The board of directors presently serving Home Federal Bank will serve as the
+ board of directors of Home Federal Bank after the conversion. The board of directors
+ of Home Federal Bancorp consists of the same individuals who serve as directors
+ of Home Federal Bank. After the conversion, the voting stockholders of new Home
+ Federal Bancorp will elect approximately one-third of its directors annually. All
+ current officers of Home Federal Bank will retain their positions with Home Federal
+ Bank after the conversion.
+
+Voting
+ Rights. Presently, all depositors are members of, and have voting rights in,
+ Home Federal MHC as to all matters requiring membership action. Upon completion
+ of the conversion, Home Federal MHC will cease to exist and depositors will no longer
+ have voting rights except to the extent they are stockholders of new Home Federal
+ Bancorp. After the conversion, voting rights in new Home Federal Bancorp will be
+ vested exclusively in the stockholders of new Home Federal Bancorp. Each holder
+ of common stock will be entitled to vote on any matter to be considered by the stockholders
+ of new Home Federal Bancorp. After completion of the conversion, voting rights in
+ Home Federal Bank will be vested exclusively in its sole stockholder, new Home Federal
+ Bancorp.
+
+148
+
+Depositors Rights if We Liquidate.
+ We have no plans to liquidate. However, if there should ever be a complete liquidation
+ of Home Federal Bank, either before or after conversion, deposit account holders
+ would receive the protection of insurance by the Federal Deposit Insurance Corporation
+ up to applicable limits. In addition, liquidation rights before and after the conversion
+ would be as follows:
+
+ 
+ 
+ 
+
+ 
+Liquidation
+ Rights Presently. Each depositor in Home Federal Bank has both a deposit account
+ in Home Federal Bank and a pro rata ownership interest in the net worth of Home
+ Federal MHC based upon the deposit balance in his or her account. This ownership
+ interest is tied to the depositor s account and has no tangible market value
+ separate from the deposit account. This interest may only be realized in the event
+ of a complete liquidation of Home Federal MHC and Home Federal Bank.
+
+ 
+
+ 
+ 
+ 
+
+ 
+Any depositor
+ who opens a deposit account obtains a pro rata ownership interest in Home Federal
+ MHC without any additional payment beyond the amount of the deposit. A depositor
+ who reduces or closes his or her account receives a portion or all, respectively,
+ of the balance in the deposit account but nothing for his or her ownership interest
+ in the net worth of Home Federal MHC, which is lost to the extent that the balance
+ in the account is reduced or closed. Consequently, depositors in Home Federal Bank
+ normally have no way to realize the value of their ownership interest, which has
+ realizable value only in the unlikely event that Home Federal MHC and Home Federal
+ Bank are liquidated. If this occurs, the depositors of record at that time, as owners,
+ would share pro rata in any residual surplus and reserves of Home Federal MHC and
+ Home Federal Bank after other claims, including claims of depositors to the amounts
+ of their deposits, are paid.
+
+ 
+
+ 
+ 
+ 
+
+ 
+Liquidation
+ Rights After the Conversion. In the unlikely event that Home Federal Bank were
+ to liquidate after the conversion, all claims of creditors, including those of depositors,
+ would be paid first, followed by distribution of the liquidation account (described
+ below) to depositors as of March 31, 2006 and September 30, 2007 who continue to
+ maintain their deposit accounts as of the date of liquidation, with any assets remaining
+ thereafter distributed to new Home Federal Bancorp, as the holder of Home Federal
+ Bank s capital stock.
+
+ 
+
+ 
+ 
+ 
+
+ 
+Home Federal
+ Bank will, at the time of the conversion, establish a liquidation account in an
+ amount equal to its total equity as of the date of the latest statement of financial
+ condition contained in the prospectus. The liquidation account will be a memorandum
+ account on the records of Home Federal Bank and there will be no segregation of
+ assets of Home Federal Bank related to it.
+
+ 
+
+ 
+ 
+ 
+
+ 
+The liquidation
+ account will be maintained subsequent to the conversion for the benefit of eligible
+ account holders and supplemental eligible account holders who retain their deposit
+ accounts in Home Federal Bank. Each eligible account holder and supplemental eligible
+ account holder will, with respect to each deposit account held, have a related inchoate
+ interest in a portion of the liquidation account balance called a subaccount.
+
+ 
+
+ 
+ 
+ 
+
+ 
+The initial
+ subaccount balance for a deposit account held by an eligible account holder or a
+ supplemental eligible account holder will be determined by multiplying the opening
+ balance in the liquidation account by a fraction of which the numerator is the amount
+ of the holder s qualifying deposit in the deposit account and the denominator
+ is the total amount of the qualifying deposits of all such holders. The initial
+ subaccount balance will not be increased, and it will be subject to downward adjustment
+ as provided below.
+
+ 
+
+ 
+ 
+ 
+
+ 
+If the balance
+ in any deposit account of an eligible account holder or supplemental eligible account
+ holder at the close of business on any September 30 subsequent to the effective
+ date of the conversion is less than the lesser of (1) the balance in the deposit
+ account at the close of business on any other September
+ 30 subsequent to March 31, 2006, or September 30, 2007, as applicable,
+
+ 
+
+149
+
+ 
+ or (2) the
+ amount of the qualifying deposit in the deposit account on March 31, 2006 or September
+ 30, 2007, as applicable, then the subaccount balance for the deposit account will
+ be adjusted by reducing the subaccount balance in an amount proportionate to the
+ reduction in the deposit balance. In the event of a downward adjustment, the subaccount
+ balance will not be subsequently increased, notwithstanding any subsequent increase
+ in the deposit balance of the related deposit account. If any such deposit account
+ is closed, the related subaccount balance will be reduced to zero.
+
+ 
+
+ 
+ 
+ 
+
+ 
+In the event
+ of a complete liquidation of Home Federal Bank (and only in that event), each eligible
+ account holder and supplemental eligible account holder will be entitled to receive
+ a liquidation distribution from the liquidation account in the amount of the then
+ current adjusted subaccount balance(s) for the deposit account(s) then held by the
+ holder before any liquidation distribution may be made to stockholders. No merger,
+ consolidation, bulk purchase of assets with assumptions of deposit accounts and
+ other liabilities or similar transactions with another federally-insured institution
+ in which Home Federal Bank is not the surviving institution will be considered to
+ be a complete liquidation. In any such transaction, the liquidation account will
+ be assumed by the surviving institution.
+
+ 
+
+Tax Effects
+ of the Conversion. We have received an opinion from our special counsel, Silver,
+ Freedman Taff, L.L.P., Washington, D.C. that the conversion will constitute
+ a tax free reorganization under the Internal Revenue Code and that no gain or loss
+ will be recognized for federal income tax purposes by Home Federal Bank or new Home
+ Federal Bancorp as a result of the completion of the conversion. However, this opinion
+ is not binding on the Internal Revenue Service or the Idaho State Tax Commission.
+
+If the liquidation
+ rights in Home Federal Bank or subscription rights to purchase new Home Federal
+ Bancorp common stock have a market value when received, or in the case of subscription
+ rights, when exercised, then depositors receiving or exercising these rights may
+ have a taxable gain. Any gain will be limited to the fair market value of these
+ rights.
+
+Liquidation
+ rights are the proportionate interest of certain depositors of Home Federal Bank
+ in the special liquidation account to be established by Home Federal Bank under
+ the plan of conversion and reorganization. See Depositors Rights
+ if We Liquidate. Special counsel has concluded that the liquidation rights
+ will have nominal, if any, fair market value.
+
+The subscription
+ rights are the preferential rights of eligible subscribers to purchase shares of
+ Home Federal Bancorp common stock in the conversion. See Subscription
+ Offering and Subscription Rights. Because the subscription rights are acquired
+ without cost, are not transferable, last for only a short period of time and give
+ the recipients a right to purchase stock in the conversion only at fair market value,
+ special counsel believes these rights do not have any taxable value when they are
+ granted or exercised. Special counsel s opinion states that it is not aware
+ of the Internal Revenue Service claiming in any similar conversion transaction that
+ liquidation rights or subscription rights have any market value. Because there are
+ no judicial opinions or official Internal Revenue Service positions on this issue,
+ however, special counsel s opinion relating to liquidation rights and subscription
+ rights comes to a reasoned conclusion instead of an absolute conclusion on these
+ issues. Special counsel s conclusion is supported by a letter from RP Financial
+ which states that the subscription rights do not have any value when they are distributed
+ or exercised.
+
+If the Internal
+ Revenue Service disagrees and says the subscription rights have value, income may
+ be recognized by recipients of these rights, in certain cases whether or not the
+ rights are exercised. This income may be capital gain or ordinary income, and new
+ Home Federal Bancorp and Home Federal Bank could recognize gain on the distribution
+ of these rights. Eligible subscribers are encouraged to consult with their own tax
+ advisor regarding their own circumstances and any tax consequences if subscription
+ rights are deemed to have value.
+
+150
+
+Special counsel
+ has also concluded that there are no other material federal income tax consequences
+ in connection with the conversion.
+
+The opinion
+ of special counsel makes certain assumptions consisting solely of factual matters
+ that would be contained in a representation letter of Home Federal Bank to the Internal
+ Revenue Service if it were seeking a private letter ruling relating to the federal
+ income tax consequences of the conversion. Special counsel s opinion is based
+ on the Internal Revenue Code, regulations now in effect or proposed, current administrative
+ rulings and practice and judicial authority, all of which are subject to change.
+ Any change may be made with retroactive effect. Unlike private letter rulings received
+ from the Internal Revenue Service, special counsel s opinion is not binding
+ on the Internal Revenue Service and there can be no assurance that the Internal
+ Revenue Service will not take a position contrary to the positions reflected in
+ special counsel s opinion, or that special counsel s opinion will be upheld
+ by the courts if challenged by the Internal Revenue Service.
+
+New Home Federal
+ Bancorp and Home Federal Bank have also obtained an opinion from Munther Goodrum
+ Sperry, Chartered, Boise, Idaho that the income tax effects of the conversion under
+ Idaho tax laws will be substantially the same as the federal income tax consequences
+ described above.
+
+Effect on Existing Compensation Plans
+
+Under the
+ plan of conversion and reorganization, the existing 2005 Stock Option and Incentive
+ Plan and 2005 Recognition and Retention Plan of Home Federal Bancorp will become
+ stock benefit plans of new Home Federal Bancorp and shares of new Home Federal Bancorp
+ common stock will be issued (or reserved for issuance) pursuant to such benefit
+ plans and not shares of the current Home Federal Bancorp common stock. Upon consummation
+ of the conversion, the common stock currently reserved for or held by these benefit
+ plans will be converted into options or new Home Federal Bancorp common stock based
+ upon the exchange ration. Upon completion of the conversion, (i) all rights to purchase,
+ sell or receive Home Federal Bancorp common stock currently under any agreement
+ between Home Federal Bancorp and Home Federal Bank and any director, officer or
+ employee of Home Federal Bank or under any plan or program of Home Federal Bancorp
+ or Home Federal Bank (including, without limitation, the 2005 Recognition and Retention
+ Plan), shall automatically, by operation of law, be converted into and shall become
+ an identical right to purchase, sell or receive new Home Federal Bancorp common
+ stock and an identical right to make payment in common stock under any such agreement
+ between Home Federal Bancorp or Home Federal Bank and any director, officer or employee
+ or under such plan or program of Home Federal Bancorp or Home Federal Bank, and
+ (ii) rights outstanding under the 2005 Stock Option and Incentive Plan shall be
+ assumed by new Home Federal Bancorp and thereafter shall be rights only for shares
+ of new Home Federal Bancorp common stock, with each such right being for a number
+ of shares of new Home Federal Bancorp common stock based upon the exchange ratio
+ and the number of shares of Home Federal Bancorp that were available thereunder
+ immediately prior to consummation of the conversion, with the price adjusted to
+ reflect the exchange ratio but with no change in any other term or condition of
+ such right.
+
+How We Determined Our Price and the Number
+ of Shares to Be Issued in the Stock Offering
+
+The plan of
+ conversion and reorganization requires that the purchase price of the common stock
+ must be based on the appraised pro forma market value of new Home Federal Bancorp
+ and Home Federal Bank, as determined on the basis of an independent valuation. We
+ have retained RP Financial, LC., a financial services industry consulting firm with
+ over 20 years of experience in valuing financial institutions for mutual to stock
+ conversions, to make this valuation. We have no prior relationship with RP Financial
+ other than our retention of that firm to perform the valuation in connection with
+ the conversion of Home Federal Bank to the mutual holding company form of ownership
+ in 2004. For its services in making the appraisal for our conversion from the mutual
+ holding company form of ownership to full public ownership, RP Financial s
+ fees and out-of-pocket expenses are estimated to be $110,000. We have agreed to
+ indemnify RP Financial and any employees of RP Financial who act for or on behalf
+ of RP Financial in connection with the appraisal against any and all loss, cost,
+ damage, claim, liability or expense of any kind, including claims under federal
+ and state securities laws, arising out of any
+
+151
+
+misstatement,
+ untrue statement of a material fact or omission to state a material fact in the
+ information we supply to RP Financial, unless RP Financial is determined to be negligent
+ or otherwise at fault.
+
+The independent
+ valuation appraisal considered the pro forma impact of the offering. Consistent
+ with the Office of Thrift Supervision appraisal guidelines, the appraisal applied
+ three primary methodologies: the pro forma price-to-book value approach applied
+ to both reported book value and tangible book value; the pro forma price-to-earnings
+ approach applied to reported and core earnings; and the pro forma price-to-assets
+ approach. The market value ratios applied in the three methodologies were based
+ upon the current market valuations of the peer group companies identified by RP
+ Financial, subject to valuation adjustments applied by RP Financial to account for
+ differences between Home Federal Bancorp and the peer group. RP Financial placed
+ the greatest emphasis on the price-to-core earnings and price-to-tangible book value
+ approaches in estimating pro forma market value.
+
+The independent
+ valuation was prepared by RP Financial in reliance upon the information contained
+ in this prospectus, including the consolidated financial statements of Home Federal
+ Bancorp. RP Financial also considered the following factors, among others:
+
+ 
+ 
+ 
+the present
+ results and financial condition of Home Federal Bank, and the projected results
+ and financial condition of new Home Federal Bancorp, a Maryland corporation;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the economic
+ and demographic conditions in Home Federal Bank s existing market area;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+certain historical,
+ financial and other information relating to Home Federal Bank;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+a comparative
+ evaluation of the operating and financial characteristics of Home Federal Bank with
+ those of other similarly situated publicly traded savings institutions located in
+ other states in the other regions of the United States;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the impact
+ of the conversion and the offering on new Home Federal Bancorp s stockholders 
+ equity and earnings potential;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the proposed
+ dividend policy of new Home Federal Bancorp; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the trading
+ market for securities of comparable institutions and general conditions in the market
+ for such securities.
+
+Included in
+ RP Financial independent valuation were certain assumptions as to the pro forma
+ earnings of new Home Federal Bancorp after the conversion and reorganization that
+ were utilized in determining the appraised value. These assumptions included estimated
+ expenses, an assumed after-tax rate of return on the net offering proceeds and purchases
+ in the open market of 3.5% of the common stock issued in the offering by the restricted
+ stock plan at the $10.00 purchase price. See Pro Forma Data for additional
+ information concerning these assumptions. The use of different assumptions may yield
+ different results.
+
+The independent
+ valuation states that as of September 14, 2007, the estimated pro forma market value
+ of new Home Federal Bancorp ranged from $173.0 million to $234.1 million, with a
+ midpoint of $203.6 million. The board of directors of new Home Federal Bancorp decided
+ to offer the shares of common stock for a price of $10.00 per share primarily because
+ it is the price most commonly used in mutual-to-stock conversions of financial institutions.
+ The number of shares offered will be equal to the aggregate pro forma market value
+ of new Home Federal Bancorp divided by the price per share. Based on the valuation
+ range and the $10.00 price per share, the minimum of the offering range will be
+ 10,200,000 shares, the midpoint of the offering range will be 12,000,000 shares
+ and the maximum of the offering range will be 13,800,000 shares, or 15,870,000 if
+ the maximum amount is adjusted because of demand for shares or changes in market
+ conditions.
+
+152
+
+The following
+ table presents a summary of selected pricing ratios for new Home Federal Bancorp
+ as contained in the appraisal and our peer group companies identified by RP Financial.
+ These ratios are based on earnings for the 12 months ended June 30, 2007 and book
+ value as of June 30, 2007 for us and the 12 months ended June 30, 2007 and as of
+ June 30, 2007, or the latest date available for the peer group. Compared to the
+ average pricing of the peer group, our pro forma pricing ratios at the maximum of
+ the offering range indicated a premium of 62.8% on a price-to-earnings basis, a
+ discount of 20.1% on a price-to-book value basis and a discount of 29.2% on a price-to-tangible
+ book value basis. The pricing ratios result from our generally having higher levels
+ of equity but lower earnings than the companies in the peer group on a pro forma
+ basis. Our board of directors, in reviewing and approving the valuation, considered
+ the range of price-to-core earnings multiples and the range of price-to-book value
+ ratios and price-to-tangible book value ratios at the different amounts of shares
+ to be sold in the offering. The appraisal did not consider one valuation approach
+ to be more important than the other. Instead, the appraisal concluded that these
+ ranges represented the appropriate balance of the two approaches to valuing new
+ Home Federal Bancorp, and the number of shares to be sold, in comparison to the
+ identified peer group institutions. Specifically, in approving the valuation, the
+ board believed that new Home Federal Bancorp would not be able to sell its shares
+ at a price-to-book value that was in line with the peer group without unreasonably
+ exceeding the peer group on a price-to-core earnings basis. The estimated appraised
+ value and the resulting premium/discount took into consideration the potential financial
+ impact of the conversion and offering.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Pro Forma
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Price-to-Tangible
+
+ 
+ 
+
+Price-to-Earnings
+ 
+
+Price-to-Book
+ 
+
+Book
+
+ 
+ 
+
+Multiple
+ 
+
+Value Ratio
+ 
+
+Value Ratio
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+(x)
+ 
+
+(x)
+ 
+
+(%)
+
+New Home Federal
+ Bancorp
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Maximum
+
+ 
+ 
+30.77
+x
+ 
+ 
+103.20
+%
+ 
+ 
+103.20
+%
+
+Minimum
+
+ 
+ 
+24.34
+ 
+ 
+ 
+88.26
+ 
+ 
+ 
+88.26
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Valuation
+ of peer group companies as of September 14, 2007:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Average
+
+ 
+ 
+18.90
+x
+ 
+ 
+129.19
+%
+ 
+ 
+145.75
+%
+
+Median
+
+ 
+ 
+14.80
+ 
+ 
+ 
+128.49
+ 
+ 
+ 
+133.67
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+The board
+ of directors of new Home Federal Bancorp reviewed the independent valuation and,
+ in particular, considered the following:
+
+ 
+ 
+ 
+Home Federal
+ Bank s financial condition and results of operations;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+comparison
+ of financial performance ratios of Home Federal Bank to those of other financial
+ institutions of similar size; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+market conditions
+ generally and, in particular, for financial institutions.
+
+All of these
+ factors are set forth in the independent valuation. The board of directors also
+ reviewed the methodology and the assumptions used by RP Financial in preparing the
+ independent valuation and believes that such assumptions were reasonable. The offering
+ range may be amended with the approval of the Office of Thrift Supervision, if required,
+ as a result of subsequent developments in the financial condition of Home Federal
+ Bancorp or Home Federal Bank or market conditions generally.
+
+The independent
+ valuation is not intended, and must not be construed, as a recommendation of any
+ kind as to the advisability of purchasing shares of our common stock. RP Financial,
+ LC did not independently verify our consolidated financial statements and other
+ information that we provided to them, nor did RP Financial, LC independently value
+ our assets or liabilities. The independent valuation considers Home
+
+153
+
+Federal
+ Bank as a going concern and should not be considered as an indication of the liquidation
+ value of Home Federal Bank. Moreover, because the valuation is necessarily based
+ upon estimates and projections of a number of matters, all of which may change from
+ time to time, no assurance can be given that persons purchasing our common stock
+ in the offering will thereafter be able to sell their shares at prices at or above
+ the $10.00 offering price per share. 
+
+Following
+ commencement of the subscription offering, the maximum of the valuation range may
+ be increased by up to 15%, or up to $269.2 million, without resoliciting subscribers,
+ which will result in a corresponding increase of up to 15% in the maximum of the
+ offering range to up to 15,870,000 shares, to reflect changes in the market and
+ financial conditions or demand for the shares. We will not decrease the minimum
+ of the valuation range and the minimum of the offering range without a resolicitation
+ of subscribers. The subscription price of $10.00 per share will remain fixed. See
+ Limitations on Common Stock Purchases as to the method of distribution
+ and allocation of additional shares that may be issued in the event of an increase
+ in the offering range to fill unfilled orders in the offering.
+
+If the update
+ to the independent valuation at the conclusion of the offering results in an increase
+ in the maximum of the valuation range to more than $269.2 million and a corresponding
+ increase in the offering range to more than 15,870,000 shares, or a decrease in
+ the minimum of the valuation range to less than $173.0 million and a corresponding
+ decrease in the offering range to fewer than 10,200,000 shares, then, with regulatory
+ approval, we may terminate the offering and promptly return, with interest at Home
+ Federal Bank s passbook savings rate, all funds previously delivered to us
+ to purchase shares of common stock and cancel deposit account withdrawal authorizations,
+ and, after consulting with the Office of Thrift Supervision, we may terminate the
+ plan of conversion and reorganization and the stock offering. Alternatively, we
+ may establish a new offering range and extend the offering period and commence a
+ resolicitation of subscribers or take other actions as permitted by the Office of
+ Thrift Supervision in order to complete the conversion and the offering. In the
+ event that a resolicitation is commenced, we will notify subscribers of the extension
+ of time and of the rights of subscribers to confirm, change or cancel their stock
+ orders for a specified resolicitation period. If a subscriber does not respond,
+ we will cancel the stock order and return funds, as described above. Any resolicitation
+ following the conclusion of the subscription and community offerings would not exceed
+ 45 days.
+
+An increase
+ in the number of shares to be issued in the offering would decrease both a subscriber s ownership interest and new Home Federal Bancorp s pro forma earnings
+ and stockholders equity on a per share basis while increasing pro forma earnings
+ and stockholders equity on an aggregate basis. A decrease in the number of
+ shares to be issued in the offering would increase both a subscriber s ownership
+ interest and Home Federal Bancorp s pro forma earnings and stockholders 
+ equity on a per share basis, while decreasing pro forma earnings and stockholders equity on an aggregate basis. For a presentation of the effects of these changes,
+ see Pro Forma Data. 
+
+Copies of
+ the appraisal report of RP Financial, including any amendments, and the detailed
+ report of the appraiser setting forth the method and assumptions for the appraisal
+ are available for inspection at the office of Home Federal Bank and as specified
+ under Where You Can Find More Information. In addition, the appraisal
+ report is an exhibit to the registration statement of which this prospectus is a
+ part. The registration statement is available on the SEC s website (http://www.sec.gov).
+
+Subscription Offering and Subscription
+ Rights
+
+Under the
+ plan of conversion and reorganization, rights to subscribe for the purchase of common
+ stock have been granted to the following persons in the following order of descending
+ priority:
+
+ 
+ 
+ 
+depositors
+ of Home Federal Bank with account balances of at least $50.00 as of the close of
+ business on March 31, 2006 ( Eligible Account Holders );
+
+ 
+
+ 
+ 
+ 
+the Home Federal
+ Bancorp employee stock ownership plan ( Tax-Qualified Employee Stock Benefit
+ Plans );
+
+154
+
+ 
+ 
+ 
+depositors
+ of Home Federal Bank with account balances of at least $50.00 as of the close of
+ business on September 30, 2007 ( Supplemental Eligible Account Holders );
+ and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+depositors
+ of Home Federal Bank, as of the close of business on _______ __, 2007, other than
+ Eligible Account Holders or Supplemental Eligible Account Holders and borrowers
+ as of March 16, 2004 ( Other Members ).
+
+All subscriptions
+ received will be subject to the availability of common stock after satisfaction
+ of all subscriptions of all persons having prior rights in the subscription offering
+ and to the maximum and minimum purchase limitations set forth in the plan of conversion
+ and reorganization and as described below under Limitations on Stock
+ Purchases. 
+
+Preference
+ Category No. 1: Eligible Account Holders. Each Eligible
+ Account Holder shall receive, without payment, first priority, nontransferable subscription
+ rights to subscribe for shares of common stock in an amount equal to the greater
+ of:
+
+ 
+ 
+ 
+ 
+
+ 
+(1)
+ 
+5% of the
+ shares of common stock sold in the offering;
+
+ 
+ 
+ 
+ 
+
+ 
+(2)
+ 
+one-tenth
+ of one percent of the total offering of shares of common stock; or
+
+ 
+ 
+ 
+ 
+
+ 
+(3)
+ 
+15 times the
+ product (rounded down to the next whole number) obtained by multiplying the total
+ number of shares of common stock to be issued by a fraction, of which the numerator
+ is the amount of the qualifying deposit of the Eligible Account Holder and the denominator
+ is the total amount of qualifying deposits of all Eligible Account Holders in Home
+ Federal Bank in each case on the close of business on March 31, 2006 (the Eligibility
+ Record Date ), subject to the overall purchase limitations.
+
+See Limitations on Stock Purchases. 
+
+If there are
+ not sufficient shares available to satisfy all subscriptions, shares first will
+ be allocated among subscribing Eligible Account Holders so as to permit each such
+ Eligible Account Holder, to the extent possible, to purchase a number of shares
+ sufficient to make his total allocation equal to the lesser of the number of shares
+ subscribed for or 100 shares. Thereafter, any shares remaining will be allocated
+ among the subscribing Eligible Account Holders whose subscriptions remain unfilled
+ pro rata in the proportion that the amounts of their respective qualifying deposits
+ bear to the total amount of qualifying deposits of all subscribing Eligible Account
+ Holders whose subscriptions remain unfilled. For example, if an Eligible Account
+ Holder with an unfilled subscription has qualifying deposits totaling $100, and
+ the total amount of qualifying deposits for Eligible Account Holders with unfilled
+ subscriptions was $1,000, then the number of shares that may be allocated to fill
+ this Eligible Account Holder s subscription would be 10% of the shares remaining
+ available, up to the amount subscribed for.
+
+To ensure
+ proper allocation of stock, each Eligible Account Holder must list on his or her
+ subscription order form all accounts in which he or she has an ownership interest.
+ Failure to list an account could result in fewer shares being allocated than if
+ all accounts had been disclosed. The subscription rights of Eligible Account Holders
+ who are also directors or officers of Home Federal Bank or their associates will
+ be subordinated to the subscription rights of other Eligible Account Holders to
+ the extent attributable to increased deposits in the year preceding March 31, 2006.
+
+Preference
+ Category No. 2: Tax-Qualified Employee Stock Benefit Plans. The plan of conversion and reorganization provides that each Tax-Qualified
+ Employee Stock Benefit Plan, including the Home Federal Bancorp employee stock ownership
+ plan, shall receive nontransferable subscription rights to purchase up to 10% of
+ the common stock sold in the offering, provided that individually or in the aggregate
+ these plans (other than that portion of these plans which is self-directed) shall
+ not purchase more than 10% of the shares of common stock, including any increase
+ in the number of shares of common stock after the date hereof as a result of an
+ increase of up to 15% in the
+
+155
+
+maximum of the estimated valuation range.
+ The proposed employee stock ownership plan intends to purchase 8% of the shares
+ of common stock sold in the offering, or 816,000 shares and 1,104,000 shares based
+ on the minimum and maximum of the estimated offering range, respectively, which,
+ when combined with the existing shares held by the employee stock ownership plan,
+ will be less than 8% of the shares outstanding following the conversion as required
+ by Office of Thrift Supervision regulations. Subscriptions by the Tax-Qualified
+ Employee Stock Benefit Plans will not be aggregated with shares of common stock
+ purchased directly by or which are otherwise attributable to any other participants
+ in the subscription and direct community offerings, including subscriptions of any
+ of Home Federal Bank s directors, officers, employees or associates thereof.
+ Subscription rights received pursuant to this category shall be subordinated to
+ all rights received by Eligible Account Holders to purchase shares pursuant to Preference
+ Category No. 1; provided, however, that notwithstanding any other provisions of
+ the plan of conversion and reorganization to the contrary, the Tax-Qualified Employee
+ Stock Benefit Plans shall have a first priority subscription right to the extent
+ that the total number of shares of common stock sold in the stock offering exceeds
+ the maximum of the estimated offering. If the total number of shares offered in
+ the stock offering is increased to an amount greater than then number of shares
+ representing the maximum of the estimated valuation range to be sold to the public,
+ each Tax-Qualified Employee Stock Benefit Plan will have a priority right to purchase
+ up to 8% of the shares exceeding the maximum of the estimated offering range, up
+ to an aggregate of 10% of the common stock sold in the conversion. If the employee
+ stock ownership plan s subscription is not filled in its entirety, the plan
+ may, with the approval of the Office of Thrift Supervision, purchase shares in the
+ open market. See Management Benefits to Be Considered Following Completion
+ of the Conversion and Reorganization Employee Stock Ownership Plan. 
+
+Preference
+ Category No. 3: Supplemental Eligible Account Holders.
+ To the extent that there are sufficient shares remaining after satisfaction of subscriptions
+ by Eligible Account Holders and the Tax-Qualified Employee Stock Benefit Plans,
+ each Supplemental Eligible Account Holder shall be entitled to receive, without
+ payment therefore, third priority, nontransferable subscription rights to subscribe
+ for shares of common stock in an amount equal to the greater of:
+
+ 
+(1)
+ 
+5% of the
+ shares of common stock sold in the offering;
+
+ 
+ 
+ 
+ 
+
+ 
+(2)
+ 
+one-tenth
+ of one percent of the total offering of shares of common stock; or
+
+ 
+ 
+ 
+ 
+
+ 
+(3)
+ 
+15 times the
+ product (rounded down to the next whole number) obtained by multiplying the total
+ number of shares of common stock to be issued by a fraction, of which the numerator
+ is the amount of the qualifying deposit of the Supplemental Eligible Account Holder
+ and the denominator is the total amount of qualifying deposits of all Supplemental
+ Eligible Account Holders in Home Federal Bank in each case on the close of business
+ on September 30, 2007 (the Supplemental Eligibility Record Date ), subject
+ to the overall purchase limitations.
+
+See Limitations on Stock Purchases. 
+
+If there are
+ not sufficient shares available to satisfy all subscriptions of all Supplemental
+ Eligible Account Holders, available shares first will be allocated among subscribing
+ Supplemental Eligible Account Holders so as to permit each such Supplemental Eligible
+ Account Holder, to the extent possible, to purchase a number of shares sufficient
+ to make his total allocation (including the number of shares, if any, allocated
+ in accordance with Category No. 1) equal to the lesser of the number of shares subscribed
+ for or 100 shares. Thereafter, any shares remaining available will be allocated
+ among the Supplemental Eligible Account Holders whose subscriptions remain unfilled
+ pro rata in the proportion that the amounts of their respective qualifying deposits
+ bear to the total amount of qualifying deposits of all subscribing Supplemental
+ Eligible Account Holders whose subscriptions remain unfilled.
+
+Preference
+ Category No. 4: Other Members. To the extent that there are
+ sufficient shares remaining after satisfaction of subscriptions by Eligible Account
+ Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible
+ Account Holders, each Other Member shall receive, without payment therefore, fourth
+ priority, nontransferable subscription rights to subscribe for shares of new Home
+ Federal Bancorp common stock, up to the greater of:
+
+156
+
+ 
+(1)
+ 
+5% of the
+ shares of common stock sold in the offering; or
+
+ 
+ 
+ 
+ 
+
+ 
+(2)
+ 
+one-tenth
+ of one percent of the total offering of shares of common stock in the offerings,
+ subject to the overall purchase limitations.
+
+ 
+ 
+ 
+ 
+
+See Limitations on Stock
+ Purchases. 
+
+In the event
+ the Other Members subscribe for a number of shares which, when added to the shares
+ subscribed for by Eligible Account Holders, the Tax-Qualified Employee Stock Benefit
+ Plans and Supplemental Eligible Account Holders, is in excess of the total number
+ of shares of common stock offered in the conversion, available shares will be allocated
+ among the subscribing Other Members pro rata on the basis of the amounts of their
+ respective subscriptions.
+
+Expiration
+ Date for the Subscription Offering. The subscription offering will expire at
+ 12:00 Noon, Mountain time, on ________ __, 2007, unless extended for the full 45
+ day period and may be extended an additional 45 days to ________ __, 2008 without
+ the approval of the Office of Thrift Supervision. Any further extensions of the
+ subscription offering must be approved by the Office of Thrift Supervision. The
+ subscription offering may not be extended beyond _________ __, 2009. Subscription
+ rights which have not been exercised prior to _________ __, 2008 (unless extended)
+ will become void.
+
+New Home Federal
+ Bancorp and Home Federal Bank will not execute orders until at least the minimum
+ number of shares of common stock, 10,200,000 shares, have been subscribed for or
+ otherwise sold. If all shares have not been subscribed for or sold by ________ __,
+ 2007, unless this period is extended with the consent of the Office of Thrift Supervision,
+ all funds delivered to Home Federal Bank pursuant to the subscription offering will
+ be returned promptly to the subscribers with interest and all withdrawal authorizations
+ will be canceled. If an extension beyond ________ __, 2008 is granted, new Home
+ Federal Bancorp and Home Federal Bank will notify subscribers of the extension of
+ time and of any rights of subscribers to confirm, modify or rescind their subscriptions.
+ This is commonly referred to as a resolicitation offering. 
+
+In a resolicitation
+ offering, new Home Federal Bancorp would mail you a supplement to this prospectus
+ if you subscribed for stock to let you confirm, modify or cancel your subscription.
+ If you fail to respond to the resolicitation offering, it would be as if you had
+ canceled your order and all subscription funds, together with accrued interest,
+ would be returned to you. If you authorized payment by withdrawal of funds on deposit
+ at Home Federal Bank, that authorization would terminate. If you affirmatively confirm
+ your subscription order during the resolicitation offering, new Home Federal Bancorp
+ and Home Federal Bank would continue to hold your subscription funds until the end
+ of the resolicitation offering. Your resolicitation order would be irrevocable without
+ the consent of new Home Federal Bancorp and Home Federal Bank until the conversion
+ is completed or terminated.
+
+Direct Community Offering
+
+To the extent
+ that shares remain available for purchase after satisfaction of all subscription
+ rights discussed above, we anticipate offering shares pursuant to the plan of conversion
+ and reorganization to members of the general public who receive a prospectus, with
+ a preference given to natural persons residing in Ada, Canyon, Elmore, and Gem Counties.
+ These natural persons are referred to as preferred subscribers. We may limit total
+ subscriptions in the direct community offering to ensure that the number of shares
+ available for the syndicated community offering may be up to a specified percentage
+ of the number of shares of common stock. Finally, we may reserve shares offered
+ in the direct community offering for sales to institutional investors. The opportunity
+ to subscribe for shares of common stock in any direct community offering will be
+ subject to our right, in our sole discretion, to accept or reject any such orders
+ either at the time of receipt of an order or as soon as practicable following _________
+ __, 2007. The direct community offering, if any, will begin at the same time as,
+ during or promptly after the subscription offering and will not be for more than
+ 45 days after the end of the subscription offering.
+
+157
+
+The price
+ at which common stock is sold in the direct community offering will be the same
+ price at which shares are offered and sold in the subscription offering. No person,
+ by himself or herself, or with an associate or group of persons acting in concert,
+ may purchase more than $4.0 million of common stock in the direct community offering,
+ subject to the maximum purchase limitations. See Limitations on Stock
+ Purchases. In the event of an oversubscription for shares in the direct community
+ offering, shares may be allocated, to the extent shares remain available, on a pro
+ rata basis to such person based on the amount of their respective subscriptions.
+
+Syndicated Community Offering
+
+As a final
+ step in the conversion, the plan of conversion and reorganization provides that,
+ if feasible, all shares of common stock not purchased in the subscription offering
+ and direct community offering may be offered for sale to selected members of the
+ general public in a syndicated community offering through a syndicate of registered
+ broker-dealers managed by Keefe, Bruyette Woods as agent of Home Federal
+ Bancorp. We call this the syndicated community offering. We expect that the syndicated
+ community offering will begin as soon as practicable after termination of the subscription
+ offering and the direct community offering, if any. We, in our sole discretion,
+ have the right to reject orders in whole or in part received in the syndicated community
+ offering. Neither Keefe, Bruyette Woods nor any registered broker-dealer
+ shall have any obligation to take or purchase any shares of common stock in the
+ syndicated community offering; however, Keefe, Bruyette Woods has agreed
+ to use its best efforts in the sale of shares in any syndicated community offering.
+
+The price
+ at which common stock is sold in the syndicated community offering will be the same
+ price at which shares are offered and sold in the subscription offering and direct
+ community offering. No person, acting alone, or with an associate or group of persons
+ acting in concert, may purchase more than $4.0 million of common stock in the syndicated
+ community offering, subject to the maximum purchase limitations. See 
+ Limitations on Stock Purchases. 
+
+Keefe, Bruyette Woods may enter into
+ agreements with broker-dealers to assist in the sale of the shares in the syndicated
+ community offering, although no such agreements currently exist. No orders may be
+ placed or filled by or for a selected dealer during the subscription offering. After
+ the close of the subscription offering, Keefe, Bruyette Woods will instruct
+ selected dealers as to the number of shares to be allocated to each dealer. Only
+ after the close of the subscription offering and upon allocation of shares to selected
+ dealers may selected dealers take orders from their customers. During the subscription
+ offering and direct community offering, selected dealers may only solicit indications
+ of interest from their customers to place orders as of a certain order date for
+ the purchase of shares of new Home Federal Bancorp common stock. When, and if, Keefe,
+ Bruyette Woods and Home Federal Bank believe that enough indications of interest
+ and orders have not been received in the subscription offering and direct community
+ offering to consummate the conversion, Keefe, Bruyette Woods will request,
+ as of the order date, selected dealers to submit orders to purchase shares for which
+ they have previously received indications of interest from their customers. The
+ dealers will send confirmations of the orders to their customers on the next business
+ day after the order date. The dealers will debit the accounts of their customers
+ on the settlement date, which will be three business days from the order date. Customers
+ who authorize selected dealers to debit their brokerage accounts are required to
+ have the funds for payment in their account on but not before the settlement date.
+ On the settlement date, the dealers will deposit funds to the account established
+ by Home Federal Bank for each dealer. Each customer s funds forwarded to Home
+ Federal Bank, along with all other accounts held in the same title, will be insured
+ by the Federal Deposit Insurance Corporation up to $100,000 in accordance with applicable
+ Federal Deposit Insurance Corporation regulations. After payment has been received
+ by Home Federal Bank from the dealers, funds will earn interest at Home Federal
+ Bank s regular savings account rate until the completion or termination of
+ the conversion. Funds will be promptly returned, with interest, in the event the
+ conversion is not consummated as described above. Notwithstanding the foregoing,
+ any checks received by Keefe, Bruyette Woods or any selected dealer specifically
+ for payment for the shares will be forwarded to Home Federal Bank by noon of the
+ day following receipt for deposit to the account established by Home Federal Bank
+ for each dealer. Keefe, Bruyette Woods shall also have the right, in its
+ sole discretion, to permit investors to submit irrevocable orders together with
+ legally binding commitments for payment for shares for which they subscribe at any
+ time prior to the closing of the offering.
+
+158
+
+The syndicated
+ community offering will be completed within 45 days after the termination of the
+ subscription offering, unless extended by Home Federal Bank with the approval of
+ the Office of Thrift Supervision. The syndicated community offering may not be extended
+ past _________ __, 2009. See How We Determined Our Price and the Number
+ of Shares to Be Issued in the Stock Offering above for a discussion of rights
+ of subscribers, if any, in the event an extension is granted.
+
+Persons Who Are Not Permitted to Participate
+ in the Stock Offering
+
+We will make
+ reasonable efforts to comply with the securities laws of all states in the United
+ States in which persons entitled to subscribe for stock pursuant to the plan of
+ conversion and reorganization reside. However, we are not required to offer stock
+ in the subscription offering to any person who resides in a foreign country or resides
+ in a state of the United States with respect to which:
+
+ 
+ 
+ 
+the number
+ of persons otherwise eligible to subscribe for shares under the plan of conversion
+ and reorganization who reside in such state is small;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the granting
+ of subscription rights or the offer or sale of shares of common stock to such persons
+ would require any of us or our officers, directors or employees, under the laws
+ of such state to register as a broker, dealer, salesperson or selling agent or to
+ register or otherwise qualify the securities of new Home Federal Bancorp for sale
+ in such state; or
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+such registration,
+ qualification or filing in our judgment would be impracticable or unduly burdensome
+ for reasons of cost or otherwise.
+
+Where the number of persons eligible to
+ subscribe for shares in one state is small, we will base our decision as to whether
+ or not to offer the common stock in that state on a number of factors, including
+ but not limited to the size of accounts held by account holders in the state, the
+ cost of registering or qualifying the shares or the need to register us or our officers,
+ directors or employees as brokers, dealers or salespersons.
+
+Limitations on Stock Purchases
+
+The plan of
+ conversion and reorganization includes the following limitations on the number of
+ shares of new Home Federal Bancorp common stock which may be purchased in the conversion:
+
+ 
+(1)
+ 
+No fewer than
+ 25 shares of common stock may be purchased, to the extent shares are available;
+
+ 
+ 
+ 
+ 
+
+ 
+(2)
+ 
+Each Eligible
+ Account Holder may subscribe for and purchase in the subscription offering up to
+ the greater of:
+
+ 
+(a)
+ 
+5% of the
+ shares of common stock sold in the offering;
+
+ 
+ 
+ 
+ 
+
+ 
+(b)
+ 
+one-tenth
+ of one percent of the total offering of shares of common stock; or
+
+ 
+ 
+ 
+ 
+
+ 
+(c)
+ 
+15 times the
+ product (rounded down to the next whole number) obtained by multiplying the total
+ number of shares of common stock to be issued by a fraction, of which the numerator
+ is the amount of the qualifying deposit of the Eligible Account Holder and the denominator
+ is the total amount of qualifying deposits of all Eligible Account Holders in Home
+ Federal Bank in each case as of the close of business on the Eligibility Record
+ Date, subject to the overall limitation in clause (7) below;
+
+ 
+(3)
+ 
+The Tax-Qualified
+ Employee Stock Benefit Plans, including the employee stock ownership plan, may purchase
+ in the aggregate up to 10% of the shares of common stock issued in the conversion,
+ and including any additional shares issued in the event of an increase in the estimated
+ offering
+
+159
+
+ 
+ 
+ 
+range; at this time the employee stock ownership plan intends to purchase
+ only 8% of such shares which, when combined with the existing shares held by the
+ employee stock ownership plan, will be less than 8% of the shares outstanding following
+ the conversion as required by Office of Thrift Supervision regulations;
+
+ 
+ 
+ 
+ 
+
+ 
+(4)
+ 
+Each Supplemental
+ Eligible Account Holder may subscribe for and purchase in the subscription offering
+ up to the greater of:
+
+ 
+(a)
+ 
+5% of the
+ shares of common stock sold in the offering;
+
+ 
+ 
+ 
+ 
+
+ 
+(b)
+ 
+one-tenth
+ of one percent of the total offering of shares of common stock; or
+
+ 
+ 
+ 
+ 
+
+ 
+(c)
+ 
+15 times the
+ product (rounded down to the next whole number) obtained by multiplying the total
+ number of shares of common stock to be issued by a fraction, of which the numerator
+ is the amount of the qualifying deposit of the Supplemental Eligible Account Holder
+ and the denominator is the total amount of qualifying deposits of all Supplemental
+ Eligible Account Holders in Home Federal Bank in each case as of the close of business
+ on the Supplemental Eligibility Record Date, subject to the overall limitation in
+ clause (7) below;
+
+ 
+(5)
+ 
+Each Other
+ Member may subscribe for and purchase in the subscription offering up to the greater
+ of:
+
+ 
+(a)
+ 
+5% of the
+ shares of common stock sold in the offering; or
+
+ 
+ 
+ 
+ 
+
+ 
+(b)
+ 
+one-tenth
+ of one percent of the total offering of shares of common stock, subject to the overall
+ limitation in clause (7) below;
+
+ 
+(6)
+ 
+Persons purchasing
+ shares of common stock in the direct community offering or syndicated community
+ offering may purchase in the direct community offering or syndicated community offering
+ up to 5% of the shares of common stock sold in the offering, subject to the overall
+ limitation in clause (7) below; and
+
+ 
+ 
+ 
+ 
+
+ 
+(7)
+ 
+Except for
+ the Tax-Qualified Employee Stock Benefit Plans, and the Eligible Account Holders
+ and Supplemental Eligible Account Holders whose subscription rights are based upon
+ the amount of their deposits, as a result of (2)(c) and (4)(c) above the maximum
+ number of shares of Home Federal Bancorp common stock subscribed for or purchased
+ in all categories of the offerings by any person, together with associates of and
+ groups of persons acting in concert with such persons, shall not exceed 5% of the
+ shares of common stock sold in the offering.
+
+In addition
+ to the above purchase limitations, there is an ownership limitation for stockholders
+ other than our employee stock ownership plan. Shares of common stock that you purchase
+ in the offering individually and together with persons described above, plus
+ any shares you and they receive in exchange for existing shares of Home Federal
+ Bancorp common stock, may not exceed 5% of the total shares of common stock to be
+ issued and outstanding after the completion of the conversion.
+
+Subject to
+ any required Office of Thrift Supervision or other regulatory approval and the requirements
+ of applicable laws and regulations, but without further approval of the members
+ of Home Federal MHC or the stockholders of Home Federal Bancorp, the boards of directors
+ of new Home Federal Bancorp and Home Federal Bank may, in their sole discretion,
+ increase the individual amount permitted to be subscribed for to a maximum of 9.99%
+ of the number of shares sold in the conversion, provided that orders for shares
+ exceeding 5% of the shares being offered in the conversion shall not exceed, in
+ the aggregate, 10% of the shares being offered in the conversion.
+
+160
+
+Requests to purchase
+ additional shares of common stock will be allocated by the boards of directors on
+ a pro rata basis giving priority in accordance with the preference categories set
+ forth in this prospectus.
+
+The term associate when used to indicate a relationship with any person means:
+
+ 
+ 
+ 
+any corporation
+ or organization (other than Home Federal Bank, Home Federal Bancorp, Home Federal
+ MHC or a majority-owned subsidiary of any of them) of which such person is an officer
+ or partner or is directly or indirectly the beneficial owner of 10% or more of any
+ class of equity securities;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+any trust
+ or other estate in which such person has a substantial beneficial interest or as
+ to which such person serves as trustee or in a similar fiduciary capacity;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+any relative
+ or spouse of such person, or any relative of such spouse, who has the same home
+ as such person or who is a director or officer of Home Federal Bank, Home Federal
+ Bancorp, Home Federal MHC or any subsidiary of Home Federal Bank, Home Federal Bancorp,
+ Home Federal MHC; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+any person
+ acting in concert with any of the persons or entities specified above;
+
+provided, however, that Tax-Qualified Employee
+ Plans shall not be deemed to be an associate of any director or officer of Home
+ Federal Bank, Home Federal Bancorp, Home Federal MHC. When used to refer to a person
+ other than an officer or director of Home Federal Bank, the board of directors of
+ Home Federal Bank or officers delegated by the board of directors in their sole
+ discretion may determine the persons that are associates of other persons.
+
+The term acting in concert means
+ knowing participation in a joint activity or parallel action towards a common goal
+ whether or not pursuant to an express agreement, or a combination or pooling of
+ voting or other interests in the securities of an issuer for a common purpose pursuant
+ to any arrangement. A person or company which acts in concert with another person
+ or company shall also be deemed to be acting in concert with any person or company
+ who is also acting in concert with that other party, except that the Tax-Qualified
+ Employee Stock Benefit Plans will not be deemed to be acting in concert with their
+ trustees or a person who serves in a similar capacity solely for the purpose of
+ determining whether stock held by the trustee and stock held by each plan will be
+ aggregated. The determination of whether a group is acting in concert shall be made
+ solely by the board of directors of Home Federal Bank or officers delegated by the
+ board of directors and may be based on any evidence upon which the board or delegatee
+ chooses to rely.
+
+Marketing Arrangements
+
+We have retained
+ Keefe, Bruyette Woods to consult with and to advise Home Federal Bank, and
+ to assist new Home Federal Bancorp, on a best efforts basis, in the distribution
+ of the shares of common stock in the subscription offering and direct community
+ offering. The services that Keefe, Bruyette Woods will provide include:
+
+ 
+ 
+ 
+training the
+ employees of Home Federal Bank who will perform certain ministerial functions in
+ the offering regarding the mechanics and regulatory requirements of the stock offering
+ process;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+managing the
+ stock information center by assisting interested stock subscribers and by keeping
+ records of all stock orders;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+preparing
+ marketing materials; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+assisting
+ in the solicitation of proxies from Home Federal Bank s members for use at
+ the special meeting.
+
+161
+
+For its services,
+ Keefe, Bruyette Woods will receive a management fee of $50,000 and a success
+ fee of 1.0% of the aggregate purchase price, less any shares of common stock sold
+ to our directors, officers and employees (or members of their immediate family)
+ and the Tax-Qualified Employee Stock Benefit Plans. If selected dealers are used
+ to assist in the sale of shares of new Home Federal Bancorp common stock in the
+ direct community offering, these dealers will be paid a fee of up to 5.5% of the
+ total purchase price of the shares sold by the dealers. We have agreed to indemnify
+ Keefe, Bruyette Woods against certain claims or liabilities, including certain
+ liabilities under the Securities Act of 1933, as amended, and will contribute to
+ payments Keefe, Bruyette Woods may be required to make in connection with
+ any such claims or liabilities. In addition, Keefe, Bruyette Woods will be
+ reimbursed for the fees of its legal counsel in an amount not to exceed $50,000
+ and other reimbursable out-of-pocket expenses
+of such counsel
+not to exceed $5,000
+and other reimbursable out-of-pocket expenses not to exceed $30,000.
+
+Sales of shares
+ of new Home Federal Bancorp common stock will be made by registered representatives
+ affiliated with Keefe, Bruyette Woods or by the broker-dealers managed by
+ Keefe, Bruyette Woods. Keefe, Bruyette Woods has undertaken that the
+ shares of Home Federal Bancorp common stock will be sold in a manner which will
+ ensure that the distribution standards of the Nasdaq Stock Market will be met. A
+ stock information center will be established at Home Federal Bank s corporate
+ office located at 500 12th Avenue South, Nampa, Idaho. New Home Federal
+ Bancorp will rely on Rule 3a4-1 of the Securities Exchange Act of 1934 and sales
+ of new Home Federal Bancorp common stock will be conducted within the requirements
+ of this rule, so as to permit officers, directors and employees to participate in
+ the sale of new Home Federal Bancorp common stock in those states where the law
+ permits. No officer, director or employee of new Home Federal Bancorp or Home Federal
+ Bank will be compensated directly or indirectly by the payment of commissions or
+ other remuneration in connection with his or her participation in the sale of common
+ stock.
+
+Procedure for Purchasing Shares in the
+ Subscription Offering
+
+To ensure that each purchaser receives a
+ prospectus at least 48 hours before _______ __, 2007, the subscription expiration
+ date, unless extended, in accordance with Rule 15c2-8 of the Securities Exchange
+ Act of 1934, no prospectus will be mailed any later than five days prior to that
+ date or hand delivered any later than two days prior to that date. Execution of
+ the order form will confirm receipt or delivery in accordance with Rule 15c2-8.
+ Order forms will only be distributed with a prospectus.
+
+To purchase
+ shares in the subscription offering, an executed order form with the required payment
+ for each share subscribed for, or with appropriate authorization for withdrawal
+ from a deposit account at Home Federal Bank must be received by Home Federal Bank
+ by 12:00 Noon, Mountain time, on _______ __, 2007, unless extended. In addition,
+ new Home Federal Bancorp and Home Federal Bank will require a prospective purchaser
+ to execute a certification in the form required by the Office of Thrift Supervision.
+ Order forms which are not received by this time or are executed defectively or are
+ received without full payment, or appropriate withdrawal instructions, are not required
+ to be accepted. In addition, Home Federal Bank will not accept orders submitted
+ on photocopied or facsimiled order forms nor order forms without an executed certification.
+ Home Federal Bank has the right to waive or permit the correction of incomplete
+ or improperly executed forms, but does not represent that it will do so. Once received,
+ an executed order form may not be modified, amended or rescinded without the consent
+ of Home Federal Bank, unless the conversion has not been completed within 45 days
+ after the end of the subscription offering, or this period has been extended.
+
+In order to
+ ensure that Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans,
+ Supplemental Eligible Account Holders and Other Members are properly identified
+ as to their stock purchase priority, depositors as of the close of business on the
+ Eligibility Record Date, March 31, 2006, or the Supplemental Eligibility Record
+ Date, September 30, 2007, and depositors as of the close of business on the Voting
+ Record Date, _______ __, 2007, must list all accounts on the stock order form giving
+ all names in each account and the account numbers.
+
+162
+
+Payment for
+ subscriptions may be made:
+
+ 
+ 
+ 
+by check or
+ money order;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+by authorization
+ of withdrawal from deposit accounts maintained with Home Federal Bank (including
+ a certificate of deposit); or
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+in cash, if
+ delivered in person to any full-service banking office of Home Federal Bank, although
+ we request that you exchange cash for a check with any of our tellers.
+
+No wire transfers will be accepted. Funds
+ received before the completion of the conversion will be held in a segregated account
+ at the Home Federal Bank or, at our discretion, at an independent insured depository
+ institution. Interest will be paid on payments made by cash, check or money order
+ at our then-current passbook rate from the date payment is received until completion
+ of the conversion. If payment is made by authorization of withdrawal from deposit
+ accounts, the funds authorized to be withdrawn from a deposit account will continue
+ to accrue interest at the contractual rate, but may not be used by the subscriber
+ until all of new Home Federal Bancorp s common stock has been sold or the plan
+ of conversion and reorganization is terminated, whichever is earlier. If a subscriber
+ authorizes Home Federal Bank to withdraw the amount of the purchase price from his
+ or her deposit account, Home Federal Bank will do so as of the effective date of
+ the conversion. Home Federal Bank will waive any applicable penalties for early
+ withdrawal from certificate accounts.
+
+If any amount
+ of a subscription order is unfilled, Home Federal Bank will make an appropriate
+ refund or cancel an appropriate portion of the related withdrawal authorization,
+ after completion of the conversion. If the conversion is not consummated, purchasers
+ will have refunded to them all payments made, with interest, and all withdrawal
+ authorizations will be canceled in the case of subscription payments authorized
+ from accounts at Home Federal Bank.
+
+If any Tax-Qualified
+ Employee Stock Benefit Plans subscribe for shares during the subscription offering,
+ these plans will not be required to pay for the shares subscribed for at the time
+ they subscribe, but rather, may pay for shares of common stock subscribed for at
+ the purchase price upon completion of the subscription offering and direct community
+ offering, if all shares are sold, or upon completion of the syndicated community
+ offering if shares remain to be sold in such offering. If, after the completion
+ of the subscription offering, the amount of shares to be issued is increased above
+ the maximum of the estimated valuation range included in this prospectus, the Tax-Qualified
+ Employee Stock Benefit Plans will be entitled to increase their subscriptions by
+ a percentage equal to the percentage increase in the amount of shares to be issued
+ above the maximum of the estimated valuation range, provided that such subscription
+ will continue to be subject to applicable purchase limits and stock allocation procedures.
+
+You may subscribe
+ for shares of common stock using funds in your Individual Retirement Account at
+ Home Federal Bank or elsewhere. However, common stock must be held in a self-directed
+ retirement account. Home Federal Bank s IRAs are not self-directed, so they
+ cannot be invested in common stock. If you wish to use some or all of the funds
+ in your Home Federal Bank IRA, the applicable funds must be transferred to a self-directed
+ account reinvested by an independent trustee, such as a brokerage firm. If you do
+ not have such an account, you will need to establish one before placing your stock
+ order. An annual administrative fee may be payable to the independent trustee.
+Because individual circumstances differ and processing of retirement fund orders
+ takes additional time, we recommend that you contact the stock information center
+ promptly, preferably at least two weeks before the end of the offering period, for
+ assistance with purchases using you IRA or other retirement account that you may
+ have. Whether you may use such funds for the purchase of shares in the stock offering
+ may depend on timing constraints and possible limitations imposed by the institution
+ where the funds are held.
+
+The records
+ of Home Federal Bank will control all matters related to the existence of subscription
+ rights and/or one s ability to purchase shares of common stock in the subscription
+ offering.
+
+163
+
+Should an
+ oversubscription result in an allocation of shares, the allocation of shares will
+ be completed in accordance with the plan of conversion and reorganization. Our interpretation
+ of the terms and conditions of the plan of reorganization and of the acceptability
+ of the order form will be final. If a partial payment for your shares is required,
+ we will first take the funds from the cash or check you paid with and secondly from
+ any account from which you wanted funds withdrawn.
+
+Restrictions on Transfer of Subscription
+ Rights and Shares
+
+No person
+ with subscription rights may transfer or enter into any agreement or understanding
+ to transfer the legal or beneficial ownership of the subscription rights issued
+ under the plan of conversion and reorganization or the shares of common stock to
+ be issued upon their exercise. These rights may be exercised only by the person
+ to whom they are granted and only for that person s account. Each person exercising
+ subscription rights will be required to certify that the person is purchasing shares
+ solely for the person s own account and that such person has no agreement or
+ understanding regarding the sale or transfer of such shares. Regulations also prohibit
+ any person from offering or making an announcement of an offer or intent to make
+ an offer to purchase subscription rights or shares of common stock prior to the
+ completion of the conversion.
+
+Home Federal
+ Bank will refer to the Office of Thrift Supervision any situations that it believes
+ may involve a transfer of subscription rights and will not honor orders believed
+ by it to involve the transfer of such rights.
+
+Delivery and Exchange of Stock Certificates
+
+Subscription
+ Shares. Certificates representing shares subscribed for in connection with the
+ offering will be mailed by our transfer agent for the common stock to the persons
+ entitled thereto at the addresses of such persons appearing on the stock order form
+ for common stock as soon as practicable following completion of the conversion and
+ reorganization. Any certificates returned as undeliverable will be held by us until
+ claimed by persons legally entitled thereto or otherwise disposed of in accordance
+ with applicable law. Until certificates for shares are available and delivered to
+ subscribers, subscribers may not be able to sell such shares, even though trading
+ of the common stock of new Home Federal Bancorp may have commenced.
+
+Exchange
+ Shares. After completion of the conversion, each holder of a certificate or
+ certificates theretofore evidencing issued and outstanding shares of Home Federal
+ Bancorp common stock (other than Home Federal MHC), upon surrender of the same to
+ the exchange agent, which is anticipated to be the transfer agent for our common
+ stock, will receive a certificate or certificates representing the number of full
+ shares of new Home Federal Bancorp common stock for which the shares of the Home
+ Federal Bancorp common stock theretofore represented by the certificate or certificates
+ so surrendered shall have been converted based on the exchange ratio. The exchange
+ agent will promptly mail to each such holder of record of an outstanding certificate
+ which immediately prior to the consummation of the conversion and reorganization
+ evidenced shares of Home Federal Bancorp common stock, and which is to be exchanged
+ for new Home Federal Bancorp common stock based on the exchange ratio as provided
+ in the plan of conversion and reorganization, a form of letter of transmittal (which
+ shall specify that delivery shall be effected, and risk of loss and title to such
+ certificate shall pass, only upon delivery of such certificate to the exchange agent)
+ advising such holder of the terms of the exchange and of the procedure for surrendering
+ to the exchange agent such certificate in exchange for a certificate or certificates
+ evidencing new Home Federal Bancorp common stock. Home Federal Bancorp s stockholders
+ should not forward Home Federal Bancorp common stock certificates to Home Federal
+ Bank or the exchange agent until they have received the transmittal letter.
+
+No holder
+ of a certificate theretofore representing shares of Home Federal Bancorp common
+ stock will be entitled to receive any dividends in respect of the common stock into
+ which such shares shall have been converted until the certificate representing such
+ shares of Home Federal Bancorp common stock is surrendered in exchange for certificates
+ representing shares of new Home Federal Bancorp common stock. In the event that
+ we declare dividends after the conversion but prior to surrender of certificates
+ representing shares of Home Federal Bancorp common stock, dividends payable in respect
+ of shares of new Home Federal Bancorp common stock not then issued shall
+
+164
+
+accrue (without interest). Any such dividends
+ shall be paid (without interest) upon surrender of the certificates representing
+ such shares of Home Federal Bancorp common stock. We will be entitled, after the
+ completion of the conversion, to treat certificates representing shares of Home
+ Federal Bancorp common stock as evidencing ownership of the number of full shares
+ of new Home Federal Bancorp common stock into which the shares of Home Federal Bancorp
+ common stock represented by such certificates shall have been converted, notwithstanding
+ the failure on the part of the holder thereof to surrender such certificates.
+
+We will not
+ be obligated to deliver a certificate or certificates representing shares of new
+ Home Federal Bancorp common stock to which a holder of Home Federal Bancorp common
+ stock would otherwise be entitled as a result of the conversion until such holder
+ surrenders the certificate or certificates representing the shares of new Home Federal
+ Bancorp common stock for exchange as provided above, or, in default thereof, an
+ appropriate affidavit of loss and indemnity agreement and/or a bond as may be required
+ in each case by new Home Federal Bancorp. If any certificate evidencing shares of
+ common stock is to be issued in a name other than that in which the certificate
+ evidencing Home Federal Bancorp common stock surrendered in exchange therefor is
+ registered, it shall be a condition of the issuance thereof that the certificate
+ so surrendered shall be properly endorsed and otherwise in proper form for transfer
+ and that the person requesting such exchange pay to the exchange agent any transfer
+ or other tax required by reason of the issuance of a certificate for shares of common
+ stock in any name other than that of the registered holder of the certificate surrendered
+ or otherwise establish to the satisfaction of the Exchange Agent that such tax has
+ been paid or is not payable.
+
+Required Approvals
+
+In order to
+ complete the conversion and the exchange of shares , we will need to receive the approval of the Office of Thrift
+ Supervision. We also will need to have our members and stockholders approve the
+ plan of conversion and reorganization at special meetings, which will be called
+ for that purpose.
+
+Home Federal
+ Bancorp may be required to make certain filings with state securities regulatory
+ authorities in connection with the issuance of Home Federal Bancorp common stock
+ in the offerings.
+
+Restrictions on Purchase or Transfer
+ of Shares After the Conversion
+
+All shares
+ of common stock purchased in connection with the conversion by a director or an
+ executive officer of new Home Federal Bancorp and Home Federal Bank will be subject
+ to a restriction that the shares not be sold for a period of one year following
+ the conversion except in the event of the death of the director or officer or pursuant
+ to a merger or similar transaction approved by the Office of Thrift Supervision.
+ Each certificate for restricted shares will bear a legend giving notice of this
+ restriction, and instructions will be issued to the effect that any transfer within
+ the first year of any certificate or record ownership of the shares other than as
+ provided above is a violation of the restriction. Any shares of common stock issued
+ at a later date within this one year period as a stock dividend, stock split or
+ otherwise with respect to the restricted stock will be subject to the same restrictions.
+
+Purchases
+ of common stock of new Home Federal Bancorp by directors, executive officers and
+ their associates during the three-year period following completion of the conversion
+ may be made only through a broker or dealer registered with the Securities and Exchange
+ Commission, except with the prior written approval of the Office of Thrift Supervision.
+ This restriction does not apply, however, to negotiated transactions involving more
+ than 1% of new Home Federal Bancorp s outstanding common stock or to certain
+ purchases of stock pursuant to an employee stock benefit plan.
+
+For information
+ regarding the proposed purchases of common stock by officers and directors of Home
+ Federal Bank and new Home Federal Bancorp, see Proposed Purchases by Management. Any purchases made by the officers and directors of Home Federal Bank and
+ new Home Federal Bancorp are intended for investment purposes only, and not for
+ resale, including any purchases made for the purpose of meeting the minimum of the
+ offering range.
+
+165
+
+Pursuant to
+ regulations of the Office of Thrift Supervision, new Home Federal Bancorp may not,
+ for a period of one year following completion of this offering, repurchase shares
+ of the common stock except on a pro rata basis, pursuant to an offer approved by
+ the Office of Thrift Supervision and made to all stockholders, or through open market
+ purchases of up to five percent of the outstanding stock where extraordinary circumstances
+ exist.
+
+COMPARISON OF RIGHTS OF
+ NEW HOME FEDERAL BANCORP
+AND HOME FEDERAL BANCORP S STOCKHOLDERS
+
+As a result
+ of the conversion, current holders of Home Federal Bancorp common stock will become
+ stockholders of new Home Federal Bancorp. There are certain differences in stockholder
+ rights arising from distinctions between the federal stock charter and bylaws of
+ Home Federal Bancorp and the articles of incorporation and bylaws of new Home Federal
+ Bancorp and from distinctions between federal laws and regulations governing federally
+ chartered holding companies and Maryland corporate law.
+
+In some instances,
+ the rights of stockholders of new Home Federal Bancorp will be less than the rights
+ stockholders of Home Federal Bancorp currently have. The decrease in stockholders
+ rights under the Maryland articles of incorporation and bylaws are not mandated
+ by Maryland law but have been chosen by the board of directors as being in the best
+ interests of new Home Federal Bancorp In some instances, the differences in stockholder
+ rights may increase management rights. In other instances, these provisions in new
+ Home Federal Bancorp s articles of incorporation and bylaws described below
+ may make it more difficult to pursue a takeover attempt that management opposes.
+ These provisions may also make the removal of the board of directors or management,
+ or the appointment of new directors, more difficult. We believe that the provisions
+ described below are prudent and will reduce our vulnerability to takeover attempts
+ and certain other transactions that have not been negotiated with and approved by
+ our board of directors. These provisions also will assist us in the orderly deployment
+ of the proceeds of the stock offering into productive assets and allow us to implement
+ our business plan during the initial period after the conversion. We believe these
+ provisions are in the best interests of new Home Federal Bancorp and its stockholders.
+
+The following
+ discussion is not intended to be a complete statement of the differences affecting
+ the rights of stockholders, but does contain all material changes and summarizes
+ the more significant differences and certain important similarities. Please refer
+ to the articles of incorporation and bylaws of new Home Federal Bancorp and Maryland
+ law for additional information.
+
+Authorized Capital Stock
+
+The authorized
+ capital stock of new Home Federal Bancorp consists of 90,000,000 shares of common
+ stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
+ value $0.01 per share. The current authorized capital stock of Home Federal Bancorp
+ consists of 50,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
+ shares of preferred stock, par value $0.01 per share.
+
+Home Federal
+ Bancorp s charter and new Home Federal Bancorp, Inc. s articles of incorporation
+ both authorize the board of directors to establish one or more series of preferred
+ stock and, for any series of preferred stock, to determine the terms and rights
+ of the series, including voting rights, conversion rates and liquidation preferences.
+ Although neither board of directors has any intention at the present time of doing
+ so, it could issue a series of preferred stock that could, depending on its terms,
+ impede a merger, tender offer or other takeover attempt.
+
+The articles
+ of incorporation of new Home Federal Bancorp authorize the board of directors to
+ amend the articles to authorize additional shares of common and preferred stock
+ without stockholder approval. Although the board of directors ha no intention to
+ authorize additional shares at the present time, it could do so and issue additional
+ shares in a fashion that impedes a takeover attempt. In additional, the issuance
+ of additional common stock would dilute the ownership interests of then-existing
+ stockholders.
+
+166
+
+Issuance of Capital Stock
+
+Currently,
+ pursuant to applicable laws and regulations, Home Federal MHC is required to own
+ not less than a majority of the outstanding common stock of Home Federal Bancorp.
+ There will be no such restriction applicable to new Home Federal Bancorp following
+ consummation of the conversion, as Home Federal MHC will cease to exist.
+
+New Home Federal
+ Bancorp s articles of incorporation does not contain restrictions on the issuance
+ of shares of capital stock to the directors, officers or controlling persons of
+ new Home Federal Bancorp, whereas the current federal stock charter of Home Federal
+ Bancorp restricts such issuance to general public offerings, or if qualifying shares,
+ to directors, unless the share issuance or the plan under which they would be issue
+ has been approved by a majority of the total votes eligible to be cast at a legal
+ meeting. Thus, new Home Federal Bancorp could adopt stock-related compensation plans,
+ such as stock option plans, without stockholder approval and shares of the capital
+ stock of new Home Federal Bancorp could be issued director to directors or officers
+ without stockholder approval. However, the rules of the NASDAQ Stock Market, on
+ which the common stock of Home Federal Bancorp is currently listed and on which
+ the common stock of new Home Federal Bancorp will be listed, generally require stockholder
+ approval of most compensation plans for directors, officers and key employees of
+ the corporation. Moreover, although generally not required, stockholder approval
+ of stock-related compensation plans may be sought in certain instances to qualify
+ such plans for favorable treatment under current federal income tax laws and regulations.
+ We plan to submit the stock compensation plans discussed in this prospectus to stockholders
+ for their approval. In addition, the issuance of additional common stock would dilute
+ the ownership interests of then-existing stockholders.
+
+Neither the
+ federal stock charter and bylaws of Home Federal Bancorp nor the articles of incorporation
+ and bylaws of new Home Federal Bancorp provide for preemptive rights to stockholders
+ in connection with the issuance of capital stock.
+
+Voting Rights in Director Elections
+
+Neither the
+ federal stock charter and bylaws of Home Federal Bancorp nor the articles of incorporation
+ and bylaws of new Home Federal Bancorp permits cumulative voting in the election
+ of directors. Cumulative voting entitles you to as many votes as are equal to the
+ number of shares you hold, multiplied by the number of directors to be elected.
+ Cumulative voting allows you to cast all your votes for a single nominee or apportion
+ your votes among any two or more nominees. For example, when three directors are
+ to be elected, cumulative voting allows a holder of 100 shares to cast 300 votes
+ for a single nominee, apportion 100 votes for each nominee, or apportion 300 votes
+ in any other manner.
+
+Payment of Dividends
+
+The ability
+ of Home Federal Bank to pay dividends on its capital stock is restricted by Office
+ of Thrift Supervision regulations and by tax considerations related to federal savings
+ banks. Home Federal Bank will continue to be subject to these restrictions after
+ the conversion, and such restrictions will indirectly affect new Home Federal Bancorp
+ because dividends from Home Federal Bank will be a primary source of funds for the
+ payment of dividends to the stockholders of new Home Federal Bancorp.
+
+Maryland law
+ generally provides that, unless otherwise restricted in a corporation s charter,
+ a corporation s board of directors may authorize and a corporation may pay
+ dividends to stockholders. However, a distribution may not be made if, after giving
+ effect to the distribution:
+
+ 
+ 
+ 
+the corporation
+ would not be able to pay its debts as they become due in the usual course of business;
+ or
+
+167
+
+ 
+ 
+ 
+the total
+ assets of the corporation would be less than the sum of its total liabilities plus
+ (unless otherwise provided in its charter) the amount that would be needed, if the
+ corporation were to be dissolved at the time of the distribution, to satisfy the
+ preferential rights upon dissolution of stockholder whose preferential rights are
+ superior to those receiving the distribution.
+
+Board of Directors
+
+The federal
+ stock charter and bylaws of Home Federal Bancorp and the articles of incorporation
+ and bylaws of new Home Federal Bancorp each provide for the board of directors to
+ be divided into three classes as nearly equal in number as possible and that the
+ members of each class be elected for a term of three years (or, in the case of new
+ Home Federal Bancorp, for such shorter period of time as the board of directors
+ may determine) and until their successors are elected and qualified, with one class
+ being elected annually. Under both the bylaws of Home Federal Bancorp and the bylaws
+ of new Home Federal Bancorp, any vacancy occurring in the board of directors, however
+ caused, may be filled by an affirmative vote of the majority of the directors then
+ in office, whether or not a quorum is present. In the case of Home Federal Bancorp,
+ any director so chosen shall hold office only until the next annual meeting of stockholders
+ at which directors are elected; in the case of new Home Federal Bancorp, any director
+ so chosen shall hold office for the remainder of the full term of the class of directors
+ in which the vacancy occurred and until a successor is elected and qualified.
+
+Under the
+ bylaws of Home Federal Bancorp, any director may be removed only for cause by vote
+ of the holders of a majority of the outstanding voting shares at a meeting of stockholders
+ called for such purpose. The articles of incorporation of new Home Federal Bancorp
+ provides that any director may be removed by stockholders only for cause upon the
+ affirmative vote of the holders of not less than 80% of the outstanding shares entitled
+ to vote generally in the election of directors voting together as a single class
+ (i.e. the common stock, unless and until preferred shares with such voting rights
+ are issued). The higher vote threshold will make it more difficult for stockholders
+ to remove directors and replace them with their own nominees.
+
+Limitations on Liability
+
+Consistent
+ with Maryland law, the articles of incorporation of new Home Federal Bancorp provide
+ that an officer or director of new Home Federal Bancorp may not be liable to new
+ Home Federal Bancorp or its stockholders for money damages, except to the extent;
+
+ it is proved
+ that the person actually received an improper benefit, for the amount of the benefit;
+ or
+
+ a final judgment
+ of adjudication against the person is based on a finding that the person s
+ action, or failure to act, was the result of active and deliberate dishonesty and
+ was material to the cause of the action against the person; or
+
+ otherwise
+ provided by Maryland law.
+
+Indemnification of Directors, Officer,
+ Employees and Agents
+
+The articles
+ of incorporation of new Home Federal Bancorp provides that it will indemnify its
+ directors and officers, whether serving it, or at its request any other entity,
+ to the fullest extent permitted under Maryland law. Such indemnification includes
+ the advancement of expenses. The articles of incorporation of new Home Federal Bancorp
+ also provide that it will indemnify its employees and agents to such extent as shall
+ be authorized by the board of directors or the bylaws and be permitted by law.
+
+168
+
+Special Meetings of Stockholders
+
+The bylaws
+ of Home Federal Bancorp provide that special meetings of the stockholders of Home
+ Federal Bancorp may be called by the chairman, the President, a majority of the
+ board of directors or the holders of not less than ten percent of the outstanding capital
+ stock of Home Federal Bancorp entitled to vote at the meeting. The bylaws of new
+ Home Federal Bancorp contain a provision pursuant to which special meetings of the
+ stockholders of new Home Federal Bancorp may be called by the President, the board
+ of directors pursuant to a resolution adopted by a majority of the total number
+ of directors which new Home Federal Bancorp would have if there were no vacancies
+ on the board of directors or the holders of not less than a majority of the capital
+ stock of new Home Federal Bancorp entitled to vote at the meeting. There is no comparable
+ provision in the federal stock charter or bylaws of Home Federal Bancorp.
+
+Stockholder Nominations and Proposals
+
+The bylaws
+ of Home Federal Bancorp generally provide that stockholders may submit new business
+ to be taken up at the annual meeting. Any stockholder may make any proposal at the
+ annual meeting and the same may be discussed and considered, provided such submission
+ is provided in writing and filed with the secretary at least five days before the
+ meeting.
+
+New Home Federal
+ Bancorp s bylaws establish an advance notice procedure for stockholders to
+ nominate directors or bring other business before an annual meeting of stockholders
+ of new Home Federal Bancorp. New Home Federal Bancorp s bylaws provide that
+ new Home Federal Bancorp must receive written notice of any stockholder director
+ nomination for a meeting of stockholders not less than 90 days or more than 120
+ days before the date of the meeting. If, however, less than 100 days notice
+ or prior public disclosure of the date of the meeting is given or made to stockholders,
+ notice of the nomination must be received by the secretary no later than the tenth
+ day following the day on which notice of the meeting is mailed or public disclosure
+ of the meeting date is first made, whichever occurs first. New Home Federal Bancorp s bylaws also provide that new Home Federal Bancorp must receive written notice
+ of any stockholder proposal for business at an annual meeting of stockholders not
+ less than 90 days or more than 120 days before the anniversary of the preceding
+ year s annual meeting (prior to January 16, 2008, in the case of the first
+ annual meeting of stockholders of new Home Federal Bancorp). If the date of the
+ current year annual meeting is advanced by more than 20 days or delayed by more
+ than 60 days from the anniversary date of the preceding year s annual meeting
+ (or from January 16, 2008, in the case of the first annual meeting), notice of the
+ proposal must be received by new Home Federal Bancorp no earlier than the close
+ of business on the 120th day prior to the date of the annual meeting and no later
+ than the close of business on the later of the 90th day prior to the annual meeting
+ or the 10th day following the day on which notice of the meeting is mailed or public
+ disclosure of the meeting date is first made, whichever occurs first.
+
+Advance notice
+ of nominations or proposed business by stockholders gives new Home Federal Bancorp s board of directors time to consider the qualifications of the proposed nominees,
+ the merits of the proposals and, to the extent deemed necessary or desirable by
+ the board of directors, to inform stockholders and make recommendations about those
+ matters.
+
+Stockholder Action Without a Meeting
+
+The bylaws
+ of Home Federal Bancorp and new Home Federal Bancorp provide for action to be taken
+ by stockholders without a meeting, only if all stockholders entitled to vote on
+ the action consent to taking such action without a meeting.
+
+Stockholder s Rights to Examine
+ Books and Records
+
+An Office of Thrift Supervision regulation,
+ which is currently applicable to Home Federal Bancorp, provides that stockholders
+ holding of record at least $100,000 of stock or least 1% of the total outstanding
+ voting shares may inspect and make extracts from specified books and records of
+ Home Federal Bancorp after proper 
+
+169
+
+written notice for a proper purpose. Maryland
+ law provides that a stockholder holding less than five percent of the outstanding
+ capital stock may inspect specified books and records. Additionally, stockholders
+ who have for at least six months beneficially owned more than five percent of the
+ outstanding capital stock may, upon written request, inspect and copy the corporation s books of account, stock ledger and list of stockholders.
+
+Limitations on Voting Rights
+
+The charter
+ of Home Federal Bancorp provides that, for a period of five years from the effective
+ date of Home Federal Bank s 2004 mutual holding company reorganization, no
+ person, other than Home Federal MHC, shall directly or indirectly offer to acquire
+ or acquire more than 10% of the then-outstanding shares of Home Federal Bancorp s common stock. This restriction does not apply to:
+
+ 
+ 
+ 
+the purchase
+ of shares by underwriters in connection with a public offering; or
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the purchase
+ of shares by any employee benefit plans of Home Federal Bancorp or any subsidiary.
+
+The articles
+ of incorporation of new Home Federal Bancorp contain a similar restriction that
+ will apply for five years following the mutual-to-stock conversion of Home Federal
+ MHC contemplated by this prospectus. In addition, the articles of incorporation
+ of New Home Federal Bancorp generally prohibit any stockholder who beneficially
+ owns more than 10% of new Home Federal Bancorp s common stock from voting shares
+ in excess of this limit.
+
+Mergers, Consolidations and Sales of
+ Assets
+
+Office of
+ Thrift Supervision regulations currently require the approval of two-thirds of the
+ board of directors of Home Federal Bancorp and the holders of two-thirds of the
+ outstanding shares of Home Federal Bancorp common stock for mergers, consolidations
+ and sales of all or substantially all of its assets. These regulations permit Home
+ Federal Bancorp to merge with another corporation without obtaining the approval
+ of Home Federal Bancorp s stockholders if:
+
+ 
+ 
+ 
+the transaction
+ does not involve an interim savings institution;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the charter
+ of Home Federal Bancorp is not changed;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+each share
+ of Home Federal Bancorp stock outstanding immediately before the transaction is
+ to be an identical outstanding share or a treasury share of Home Federal Bancorp
+ after the transaction; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+either: (1)
+ no shares of voting stock of Home Federal Bancorp and no securities convertible
+ into such stock are to be issued in the transaction; or (2) the shares of voting
+ stock of Home Federal Bancorp to be issued in the transactions, do not exceed 15%
+ of the total shares of voting stock of Home Federal Bancorp outstanding immediately
+ before the transaction.
+
+Under Maryland
+ law and the articles of incorporation of new Home Federal Bancorp, a proposed consolidation,
+ merger, transfer of assets or share exchange involving new Home Federal Bancorp
+ generally must be approved by new Home Federal Bancorp s board of directors
+ and by the holders of a majority of the outstanding shares of New Home Federal Bancorp
+ stock entitled to vote on the matter. This stockholder approval requirement does
+ not apply in a share exchange or transfer of assets transaction where new Home Federal
+ Bancorp is the successor or transferee, or to a merger where new Home Federal Bancorp
+ is the survivor and either no new Home Federal Bancorp stock is issued in the merger
+ or the number of shares of new Home Federal Bancorp stock issued does not exceed
+ 20% of the shares outstanding prior to the merger.
+
+170
+
+Business Combinations with Interested
+ Stockholders
+
+New Home Federal
+ Bancorp s articles of incorporation provide that certain business combinations
+ (for example, mergers, share exchanges, significant asset sales and significant
+ stock issuances) involving interested stockholders of new Home Federal
+ Bancorp require, in addition to any vote required by law, the approval of at least
+ 80% of the voting power of the outstanding shares of stock entitled to vote generally
+ in the election of directors, voting together as a single class, unless
+ either (1) a majority of the disinterested directors of new Home Federal Bancorp
+ have approved the business combination or (2) certain fair price and procedural
+ requirements are satisfied. An interested stockholder generally means
+ a person who is a greater than 10% stockholder of new Home Federal Bancorp or who
+ is an affiliate of new Home Federal Bancorp and at any time within the past two
+ years was a greater than 10% stockholder of new Home Federal Bancorp. This provision
+ could tend to make the acquisition of new Home Federal Bancorp more difficult to
+ accomplish without the cooperation or favorable recommendation of new Home Federal
+ Bancorp s board of directors.
+
+Neither the
+ charter and bylaws of Home Federal Bancorp nor the federal laws and regulations
+ applicable to Home Federal Bancorp contain a provision that restricts business combinations
+ between Home Federal Bancorp and any interested stockholder in the manner set forth
+ above.
+
+Dissenters Rights of Appraisal
+
+Office of
+ Thrift Supervision regulations provide generally that in a merger, consolidation
+ or sale of all or substantially all of the assets of a federally chartered savings
+ and loan association, savings bank or savings and loan holding company, each stockholder
+ of such an institution or company has the right to demand payment of the fair or
+ appraised value of his or her stock, subject to specified procedural requirements.
+ This right does not apply where, as in the case of Home Federal Bancorp, the stock
+ of the institution or company is listed on a national securities exchange and the
+ consideration the stockholder is required to accept for his or her shares in the
+ transaction consists of cash, shares of another institution or company which are
+ listed on a national securities exchange, or a combination of both.
+
+Under Maryland
+ law, because the stock of new Home Federal Bancorp will be listed on a national
+ securities exchange, stockholders of new Home Federal Bancorp will not be entitled
+ to appraisal rights with respect to their shares in any transaction, regardless
+ of the form of consideration to be paid for their shares.
+
+Evaluation of Offers
+
+The articles
+ of incorporation of new Home Federal Bancorp provide that its board of directors,
+ when evaluating a transaction that would or may involve a change in control of new
+ Home Federal Bancorp (including a tender or exchange offer, merger or consolidation
+ or sale of all or substantially all of the assets of new Home Federal Bancorp) may,
+ in connection with the exercise of its judgment in determining what is in the best
+ interest of new Home Federal Bancorp and its stockholders, give consideration to
+ the following factors:
+
+ 
+ 
+ 
+the immediate
+ and long-term, economic effect upon new Home Federal Bancorp s stockholders,
+ including stockholders, if any, who do not participate in the transaction;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the social
+ and economic effect on the employees, creditors and customers of, and others dealing
+ with, new Home Federal Bancorp and its subsidiaries and on the communities in which
+ new Home Federal Bancorp and its subsidiaries operate or are located;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+whether the
+ proposal is acceptable based on the historical, current or projected future operating
+ results or financial condition of new Home Federal Bancorp;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+whether a
+ more favorable price could be obtained for new Home Federal Bancorp s stock
+ or other securities in the future;
+
+171
+
+ 
+ 
+ 
+the reputation
+ and business practices of the other entity to be involved in the transaction and
+ its management and affiliates as they would affect the employees of new Home Federal
+ Bancorp and its subsidiaries;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the future
+ value of the stock or any other securities of new Home Federal Bancorp or the other
+ entity to be involved in the proposed transaction;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+any antitrust
+ or other legal and regulatory issues that are raised by the proposal;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the business
+ and historical, current or projected future financial condition or operating results
+ of the other entity to be involved in the proposed transaction, including, but not
+ limited to, debt service and other existing financial obligations, financial obligations
+ to be incurred in connection with the proposed transaction, and other likely financial
+ obligations of the other entity to be involved in the proposed transaction; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the ability
+ of new Home Federal Bancorp to fulfill its objectives as a financial institution
+ holding company and on the ability of its subsidiary financial institution(s) to
+ fulfill the objectives of a federally insured financial institution.
+
+If new Home Federal Bancorp s board
+ of directors determines that any proposed transaction of the type described above
+ should be rejected, it may take any lawful action to defeat the transaction, including,
+ but not limited to, any or all of the following:
+
+ 
+ 
+ 
+advising stockholders
+ not to accept the proposal;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+instituting
+ litigation against the party making the proposal;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+filing complaints
+ with governmental and regulatory authorities;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+acquiring
+ the stock or any other securities of new Home Federal Bancorp;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+increasing
+ the authorized capital stock of new Home Federal Bancorp;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+selling or
+ otherwise issuing authorized but unissued stock, other securities or granting options
+ or rights with respect to authorized but unissued stock;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+acquiring
+ a company to create an antitrust or other regulatory problem for the party making
+ the proposal; and
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+obtaining
+ a more favorable offer from another individual or entity.
+
+ 
+ 
+ 
+ 
+
+By having
+ these standards in the articles of incorporation of new Home Federal Bancorp, the
+ board of directors may be in a stronger position to oppose such a transaction if
+ the board concludes that the transaction would not be in the best interest of new
+ Home Federal Bancorp, even if the price offered is significantly greater than the
+ then market price of any equity security of new Home Federal Bancorp.
+
+Neither the
+ charter nor the bylaws of Home Federal Bancorp contain similar provisions.
+
+172
+
+Prevention of Greenmail
+
+New Home Federal
+ Bancorp s articles of incorporation generally prohibit new Home Federal Bancorp
+ from acquiring any of its own equity securities from a beneficial owner of 5% or
+ more of new Home Federal Bancorp s voting stock unless: (i) the acquisition
+ is approved by the holders of at least 80% of new Home Federal Bancorp s voting
+ stock not owned by the seller, voting together as a single class; (ii) the acquisition
+ is made as part of a tender or exchange offer by new Home Federal Bancorp or a subsidiary
+ of new Home Federal Bancorp to purchase securities of the same class on the same
+ terms to all holders of such securities; (iii) the acquisition is pursuant to an open market purchase program approved by
+ a majority of the board of directors, including a majority of the disinterested
+ directors; or (iv) the acquisition is at or below the market price of the new Home
+ Federal Bancorp common stock and is approved by a majority of the board of directors,
+ including a majority of the disinterested directors. The purpose of this provision
+ is to discourage someone from accumulating a large ownership interest in new Home
+ Federal Bancorp with the purpose of pressuring new Home Federal Bancorp to purchase
+ his or her shares at a premium to the market price (a tactic commonly referred to
+ as greenmail ).
+
+Neither the
+ charter nor the bylaws of Home Federal Bancorp contain a similar provision.
+
+Amendment of Governing Instruments
+
+No amendment
+ of the charter of Home Federal Bancorp may be made unless it is first proposed by
+ the board of directors, then preliminarily approved by the Office of Thrift Supervision,
+ and thereafter approved by the holders of a majority of the total votes eligible
+ to be cast at a legal meeting of stockholders. The articles of incorporation of
+ new Home Federal Bancorp generally may be amended by the holders of a majority of
+ the shares entitled to vote; provided, however, that any amendment of Section C
+ of Article 5 (Issuing Preferred Stock; Limitation of Voting Common Stock), Article
+ 7 (Number, Classification, Election and Removal of Directors), Article 8 and 14
+ (Amendment of Governing Instruments), Article 9 (Approval of Certain Business Combinations),
+ Article 11 (Acquisitions of Securities from Interested Persons (anti-greenmail provision)),
+ 12 (Indemnification of Directors and Officers) and Article 13 (Limitation of Liability
+ of Directors and Officers) must be approved by the board of directors and by the
+ affirmative vote of the holders of at least 80% of the outstanding shares entitled
+ to vote, except that the board of directors may amend the articles of incorporation
+ without any action by the stockholders in order to increase or decrease the number
+ of authorized shares of common stock or preferred stock.
+
+The bylaws
+ of Home Federal Bancorp may be amended in a manner consistent with regulations of
+ the Office of Thrift Supervision and shall be effective after: (1) approval of the
+ amendment by a majority vote of the authorized board of directors, or by a majority
+ of the votes cast by the stockholders of Home Federal Bancorp at any legal meeting;
+ and (2) receipt of applicable regulatory approval. The bylaws of new Home Federal
+ Bancorp may be amended by the board of directors with a majority vote of the total
+ number of directors assuming no vacancies on the board, or by the stockholders by
+ the affirmative vote of the holders of at least 80% of the voting power of the outstanding
+ shares entitled to vote generally in the election of directors, voting together
+ as a single class.
+
+RESTRICTIONS ON ACQUISITIONS
+ OF
+NEW HOME FEDERAL BANCORP AND HOME FEDERAL BANK
+
+The principal
+ federal regulatory restrictions that affect the ability of any person, firm or entity
+ to acquire new Home Federal Bancorp, Home Federal Bank or a controlling interest
+ in their respective capital stock are described below. Certain provisions in new
+ Home Federal Bancorp s articles of incorporation and bylaws that may be deemed
+ to affect the ability of a person, firm or entity to acquire new Home Federal Bancorp
+ also are described below. These descriptions are qualified by reference to the laws
+ and regulations referred to and the provisions of the charter and bylaws of new
+ Home Federal Bancorp.
+
+173
+
+Federal Law
+
+Home Federal
+ Bank is a federal savings bank. Acquisitions of control of Home Federal Bank by
+ an individual are governed by the Change in Bank Control Act and by another company
+ are governed by Section 10 of the Home Owners Loan Act. The Office of Thrift
+ Supervision has promulgated regulations under these laws.
+
+The Change
+ in Bank Control Act provides that no person, acting directly or indirectly or through
+ or in concert with one or more other individuals, may acquire control of a federal
+ savings bank, unless the Office of Thrift Supervision has been given 60 days prior
+ written notice. Similar notice is required to be provided to the Office of Thrift
+ Supervision by an individual acquiring a similar ownership interest in a savings
+ and loan holding company. The Home Owners Loan Act provides that no company
+ may acquire control of a savings association without the prior approval of the Office of Thrift Supervision.
+ Any company that acquires such control becomes a savings and loan holding company
+ subject to registration, examination and regulation by the Office of Thrift Supervision.
+ In addition, acquisitions of control of a savings and loan holding company by another
+ company are subject to registration, examination and regulation by the Office of
+ Thrift Supervision. In addition, acquisitions of control of a savings and loan holding
+ company by another company are subject to the approval of the Office of Thrift Supervision.
+
+Pursuant to
+ the acquisition of control regulations of the Office of Thrift Supervision, control
+ of a savings institution is conclusively deemed to have been acquired by, among
+ other things, the acquisition of more than 25% of any class of voting stock of the
+ institution or the ability to control the election of a majority of the directors
+ of an institution. Moreover, control is presumed to have been acquired, subject
+ to rebuttal, upon the acquisition of more than 10% of any class of voting stock,
+ or ob more than 25% of any class of stock of a savings institution, where certain
+ enumerated control factors are also present in the acquisition. The
+ Office of Thrift Supervision may prohibit an acquisition of control if:
+
+ 
+ 
+ 
+it would result
+ in a monopoly or substantially lessen competition;
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the financial
+ condition of the acquiring person might jeopardize the financial stability of the
+ institution; or
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+the competence,
+ experience or integrity of the acquiring person indicates that it would not be in
+ the interest of the depositors or of the public to permit the acquisition of control
+ by such person.
+
+These restrictions
+ do not apply to the acquisition of a savings institution s capital stock by
+ one or more tax-qualified employee stock benefit plans, provided that the plans
+ do not have beneficial ownership of more than 25% of any class of equity security
+ of the savings institution.
+
+For a period
+ of three years following completion of the reorganization, Office of Thrift Supervision
+ regulations generally prohibit any person from acquiring or making an offer to acquire
+ beneficial ownership of more than 10% of the stock of new Home Federal Bancorp or
+ Home Federal Bank without Office of Thrift Supervision approval.
+
+State Law
+
+Business Combination Statute. Maryland
+ law contains a business combination statute that prohibits a business combination
+ between a corporation and an interested stockholder (one who beneficially owns 10%
+ or more of the voting power) for a period of five years after the interested stockholder
+ first becomes an interested stockholder, unless the transaction has been approved
+ by the board of directors before the interested stockholder became an interested
+ stockholder or the corporation has exempted itself from the statute pursuant to
+ a charter provision. After the five-year period has elapsed, a corporation subject
+ to the statute may not consummate a business combination with an interested stockholder
+ unless (1) the transaction has been recommended by the board of
+
+174
+
+directors and (2)
+ the transaction has been approved by (a) 80% of the outstanding shares entitled
+ to be cast and (b) two-thirds of the votes entitled to be cast other than shares
+ owned by the interested stockholder. This approval requirement need not be met if
+ certain fair price and terms criteria have been satisfied. New Home Federal Bancorp
+ has opted-out of the Maryland business combination statute through a provision in
+ its articles of incorporation. As described under Comparison of Rights of
+ New Home Federal Bancorp and Home Federal Bancorp s Stockholders-Business Combinations
+ with Interested Stockholders, however, the articles of incorporation of new
+ Home Federal Bancorp contain a provision governing business combinations with interested
+ stockholders that works in a manner similar to the Maryland business combination
+ statute.
+
+Control
+ Share Acquisition Statute. Maryland law also contains a control share acquisition
+ statute which, in general terms, provides that where a stockholder acquires issued
+ and outstanding shares of a corporation s voting stock (referred to as control
+ shares) within one of several specified ranges (one-tenth or more but less than
+ one-third, one-third or more but less than a majority,
+ or a majority or more), approval by stockholders of the control share acquisition
+ must be obtained before the acquiring stockholder may vote the control shares. The
+ required stockholder vote is two-thirds of all votes entitled to be cast, excluding
+ interested shares, defined as shares held by the acquiring person, officers
+ of the corporation and employees who are also directors of the corporation. A corporation
+ may, however, opt-out of the control share statute through a provision in its articles
+ of incorporation or bylaws, which new Home Federal Bancorp has done pursuant to
+ its bylaws. Accordingly, the Maryland control share acquisition statute does not
+ apply to acquisitions of shares of new Home Federal Bancorp common stock. Though
+ not expected, new Home Federal Bancorp could decide to become subject to the Maryland
+ control share acquisition statute by amending its bylaws to eliminate the opt-out
+ provision.
+
+Articles of Incorporation and Bylaws of
+ New Home Federal Bancorp
+
+Certain provisions
+ in new Home Federal Bancorp s articles of incorporation and bylaws may be deemed
+ to affect the ability of a person, firm or entity to acquire new Home Federal Bancorp
+ The following discussion is a summary of the material provisions. This summary is
+ necessarily general and qualified by reference to the articles of incorporation
+ and bylaws. Certain of these provisions, in addition to discouraging a takeover
+ attempt that a majority of our stockholders might determine to be in their best
+ interest or in which our stockholders might receive a premium over the current market
+ prices for their shares, may have the effect of rendering the removal of our management
+ more difficult. Some of these provisions are described in greater detail under Comparison of Rights of New Home Federal Bancorp and Home Federal Bancorp
+ Stockholders. 
+
+Classified
+ Board of Directors. Like the board of directors of Home Federal Bancorp, the
+ board of directors of new Home Federal Bancorp is required by its articles of incorporation
+ to be divided into three staggered classes which are as equal in size as is possible.
+ One class is required to be elected annually for three-year term (or for such shorter
+ period of time as the board of directors may determine). A classified board promotes
+ continuity and stability of management, but makes it more difficult for stockholders
+ to change a majority of the directors because it generally takes at least two annual
+ elections of directors for this to occur.
+
+Prohibition
+ on Cumulative Voting. Like the charter of Home Federal Bancorp, new Home Federal
+ Bancorp s articles of incorporation provides that there will not be cumulative
+ voting by stockholders for the election of new Home Federal Bancorp s directors.
+ This could prevent minority stockholder representation on new Home Federal Bancorp s board of directors.
+
+Removal
+ of Directors. The articles of incorporation of new Home Federal Bancorp provides
+ that any director may be removed by stockholders only for cause upon the affirmative
+ vote of the holders of not less than 80% of the outstanding shares entitled to vote
+ generally in the election of directors, voting together as a single class. This
+ high vote threshold will make it very difficult for stockholders to remove directors
+ outside of an election at an annual meeting of stockholders.
+
+Authorized
+ but Unissued Shares of Capital Stock. Following the stock offering, new Home
+ Federal Bancorp will have authorized but unissued shares of preferred stock and
+ common stock. See Description of Capital
+
+175
+
+Stock. These shares could be
+ used by the board of directors to make it more difficult or to discourage an attempt
+ to obtain control of new Home Federal Bancorp through a merger, tender offer, proxy
+ contest or otherwise. The board of directors of new Home Federal Bancorp also has
+ the ability to amend the articles of incorporation, without stockholder approval,
+ to increase the number of authorized shares of common or preferred stock.
+
+Restrictions
+ on Acquisition of Shares and Vote Sterilization. New Home Federal Bancorp s
+ articles of incorporation provides that for a period of five years from the date
+ of completion of the conversion, no person may offer to acquire or acquire the beneficial
+ ownership of more than 10% of any class of equity security of new Home Federal Bancorp.
+ In addition, at no time may a person beneficially owning in excess of 10% of the
+ outstanding shares of new Home Federal Bancorp common stock vote the excess shares.
+
+Special
+ Meetings of Stockholders. New Home Federal Bancorp s bylaws provide that
+ special meetings of stockholders may be called only by new Home Federal Bancorp s President or by its board of directors by a resolution adopted by a majority
+ of the number of authorized directors, or by the holders of a majority of the stock
+ entitled to vote at the meeting.
+
+Action
+ by Stockholders Without a Meeting. The bylaws of new Home Federal Bancorp provide
+ for action to be taken by stockholders without a meeting only if all stockholders
+ entitled to vote on the action consent to taking such action without a meeting.
+ The practical effect of this provision is that stockholders of new Home Federal
+ Bancorp will only be able to take action at a duly called meeting of stockholders.
+
+Procedures
+ for Stockholder Nominations. As described under Comparison of Rights of
+ New Home Federal Bancorp and Home Federal Bancorp Stockholders-Stockholder Nominations
+ and Proposals, new Home Federal Bancorp s bylaws provide that any stockholder
+ wanting to make a nomination for the election of directors or a proposal for new
+ business at a meeting of stockholders must send written notice to the secretary
+ of new Home Federal Bancorp in advance of the meeting date. The board of directors
+ believes that it is in the best interests of new Home Federal Bancorp and its stockholders
+ to provide enough time for management to disclose to stockholders information about
+ a opposition slate of nominations for directors. This advance notice requirement
+ may also give management time to solicit its own proxies in an attempt to defeat
+ any opposition slate of nominations if management thinks it is in the best interest
+ of stockholders generally. Similarly, adequate advance notice of stockholder proposals
+ will give management time to study these proposals and to determine whether to recommend
+ to the stockholders that these proposals be adopted.
+
+Procedures
+ for Certain Business Combinations. As described under Comparison of Rights
+ of New Home Federal Bancorp and Home Federal Bancorp-Business Combinations with
+ Interested Stockholders, new Home Federal Bancorp s articles of incorporation
+ provide that certain business combinations with greater than 10% stockholders require
+ a supermajority stockholder vote unless the transaction is approved by a majority
+ of the disinterested directors or certain fair price and procedure requirements
+ are satisfied. This could make it more difficult to accomplish a business combination
+ with large stockholder where the transaction does not have the support of a majority
+ of the disinterested members of the board.
+
+Consideration
+ of Offers. As described under Comparison of Rights of New Home Federal
+ Bancorp and Home Federal Bancorp-Consideration of Other Offers, the articles
+ of incorporation of new Home Federal Bancorp provide that the board of directors,
+ when evaluating a transaction that could involve a change in control of new Home
+ Federal Bancorp, may consider a variety of different factors that could enable the
+ board to oppose such a transaction even if the price offered is significantly greater
+ than the then market price of new Home Federal Bancorp common stock.
+
+Anti-Greenmail
+ Provision. As described under Comparison of Rights of New Home Federal
+ Bancorp and Home Federal Bancorp-Prevention of Greenmail, the articles of
+ incorporation of new Home Federal Bancorp contain a provision that may discourage
+ a would-be hostile acquiror from seeking control of new Home Federal Bancorp by
+ prohibiting new Home Federal Bancorp from paying a premium to buy-out the acquiror s interest at a premium without approval by the holders of at least 80% of
+ the outstanding shares.
+
+176
+
+Amendment
+ to Articles of Incorporation and Bylaws. Amendments to new Home Federal Bancorp s articles of incorporation generally must be approved by the board of directors
+ and also by the holders of a majority of the outstanding shares of new Home Federal
+ Bancorp stock, though the board may amend the articles of incorporation without
+ stockholder approval to increase the number of authorized shares of common or preferred
+ stock. Approval by the holders of at least 80% of the shares is required to amend
+ provisions relating to the terms of preferred stock, the voting limitation on greater
+ than 10% stockholders, the number, classification, election and removal of directors,
+ the approval of certain business combinations with greater than 10% stockholders,
+ the prevention of greenmail, the indemnification of officers and directors, the
+ limitation on liability of officers and directors; and the manner of amending the
+ bylaws and articles of incorporation. Stockholders may amend new Home Federal Bancorp s bylaws only with the approval of the holders of at least 80% of the outstanding
+ shares, a very difficult vote to obtain especially
+ if the amendment does not have the support of the board of directors and management.
+
+DESCRIPTION OF CAPITAL
+ STOCK
+
+General
+
+New Home Federal
+ Bancorp is a newly formed Maryland corporation. It is authorized to issue 90,000,000
+ shares of common stock, par value $0.01 per share and 10,000,000 shares of serial
+ preferred stock, par value $0.01 per share. We will issue between 10,200,000 and
+ 13,800,000 shares of common stock in the stock offering, subject to adjustment up
+ to 15,870,000 shares. Upon payment of the purchase prices shares of common stock
+ issued in the stock offering will be fully paid and non-assessable. No shares of
+ preferred stock will be issued in the Stock Offering. Subject to the listing requirements
+ of the NASDAQ Stock Market, the board of directors generally can, without stockholder
+ approval, issue additional shares of common stock. The board of directors also can,
+ without stockholder approval, amend the articles of incorporation to change the
+ number of authorized shares of common or preferred stock.
+
+Common Stock
+
+Each share
+ of common stock will have the same relative rights as, will be identical in all
+ respects with, each other share of common stock. The common stock will represent
+ non-withdrawable capital, will not be an account of insurable type and will not
+ be insured by the Federal Deposit Insurance Corporation or any other governmental
+ agency.
+
+Dividends. New Home Federal Bancorp can pay dividends if, after giving effect to the distribution,
+ it would be able to pay its indebtedness as the indebtedness comes due in the usual
+ course of business and its total assets exceed the sum of its liabilities and the
+ amount needed, if new Home Federal Bancorp were to be dissolved at the time of the
+ distribution, to satisfy the preferential rights upon dissolution of any holders
+ of capital stock who have a preference in the event of dissolution. The holders
+ of common stock of new Home Federal Bancorp will be entitled to receive and share
+ equally in dividends as may be declared by the board of directors of new Home Federal
+ Bancorp out of funds legally available for dividends. If new Home Federal Bancorp
+ issues preferred stock, the holders of the preferred stock may have a priority over
+ the holders of the common stock with respect to dividends. Office of Thrift Supervision
+ regulations also limit our ability to pay dividends. See We Intend to Continue
+ To Pay Quarterly Cash Dividends. 
+
+Voting
+ Rights. After the conversion, the holders of common stock of new Home Federal
+ Bancorp will possess exclusive voting rights in new Home Federal Bancorp unless
+ and until shares of preferred stock with voting rights are issued. Subject to the
+ provision of new Home Federal Bancorp s articles of incorporation which prohibits
+ a person who beneficially owns more than 10% of the common stock from voting the
+ excess shares, the holders of shares of common stock will be entitled to one vote
+ for each share held on all matters subject to stockholder vote. The holders of common
+ stock will not have the right to cumulate votes in the election of directors.
+
+177
+
+Liquidation Rights. In the event
+ of any liquidation, dissolution, or winding-up of new Home Federal Bancorp, the
+ holders of the common stock generally would be entitled to receive, after payment
+ of all debts and liabilities of new Home Federal Bancorp (including all debts and
+ liabilities of Home Federal Bank and distribution of the balance in the special
+ liquidation account of Home Federal Bank to eligible account holders and supplemental
+ eligible account holders), all assets of new Home Federal Bancorp available for
+ distribution. If preferred stock is issued, the holders thereof may have a priority
+ over the holders of the common stock in the event of liquidation or dissolution.
+
+Preemptive
+ Rights; Redemption. Because the holders of the common stock do not have any
+ preemptive rights with respect to any shares that may be issued by new Home Federal
+ Bancorp, the board of directors may sell
+
+shares of capital stock of new Home Federal
+ Bancorp without first offering these shares to existing stockholders. The common
+ stock will not be subject to any redemption provisions.
+
+Preferred Stock
+
+We are authorized
+ to issue up to 10,000,000 shares of serial preferred stock and to fix and state
+ voting powers, designations, preferences, or other special rights of preferred stock
+ and the qualifications, limitations and restrictions of those shares as the board
+ of directors may determine in its discretion. Preferred stock may be issued in distinctly
+ designated series, may be convertible into common stock and may rank prior to the
+ common stock as to dividend rights, liquidation preferences, or both, and may have
+ full or limited voting rights. The issuance of preferred stock could adversely affect
+ the voting and other rights of holders of common stock.
+
+The authorized
+ but unissued shares of preferred stock and the authorized but unissued and unreserved
+ shares of common stock will be available for issuance in future mergers or acquisitions,
+ in future public offerings or private placements. Except as otherwise required to
+ approve the transaction in which the additional authorized shares of preferred stock
+ would be issued or under the listing requirements of the NASDAQ Stock Market, no
+ stockholder approval generally would be required for the issuance of these shares.
+
+TRANSFER AGENT AND REGISTRAR
+
+The transfer
+ agent and registrar for new Home Federal Bancorp common stock is Registrar and Transfer
+ Company, Cranford, New Jersey.
+
+EXPERTS
+
+The consolidated
+ financial statements of Home Federal Bancorp and Subsidiary as of September 30,
+ 2006 and 2005 and for each of the three years in the three-year period ended September
+ 30, 2006 have been included herein and in the registration statement in reliance
+ upon the report of Moss Adams LLP, an independent registered public accounting firm,
+ appearing elsewhere herein, and upon the authority of said firm as experts in accounting
+ and auditing.
+
+RP Financial,
+ LC. has consented to the publication herein of the summary of its report to new
+ Home Federal Bancorp setting forth its opinion as to the estimated pro forma market
+ value of the common stock upon conversion and its letter with respect to subscription
+ rights.
+
+LEGAL AND TAX OPINIONS
+
+The legality
+ of the common stock has been passed upon for new Home Federal Bancorp by Breyer
+ Associates PC, McLean, Virginia, special counsel to Home Federal Bank and
+ Home Federal Bancorp. The federal income tax consequences of the conversion have
+ been passed upon for new Home Federal Bancorp and Home Federal Bank by Silver, Freedman
+ and Taff, L.L.P., Washington D.C. The Idaho income tax consequences of the conversion
+ have been passed upon for Home Federal Bank by Munther Goodrum Sperry, Chartered,
+ Boise, Idaho.
+
+178
+
+Certain legal matters will be passed upon for Keefe, Bruyette 
+ Woods, Inc. by Elias, Matz, Tiernan Herrick, LLP, Washington, D.C.
+
+WHERE YOU CAN FIND MORE
+ INFORMATION
+
+New Home Federal
+ Bancorp has filed with the Securities and Exchange Commission a registration statement
+ under the Securities Act of 1933 with respect to the common stock offered hereby.
+ As permitted by the rules and regulations of the Securities and Exchange Commission,
+ this prospectus does not contain all the information set forth in the registration
+ statement. This information, including the appraisal report which is an exhibit
+ to the registration statement, can be examined without charge at the public reference
+ facilities of the Securities and Exchange Commission located at 100 F Street, N.E.,
+ Washington, D.C. 20549, and copies of this material can be obtained from the Securities
+ and Exchange Commission at prescribed rates. You may obtain information on the operation
+ of the public reference room by calling the Securities and Exchange Commission at
+ 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains a
+ web site (http://www.sec.gov) that contains reports, proxy and information statements
+ and other information regarding registrants that file electronically with the Securities
+ and Exchange Commission, including new Home Federal Bancorp. The statements contained
+ in this prospectus as to the contents of any contract or other document filed as
+ an exhibit to the registration statement are, of necessity, brief descriptions thereof
+ and are not necessarily complete; each statement is qualified by reference to the
+ contract or document. We believe, however, that we have included the material information
+ an investor needs to consider in making an investment decision. Home Federal Bank
+ also maintains a website (http://www.myhomefed.com), which contains various information
+ about Home Federal Bank.
+
+Home Federal
+ Bank has filed with the Office of Thrift Supervision an Application for Approval
+ of Conversion, which includes proxy materials
+ for the special meeting of members and certain other information. This prospectus
+ omits certain information contained in the Application for Approval of Conversion.
+ The Application for Approval of Conversion, including the proxy materials, exhibits
+ and certain other information, may be inspected, without charge, at the office of
+ the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552 and
+ the office of the Regional Director of the Office of Thrift Supervision at the West
+ Regional office of the Office of Thrift Supervision, Pacific Plaza, 2001 Junipero
+ Serra Boulevard, Suite 650, Daly City, California 94014.
+
+In connection
+ with the conversion, new Home Federal Bancorp has registered its common stock with
+ the Securities and Exchange Commission under Section 12 of the Securities Exchange
+ Act of 1934, and, upon such registration, new Home Federal Bancorp and the holders
+ of its stock will become subject to the proxy solicitation rules, reporting requirements
+ and restrictions on stock purchases and sales by directors, officers and greater
+ than 10% stockholders, the annual and periodic reporting and certain other requirements
+ of the Securities Exchange Act of 1934. Under the plan of conversion and reorganization,
+ new Home Federal Bancorp has undertaken that it will not terminate this registration
+ for a period of at least three years following the conversion.
+
+A copy of
+ the plan of conversion and reorganization, the articles of incorporation and bylaws
+ of new Home Federal Bancorp and Home Federal Bank are available without charge from
+ Home Federal Bank. Requests for such information should be directed to: Daniel L.
+ Stevens, Home Federal Bank, 500 12th Avenue South, Nampa, Idaho 83651.
+
+179
+
+HOME FEDERAL BANCORP, INC.
+ AND SUBSIDIARY
+
+INDEX TO CONSOLIDATED FINANCIAL
+ STATEMENTS
+
+ 
+ 
+Page
+
+ 
+ 
+ 
+
+Report of
+ Independent Registered Public Accounting Firm
+ 
+F-2
+
+ 
+ 
+ 
+
+Consolidated
+ Balance Sheets as of June 30, 2007 (unaudited) and September 30, 2006 and 2005
+
+ 
+F-4
+
+ 
+ 
+ 
+
+Consolidated
+ Statements of Income for the Nine Months Ended June 30, 2007 (unaudited) and 2006
+ (unaudited) and For the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-5
+
+ 
+ 
+ 
+
+Consolidated
+ Statements of Stockholders Equity for the Nine Months Ended June 30, 2007
+ (unaudited) and For the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-6
+
+ 
+ 
+ 
+
+Consolidated
+ Statements of Cash Flows for the Nine Months Ended June 30, 2007 (unaudited) and
+ 2006 (unaudited) and For the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-8
+
+ 
+ 
+ 
+
+Selected
+ Notes to Consolidated Financial Statements
+
+ 
+F-10
+
+ 
+ 
+ 
+
+All schedules
+ are omitted because the required information is not applicable or is included in
+ the Consolidated Financial Statements and related Notes.
+
+The financial
+ statements of new Home Federal Bancorp, Inc. have been omitted because new Home
+ Federal Bancorp, Inc. has not yet issued any stock, has no assets or liabilities,
+ and has not conducted any business other than that of an organizational nature.
+
+F-1
+
+ 
+
+MOSS ADAMS LLP
+
+ 
+CERTIFIED PUBLIC ACCOUNTANTS | BUSINESS CONSULTANTS
+
+REPORT OF INDEPENDENT REGISTERED 
+PUBLIC
+ ACCOUNTING FIRM
+
+To the Board of Directors and Stockholders 
+Home Federal Bancorp,
+ Inc. and Subsidiary 
+Nampa, Idaho
+
+We have audited the accompanying consolidated balance sheet
+ of Home Federal Bancorp, Inc. and subsidiary (Company) as of September 30, 2006
+ and 2005, and the related consolidated statements of income, stockholders 
+ equity, and cash flows for each of the three years in the period ended September
+ 30, 2006. We also have audited management s assessment included in the accompanying
+ Management, Annual Report on Internal Control over Financial Reporting that the Company
+ maintained effective internal control over financial reporting as of September 30,
+ 2006, based on criteria established in Internal Control - Integrated Framework issued
+ by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
+ The Company s management is responsible for these consolidated financial statements, for
+ maintaining effective internal control over financial reporting, and for its assessment
+ of the effectiveness of internal control over consolidated financial reporting.
+ Our responsibility is to express an opinion on these consolidated financial statements,
+ an opinion on management s assessment, and an opinion on the effectiveness
+ of the Company s internal control over financial reporting based on our audits.
+
+We conducted our audits in accordance with auditing standards of the Public Company
+ Accounting Oversight Board (United States). Those standards require that we plan
+ and perform the audit to obtain reasonable assurance about whether the financial
+ statements are free of material misstatement and whether effective internal control
+ over financial reporting was maintained in all material respects. Our audit of the
+ financial statements included examining, on a test basis, evidence supporting the
+ amounts and disclosures in the financial statements, assessing the accounting principles
+ used and significant estimates made by management and evaluating the overall financial
+ statement presentation. Our audit of internal control over financial reporting included
+ obtaining an understanding of internal control over financial reporting, evaluating
+ management s assessment, testing and evaluating the design and operating effectiveness
+ of internal control, and performing such other procedures as we considered necessary
+ in the circumstances. We believe that our audits provide a reasonable basis for
+ our opinions.
+
+The Company s 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 for external purposes
+ in accordance with generally accepted accounting principles. The Company s
+ internal control over financial reporting includes those policies and procedures
+ that (1) pertain to the maintenance of records that, in reasonable detail, accurately
+ and fairly reflect the transactions and dispositions of the assets of the Company;
+ (2) provide reasonable assurance that transactions are recorded as necessary to
+ permit preparation of financial statements in accordance with generally accepted
+ accounting principles, and that receipts and expenditures of the Company are being
+ made only in accordance with authorizations of management and Directors of the Company;
+ and (3) provide reasonable assurance regarding prevention or timely detection of
+ unauthorized acquisition, use, or disposition of the Company s assets that
+ could have a material effect of the financial statements.
+
+Because of its inherent
+ limitations, internal control over financial reporting may not prevent or detect
+ misstatements. Also projections of any evaluation of effectiveness to future periods
+ are subject to the risk that controls may become inadequate because of changes in
+ conditions, or that the degree of compliance with the policies or procedures may
+ deteriorate.
+
+In our opinion, the consolidated financial statements referred to
+ above present fairly, in all material respects, the consolidated financial position
+ of the Company as of September 30, 2006 and 2005, and the results of their operations
+ and their cash flows for each of the three years in the three-year period ended
+ September 30, 2006, in conformity with accounting principles generally accepted
+ in the United States of America. Also in our opinion, management s assessment
+ that the Company maintained effective internal control over financial reporting
+ as of September 30, 2006, is fairly stated, in all material respects, based on criteria
+ established in Internal Control - Integrated Framework issued by COSO. Furthermore,
+ in our opinion, the Company maintained, in all material
+
+F-2
+
+REPORT OF INDEPENDENT REGISTERED
+PUBLIC
+ ACCOUNTING FIRM
+Page 2
+
+respects, effective internal control over
+ financial reporting as of September 30, 2006, based on criteria established in Internal
+ Control - Integrated Framework issued by COSO.
+
+Spokane, Washington
+ December 8, 2006
+
+F-3
+
+HOME FEDERAL
+ BANCORP, INC. AND SUBSIDIARY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+CONSOLIDATED BALANCE SHEET
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In thousands, except share data)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+
+September 30,
+ 
+
+September 30,
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ASSETS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash
+ and amounts due from depository institutions
+
+ 
+ 
+$
+23,086
+ 
+ 
+ 
+$
+18,385
+ 
+ 
+ 
+$
+19,033
+ 
+
+Mortgage-backed
+ securities available for sale, at fair value
+
+ 
+ 
+ 
+166,755
+ 
+ 
+ 
+ 
+12,182
+ 
+ 
+ 
+ 
+14,830
+ 
+
+Mortgage-backed
+ securities held to maturity, at cost
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+183,279
+ 
+ 
+ 
+ 
+180,974
+ 
+
+FHLB
+ stock, at cost
+
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+9,591
+ 
+
+Loans
+ receivable, net of allowance for loan losses of $2,748, $2,974 and $2,882
+
+ 
+ 
+ 
+491,768
+ 
+ 
+ 
+ 
+503,065
+ 
+ 
+ 
+ 
+430,944
+ 
+
+Loans
+ held for sale
+
+ 
+ 
+ 
+4,363
+ 
+ 
+ 
+ 
+4,119
+ 
+ 
+ 
+ 
+5,549
+ 
+
+Accrued
+ interest receivable
+
+ 
+ 
+ 
+2,880
+ 
+ 
+ 
+ 
+3,025
+ 
+ 
+ 
+ 
+2,458
+ 
+
+Property
+ and equipment, net
+
+ 
+ 
+ 
+12,271
+ 
+ 
+ 
+ 
+12,849
+ 
+ 
+ 
+ 
+11,995
+ 
+
+Mortgage
+ servicing rights, net
+
+ 
+ 
+ 
+2,269
+ 
+ 
+ 
+ 
+2,492
+ 
+ 
+ 
+ 
+2,671
+ 
+
+Bank
+ owned life insurance
+
+ 
+ 
+ 
+11,065
+ 
+ 
+ 
+ 
+10,763
+ 
+ 
+ 
+ 
+10,099
+ 
+
+Real
+ estate and other property owned
+
+ 
+ 
+ 
+153
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+534
+ 
+
+Deferred
+ income tax asset
+
+ 
+ 
+ 
+1,757
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Other
+ assets
+
+ 
+ 
+ 
+2,357
+ 
+ 
+ 
+ 
+1,542
+ 
+ 
+ 
+ 
+899
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+TOTAL
+ ASSETS
+
+ 
+ 
+$
+728,315
+ 
+ 
+ 
+$
+761,292
+ 
+ 
+ 
+$
+689,577
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+LIABILITIES
+ AND STOCKHOLDERS EQUITY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+LIABILITIES
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deposit
+ accounts
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Noninterest-bearing
+ demand deposits
+
+ 
+ 
+$
+34,368
+ 
+ 
+ 
+$
+44,626
+ 
+ 
+ 
+$
+46,311
+ 
+
+Interest-bearing
+ demand deposits
+
+ 
+ 
+ 
+133,770
+ 
+ 
+ 
+ 
+128,276
+ 
+ 
+ 
+ 
+127,330
+ 
+
+Savings
+ deposits
+
+ 
+ 
+ 
+23,465
+ 
+ 
+ 
+ 
+23,655
+ 
+ 
+ 
+ 
+25,219
+ 
+
+Certificates
+ of deposit
+
+ 
+ 
+ 
+227,095
+ 
+ 
+ 
+ 
+233,724
+ 
+ 
+ 
+ 
+197,465
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ deposit accounts
+
+ 
+ 
+ 
+418,698
+ 
+ 
+ 
+ 
+430,281
+ 
+ 
+ 
+ 
+396,325
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Advances
+ by borrowers for taxes and insurance
+
+ 
+ 
+ 
+921
+ 
+ 
+ 
+ 
+2,133
+ 
+ 
+ 
+ 
+3,898
+ 
+
+Interest
+ payable
+
+ 
+ 
+ 
+773
+ 
+ 
+ 
+ 
+971
+ 
+ 
+ 
+ 
+1,670
+ 
+
+Deferred
+ compensation
+
+ 
+ 
+ 
+4,418
+ 
+ 
+ 
+ 
+3,875
+ 
+ 
+ 
+ 
+3,049
+ 
+
+FHLB
+ advances
+
+ 
+ 
+ 
+189,264
+ 
+ 
+ 
+ 
+210,759
+ 
+ 
+ 
+ 
+175,932
+ 
+
+Deferred
+ income tax liability
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+800
+ 
+ 
+ 
+ 
+1,205
+ 
+
+Other
+ liabilities
+
+ 
+ 
+ 
+4,243
+ 
+ 
+ 
+ 
+4,604
+ 
+ 
+ 
+ 
+6,131
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ liabilities
+
+ 
+ 
+ 
+618,317
+ 
+ 
+ 
+ 
+653,423
+ 
+ 
+ 
+ 
+588,210
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+STOCKHOLDERS EQUITY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Serial
+ preferred stock, $.01 par value; 5,000,000 authorized, issued and outstanding, none
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Common
+ stock, $.01 par value; 50,000,000 authorized, issued and outstanding:
+
+ 
+ 
+ 
+152
+ 
+ 
+ 
+ 
+152
+ 
+ 
+ 
+ 
+149
+ 
+
+June
+ 30, 2007 15,278,803 issued, 15,232,243 outstanding
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Sept.
+ 30, 2006 15,208,750 issued, 15,169,114 outstanding
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Sept.
+ 30, 2005 15,208,750 issued, 14,910,658 outstanding
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Additional
+ paid-in capital
+
+ 
+ 
+ 
+59,209
+ 
+ 
+ 
+ 
+57,222
+ 
+ 
+ 
+ 
+56,115
+ 
+
+Retained
+ earnings
+
+ 
+ 
+ 
+57,922
+ 
+ 
+ 
+ 
+54,805
+ 
+ 
+ 
+ 
+49,818
+ 
+
+Unearned
+ shares issued to ESOP
+
+ 
+ 
+ 
+(3,808
+)
+ 
+ 
+ 
+(4,134
+)
+ 
+ 
+ 
+(4,550
+)
+
+Accumulated
+ other comprehensive loss
+
+ 
+ 
+ 
+(3,477
+)
+ 
+ 
+ 
+(176
+)
+ 
+ 
+ 
+(165
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ stockholders equity
+
+ 
+ 
+ 
+109,998
+ 
+ 
+ 
+ 
+107,869
+ 
+ 
+ 
+ 
+101,367
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+TOTAL
+ LIABILITIES AND STOCKHOLDERS EQUITY
+
+ 
+ 
+$
+728,315
+ 
+ 
+ 
+$
+761,292
+ 
+ 
+ 
+$
+689,577
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+See accompanying
+ notes.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+F-4
+
+HOME FEDERAL
+ BANCORP, INC. AND SUBSIDIARY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+CONSOLIDATED STATEMENT OF INCOME
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In thousands, except share data)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Nine Months Ended June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+2007
+ 
+ 
+ 
+
+2006
+ 
+ 
+ 
+
+2006
+ 
+ 
+ 
+
+2005
+ 
+ 
+ 
+
+2004
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest
+ and dividend income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Loan
+ interest
+
+ 
+ 
+$
+25,331
+ 
+ 
+ 
+$
+21,959
+ 
+ 
+ 
+$
+30,175
+ 
+ 
+ 
+$
+25,934
+ 
+ 
+ 
+$
+23,936
+ 
+
+Investment
+ interest
+
+ 
+ 
+ 
+223
+ 
+ 
+ 
+ 
+114
+ 
+ 
+ 
+ 
+140
+ 
+ 
+ 
+ 
+313
+ 
+ 
+ 
+ 
+260
+ 
+
+Mortgage-backed
+ securities
+
+ 
+ 
+ 
+6,673
+ 
+ 
+ 
+ 
+7,220
+ 
+ 
+ 
+ 
+9,598
+ 
+ 
+ 
+ 
+7,633
+ 
+ 
+ 
+ 
+3,038
+ 
+
+FHLB
+ dividends
+
+ 
+ 
+ 
+33
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+30
+ 
+ 
+ 
+ 
+278
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ interest and dividend income
+
+ 
+ 
+ 
+32,260
+ 
+ 
+ 
+ 
+29,293
+ 
+ 
+ 
+ 
+39,913
+ 
+ 
+ 
+ 
+33,910
+ 
+ 
+ 
+ 
+27,512
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Interest expense:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deposits
+
+ 
+ 
+ 
+9,146
+ 
+ 
+ 
+ 
+6,187
+ 
+ 
+ 
+ 
+8,914
+ 
+ 
+ 
+ 
+6,288
+ 
+ 
+ 
+ 
+4,955
+ 
+
+FHLB
+ advances
+
+ 
+ 
+ 
+6,942
+ 
+ 
+ 
+ 
+5,696
+ 
+ 
+ 
+ 
+8,003
+ 
+ 
+ 
+ 
+5,943
+ 
+ 
+ 
+ 
+4,695
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ interest expense
+
+ 
+ 
+ 
+16,088
+ 
+ 
+ 
+ 
+11,883
+ 
+ 
+ 
+ 
+16,917
+ 
+ 
+ 
+ 
+12,231
+ 
+ 
+ 
+ 
+9,650
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ interest income
+
+ 
+ 
+ 
+16,172
+ 
+ 
+ 
+ 
+17,410
+ 
+ 
+ 
+ 
+22,996
+ 
+ 
+ 
+ 
+21,679
+ 
+ 
+ 
+ 
+17,862
+ 
+
+Provision
+ for loan losses
+ 
+ 
+ 
+71
+ 
+ 
+ 
+ 
+320
+ 
+ 
+ 
+ 
+138
+ 
+ 
+ 
+ 
+456
+ 
+ 
+ 
+ 
+900
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ interest income after provision for loan losses
+
+ 
+ 
+ 
+16,101
+ 
+ 
+ 
+ 
+17,090
+ 
+ 
+ 
+ 
+22,858
+ 
+ 
+ 
+ 
+21,223
+ 
+ 
+ 
+ 
+16,962
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Noninterest
+ income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Service
+ charges and fees
+
+ 
+ 
+ 
+6,921
+ 
+ 
+ 
+ 
+6,893
+ 
+ 
+ 
+ 
+9,292
+ 
+ 
+ 
+ 
+8,274
+ 
+ 
+ 
+ 
+7,401
+ 
+
+Gain
+ on sale of loans
+
+ 
+ 
+ 
+1,168
+ 
+ 
+ 
+ 
+794
+ 
+ 
+ 
+ 
+1,056
+ 
+ 
+ 
+ 
+382
+ 
+ 
+ 
+ 
+375
+ 
+
+Income
+ from bank owned life insurance
+
+ 
+ 
+ 
+301
+ 
+ 
+ 
+ 
+285
+ 
+ 
+ 
+ 
+383
+ 
+ 
+ 
+ 
+343
+ 
+ 
+ 
+ 
+493
+ 
+
+Loan
+ servicing fees
+
+ 
+ 
+ 
+420
+ 
+ 
+ 
+ 
+470
+ 
+ 
+ 
+ 
+620
+ 
+ 
+ 
+ 
+672
+ 
+ 
+ 
+ 
+671
+ 
+
+Mortgage
+ servicing rights, net
+
+ 
+ 
+ 
+(223
+)
+ 
+ 
+ 
+(47
+)
+ 
+ 
+ 
+(179
+)
+ 
+ 
+ 
+(480
+)
+ 
+ 
+ 
+22
+ 
+
+Other
+
+ 
+ 
+ 
+39
+ 
+ 
+ 
+ 
+(52
+)
+ 
+ 
+ 
+(63
+)
+ 
+ 
+ 
+937
+ 
+ 
+ 
+ 
+20
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ noninterest income
+
+ 
+ 
+ 
+8,626
+ 
+ 
+ 
+ 
+8,343
+ 
+ 
+ 
+ 
+11,109
+ 
+ 
+ 
+ 
+10,128
+ 
+ 
+ 
+ 
+8,982
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Noninterest
+ expense:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Compensation
+ and benefits
+
+ 
+ 
+ 
+11,363
+ 
+ 
+ 
+ 
+11,428
+ 
+ 
+ 
+ 
+15,081
+ 
+ 
+ 
+ 
+12,636
+ 
+ 
+ 
+ 
+10,553
+ 
+
+Occupancy
+ and equipment
+
+ 
+ 
+ 
+2,145
+ 
+ 
+ 
+ 
+2,073
+ 
+ 
+ 
+ 
+2,759
+ 
+ 
+ 
+ 
+2,765
+ 
+ 
+ 
+ 
+2,778
+ 
+
+Data
+ processing
+
+ 
+ 
+ 
+1,549
+ 
+ 
+ 
+ 
+1,364
+ 
+ 
+ 
+ 
+1,802
+ 
+ 
+ 
+ 
+1,616
+ 
+ 
+ 
+ 
+1,549
+ 
+
+Advertising
+
+ 
+ 
+ 
+972
+ 
+ 
+ 
+ 
+740
+ 
+ 
+ 
+ 
+1,025
+ 
+ 
+ 
+ 
+1,147
+ 
+ 
+ 
+ 
+1,060
+ 
+
+Postage
+ and supplies
+
+ 
+ 
+ 
+487
+ 
+ 
+ 
+ 
+616
+ 
+ 
+ 
+ 
+811
+ 
+ 
+ 
+ 
+785
+ 
+ 
+ 
+ 
+805
+ 
+
+Professional
+ services
+
+ 
+ 
+ 
+620
+ 
+ 
+ 
+ 
+641
+ 
+ 
+ 
+ 
+917
+ 
+ 
+ 
+ 
+905
+ 
+ 
+ 
+ 
+433
+ 
+
+Insurance
+ and taxes
+
+ 
+ 
+ 
+323
+ 
+ 
+ 
+ 
+320
+ 
+ 
+ 
+ 
+431
+ 
+ 
+ 
+ 
+341
+ 
+ 
+ 
+ 
+434
+ 
+
+Charitable
+ contribution to Foundation
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,825
+ 
+ 
+ 
+ 
+ 
+ 
+
+Other
+
+ 
+ 
+ 
+675
+ 
+ 
+ 
+ 
+880
+ 
+ 
+ 
+ 
+1,119
+ 
+ 
+ 
+ 
+1,138
+ 
+ 
+ 
+ 
+964
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ noninterest expense
+
+ 
+ 
+ 
+18,134
+ 
+ 
+ 
+ 
+18,062
+ 
+ 
+ 
+ 
+23,945
+ 
+ 
+ 
+ 
+23,158
+ 
+ 
+ 
+ 
+18,576
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Income before
+ income taxes
+ 
+ 
+ 
+6,593
+ 
+ 
+ 
+ 
+7,371
+ 
+ 
+ 
+ 
+10,022
+ 
+ 
+ 
+ 
+8,193
+ 
+ 
+ 
+ 
+7,368
+ 
+
+Income tax
+ expense
+ 
+ 
+ 
+2,517
+ 
+ 
+ 
+ 
+2,817
+ 
+ 
+ 
+ 
+3,810
+ 
+ 
+ 
+ 
+2,910
+ 
+ 
+ 
+ 
+2,684
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+NET
+ INCOME
+
+ 
+ 
+$
+ 4,076
+ 
+ 
+ 
+$
+ 4,554
+ 
+ 
+ 
+$
+ 6,212
+ 
+ 
+ 
+$
+ 5,283
+ 
+ 
+ 
+$
+ 4,684
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Earnings per
+ common share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Basic
+
+ 
+ 
+$
+0.28
+ 
+ 
+ 
+$
+0.31
+ 
+ 
+ 
+$
+0.43
+ 
+ 
+ 
+$
+0.36
+ 
+ 
+ 
+ 
+nm
+(1)
+
+Diluted
+
+ 
+ 
+$
+0.28
+ 
+ 
+ 
+$
+0.31
+ 
+ 
+ 
+$
+0.43
+ 
+ 
+ 
+$
+0.36
+ 
+ 
+ 
+ 
+nm
+(1)
+
+Weighted average
+ number of shares outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Basic
+
+ 
+ 
+ 
+14,594,936
+ 
+ 
+ 
+ 
+14,478,701
+ 
+ 
+ 
+ 
+14,484,982
+ 
+ 
+ 
+ 
+14,696,071
+ 
+ 
+ 
+ 
+nm
+(1)
+
+Diluted
+
+ 
+ 
+ 
+14,716,165
+ 
+ 
+ 
+ 
+14,503,587
+ 
+ 
+ 
+ 
+14,519,778
+ 
+ 
+ 
+ 
+14,702,084
+ 
+ 
+ 
+ 
+nm
+(1)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Dividends
+ declared per share:
+ 
+ 
+$
+0.165
+ 
+ 
+ 
+$
+0.160
+ 
+ 
+ 
+$
+0.215
+ 
+ 
+ 
+$
+0.100
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1) Shares outstanding and earnings per share information are not meaningful. The
+ Company did not complete its minority stock offering until December 6, 2004 and
+ did not have any outstanding shares prior to that date.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+See accompanying
+ notes.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+F-5
+
+HOME FEDERAL
+ BANCORP, INC. AND SUBSIDIARY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In thousands,
+ except share data)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Unearned
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Issued to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Employee
+ 
+
+Accumulated
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Common Stock
+ 
+
+ Additional
+ 
+ 
+ 
+ 
+ 
+
+Stock
+ 
+
+Other
+ 
+
+Total
+
+ 
+ 
+
+ 
+
+Paid-In
+ 
+
+Retained
+ 
+
+Ownership
+ 
+
+Comprehensive
+ 
+
+Stockholders 
+
+ 
+ 
+
+Shares
+ 
+
+Amount
+ 
+
+Capital
+ 
+
+Earnings
+ 
+
+Plan
+ 
+
+Income (Loss)
+ 
+
+Equity
+
+ 
+ 
+
+ 
+
+Balance at
+ Sept. 30, 2003
+ 
+ 
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+40,415
+ 
+ 
+$
+ 
+ 
+ 
+$
+ (16
+)
+ 
+ 
+$
+ 40,399
+ 
+
+Comprehensive
+ income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ income
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,684
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,684
+ 
+
+Other
+ comprehensive income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Change
+ in unrealized holding loss on securities available for sale, net of taxes
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+14
+ 
+ 
+ 
+ 
+14
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Comprehensive income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,698
+ 
+
+ 
+ 
+
+ 
+
+Balance at
+ Sept. 30, 2004
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+45,099
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(2
+)
+ 
+ 
+ 
+45,097
+ 
+
+Common stock
+ issued
+ 
+ 
+15,062,746
+ 
+ 
+ 
+151
+ 
+ 
+ 
+58,424
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(4,984
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+53,591
+ 
+
+Common stock
+ issued to Foundation
+ 
+ 
+146,004
+ 
+ 
+ 
+1
+ 
+ 
+ 
+1,459
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,460
+ 
+
+Distribution
+ to capitalize Mutual Holding Company
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(50
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(50
+)
+
+ESOP shares
+ committed to be released
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+181
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+434
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+615
+ 
+
+Treasury shares
+ purchased
+ 
+ 
+(298,092
+)
+ 
+ 
+(3
+)
+ 
+ 
+(3,899
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,902
+)
+
+Dividends
+ paid ($0.10 per share)(1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(564
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(564
+)
+
+Comprehensive
+ income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ income
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,283
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,283
+ 
+
+Other
+ comprehensive income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Change
+ in unrealized holding loss on securities available for sale, net of taxes
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(163
+)
+ 
+ 
+ 
+(163
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Comprehensive
+ income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,120
+ 
+
+ 
+ 
+
+ 
+
+Balance at
+ Sept. 30, 2005
+ 
+ 
+14,910,658
+ 
+ 
+ 
+149
+ 
+ 
+ 
+56,115
+ 
+ 
+ 
+49,818
+ 
+ 
+ 
+(4,550
+)
+ 
+ 
+(165
+)
+ 
+ 
+ 
+101,367
+ 
+
+Restricted
+ stock issued, net of forfeitures
+ 
+ 
+258,456
+ 
+ 
+ 
+3
+ 
+ 
+ 
+(3
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ESOP shares
+ committed to be released
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+265
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+416
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+681
+ 
+
+Share-based
+ compensation expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+845
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+845
+ 
+
+Dividends
+ paid ($0.215 per share)(1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(1,225
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(1,225
+)
+
+Comprehensive
+ income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ income
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,212
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,212
+ 
+
+Other
+ comprehensive income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Change
+ in unrealized holding loss on securities available for sale, net of taxes
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(11
+)
+ 
+ 
+ 
+(11
+)
+
+Comprehensive
+ income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,201
+ 
+
+ 
+ 
+
+Balance at
+ Sept. 30, 2006
+ 
+ 
+15,169,114
+ 
+ 
+ 
+152
+ 
+ 
+ 
+57,222
+ 
+ 
+ 
+54,805
+ 
+ 
+ 
+(4,134
+)
+ 
+ 
+(176
+)
+ 
+ 
+ 
+107,869
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(continues
+ on next page)
+
+F-6
+
+HOME FEDERAL
+ BANCORP, INC. AND SUBSIDIARY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+CONSOLIDATED
+ STATEMENT OF STOCKHOLDERS EQUITY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(Continued)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In thousands,
+ except share data)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Unearned
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Shares
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Issued to
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Employee
+ 
+
+Accumulated
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Common Stock
+ 
+
+Additional
+ 
+ 
+ 
+ 
+ 
+
+Stock
+ 
+
+Other
+ 
+
+Total
+
+ 
+ 
+
+ 
+
+Paid-In
+ 
+
+Retained
+ 
+
+Ownership
+ 
+
+Comprehensive
+ 
+
+Stockholders 
+
+ 
+ 
+
+Shares
+ 
+
+Amount
+ 
+
+Capital
+ 
+
+Earnings
+ 
+
+Plan
+ 
+
+Income (Loss)
+ 
+ 
+
+Equity
+
+ 
+ 
+
+ 
+
+Balance at
+ Sept. 30, 2006
+ 
+ 
+15,169,114
+ 
+ 
+ 
+152
+ 
+ 
+ 
+57,222
+ 
+ 
+ 
+54,805
+ 
+ 
+ 
+(4,134
+)
+ 
+ 
+(176
+)
+ 
+ 
+ 
+107,869
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Restricted
+ stock issued, net of forfeitures
+ 
+ 
+(6,924
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ESOP shares
+ committed to be released
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+292
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+326
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+618
+ 
+
+Exercise of
+ stock options
+ 
+ 
+70,053
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+854
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+854
+ 
+
+Share-based
+ compensation expense
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+783
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+783
+ 
+
+Excess tax
+ benefits from equity compensation plans
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+58
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+58
+ 
+
+Dividends
+ paid ($0.165 per share) (1)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(959
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(959
+)
+
+Comprehensive
+ income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ income
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,076
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+4,076
+ 
+
+Other
+ comprehensive income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Change
+ in unrealized holding loss on securities available for sale, net of taxes
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(1,352
+)
+ 
+ 
+ 
+(1,352
+)
+
+Unrealized
+ holding loss resulting from transfer of securities from held to maturity to available
+ for sale, net of deferred income taxes
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(1,949
+)
+ 
+ 
+ 
+(1,949
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Comprehensive
+ income:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+775
+ 
+
+ 
+ 
+
+ 
+
+Balance at
+ June 30, 2007
+ 
+ 
+15,232,243
+ 
+ 
+$
+152
+ 
+ 
+$
+59,209
+ 
+ 
+$
+57,922
+ 
+ 
+$
+(3,808
+)
+ 
+$
+(3,477
+)
+ 
+ 
+$
+109,998
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1)
+ Home Federal MHC waived its receipt of dividends on the 8,979,246 shares it owns.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+See accompanying
+ notes.
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+F-7
+
+HOME FEDERAL
+ BANCORP, INC. AND SUBSIDIARY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+CONSOLIDATED STATEMENT OF CASH FLOWS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+Nine Months Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+ 
+2005
+ 
+
+2004
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+CASH FLOWS
+ FROM OPERATING ACTIVITIES:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net income
+ 
+$
+4,076
+ 
+ 
+$
+4,554
+ 
+ 
+$
+6,212
+ 
+ 
+5,283
+ 
+$
+ 4,684
+ 
+
+Adjustments
+ to reconcile net income to cash provided by operating activities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Depreciation
+ and amortization
+
+ 
+ 
+1,294
+ 
+ 
+ 
+1,226
+ 
+ 
+ 
+1,640
+ 
+ 
+1,615
+ 
+ 
+1,658
+ 
+
+Net
+ accretion of premiums and discounts on investments
+
+ 
+ 
+(49
+)
+ 
+ 
+(69
+)
+ 
+ 
+(90
+)
+ 
+(43
+)
+ 
+(23
+)
+
+(Gain)
+ loss on sale of fixed assets and repossessed assets
+
+ 
+ 
+(3
+)
+ 
+ 
+115
+ 
+ 
+ 
+137
+ 
+ 
+(367
+)
+ 
+40
+ 
+
+(Gain)
+ loss on sale of securities available for sale
+
+ 
+ 
+(4
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+11
+ 
+ 
+39
+ 
+
+Income
+ from death benefits on bank owned life insurance
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(456
+)
+ 
+ 
+ 
+
+ESOP
+ shares committed to be released
+
+ 
+ 
+618
+ 
+ 
+ 
+497
+ 
+ 
+ 
+681
+ 
+ 
+615
+ 
+ 
+ 
+ 
+
+Equity
+ compensation expense
+
+ 
+ 
+783
+ 
+ 
+ 
+624
+ 
+ 
+ 
+845
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Non-cash
+ contribution to Foundation
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,460
+ 
+ 
+ 
+ 
+
+Provision
+ for loan losses
+
+ 
+ 
+71
+ 
+ 
+ 
+320
+ 
+ 
+ 
+138
+ 
+ 
+456
+ 
+ 
+900
+ 
+
+FHLB
+ stock dividend
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(30
+)
+ 
+(278
+)
+
+Deferred
+ compensation expense
+
+ 
+ 
+543
+ 
+ 
+ 
+585
+ 
+ 
+ 
+826
+ 
+ 
+586
+ 
+ 
+661
+ 
+
+Net
+ deferred loan fees
+
+ 
+ 
+139
+ 
+ 
+ 
+414
+ 
+ 
+ 
+541
+ 
+ 
+(153
+)
+ 
+(289
+)
+
+Deferred
+ income tax benefit
+
+ 
+ 
+(357
+)
+ 
+ 
+(340
+)
+ 
+ 
+(397
+)
+ 
+(951
+)
+ 
+(225
+)
+
+Net
+ gain on sale of loans
+
+ 
+ 
+(1,168
+)
+ 
+ 
+(794
+)
+ 
+ 
+(1,056
+)
+ 
+(382
+)
+ 
+(375
+)
+
+Proceeds
+ from sale of loans held for sale
+
+ 
+ 
+78,989
+ 
+ 
+ 
+59,205
+ 
+ 
+ 
+82,416
+ 
+ 
+59,367
+ 
+ 
+70,802
+ 
+
+Originations
+ of loans held for sale
+
+ 
+ 
+(78,303
+)
+ 
+ 
+(58,114
+)
+ 
+ 
+(80,144
+)
+ 
+(60,946
+)
+ 
+(68,938
+)
+
+Net
+ decrease (increase) in value of mortgage servicing rights
+
+ 
+ 
+223
+ 
+ 
+ 
+47
+ 
+ 
+ 
+(137
+)
+ 
+300
+ 
+ 
+156
+ 
+
+Net
+ increase in value of bank owned life insurance
+
+ 
+ 
+(301
+)
+ 
+ 
+(285
+)
+ 
+ 
+(383
+)
+ 
+(343
+)
+ 
+(430
+)
+
+Change
+ in assets and liabilities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest
+ receivable
+
+ 
+ 
+145
+ 
+ 
+ 
+(525
+)
+ 
+ 
+(567
+)
+ 
+(439
+)
+ 
+(435
+)
+
+Other
+ assets
+
+ 
+ 
+(837
+)
+ 
+ 
+(435
+)
+ 
+ 
+(358
+)
+ 
+131
+ 
+ 
+(265
+)
+
+Interest
+ payable
+
+ 
+ 
+(198
+)
+ 
+ 
+(692
+)
+ 
+ 
+(699
+)
+ 
+250
+ 
+ 
+481
+ 
+
+Other
+ liabilities
+
+ 
+ 
+(553
+)
+ 
+ 
+(609
+)
+ 
+ 
+(1,652
+)
+ 
+3,949
+ 
+ 
+(1,015
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Net
+ cash provided by operating activities
+
+ 
+ 
+5,108
+ 
+ 
+ 
+5,724
+ 
+ 
+ 
+7,953
+ 
+ 
+9,913
+ 
+ 
+7,148
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+CASH
+ FLOWS FROM INVESTING ACTIVITIES:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds
+ from maturity of mortgage-backed securities held to maturity
+
+ 
+ 
+13,094
+ 
+ 
+ 
+21,045
+ 
+ 
+ 
+28,065
+ 
+ 
+21,749
+ 
+ 
+12,246
+ 
+
+Purchase
+ of mortgage-backed securities held to maturity
+
+ 
+ 
+ 
+ 
+ 
+ 
+(30,259
+)
+ 
+ 
+(30,259
+)
+ 
+(106,062
+)
+ 
+(84,394
+)
+
+Proceeds
+ from sale and maturity of mortgage-backed securities available for sale
+
+ 
+ 
+12,264
+ 
+ 
+ 
+1,928
+ 
+ 
+ 
+2,609
+ 
+ 
+4,997
+ 
+ 
+117
+ 
+
+Purchase
+ of mortgage-backed securities available for sale
+
+ 
+ 
+(2,102
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(19,261
+)
+ 
+(991
+)
+
+Proceeds
+ from sale of securities available for sale
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,429
+ 
+
+Purchases
+ of property and equipment
+
+ 
+ 
+(672
+)
+ 
+ 
+(972
+)
+ 
+ 
+(2,447
+)
+ 
+(2,802
+)
+ 
+(2,953
+)
+
+Purchase
+ of FHLB stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(2,244
+)
+ 
+(506
+)
+
+Loan
+ originations and principal collections, net
+
+ 
+ 
+11,337
+ 
+ 
+ 
+(24,828
+)
+ 
+ 
+(33,827
+)
+ 
+(39,274
+)
+ 
+(21,127
+)
+
+Purchased
+ loans
+
+ 
+ 
+ 
+ 
+ 
+ 
+(38,782
+)
+ 
+ 
+(38,782
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+F-8
+
+HOME FEDERAL BANCORP, INC.
+ AND SUBSIDIARY
+ CONSOLIDATED STATEMENT OF CASH FLOWS
+ (Continued)
+
+(In thousands)
+
+ 
+Nine Months
+ Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+June 30,
+
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+2007
+ 
+2006
+ 
+2006
+ 
+2005
+ 
+2004
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds
+ from disposition of property and equipment
+
+ 
+ 
+9
+ 
+ 
+ 
+19
+ 
+ 
+ 
+19
+ 
+ 
+ 
+562
+ 
+ 
+ 
+79
+ 
+
+Proceeds
+ from death benefits on bank owned life insurance
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+752
+ 
+ 
+ 
+ 
+ 
+
+Purchase
+ of bank owned life insurance
+
+ 
+ 
+ 
+ 
+ 
+ 
+(281
+)
+ 
+ 
+(281
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds
+ from sale of repossessed assets
+
+ 
+ 
+ 
+ 
+ 
+ 
+510
+ 
+ 
+ 
+510
+ 
+ 
+ 
+223
+ 
+ 
+ 
+436
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net
+ cash provided (used) by investing activities
+
+ 
+ 
+33,930
+ 
+ 
+ 
+(71,620
+)
+ 
+ 
+(74,393
+)
+ 
+ 
+(141,360
+)
+ 
+ 
+(91,664
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+CASH FLOWS
+ FROM FINANCING ACTIVITIES:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net
+ (decrease) increase in deposits
+
+ 
+ 
+(11,583
+)
+ 
+ 
+43,144
+ 
+ 
+ 
+33,956
+ 
+ 
+ 
+53,238
+ 
+ 
+ 
+41,814
+ 
+
+Net
+ increase (decrease) in advances by borrowers for taxes and insurance
+
+ 
+ 
+(1,212
+)
+ 
+ 
+(2,802
+)
+ 
+ 
+(1,765
+)
+ 
+ 
+182
+ 
+ 
+ 
+163
+ 
+
+Proceeds
+ from FHLB advances
+
+ 
+ 
+143,835
+ 
+ 
+ 
+186,550
+ 
+ 
+ 
+253,425
+ 
+ 
+ 
+260,950
+ 
+ 
+ 
+178,299
+ 
+
+Repayment
+ of FHLB advances
+
+ 
+ 
+(165,330
+)
+ 
+ 
+(164,761
+)
+ 
+ 
+(218,599
+)
+ 
+ 
+(207,815
+)
+ 
+ 
+(152,028
+)
+
+Stock
+ subscription orders received (refunded)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(220,813
+)
+ 
+ 
+220,813
+ 
+
+Capitalization
+ of Home Federal MHC
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(50
+)
+ 
+ 
+ 
+ 
+
+Proceeds
+ from exercise of stock options
+
+ 
+ 
+854
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Excess
+ tax benefit from equity compensation plans
+
+ 
+ 
+58
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Dividends
+ paid
+
+ 
+ 
+(959
+)
+ 
+ 
+(910
+)
+ 
+ 
+(1,225
+)
+ 
+ 
+(564
+)
+ 
+ 
+ 
+ 
+
+Repurchase
+ of common stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,902
+)
+ 
+ 
+ 
+ 
+
+Net
+ proceeds from stock issuance
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+53,591
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net
+ cash (used) provided by financing activities
+
+ 
+ 
+(34,337
+)
+ 
+ 
+61,221
+ 
+ 
+ 
+65,792
+ 
+ 
+ 
+(65,183
+)
+ 
+ 
+289,061
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+NET
+ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
+
+ 
+ 
+4,701
+ 
+ 
+ 
+(4,675
+)
+ 
+ 
+(648
+)
+ 
+ 
+(196,630
+)
+ 
+ 
+204,545
+ 
+
+CASH
+ AND CASH EQUIVALENTS, BEGINNING OF YEAR
+
+ 
+ 
+18,385
+ 
+ 
+ 
+19,033
+ 
+ 
+ 
+19,033
+ 
+ 
+ 
+215,663
+ 
+ 
+ 
+11,118
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+CASH
+ AND CASH EQUIVALENTS, END OF YEAR
+
+ 
+$
+23,086
+ 
+ 
+$
+14,358
+ 
+ 
+$
+18,385
+ 
+ 
+$
+ 19,033
+ 
+ 
+$
+215,663
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+SUPPLEMENTAL
+ DISCLOSURE OF CASH FLOW INFORMATION:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash
+ paid during the year for:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest
+
+ 
+$
+16,286
+ 
+ 
+$
+12,575
+ 
+ 
+$
+17,617
+ 
+ 
+$
+11,988
+ 
+ 
+$
+9,170
+ 
+
+Income
+ taxes
+
+ 
+ 
+2,825
+ 
+ 
+ 
+3,296
+ 
+ 
+ 
+4,226
+ 
+ 
+ 
+3,650
+ 
+ 
+ 
+3,416
+ 
+
+NONCASH
+ INVESTING AND FINANCING ACTIVITIES:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Acquisition
+ of real estate and other assets in settlement of loans
+
+ 
+$
+153
+ 
+ 
+$
+2
+ 
+ 
+$
+2
+ 
+ 
+$
+790
+ 
+ 
+$
+ 512
+ 
+
+Fair
+ value adjustment to securities available for sale, net of taxes
+
+ 
+ 
+(3,301
+)
+ 
+ 
+(125
+)
+ 
+ 
+(11
+)
+ 
+ 
+(163
+)
+ 
+ 
+14
+ 
+
+Transfer
+ of securities from held to maturity to available for sale
+
+ 
+ 
+171,688
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fair
+ value adjustment to securities available for sale, net of taxes as a result of transferring
+ securities from held to maturity to available for sale
+
+ 
+ 
+(1,949
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+See accompanying notes.
+
+F-9
+
+HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
+
+SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+
+Note 1 - Summary of Significant
+ Accounting Policies
+
+Nature of Business and Reorganization:
+
+Home Federal Bancorp, Inc. was formed to serve as the stock holding company for
+ Home Federal Savings and Loan Association of Nampa pursuant to the Association s
+ mutual holding company reorganization. In connection with the mutual holding company
+ reorganization, the Association converted to a federally chartered stock savings
+ bank and changed its name to Home Federal Bank. On December 6, 2004, the Company s minority stock offering closed and 6,083,500 shares were sold at $10.00 per
+ share, 8,979,246 shares were issued to Home Federal MHC, the mutual holding company
+ parent of the Company, and an additional 146,004 shares were issued to the Foundation.
+
+The Bank was founded in 1920 as a building and loan association and reorganized
+ as a federal mutual savings and loan association in 1936. The Bank is a community-oriented
+ financial institution dedicated to serving the financial service needs of consumers
+ and businesses within its market area. The Bank s primary business is attracting
+ deposits from the general public and using these funds to originate loans. It emphasizes
+ the origination of loans secured by first mortgages on owner-occupied, residential
+ real estate, residential development and construction, and commercial real estate.
+ To a lesser extent, it originates other types of real estate loans, commercial business
+ loans and consumer loans.
+
+The Bank serves the Treasure Valley region of southwestern
+ Idaho, which includes Ada, Canyon, Elmore and Gem Counties, through its 15 full-service
+ banking offices and two loan centers. Nearly 40% of the state s population
+ lives and works in the four counties served by Home Federal Bank. Ada County has
+ the largest population and includes the city of Boise, the state capitol. Home Federal
+ Bank maintains its largest branch presence in Ada County with eight locations, followed
+ by Canyon County with five offices, including the Company s corporate headquarters
+ in Nampa. The two remaining branches are located in Elmore and Gem Counties.
+
+Basis of Presentation:
+
+The
+consolidated financial statements presented in this report include the accounts
+of Home Federal Bancorp, Inc. (the Company ) and its wholly-owned subsidiary,
+Home Federal Bank (the Bank ). The financial statements of the Company have
+been prepared in conformity with accounting principles generally accepted in
+the United States of America for interim financial information and are
+unaudited. All significant intercompany transactions and balances have been
+eliminated. In the opinion of the Company s management, all adjustments
+consisting of normal recurring accruals necessary for a fair presentation of
+the financial condition and results of operations for the interim periods
+included herein have been made.
+
+Certain information
+and note disclosures normally included in the Company s annual consolidated
+financial statements have been condensed or omitted. Therefore, these
+consolidated financial statements and notes thereto should be read in
+conjunction with the Company s audited financial statements and notes included
+in the Annual Report on Form 10-K for the year ended September 30, 2006 ( 2006
+Form 10-K ) filed with the Securities and Exchange Commission ( SEC ) on
+December 11, 2006.
+
+Principles of Consolidation:
+The consolidated financial statements
+ of the Company include the accounts of the Company, the Bank and its wholly-owned
+ subsidiary, Idaho Home Service Corporation. The Idaho Home Service Corporation
+has been inactive since September 2002. All intercompany transactions and balances
+ have been eliminated in consolidation.
+
+Use of Estimates in the Preparation
+ of Financial Statements:
+The financial statements have been prepared
+ in accordance with accounting principles generally accepted in the United States
+ of America. In preparing the financial statements, management is required to make
+ estimates and assumptions that affect the reported amounts of certain assets and
+ liabilities as of the date of the statement of financial condition and certain revenues
+ and expenses for the period. Actual results could differ, either positively or 
+
+F-10
+
+negatively,
+ from those estimates. Material estimates that are particularly susceptible to significant
+ change in the near-term relate to the determination of the allowance for loan losses,
+ the fair market value of capitalized mortgage servicing rights, as well as deferred
+ income taxes.
+
+Management believes that the allowance for loan losses is adequate,
+ and the valuation of mortgage servicing assets and computation of deferred taxes
+ are proper. While management uses currently available information to recognize losses
+ on loans and impairment of mortgage servicing assets, future additions to the allowance
+ and future impairments may be necessary based on changes in economic conditions.
+ In addition, various regulatory agencies, as an integral part of their examination
+ process, periodically review the Company s allowance for loan losses and valuation
+ of mortgage servicing assets. Such agencies may require the Company to recognize
+ additions to the allowance or an impairment of mortgage servicing assets based on
+ their judgments of information available to them at the time of their examination.
+
+Cash and Cash Equivalents:
+For the purposes of reporting cash
+ flows, the Company has defined cash and cash equivalents as those amounts included
+ in the statement of financial condition caption Cash and amounts due from depository
+ institutions. Cash and cash equivalents, including interest-bearing
+ deposits, are on deposit with other banks and financial institutions in amounts
+ that periodically exceed the federal insurance limit. Management believes that its
+ risk of loss associated with such balances is minimal due to the financial strength
+ of the banks and financial institutions. The Company has not experienced any losses
+ in such accounts.
+
+Cash on Hand and in Banks:
+The Company is
+ required to maintain an average reserve balance with the Federal Reserve Bank, or
+ maintain such reserve in cash on hand. The amount of this required reserve balance
+ at June 30, 2007 (unaudited), September 30, 2006 and 2005 was $2.1 million, $1.9
+ million and $687,000, respectively.
+
+Securities Held to Maturity:
+
+Securities for which the Company has the positive intent and ability to hold
+ to maturity are reported at cost, adjusted for premiums and discounts that are recognized
+ in interest income using methods that approximate the interest method over the period
+ to maturity. Securities held to maturity consists only of mortgage-backed securities.
+
+Securities Available for Sale:
+Available for sale securities
+ consist of mortgage-backed securities, which are not classified as trading securities
+ or as held to maturity securities.
+
+Unrealized holding gains and losses, net of
+ tax, on available for sale securities are reported as a net amount in a separate
+ component of equity until realized. Gains and losses on the sale of available for
+ sale securities are determined using the specific-identification method and are
+ included in earnings.
+
+Declines in the fair value of individual held to maturity
+ and available for sale securities below their cost that are other than temporary
+ result in write-downs of the individual securities to their fair value. In estimating
+ other-than-temporary losses, management considers, among other things, (1) the length
+ of time and the extent to which the fair value has been less than cost, (2) the
+ financial condition and near term prospectus of the issuer, and (3) the Company s ability and intent to hold the security for a period of time sufficient to
+ allow for any anticipated recovery in fair value. Any such write-downs would be
+ included in earnings as realized losses. Management believes that all unrealized
+ losses on investment securities at June 30, 2007, September 30, 2006 and 2005 are
+ temporary.
+
+FHLB Stock:
+As a member of the FHLB of Seattle, the
+ Bank is required to maintain a minimum level of investment in capital stock of the
+ FHLB based on specific percentages of its outstanding FHLB advances, total assets
+ and mortgages. The Bank s investment in FHLB of Seattle stock is carried at
+ par value ($100 per share), which reasonably approximates its fair value. The Bank
+ may request redemption at par value of any stock in excess of the amount the Bank
+ is required to hold. FHLB stock is restricted as to purchase, sale, and redemption.
+
+F-11
+
+Loans Held for Sale:
+Mortgage loans originated and intended
+ for sale in the secondary market are carried at the lower of cost or estimated market
+ value in the aggregate. Net unrealized losses, if any, are recognized through a
+ valuation allowance by charges to income.
+
+Loan commitments related to the origination
+ of mortgage loans held for sale and the corresponding sales contracts are considered
+ derivative instruments as defined by SFAS 133 (as amended). Pursuant to that Statement,
+ they are recognized on the consolidated balance sheet in other assets and other
+ liabilities at fair value.
+
+Loans Receivable and Allowance for Loan Losses:
+
+The Bank grants commercial, real estate, and consumer loans to customers.
+ A substantial portion of the loan portfolio is represented by commercial real estate
+ and residential real estate loans made primarily to borrowers in Idaho. The ability
+ of the Bank s debtors to honor their contracts is dependent upon the real estate
+ market and/or general economic conditions in the Bank s market area.
+
+Loans
+ are stated at the amount of unpaid principal, adjusted for deferred loan fees and
+ related costs and an allowance for loan losses. Interest on loans is calculated
+ by using the simple interest method on daily balances of the principal amount outstanding. Interest
+ income is accrued on the unpaid balance. Loan origination fees, net of certain direct
+ origination costs, are deferred and recognized as an adjustment of the related loan
+ yield using the interest method.
+
+The accrual of interest on mortgage and commercial
+ loans is discontinued at the time the loan is 90 days delinquent, or in the opinion
+ of management, the collection of interest is questionable. Thereafter, no interest
+ is taken into income unless received in cash or until such time as the borrower
+ demonstrates the ability to resume payments of principal and interest.
+
+Premiums
+ and discounts on purchased loans are amortized over the estimated life of the loans
+ as an adjustment to yield using the interest method.
+
+A loan is considered impaired
+ when, based on current information and events, it is probable that the Bank will
+ be unable to collect the scheduled payments of principal or interest when due according
+ to the contractual terms of the loan agreement. Factors considered by management
+ in determining impairment include payment status, collateral value, and the probability
+ of collecting scheduled principal and interest payments when due. Loans that experience
+ insignificant payment delays and payment shortfalls generally are not classified
+ as impaired. Management determines the significance of payment delays and payment
+ shortfalls on a case-by-case basis, taking into consideration all of the circumstances
+ surrounding the loan and the borrower, including the length of the delay, the reasons
+ for the delay, the borrower s prior payment record, and the amount of the shortfall
+ in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
+ basis for nonhomogeneous loan types and larger balance homogeneous loan types by
+ either the present value of expected future cash flows discounted at the loan s
+ effective interest rate, the loan s obtainable market price, or the fair value
+ of the collateral if the loan is collateral dependent.
+
+An allowance for probable
+ losses is maintained at a level deemed by management to be adequate to provide for
+ probable loan losses through charges to operating expense. The allowance is based
+ upon a periodic review of loans which includes consideration of actual net loan
+ loss experience, changes in the size and character of the loan portfolio, identification
+ of individual problem situations that may affect the borrower s ability to
+ pay, and an evaluation of current economic conditions. Loan losses are recognized
+ through charges to the allowance.
+
+Real Estate Acquired in Settlement of
+ Loans:
+Real estate acquired through foreclosure or deeds in lieu of foreclosure
+ is stated at the lower of cost or estimated net realizable value. When the property
+ is acquired, any excess of the loan balance over the estimated net realizable value
+ is charged to the reserve for loan losses. Holding costs, subsequent write-downs
+ to net realizable value, if any, or any disposition gains or losses are included
+ in noninterest income and expenses. Costs of development and improvement of the
+ property are capitalized.
+
+F-12
+
+Property and Equipment:
+Properties
+ and equipment are stated at cost, less accumulated depreciation and amortization.
+ Leasehold improvements are amortized over the term of the lease or the estimated
+ useful life of the improvements, whichever is less. Depreciation and amortization
+ are generally computed using the straight-line method for financial statement purposes
+ over the following estimated useful lives and lease periods:
+
+ 
+Buildings
+ and leasehold improvements
+ 
+15-40 years
+ 
+
+ 
+Furniture,
+ equipment, and automobiles
+ 
+3-12 years
+ 
+
+The normal costs of maintenance and repairs
+ are charged to expense as incurred.
+
+Mortgage Servicing Rights:
+
+Impairment of mortgage servicing rights is assessed based on the fair value of
+ those rights. Fair values are estimated using discounted cash flows based on current
+ market interest rates. For purposes of measuring impairment, the rights are stratified
+ based on loan type, size, note rate, date of origination, and term. The amount of
+ impairment recognized is the amount by which the capitalized mortgage servicing
+ rights for a stratum exceed their fair value. The Company utilizes an independent
+ third party to assess the fair value of the servicing rights.
+
+Fees earned for servicing mortgage loans
+ are reported as income when the related mortgage loan payments are collected. Loan
+ servicing costs are charged to expense as incurred.
+
+Income Taxes:
+
+Deferred income taxes are reported for temporary differences between items of
+ income or expense reported in the financial statements and those reported for income
+ tax purposes. Deferred taxes are computed using the asset and liability approach
+ as prescribed in SFAS No. 109, Accounting for Income Taxes. Under this method,
+ a deferred tax asset or liability is determined based on the enacted tax rates that
+ will be in effect when the differences between the financial statement carrying
+ amounts and tax basis of existing assets and liabilities are expected to be reported
+ in the Company s income tax returns. The deferred tax provision for the year
+ is equal to the net change in the net deferred tax liability from the beginning
+ to the end of the year, less amounts applicable to the change in value related to
+ investments available for sale. The effect on deferred taxes of a change in tax
+ rates is recognized as income in the period that includes the enactment date.
+
+Comprehensive Income:
+Accounting principles generally require that
+ recognized revenue, expenses, gains, and losses be included in net income. Although
+ certain changes in assets and liabilities, such as unrealized gains and losses on
+ available for sale securities, are reported as separate components of the equity
+ section of the statement of financial condition, such items, along with net income
+ are components of comprehensive income.
+
+The components of other comprehensive
+ income and related tax effects are as follows:
+
+ 
+Nine Months
+ Ended
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+June 30,
+
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+2007
+ 
+ 
+2006
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+2004
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+(in thousands)
+
+Unrealized
+ holding gain (loss) on available for sale securities
+ 
+$
+(5,505
+)
+ 
+$
+(208
+)
+ 
+$
+(19
+)
+ 
+$
+(282
+)
+ 
+$
+63
+ 
+
+Reclassification
+ adjustment for gain (loss) realized in income
+ 
+ 
+4
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(11
+)
+ 
+ 
+(39
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net unrealized
+ gain (loss)
+ 
+ 
+(5,501
+)
+ 
+ 
+(208
+)
+ 
+ 
+(19
+)
+ 
+ 
+(271
+)
+ 
+ 
+24
+ 
+
+Tax effect
+ 
+ 
+2,200
+ 
+ 
+ 
+83
+ 
+ 
+ 
+8
+ 
+ 
+ 
+108
+ 
+ 
+ 
+(10
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Unrealized
+ gain (loss) after tax
+
+ 
+$
+(3,301
+)
+ 
+$
+(125
+)
+ 
+$
+(11
+)
+ 
+$
+(163
+)
+ 
+$
+14
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+F-13
+
+Advertising Costs:
+Advertising
+ costs are expensed as incurred. Advertising expense were $972,000 and $740,000 for
+ the nine months ended June 30, 2007 (unaudited) and 2006 (unaudited), and were $1.0
+ million, $1.1 million and $1.1 million for the years ended September 30, 2006, 2005,
+ and 2004, respectively.
+
+Recent Accounting Pronouncements:
+In
+ October 2006, the Financial Accounting Standards Board ( FASB ) issued
+ SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
+ Postretirement Plans. The Statement is an amendment of Statements No. 87, 88,
+ 106, and 132(R). SFAS No. 158 requires most public companies, as defined in the
+ Statement, to fully recognize an asset or liability for the overfunded or underfunded
+ status of their postretirement benefit plans in financial statements. The Statement
+ is effective for entities with publicly traded equity securities for fiscal years
+ ending after December 15, 2006 and did not have a significant impact on the Company s consolidated financial
+condition or results of operations.
+
+On February
+ 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
+ and Financial Liabilities. The statement permits entities to choose to measure
+ selected financial assets and liabilities at fair value, with changes in fair value recorded in earnings.
+ The objective is to improve financial reporting by providing entities with the opportunity
+ to mitigate volatility in earnings caused by measuring related assets and liabilities
+ differently without having to apply complex hedge accounting provisions. The statement
+ is effective as of the beginning of an entity s first fiscal year beginning
+ after November 15, 2007. An entity may elect to early adopt as of the beginning
+ of a fiscal year that begins on or before November 15, 2007. The Company is in the
+ process of evaluating the impact of the statement on its consolidated financial
+ position and results of operations.
+
+Stock-Based Compensation:
+
+On June 23, 2005, stockholders approved long-term stock-based benefit plans that
+ enable the Company to grant stock options, stock appreciation rights and restricted
+ stock awards to employees and directors. As of October 1, 2005, the Company adopted
+ SFAS No. 123(R), Share Based Payment, which requires the recognition of compensation
+ costs relating to share based payment transactions in the financial statements.
+ The Company has elected the modified prospective application method of reporting,
+ which provides for no restatement of prior periods and no cumulative adjustment
+ to equity accounts. Prior to the adoption of SFAS No. 123(R), the Company elected
+ to account for its stock-based compensation plans using the intrinsic value-based
+ method of recognizing compensation costs outlined in APB Opinion No. 25, Accounting
+ for Stock Issued to Employees, and adopted the disclosure-only provisions under
+ SFAS No. 123, Accounting for Stock-Based Compensation.
+
+Earnings
+ per share ( EPS ) data:
+The Company displays basic and diluted
+ EPS in the Consolidated Statements of Income. Basic EPS is computed by dividing
+ net income or loss by the weighted average number of shares outstanding during the
+ period. Unallocated shares relating to the ESOP are deducted in the calculation
+ of weighted average shares outstanding. Diluted EPS is computed by dividing net
+ income or loss by the diluted weighted average shares outstanding, which includes
+ common stock equivalent shares outstanding using the treasury stock method, unless
+ such shares are anti-dilutive. Common stock equivalents include stock options and
+ restricted stock awards.
+
+Employee Stock Ownership Plan:
+The
+ Company accounts for its ESOP in accordance with the AICPA SOP 93-6, Employer s Accounting for Employee Stock Ownership Plans. Dividends on allocated
+ shares are recorded as a reduction of retained earnings and paid to plan participants
+ or distributed to participants accounts. As shares are released, compensation
+ expense is recorded equal to the then current market price of the shares and the
+ shares become available for earnings per share calculations. The Company records
+ cash dividends on unallocated shares as a reduction of debt or accrued interest.
+
+Concentrations of Credit Risk:
+The Bank accepts deposits
+ and grants credit primarily within the Treasure Valley region of southwestern Idaho,
+ which includes Ada, Canyon, Elmore and Gem Counties. The Bank has a diversified
+ loan portfolio and grants consumer, residential, commercial, and construction real
+ estate loans, and is not dependent on any industry or group of customers. Although
+ the Bank has a diversified loan portfolio, a substantial portion of its loans are
+ real-estate-related. The ability of the Bank s debtors to honor their contracts
+ is dependant upon the real estate and general economic conditions in the area. The
+ Bank also regularly monitors real-estate related loans that include terms that may
+ give rise to a concentration of credit risk, including high loan-to-value loans
+ and interest-only loans.
+
+Reclassifications:
+Certain reclassifications
+ have been made to prior year s financial statements in order to conform with
+ the current year presentation. The reclassifications had no effect on previously
+ reported net income or equity.
+
+F-14
+
+Note 2 - Securities
+
+Our investment
+policies are designed to provide and maintain adequate liquidity and to
+generate favorable rates of return without incurring undue interest rate or
+credit risk. The investment policies generally limit investments to
+mortgage-backed securities, U.S. Government and agency securities, municipal
+bonds, certificates of deposit and marketable corporate debt obligations.
+Investment in mortgage-backed securities includes those issued or guaranteed by
+Fannie Mae, Freddie Mac and Ginnie Mae. We may purchase mortgage-backed
+securities to supplement loan originations for portfolio during periods when we
+are not able to originate the desired level of portfolio loans.
+
+During the quarter ended June 30, 2007,
+ the Company transferred its entire portfolio of held to maturity mortgage-backed
+ securities to available for sale to meet the additional liquidity needs associated
+ with increasing commercial banking activities. As a result, mortgage-backed securities
+ with an amortized cost, gross unrealized gains and gross unrealized losses of $171.7
+ million, $228,000 and $3.5 million, respectively were transferred to the available
+ for sale category. As part of its liquidity management, the Company does not intend
+ to classify any securities as held to maturity for a minimum of two years.
+
+Mortgage-backed securities available for
+ sale consisted of the following:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Gross
+ 
+ 
+
+Gross
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+Amortized
+ 
+ 
+
+Unrealized
+ 
+ 
+
+Unrealized
+ 
+ 
+
+Fair
+
+ 
+ 
+ 
+ 
+
+Cost
+ 
+ 
+
+Gains
+ 
+ 
+Losses
+ 
+
+ 
+
+Value
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+(in thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+June 30, 2007 (unaudited)
+
+ 
+ 
+ 
+ 
+
+ 
+Agency mortgage-backed
+ securities
+ 
+ 
+$
+169,076
+ 
+ 
+$
+85
+ 
+ 
+$
+(5,756
+)
+ 
+$
+163,405
+
+ 
+Non-agency
+ mortgage-backed
+ 
+ 
+ 
+3,475
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(125
+)
+ 
+ 
+3,350
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+
+ 
+ 
+$
+172,551
+ 
+ 
+$
+85
+ 
+ 
+$
+(5,881
+)
+ 
+$
+166,755
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+September 30, 2006
+
+ 
+ 
+ 
+ 
+
+ 
+Agency mortgage-backed
+ securities
+ 
+ 
+$
+12,476
+ 
+ 
+$
+ 
+ 
+ 
+$
+(294
+)
+ 
+$
+12,182
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+September 30, 2005
+
+ 
+ 
+ 
+ 
+
+ 
+Agency mortgage-backed
+ securities
+ 
+ 
+$
+15,105
+ 
+ 
+$
+ 
+ 
+ 
+$
+(275
+)
+ 
+$
+14,830
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+The contractual maturities of mortgage-backed
+ securities available for sale are shown below. Expected maturities may differ from
+ contractual maturities because borrowers have the right to prepay obligations without
+ prepayment penalties.
+
+ 
+ 
+ 
+ 
+
+June 30, 2007
+ 
+ 
+ 
+
+September 30, 2006
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+Amortized
+ 
+ 
+ 
+
+Fair
+ 
+ 
+ 
+
+Amortized
+ 
+ 
+
+Fair
+
+ 
+ 
+ 
+ 
+
+Cost
+ 
+ 
+ 
+
+Value
+ 
+ 
+ 
+
+Cost
+ 
+ 
+
+Value
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+(unaudited)
+
+ 
+ 
+ 
+
+(in thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Due within
+ one year
+ 
+ 
+$
+67
+ 
+ 
+ 
+$
+ 67
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+
+ 
+Due after
+ one year through five years
+ 
+ 
+ 
+335
+ 
+ 
+ 
+ 
+339
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Due after
+ five years through ten years
+ 
+ 
+ 
+6,924
+ 
+ 
+ 
+ 
+6,703
+ 
+ 
+ 
+ 
+574
+ 
+ 
+ 
+554
+
+ 
+Due after
+ ten years
+ 
+ 
+ 
+165,225
+ 
+ 
+ 
+ 
+159,646
+ 
+ 
+ 
+ 
+11,902
+ 
+ 
+ 
+11,628
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+
+ 
+ 
+$
+172,551
+ 
+ 
+ 
+$
+166,755
+ 
+ 
+ 
+$
+12,476
+ 
+ 
+$
+12,182
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+Proceeds from sales of securities available
+ for sale amounted to $3.9 million and $ million for the nine months
+
+F-15
+
+ended
+ June 30, 2007 (unaudited) and 2006 (unaudited) and $ , $935,000 and $5.4 million
+ for the years ended September 30, 2006, 2005, and 2004, million respectively. Gross
+ realized gains were $4,000 for the nine months ended June 30, 2007 (unaudited),
+ and were included in other noninterest income on the Consolidated Statement of Income.
+ Gross realized losses were $ , $11,000 and $39,000 for the years ended September
+ 30, 2006, 2005, and 2004, respectively, and were included in other noninterest income
+ on the Consolidated Statement of Income.
+
+Mortgage-backed securities held to maturity
+ consisted of the following:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Gross
+ 
+ 
+
+Gross
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Amortized
+ 
+ 
+
+Unrealized
+ 
+ 
+
+Unrealized
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+Cost
+ 
+
+Gains
+ 
+ 
+
+Losses
+ 
+ 
+ 
+
+Fair Value
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+June 30, 2007 (unaudited)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Agency mortgage-backed
+ securities
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 
+
+ 
+Non-agency
+ mortgage-backed securities
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+Total
+
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+September 30, 2006
+
+ 
+ 
+ 
+
+ 
+Agency mortgage-backed
+ securities
+ 
+$
+179,738
+ 
+ 
+$
+138
+ 
+ 
+$
+(4,470
+)
+ 
+ 
+$
+175,406
+
+ 
+Non-agency
+ mortgage-backed securities
+
+ 
+ 
+3,541
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(105
+)
+ 
+ 
+ 
+3,436
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+Total
+
+ 
+$
+183,279
+ 
+ 
+$
+138
+ 
+ 
+$
+(4,575
+)
+ 
+ 
+$
+178,842
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+September 30, 2005
+
+ 
+ 
+ 
+
+ 
+Agency mortgage-backed
+ securities
+ 
+$
+177,336
+ 
+ 
+$
+323
+ 
+ 
+$
+(2,607
+)
+ 
+ 
+$
+175,052
+
+ 
+Non-agency
+ mortgage-backed securities
+
+ 
+ 
+3,638
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(77
+)
+ 
+ 
+ 
+3,561
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+Total
+
+ 
+$
+180,974
+ 
+ 
+$
+323
+ 
+ 
+$
+(2,684
+)
+ 
+ 
+$
+178,613
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+The contractual
+ maturities of mortgage-backed securities held to maturity are shown below. Expected
+ maturities may differ from contractual maturities because borrowers have the right
+ to prepay obligations without prepayment penalties.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+June 30, 2007
+ 
+ 
+
+September 30, 2006
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+Amortized
+ 
+ 
+
+Fair
+ 
+ 
+
+Amortized
+ 
+ 
+
+Fair
+
+ 
+ 
+ 
+
+Cost
+ 
+ 
+
+Value
+ 
+ 
+
+Cost
+ 
+ 
+
+Value
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Due within
+ one year
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+68
+ 
+ 
+$
+68
+
+ 
+Due after
+ one year through five years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+788
+ 
+ 
+ 
+794
+
+ 
+Due after
+ five years through ten years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,955
+ 
+ 
+ 
+6,725
+
+ 
+Due after
+ ten years
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+175,468
+ 
+ 
+ 
+171,255
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+183,279
+ 
+ 
+$
+178,842
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+F-16
+
+The fair value of temporarily impaired securities,
+ the amount of unrealized losses and the length of time these unrealized losses existed
+ as of June 30, 2007 and September 30, 2006 are as follows:
+
+ 
+ 
+ 
+
+June 30, 2007 (unaudited)
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+Less than 12 months
+ 
+ 
+
+12 months or longer
+ 
+ 
+
+Total
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+Fair
+ 
+ 
+
+Unrealized
+ 
+ 
+
+Fair
+ 
+ 
+
+Unrealized
+ 
+ 
+
+Fair
+ 
+ 
+
+Unrealized
+ 
+
+ 
+ 
+ 
+
+Value
+ 
+ 
+
+Losses
+ 
+ 
+
+Value
+ 
+ 
+
+Losses
+ 
+ 
+
+Value
+ 
+ 
+
+Losses
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Mortgage-backed securities,
+ available for sale
+
+ 
+$
+13,506
+ 
+ 
+$
+(111
+)
+ 
+$
+140,747
+ 
+ 
+$
+(5,770
+)
+ 
+$
+154,253
+ 
+ 
+$
+(5,881
+)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+Total
+
+ 
+$
+13,506
+ 
+ 
+$
+(111
+)
+ 
+$
+140,747
+ 
+ 
+$
+(5,770
+)
+ 
+$
+154,253
+ 
+ 
+$
+(5,881
+)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ September 30, 2006
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+Less than 12 months
+ 
+
+12 months or longer
+ 
+ 
+
+Total
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+Fair
+ 
+
+Unrealized
+ 
+ 
+
+Fair
+ 
+
+Unrealized
+ 
+ 
+
+Fair
+ 
+
+Unrealized
+ 
+
+ 
+ 
+ 
+
+Value
+ 
+
+Losses
+ 
+ 
+
+Value
+ 
+
+Losses
+ 
+ 
+
+Value
+ 
+
+Losses
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Mortgage-backed securities,
+ available for sale
+ 
+$
+ 
+ 
+ 
+$
+ 
+ 
+ 
+$
+ 12,182
+ 
+ 
+$
+ (294
+)
+ 
+$
+ 12,182
+ 
+ 
+$
+(294
+)
+
+ 
+Mortgage-backed securities,
+ held to maturity
+ 
+ 
+38,511
+ 
+ 
+ 
+(486
+)
+ 
+ 
+125,178
+ 
+ 
+ 
+(4,089
+)
+ 
+ 
+163,689
+ 
+ 
+ 
+(4,575
+)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+Total
+
+ 
+$
+38,511
+ 
+ 
+$
+(486
+)
+ 
+$
+137,360
+ 
+ 
+$
+(4,383
+)
+ 
+$
+175,871
+ 
+ 
+$
+(4,869
+)
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Management has evaluated these securities
+ and has determined that the decline in the value is temporary and not related to
+ the underlying credit quality of the issuers or an industry specific event. The
+ declines in value are on securities that have contractual maturity dates and future
+ principal payments will be sufficient to recover the current amortized cost of the
+ securities. The Company has the ability and intent to hold the securities for a
+ reasonable period of time for a forecasted recovery of the amortized cost.
+
+As of June 30, 2007 (unaudited) and September 30, 2006, the Bank had pledged mortgage-backed
+ securities with an amortized cost of $95.2 million and $105.4 million and a fair
+ value of $90.6 million and $102.1 million as collateral for FHLB advances. As of
+ June 30, 2007 (unaudited), mortgage-backed securities with an amortized cost of
+ $7.1 million and a fair value of $6.8 million were pledged to the Federal Reserve
+ Bank as collateral for treasury tax and loan funds held by the Bank and for borrowings
+ from the discount window. As of June 30, 2007 (unaudited) and September 30, 2006,
+ the Company has also pledged a mortgage-backed security with an amortized cost of
+ $2.5 million and $3.0 million and a fair value of $2.4 million and $2.8 million
+ as collateral for a $1.5 million revolving line of credit from the Bank. As of June
+ 30, 2007 (unaudited) and September 30, 2006, there was no balance owed on the line
+ of credit.
+
+F-17
+
+Note 3 - Loans Receivable
+
+Loans receivable are summarized as follows:
+
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+
+ 
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+ 
+ 
+
+2007
+ 
+ 
+
+2006
+ 
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+
+ 
+Real Estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+One-
+ to four-family residential
+
+ 
+$
+259,600
+ 
+ 
+$
+293,640
+ 
+ 
+$
+252,126
+
+ 
+Multi-family
+ residential
+
+ 
+ 
+6,910
+ 
+ 
+ 
+7,049
+ 
+ 
+ 
+5,454
+
+ 
+Commercial
+
+ 
+ 
+134,734
+ 
+ 
+ 
+125,401
+ 
+ 
+ 
+116,432
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+ real estate
+
+ 
+ 
+401,244
+ 
+ 
+ 
+426,090
+ 
+ 
+ 
+374,012
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Real Estate
+ Construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+One-
+ to four-family residential
+
+ 
+ 
+21,296
+ 
+ 
+ 
+23,678
+ 
+ 
+ 
+14,421
+
+ 
+Multi-family
+ residential
+
+ 
+ 
+997
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,427
+
+ 
+Commercial
+ and land development
+
+ 
+ 
+23,895
+ 
+ 
+ 
+16,344
+ 
+ 
+ 
+7,470
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+ real estate construction
+
+ 
+ 
+46,188
+ 
+ 
+ 
+40,022
+ 
+ 
+ 
+23,318
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Home
+ equity
+
+ 
+ 
+40,328
+ 
+ 
+ 
+34,143
+ 
+ 
+ 
+28,558
+
+ 
+Automobile
+
+ 
+ 
+2,433
+ 
+ 
+ 
+3,245
+ 
+ 
+ 
+4,576
+
+ 
+Other
+ consumer
+
+ 
+ 
+1,393
+ 
+ 
+ 
+1,300
+ 
+ 
+ 
+1,530
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+ consumer
+
+ 
+ 
+44,154
+ 
+ 
+ 
+38,688
+ 
+ 
+ 
+34,664
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Commercial
+ business
+ 
+ 
+4,064
+ 
+ 
+ 
+2,480
+ 
+ 
+ 
+2,759
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+495,650
+ 
+ 
+ 
+507,280
+ 
+ 
+ 
+434,753
+
+ 
+Less:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Deferred
+ loan fees
+
+ 
+ 
+1,134
+ 
+ 
+ 
+1,241
+ 
+ 
+ 
+927
+
+ 
+Allowance
+ for loan losses
+
+ 
+ 
+2,748
+ 
+ 
+ 
+2,974
+ 
+ 
+ 
+2,882
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Loans
+ receivable, net
+
+ 
+$
+491,768
+ 
+ 
+$
+503,065
+ 
+ 
+$
+430,944
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+The majority of residential mortgage
+ loans are pledged as collateral for FHLB advances (see Note 7).
+
+F-18
+
+The contractual maturity of loans receivable
+ at June 30, 2007 (unaudited), are shown below. Expected maturities will differ
+ from contractual maturities because borrowers may have the right to prepay loans
+ with or without prepayment penalties.
+
+ 
+ 
+ 
+
+Within 1
+ 
+ 
+
+One Year
+ 
+ 
+
+After 5
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Year
+ 
+ 
+
+To 5 Years
+ 
+ 
+
+Years
+ 
+ 
+
+Total
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+
+ 
+Real estate:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+One-
+ to four-family residential
+
+ 
+$
+25
+ 
+ 
+$
+ 2,974
+ 
+ 
+$
+256,601
+ 
+ 
+$
+259,600
+
+ 
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,910
+ 
+ 
+ 
+6,910
+
+ 
+Commercial
+
+ 
+ 
+2,294
+ 
+ 
+ 
+6,158
+ 
+ 
+ 
+126,282
+ 
+ 
+ 
+134,734
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+ real estate
+
+ 
+ 
+2,319
+ 
+ 
+ 
+9,132
+ 
+ 
+ 
+389,793
+ 
+ 
+ 
+401,244
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Real estate
+ construction:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+One-
+ to four-family residential
+
+ 
+ 
+18,088
+ 
+ 
+ 
+1,098
+ 
+ 
+ 
+2,110
+ 
+ 
+ 
+21,296
+
+ 
+Multi-family
+ residential
+
+ 
+ 
+ 
+ 
+ 
+ 
+147
+ 
+ 
+ 
+850
+ 
+ 
+ 
+997
+
+ 
+Commercial
+ and land development
+
+ 
+ 
+8,055
+ 
+ 
+ 
+4,278
+ 
+ 
+ 
+11,562
+ 
+ 
+ 
+23,895
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+ real estate construction
+
+ 
+ 
+26,143
+ 
+ 
+ 
+5,523
+ 
+ 
+ 
+14,522
+ 
+ 
+ 
+46,188
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Consumer:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Home
+ equity
+
+ 
+ 
+689
+ 
+ 
+ 
+2,532
+ 
+ 
+ 
+37,107
+ 
+ 
+ 
+40,328
+
+ 
+Automobile
+
+ 
+ 
+21
+ 
+ 
+ 
+2,103
+ 
+ 
+ 
+309
+ 
+ 
+ 
+2,433
+
+ 
+Other
+ consumer
+
+ 
+ 
+978
+ 
+ 
+ 
+405
+ 
+ 
+ 
+10
+ 
+ 
+ 
+1,393
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total
+ consumer
+
+ 
+ 
+1,688
+ 
+ 
+ 
+5,040
+ 
+ 
+ 
+37,426
+ 
+ 
+ 
+44,154
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Commercial
+ business
+ 
+ 
+2,670
+ 
+ 
+ 
+1,247
+ 
+ 
+ 
+147
+ 
+ 
+ 
+4,064
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+Total loans
+ receivable
+ 
+$
+32,820
+ 
+ 
+$
+20,942
+ 
+ 
+$
+441,888
+ 
+ 
+$
+495,650
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+The interest rates on loans at June
+ 30, 2007 (unaudited), fall into the following fixed and variable components (in
+ thousands):
+
+ 
+Fixed rates
+ 
+$
+215,209
+
+ 
+Variable rates
+ 
+ 
+280,441
+
+ 
+ 
+ 
+
+ 
+Total
+ loans receivable
+
+ 
+$
+495,650
+
+ 
+ 
+ 
+
+An analysis of the changes in the allowance
+ for loan losses is as follows:
+
+F-19
+
+ 
+ 
+ 
+ 
+
+ 
+
+Year Ended September 30,
+ 
+
+ 
+ 
+ 
+
+June 30,
+ 
+
+June 30,
+ 
+
+ 
+
+ 
+ 
+ 
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+ 
+
+2005
+ 
+ 
+
+2004
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+(unaudited)
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+(in thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+Beginning
+ balance
+ 
+$
+2,974
+ 
+$
+
+2,882
+ 
+
+$
+2,882
+ 
+ 
+$
+2,637
+ 
+ 
+$
+1,853
+ 
+
+ 
+Provision
+ for loan losses
+
+ 
+ 
+71
+ 
+ 
+
+320
+ 
+
+ 
+138
+ 
+ 
+ 
+456
+ 
+ 
+ 
+900
+ 
+
+ 
+Charge
+ offs
+
+ 
+ 
+(115
+)
+ 
+
+(64
+)
+
+ 
+(70
+)
+ 
+ 
+(234
+)
+ 
+ 
+(136
+)
+
+ 
+Recoveries
+
+ 
+ 
+10
+ 
+ 
+
+22
+ 
+
+ 
+24
+ 
+ 
+ 
+23
+ 
+ 
+ 
+20
+ 
+
+ 
+Transfer
+ to unfunded commitments
+
+ 
+ 
+(192
+)
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+Ending balance
+ 
+$
+2,748
+ 
+$
+
+3,160
+ 
+
+$
+2,974
+ 
+ 
+$
+2,882
+ 
+ 
+$
+2,637
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+At June 30, 2007 (unaudited) and September
+ 30, 2006, 2005 and 2004, the Company did not have any impaired loans. The average
+ balance of impaired loans was approximately $94,000, $14,000, $152,000 and $93,000
+ for the nine months ended June 30, 2007 and for the years ended September 30, 2006,
+ 2005 and 2004, respectively. No interest income was recognized on impaired
+ loans as of June 30, 2007 and September 30, 2006, 2005 and 2004, respectively. As
+ of June 30, 2007 and September 30, 2006, 2005, and 2004, the Company had no accruing
+ loans that were contractually past due 90 days or more. The Company is not committed
+ to lend additional funds to debtors whose loans have been modified.
+
+Note 4 - Mortgage Servicing Rights
+
+Mortgage servicing rights represent the
+ fair value of the future loan servicing fees from the right to service loans for
+ others. The unpaid principal balances of loans serviced at June 30, 2007 (unaudited)
+ and June 30, 2006 (unaudited) were $197.6 million and $221.0 million respectively. The unpaid principal balances of loans serviced for others at September 30, 2006, 2005 , and 2004 were $216.7 million , $242.3 million, and $257.0 million, respectively. Loans serviced for others are not
+included in the consolidated statements
+ of financial condition. In general, during periods of falling interest rates, mortgage
+ loans prepay faster and the value of the mortgage servicing rights declines. Conversely,
+ during periods of rising rates, the value of the mortgage servicing rights generally
+ increases as a result of slower rates of prepayments. The Company does not use derivatives
+ to hedge fluctuations in the fair value of the servicing rights.
+
+As of October 1, 2006, the Company adopted
+ SFAS No. 156, Accounting for Servicing of Financial Assets, to measure mortgage
+ servicing rights using the fair value method. As a result, the Company measures
+ each class of mortgage servicing rights at fair value at each reporting date, and
+ reports changes in fair value in earnings in the period in which the change occurs.
+ Prior to the adoption of SFAS No. 156, the Company elected to account for its mortgage
+ servicing rights using the amortization method previously required by SFAS No. 140.
+
+The Company has identified two classes of
+ mortgage servicing assets based upon the nature of the collateral, interest rate
+ mechanism and nature of the loan. The Company uses an independent third party to
+ periodically value the residential mortgage servicing rights using information such
+ as anticipated prepayment speeds, discount rates and servicing fees associated with
+ the type of loans sold. The mortgage servicing rights associated with commercial
+ loans, which represent an immaterial portion of total mortgage servicing rights,
+ are evaluated internally on a periodic basis.
+
+Upon the change from the amortization method
+ to fair value accounting under SFAS No. 156, the calculation of amortization and
+ the assessment of impairment were discontinued. Those measurements have been replaced
+ by adjustments to fair value that encompass market-driven valuation changes. Under
+ the fair value method, the changes in fair value are reported in Mortgage
+ servicing rights, net on the Consolidated Statements of Income.
+
+The following table lists the classes of
+ servicing rights, activities in the balance of each class and fees earned for the
+ periods indicated:
+
+F-20
+
+ 
+ 
+ 
+
+Nine Months Ended
+ 
+ 
+ 
+
+Year Ended
+ 
+
+ 
+ 
+ 
+
+June 30,
+ 
+ 
+ 
+
+September 30,
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Servicing
+ Right Classes
+ 
+ 
+
+2007
+ 
+ 
+ 
+
+2006
+ 
+ 
+ 
+
+2006
+ 
+ 
+ 
+
+2005
+ 
+ 
+ 
+
+2004
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+One- to four-family
+ residential loans:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning
+ Balance
+
+ 
+ 
+$
+2,468
+ 
+ 
+ 
+$
+2,615
+ 
+ 
+ 
+$
+2,615
+ 
+ 
+ 
+$
+3,061
+ 
+ 
+ 
+$
+3,033
+ 
+
+Additions
+ for new mortgage servicing rights capitalized
+
+ 
+ 
+ 
+45
+ 
+ 
+ 
+ 
+114
+ 
+ 
+ 
+ 
+153
+ 
+ 
+ 
+ 
+429
+ 
+ 
+ 
+ 
+741
+ 
+
+Adjustments
+ to fair value
+
+ 
+ 
+ 
+(260
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(437
+)
+ 
+ 
+ 
+(575
+)
+ 
+ 
+ 
+ 
+ 
+
+Amortization
+ of servicing rights
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(351
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(557
+)
+
+Write-up
+ (impairment)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+201
+ 
+ 
+ 
+ 
+137
+ 
+ 
+ 
+ 
+(300
+)
+ 
+ 
+ 
+(156
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Ending
+ Balance
+
+ 
+ 
+$
+2,253
+ 
+ 
+ 
+$
+2,579
+ 
+ 
+ 
+$
+2,468
+ 
+ 
+ 
+$
+2,615
+ 
+ 
+ 
+$
+3,061
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Commercial
+ real estate loans:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning
+ Balance
+
+ 
+ 
+$
+ 24
+ 
+ 
+ 
+$
+ 56
+ 
+ 
+ 
+$
+ 56
+ 
+ 
+ 
+$
+ 91
+ 
+ 
+ 
+$
+ 97
+ 
+
+Additions
+ for new mortgage servicing rights capitalized
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+11
+ 
+ 
+ 
+ 
+ 
+ 
+
+Adjustments
+ to fair value
+
+ 
+ 
+ 
+(8
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Amortization
+ of servicing rights
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(11
+)
+ 
+ 
+ 
+(32
+)
+ 
+ 
+ 
+(46
+)
+ 
+ 
+ 
+(6
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Ending
+ Balance
+
+ 
+ 
+$
+16
+ 
+ 
+ 
+$
+ 45
+ 
+ 
+ 
+$
+ 24
+ 
+ 
+ 
+$
+ 56
+ 
+ 
+ 
+$
+ 91
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+The amount of contractually specified servicing
+ fees for one- to four-family residential loans were $420,000 and $470,000 for the
+ nine months ended June 30, 2007 (unaudited) and 2006 (unaudited) and were $620,000,
+ $672,000, and $671,000, for the years ended September 30, 2006, 2005 and 2004 respectively.
+ The amount of contractually specified servicing fees for commercial real estate
+ loans were $9,000 and $12,000 for the nine months ended June 30, 2007 (unaudited)
+ and 2006 (unaudited) and were $15,000, $18,000 and $22,000 for the years ended September
+ 30, 2006, 2005 and 2004, respectively. The servicing fees for one- to four-family
+ residential loans are recorded in Loan Servicing Fees on the Consolidated
+ Statements of Income. Late fees and other ancillary fees earned for the periods
+ indicated were immaterial in amount.
+
+Note 5 - Properties and Equipment
+
+Properties and equipment at June 30, 2007
+ and September 30, 2006 and 2005 are summarized as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Land
+ 
+ 
+$
+ 2,880
+ 
+ 
+ 
+$
+2,875
+ 
+ 
+ 
+$
+ 2,634
+ 
+
+Buildings
+ and leasehold improvements
+ 
+ 
+ 
+9,938
+ 
+ 
+ 
+ 
+9,718
+ 
+ 
+ 
+ 
+9,307
+ 
+
+Construction
+ in progress
+ 
+ 
+ 
+68
+ 
+ 
+ 
+ 
+261
+ 
+ 
+ 
+ 
+802
+ 
+
+Furniture
+ and equipment
+ 
+ 
+ 
+9,342
+ 
+ 
+ 
+ 
+8,888
+ 
+ 
+ 
+ 
+9,005
+ 
+
+Automobiles
+ 
+ 
+ 
+108
+ 
+ 
+ 
+ 
+114
+ 
+ 
+ 
+ 
+166
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ cost
+
+ 
+ 
+ 
+22,336
+ 
+ 
+ 
+ 
+21,856
+ 
+ 
+ 
+ 
+21,914
+ 
+
+Less accumulated
+ depreciation and amortization
+ 
+ 
+ 
+(10,065
+)
+ 
+ 
+ 
+(9,007
+)
+ 
+ 
+ 
+(9,919
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ book value
+
+ 
+ 
+$
+ 12,271
+ 
+ 
+ 
+$
+12,849
+ 
+ 
+ 
+$
+11,995
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+During the year ended September 30, 2005,
+ the Company sold a former branch. The net book value of the branch and related assets
+ sold was $145,000 and resulted in a $386,000 gain. During the year ended September
+ 30, 2004, the Company closed one branch. Assets disposed of relating to the closing
+ of the branch totaled approximately
+
+F-21
+
+$121,000 and resulted in total losses of $47,000.
+
+Repairs and maintenance are charged against
+ income as incurred; major renewals and improvements are capitalized. Depreciation
+ and amortization charged against operations were $1.2 million and $1.2 million for
+ the nine months ended June 30, 2007 (unaudited) and 2006 (unaudited) and $1.6 million,
+ $1.6 million and $1.7 million for the years ended September 30, 2006, 2005, and
+ 2004, respectively.
+
+Note 6 - Deposit Accounts
+
+Deposit information by type and weighted
+ average rates are summarized as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+At September 30,
+
+ 
+ 
+
+At June 30,
+ 
+ 
+
+ 
+ 
+
+Rate
+ 
+
+2007
+ 
+
+Rate
+ 
+
+2006
+ 
+
+Rate
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(dollars in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Savings deposits
+ 
+ 
+0.58
+%
+ 
+ 
+$
+ 23,465
+ 
+ 
+ 
+0.25
+%
+ 
+ 
+$
+ 23,655
+ 
+ 
+ 
+0.20
+%
+ 
+ 
+$
+ 25,219
+ 
+
+Demand deposits
+ 
+ 
+1.27
+%
+ 
+ 
+ 
+168,138
+ 
+ 
+ 
+0.76
+%
+ 
+ 
+ 
+172,902
+ 
+ 
+ 
+0.40
+%
+ 
+ 
+ 
+173,641
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+191,603
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+196,557
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+198,860
+ 
+
+Certificates
+ of deposit
+ 
+ 
+0.00-0.99
+%
+ 
+ 
+ 
+385
+ 
+ 
+ 
+0.00-0.99
+%
+ 
+ 
+ 
+268
+ 
+ 
+ 
+0.00-0.99
+%
+ 
+ 
+ 
+1,803
+ 
+
+ 
+ 
+ 
+1.00-1.99
+%
+ 
+ 
+ 
+30
+ 
+ 
+ 
+1.00-1.99
+%
+ 
+ 
+ 
+341
+ 
+ 
+ 
+1.00-1.99
+%
+ 
+ 
+ 
+10,287
+ 
+
+ 
+ 
+ 
+2.00-2.99
+%
+ 
+ 
+ 
+3,096
+ 
+ 
+ 
+2.00-2.99
+%
+ 
+ 
+ 
+17,924
+ 
+ 
+ 
+2.00-2.99
+%
+ 
+ 
+ 
+56,343
+ 
+
+ 
+ 
+ 
+3.00-3.99
+%
+ 
+ 
+ 
+40,003
+ 
+ 
+ 
+3.00-3.99
+%
+ 
+ 
+ 
+57,055
+ 
+ 
+ 
+3.00-3.99
+%
+ 
+ 
+ 
+89,955
+ 
+
+ 
+ 
+ 
+4.00-4.99
+%
+ 
+ 
+ 
+56,398
+ 
+ 
+ 
+4.00-4.99
+%
+ 
+ 
+ 
+75,300
+ 
+ 
+ 
+4.00-4.99
+%
+ 
+ 
+ 
+20,437
+ 
+
+ 
+ 
+ 
+5.00-5.99
+%
+ 
+ 
+ 
+126,443
+ 
+ 
+ 
+5.00-5.99
+%
+ 
+ 
+ 
+74,728
+ 
+ 
+ 
+5.00-5.99
+%
+ 
+ 
+ 
+18,412
+ 
+
+ 
+ 
+ 
+6.00-6.99
+%
+ 
+ 
+ 
+740
+ 
+ 
+ 
+6.00-6.99
+%
+ 
+ 
+ 
+8,108
+ 
+ 
+ 
+6.00-6.99
+%
+ 
+ 
+ 
+228
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Total
+ Certificates of deposit
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+227,095
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+233,724
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+197,465
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Total deposits
+ 
+ 
+ 
+ 
+ 
+ 
+$
+418,698
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+430,281
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+396,325
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Scheduled maturities of certificates of
+ deposits are as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2006
+ 
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+$
+107,381
+ 
+
+2007
+ 
+ 
+ 
+81,327
+ 
+ 
+ 
+ 
+188,461
+ 
+ 
+ 
+ 
+62,886
+ 
+
+2008
+ 
+ 
+ 
+113,874
+ 
+ 
+ 
+ 
+28,407
+ 
+ 
+ 
+ 
+17,976
+ 
+
+2009
+ 
+ 
+ 
+16,253
+ 
+ 
+ 
+ 
+8,586
+ 
+ 
+ 
+ 
+5,911
+ 
+
+2010
+ 
+ 
+ 
+9,529
+ 
+ 
+ 
+ 
+6,201
+ 
+ 
+ 
+ 
+3,057
+ 
+
+2011
+ 
+ 
+ 
+4,961
+ 
+ 
+ 
+ 
+1,810
+ 
+ 
+ 
+ 
+ 
+ 
+
+Thereafter
+ 
+ 
+ 
+1,151
+ 
+ 
+ 
+ 
+259
+ 
+ 
+ 
+ 
+254
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+$
+227,095
+ 
+ 
+ 
+$
+233,724
+ 
+ 
+ 
+$
+197,465
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Deposit accounts are insured by the FDIC
+ up to $100,000, except for individual retirement accounts that are insured up to
+ $250,000. At June 30, 2007 (unaudited), September 30, 2006 and 2005, certificates
+ of deposits of $100,000 or greater were $67.5 million, $68.5 million and $54.1 million,
+ respectively.
+
+F-22
+
+Interest expense by type of deposit account
+ is summarized as follows:
+
+ 
+ 
+
+Nine Months Ended
+ 
+ 
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+Year Ended September 30,
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Savings deposits
+ 
+ 
+$
+ 68
+ 
+ 
+ 
+$
+ 38
+ 
+ 
+ 
+$
+ 51
+ 
+ 
+ 
+$
+ 51
+ 
+ 
+ 
+$
+ 60
+ 
+
+Demand deposits
+ 
+ 
+ 
+1,234
+ 
+ 
+ 
+ 
+697
+ 
+ 
+ 
+ 
+1,000
+ 
+ 
+ 
+ 
+692
+ 
+ 
+ 
+ 
+460
+ 
+
+Certificates
+ of deposit
+ 
+ 
+ 
+7,844
+ 
+ 
+ 
+ 
+5,452
+ 
+ 
+ 
+ 
+7,863
+ 
+ 
+ 
+ 
+5,545
+ 
+ 
+ 
+ 
+4,435
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+
+ 
+ 
+$
+9,146
+ 
+ 
+ 
+$
+6,187
+ 
+ 
+ 
+$
+8,914
+ 
+ 
+ 
+$
+6,288
+ 
+ 
+ 
+$
+4,955
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Note 7 - Federal Home Loan Bank Advances
+
+The Bank has the ability to borrow up to
+ 40% of its total assets from the FHLB of Seattle, limited by available collateral.
+ Advances are collateralized by all FHLB stock owned by the Bank, deposits with the
+ FHLB of Seattle, and certain residential mortgages and mortgage-backed securities.
+ The outstanding balances on FHLB advances at June 30, 2007 (unaudited), September
+ 30, 2006 and 2005 were $189.3 million, $210.8 million and $175.9 million, respectively,
+ with interest rates ranging from 2.84% to 6.77% as of June 30, 2007.
+
+The Bank s borrowings consisted of
+ the following:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+ 
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(dollars in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+FHLB advances
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Maximum
+ outstanding at any month end
+
+ 
+ 
+$
+223,000
+ 
+ 
+ 
+$
+214,000
+ 
+ 
+ 
+$
+182,000
+ 
+
+Average
+ outstanding
+
+ 
+ 
+ 
+208,000
+ 
+ 
+ 
+ 
+191,000
+ 
+ 
+ 
+ 
+153,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Weighted average
+ interest rates
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+For
+ the period
+
+ 
+ 
+ 
+4.46
+%
+ 
+ 
+ 
+4.20
+%
+ 
+ 
+ 
+3.87
+%
+
+At
+ end of period
+
+ 
+ 
+ 
+4.50
+%
+ 
+ 
+ 
+4.36
+%
+ 
+ 
+ 
+3.96
+%
+
+F-23
+
+Scheduled maturities of the fixed rate FHLB
+ borrowings were:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+
+ 
+ 
+
+June 30,
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+Average
+Interest
+Rates
+ 
+ 
+
+Amount
+ 
+
+Average
+Interest
+Rates
+ 
+ 
+
+Amount
+ 
+
+Average
+Interest
+Rates
+ 
+
+Amount
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(dollars in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2006
+ 
+ 
+ 
+%
+ 
+ 
+$
+ 
+ 
+ 
+ 
+ 
+%
+ 
+ 
+$
+ 
+ 
+ 
+ 
+3.76
+%
+ 
+ 
+$
+ 33,279
+ 
+
+2007
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3.87
+ 
+ 
+ 
+ 
+47,729
+ 
+ 
+ 
+3.51
+ 
+ 
+ 
+ 
+38,453
+ 
+
+2008
+ 
+ 
+3.96
+ 
+ 
+ 
+ 
+43,682
+ 
+ 
+ 
+4.14
+ 
+ 
+ 
+ 
+43,758
+ 
+ 
+ 
+3.90
+ 
+ 
+ 
+ 
+34,358
+ 
+
+2009
+ 
+ 
+4.53
+ 
+ 
+ 
+ 
+76,192
+ 
+ 
+ 
+4.60
+ 
+ 
+ 
+ 
+76,882
+ 
+ 
+ 
+4.08
+ 
+ 
+ 
+ 
+34,902
+ 
+
+2010
+ 
+ 
+4.71
+ 
+ 
+ 
+ 
+15,840
+ 
+ 
+ 
+4.69
+ 
+ 
+ 
+ 
+15,240
+ 
+ 
+ 
+4.44
+ 
+ 
+ 
+ 
+9,240
+ 
+
+2011
+ 
+ 
+5.07
+ 
+ 
+ 
+ 
+15,300
+ 
+ 
+ 
+5.10
+ 
+ 
+ 
+ 
+1,450
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2012
+ 
+ 
+4.96
+ 
+ 
+ 
+ 
+14,550
+ 
+ 
+ 
+4.71
+ 
+ 
+ 
+ 
+4,000
+ 
+ 
+ 
+4.71
+ 
+ 
+ 
+ 
+4,000
+ 
+
+Thereafter
+ 
+ 
+4.65
+ 
+ 
+ 
+ 
+23,700
+ 
+ 
+ 
+4.64
+ 
+ 
+ 
+ 
+21,700
+ 
+ 
+ 
+4.64
+ 
+ 
+ 
+ 
+21,700
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Total
+
+ 
+ 
+ 
+ 
+ 
+ 
+$
+189,264
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+210,759
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+175,932
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Included in the Bank s borrowing capacity
+ with the FHLB is a cash management advance account. The balance in this account
+ at June 30, 2007 (unaudited), September 30, 2006 and 2005 was $ , $4.6 million
+ and $2.1 million, respectively, and the interest rates for this account were 5.62%,
+ 5.58% and 4.14%, respectively. In addition, during the current year, the Company
+ entered into an agreement with the Federal Reserve to borrow from the discount window.
+ The balance in this account at June 30, 2007 (unaudited), was $ .
+
+Note 8 - Employee Retirement Plans
+
+401(k) Plan: The Company has
+ a 401(k) retirement plan covering substantially all of its employees. The Company
+ matches 50% of employee contributions up to the employee s first 10% contributed
+ to the Plan. Total Company contributions were $161,000 and $141,000 for the nine
+ months ended June 30, 2007 (unaudited) and 2006 (unaudited), and $192,000, $171,000
+ and $141,000, for the years ended September 30, 2006, 2005, and 2004, respectively.
+
+Salary Continuation Plan:
+As a supplement to the 401(k) retirement
+ plan, the Company has adopted a Salary Continuation Plan pursuant to agreements
+ with certain executive officers of the Company and its subsidiaries. Under the Salary
+ Continuation Plan, an executive will be entitled to a stated annual benefit for
+ a period of 15 years (i) upon retirement from the Company after attaining age 65,
+ or (ii) upon attaining age 65 if his or her employment had been previously terminated
+ due to disability. In the event the executive dies while in active service, the
+ Company shall pay the beneficiary the normal retirement projected benefit for a
+ period of 15 years commencing with the month following the executive s death.
+ In the event the executive dies after age 65, but before receiving the full 15 years
+ of annual benefits, the remaining payments shall be paid to his or her beneficiaries.
+ Upon termination of employment, the annual benefit amount is 50% of the officer s average final 36 months base salary. Benefits under the Plan vest over ten
+ years. Upon early retirement, the Company shall pay the executive the vested accrual
+ balance as of the end of the month prior to the early retirement date. The Company
+ shall pay the early retirement benefit in 180 equal installments.
+
+The accrued
+ liability for the salary continuation plan was $1.8 million, $1.5 million and $1.1
+ million at June 30, 2007 (unaudited), September 30, 2006 and 2005, respectively.
+ The amounts recognized in compensation expense were $351,000 and $233,000 for the
+ nine months ended June 30, 2007 (unaudited) and 2006 (unaudited), and $311,000,
+ $318,000 and $192,000 for the years ended September 30, 2006, 2005, and 2004, respectively.
+
+Deferred Incentive Compensation:
+The Company has deferred incentive compensation
+ agreements with certain executive officers and the Board of
+
+F-24
+
+Directors. Under the agreements, the Company
+ is obligated to provide for each such executive and board member or his beneficiaries
+ during a period of fifteen or ten years after the death, disability, or retirement
+ of the executive or board member. The estimated present value of future benefits
+ to be paid is being accrued over the period from the effective date of the agreement
+ until the expected retirement dates of the participants.
+
+The Company accrues annual interest on the
+ unfunded liability under the plan based upon a formula relating to the change in
+ stockholders equity, which amounted to 12.0%, 11.0%, and 11.1% for directors
+ and 12.0%, 11.7%, and 11.7% for executive officers for the years ended September
+ 30, 2006, 2005 and 2004, respectively. The accrued liability for the deferred incentive
+ compensation agreements was $1.8 million, $1.7 million and $1.3 million at June
+ 30, 2007 (unaudited), September 30, 2006 and 2005, respectively. The amounts recognized
+ in compensation expense were $123,000 and $302,000 for the nine months ended June
+ 30, 2007 (unaudited) and 2006 (unaudited), and $422,000, $93,000 and $230,000 for
+ the years ended September 30, 2006, 2005, and 2004, respectively.
+
+Director Retirement Plan:
+The Company adopted a Director Retirement
+ Plan, effective October 1, 2004, pursuant to agreements with the directors of the
+ Company. Under the Director Retirement Plan, a director will be entitled to a stated
+ annual benefit of $500 for each completed year of service paid over a period of
+ 15 years upon separation from service. In the event the director dies after separation
+ from service, but before receiving the full 15 years of annual benefits, the remaining
+ payments shall be paid to his or her beneficiaries.
+
+The accrued liability for
+ the director retirement plans was $503,000, $478,000 and $453,000 at June 30, 2007
+ (unaudited), September 30, 2006 and 2005, respectively. The amounts recognized in
+ compensation expense were $37,000 and $38,000 for the nine months ended June 30,
+ 2007 (unaudited) and 2006 (unaudited) and $50,000 and $120,000 for the years ended
+ September 30, 2006 and 2005, respectively.
+
+The Company s deferred compensation
+ agreements and supplemental executive retirement plans are unfunded plans and have
+ no plan assets. The following table reconciles the accumulated liability for the
+ benefit obligation of these contracts. The benefit obligation represents the net
+ present value of future payments to individuals under the agreements.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Year ended September 30,
+ 
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning
+ balance
+
+ 
+ 
+$
+3,875
+ 
+ 
+ 
+$
+3,049
+ 
+ 
+ 
+$
+2,463
+ 
+
+Benefit
+ expense
+
+ 
+ 
+ 
+558
+ 
+ 
+ 
+ 
+842
+ 
+ 
+ 
+ 
+592
+ 
+
+Benefit
+ payments
+
+ 
+ 
+ 
+(15
+)
+ 
+ 
+ 
+(16
+)
+ 
+ 
+ 
+(6
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Ending
+ Balance
+
+ 
+ 
+$
+4,418
+ 
+ 
+ 
+$
+3,875
+ 
+ 
+ 
+$
+3,049
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Note 9 - Stock-Based Compensation
+
+On June 23, 2005, stockholders approved
+ long-term stock-based benefit plans that enable the Company to grant stock options,
+ stock appreciation rights and restricted stock awards to employees and directors.
+ As of October 1, 2005, the Company adopted SFAS No. 123(R), Share Based Payment, which requires the recognition of compensation costs relating to share based
+ payment transactions in the financial statements. The Company has elected the modified
+ prospective application method of reporting, which provides for no restatement of
+ prior periods and no cumulative adjustment to equity accounts. Prior to the adoption
+ of SFAS No. 123(R), the Company elected to account for its stock-based compensation
+ plans using the intrinsic value-based method of recognizing compensation costs outlined
+ in APB Opinion No. 25, Accounting for Stock Issued to Employees, and adopted
+ the disclosure-only provisions under SFAS No. 123, Accounting for Stock-Based
+ Compensation.
+
+Recognition and Retention Plan ( RRP ). The purpose of the RRP is to promote the long-term interests of the
+ Company and its stockholders by providing restricted stock as a means for attracting
+ and retaining directors and key employees. The maximum number of shares that may
+ be awarded under the RRP is 298,092. Restricted stock
+
+F-25
+
+awards vest over a five-year period and,
+ therefore, the fair value of these awards will be accrued ratably over a five-year
+ period as compensation expense. The amounts recognized in compensation expense were
+ $532,000 and $513,000 for the nine months ended June 30, 2007 (unaudited) and 2006
+ (unaudited), and $616,000 for the year ended September 30, 2006. As of June 30,
+ 2007, restricted stock awards of 251,532 shares of common stock were outstanding.
+ As of June 30, 2007, awards of 48,693 shares have vested with a fair value of $618,000.
+ The Company has an aggregate of 46,560 restricted shares available for future issuance
+ under the RRP.
+
+Restricted stock activity is summarized
+ in the following table:
+
+ 
+ 
+
+Number of
+Shares
+ 
+
+Weighted
+Average
+Fair Value
+at Date of
+Grant
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Nonvested
+ at September 30, 2005
+ 
+ 
+ 
+ 
+ 
+ 
+$
+ 
+ 
+
+ Granted
+ 
+ 
+270,380
+ 
+ 
+ 
+ 
+12.70
+ 
+
+ Forfeited
+ 
+ 
+(11,924
+)
+ 
+ 
+ 
+12.70
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Nonvested
+ at September 30, 2006
+ 
+ 
+258,456
+ 
+ 
+ 
+$
+12.85
+ 
+
+ Vested
+ 
+ 
+(48,693
+)
+ 
+ 
+ 
+12.70
+ 
+
+ Granted
+ 
+ 
+5,000
+ 
+ 
+ 
+ 
+17.43
+ 
+
+ Forfeited
+ 
+ 
+(11,924
+)
+ 
+ 
+ 
+12.70
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Nonvested
+ at June 30, 2007
+ 
+ 
+202,839
+ 
+ 
+ 
+$
+12.95
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Stock Option and Incentive Plan ( SOP ). The Company implemented the SOP to promote the long-term interests of
+ the Company and its stockholders by providing an incentive to directors and key
+ employees who contribute to the operating success of the Company. The maximum number
+ of stock options and stock appreciation rights that may be issued under the SOP
+ is 745,229. The exercise price of each option equals the fair market value of the
+ Company s stock on the date of grant. The options vest over five years and
+ expire ten years from the date of grant. The Company has an aggregate of 115,948
+ stock options available for future issuance under the SOP.
+
+The fair value of each option award is estimated
+ on the date of grant using the Black-Scholes option pricing model that uses the
+ assumptions noted in the following table. The risk-free rate is based on the U.S.
+ Treasury yield curve in effect at the time of grant. The expected life of options
+ granted represents the period of time that options granted are expected to be outstanding.
+ Expected volatilities are based on historical volatility of the Company s stock.
+ Expected forfeiture rate is the estimated forfeiture rate based upon the circumstances
+ of the individuals that received stock options. Expected dividends represent the
+ Company s estimated annual dividend rate over the expected life.
+
+ 
+ 
+
+Risk Free
+Interest
+Rate
+ 
+
+Expected
+Life (yrs)
+ 
+
+Expected
+Volatility
+ 
+
+Expected
+Forfeiture
+Rate
+ 
+
+Expected
+Dividend
+Yield
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Options granted
+ in 2005
+ 
+ 
+3.98
+%
+ 
+ 
+5.50
+ 
+ 
+ 
+14.96
+%
+ 
+ 
+3.03
+%
+ 
+ 
+2.00
+%
+
+Options granted
+ in 2006
+ 
+ 
+4.72
+%
+ 
+ 
+7.50
+ 
+ 
+ 
+16.76
+%
+ 
+ 
+ 
+%
+ 
+ 
+2.00
+%
+
+Options granted
+ in 2007 (unaudited)
+ 
+ 
+4.57
+%
+ 
+ 
+7.50
+ 
+ 
+ 
+17.43
+%
+ 
+ 
+ 
+%
+ 
+ 
+2.00
+%
+
+F-26
+
+Stock option activity is summarized in the
+ following table:
+
+ 
+ 
+
+Number of
+Shares
+ 
+
+Weighted
+Average
+Exercise
+Price
+ 
+
+Weighted
+Average
+Fair Value
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Outstanding
+ at September 30, 2004
+ 
+ 
+ 
+ 
+ 
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 
+ 
+
+Granted
+ 
+ 
+581,278
+ 
+ 
+ 
+ 
+12.20
+ 
+ 
+ 
+ 
+2.08
+ 
+
+Forfeited
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Exercised
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Outstanding
+ at September 30, 2005
+ 
+ 
+581,278
+ 
+ 
+ 
+ 
+12.20
+ 
+ 
+ 
+ 
+2.08
+ 
+
+Granted
+ 
+ 
+180,510
+ 
+ 
+ 
+ 
+14.70
+ 
+ 
+ 
+ 
+3.43
+ 
+
+Forfeited
+ 
+ 
+(87,937
+)
+ 
+ 
+ 
+12.20
+ 
+ 
+ 
+ 
+2.08
+ 
+
+Exercised
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Outstanding
+ at September 30, 2006
+ 
+ 
+673,851
+ 
+ 
+ 
+$
+12.87
+ 
+ 
+ 
+$
+2.44
+ 
+
+Granted
+ 
+ 
+25,000
+ 
+ 
+ 
+ 
+17.43
+ 
+ 
+ 
+ 
+4.06
+ 
+
+Forfeited
+ 
+ 
+(69,570
+)
+ 
+ 
+ 
+12.22
+ 
+ 
+ 
+ 
+2.11
+ 
+
+Exercised
+ 
+ 
+(70,053
+)
+ 
+ 
+ 
+12.20
+ 
+ 
+ 
+ 
+2.08
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Outstanding
+ at June 30, 2007 (unaudited)
+ 
+ 
+559,228
+ 
+ 
+ 
+$
+13.24
+ 
+ 
+ 
+$
+2.60
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Options outstanding at June 30, 2007 (unaudited)
+ were as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Options Outstanding
+ 
+
+Options Exercisable
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Range of
+Exercise
+Price
+ 
+
+Weighted
+Average
+Remaining
+Contractual
+Life (years)
+ 
+
+Number
+Outstanding
+ 
+ 
+
+Weighted
+Average
+Exercise
+Price
+ 
+ 
+
+Aggregate
+Intrinsic
+Value
+ 
+ 
+
+Number
+Exercisable
+ 
+ 
+
+Weighted
+Average
+Exercise
+Price
+ 
+ 
+
+Aggregate
+Intrinsic
+Value
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+$12.20
+ 
+ 
+ 
+8.1
+ 
+ 
+ 
+356,218
+ 
+ 
+ 
+$
+12.20
+ 
+ 
+ 
+$
+1,563,800
+ 
+ 
+ 
+41,733
+ 
+ 
+ 
+$
+12.20
+ 
+ 
+ 
+$
+183,200
+ 
+
+12.85
+ 
+ 
+ 
+8.7
+ 
+ 
+ 
+37,500
+ 
+ 
+ 
+ 
+12.85
+ 
+ 
+ 
+ 
+140,200
+ 
+ 
+ 
+7,500
+ 
+ 
+ 
+ 
+12.85
+ 
+ 
+ 
+ 
+28,000
+ 
+
+15.13
+ 
+ 
+ 
+9.2
+ 
+ 
+ 
+65,580
+ 
+ 
+ 
+ 
+15.13
+ 
+ 
+ 
+ 
+95,800
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+15.30
+ 
+ 
+ 
+9.2
+ 
+ 
+ 
+74,930
+ 
+ 
+ 
+ 
+15.30
+ 
+ 
+ 
+ 
+96,700
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+17.43
+ 
+ 
+ 
+9.5
+ 
+ 
+ 
+25,000
+ 
+ 
+ 
+ 
+17.43
+ 
+ 
+ 
+ 
+(21,000
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+559,228
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+1,875,500
+ 
+ 
+ 
+49,233
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+$
+211,200
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+The total fair value of options granted
+ was approximately $1.7 million. The fair value of the options granted is amortized
+ ratably over the vesting period of the options. Cash proceeds received from the
+ exercise of stock options were $854,000 for the nine months ended June 30, 2007
+ (unaudited) and $ for the year ended September 30, 2006. The total intrinsic
+ value of stock options exercised was $339,000 for the nine months ended June 30,
+ 2007 (unaudited) and $ for the year ended September 30, 2006. The amounts
+ recognized in compensation expense were $337,000 and $181,000 for the nine months
+ ended June 30, 2007 (unaudited) and 2006 (unaudited), and $228,000 for the year
+ ended September 30, 2006. Tax benefits related to stock option exercises were $55,000
+ for the nine months ended June 30, 2007 (unaudited) and $ for the year ended
+ September 30, 2006. It is the Company s general policy to issue new shares
+ for the exercise of stock options.
+
+F-27
+
+As of October 1, 2005, the Company adopted
+ SFAS No. 123(R), Share Based Payment, which requires the recognition of compensation
+ costs relating to share based payment transactions in the financial statements.
+ The following table illustrates the effect of the change, from applying the original
+ provisions of SFAS No. 123, to the adoption of SFAS No. 123(R), on the Company s
+ results of operations.
+
+ 
+ 
+
+For the Year Ended September 30, 2006
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+Using
+Previous
+Accounting
+ 
+
+Pro
+Forma
+Adjustments
+ 
+
+As
+Reported
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(in thousands, except per share data)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Income before
+ income taxes
+ 
+ 
+$
+10,250
+ 
+ 
+ 
+$
+(228
+)
+ 
+ 
+$
+10,022
+ 
+
+Income taxes
+ 
+ 
+ 
+3,832
+ 
+ 
+ 
+ 
+(22
+)
+ 
+ 
+ 
+3,810
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net income
+ 
+ 
+$
+ 6,418
+ 
+ 
+ 
+$
+(206
+)
+ 
+ 
+$
+ 6,212
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Basic earnings
+ per share
+ 
+ 
+$
+0.44
+ 
+ 
+ 
+$
+(.01
+)
+ 
+ 
+$
+0.43
+ 
+
+Diluted earnings
+ per share
+ 
+ 
+$
+0.44
+ 
+ 
+ 
+$
+(.01
+)
+ 
+ 
+$
+0.43
+ 
+
+As of June 30, 2007 (unaudited), the compensation
+ expense yet to be recognized for stock-based awards that have been awarded but not
+ vested is as follows:
+
+ 
+ 
+
+Stock
+Options
+ 
+
+Restricted
+Stock
+ 
+
+Total
+Awards
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+2007
+ 
+ 
+$
+ 97
+ 
+ 
+ 
+$
+ 161
+ 
+ 
+ 
+$
+ 258
+ 
+
+2008
+ 
+ 
+ 
+354
+ 
+ 
+ 
+ 
+583
+ 
+ 
+ 
+ 
+937
+ 
+
+2009
+ 
+ 
+ 
+277
+ 
+ 
+ 
+ 
+583
+ 
+ 
+ 
+ 
+860
+ 
+
+2010
+ 
+ 
+ 
+219
+ 
+ 
+ 
+ 
+583
+ 
+ 
+ 
+ 
+802
+ 
+
+2011
+ 
+ 
+ 
+83
+ 
+ 
+ 
+ 
+65
+ 
+ 
+ 
+ 
+148
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ Total
+
+ 
+ 
+$
+1,030
+ 
+ 
+ 
+$
+1,975
+ 
+ 
+ 
+$
+3,005
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Note 10 - Employee Stock Ownership Plan
+
+In connection with the minority stock offering,
+ the Company established an ESOP for the benefit of its employees. The ESOP covers
+ all employees with at least one year and 1000 hours of service. Shares are released
+ for allocation at the discretion of the Board of Directors. The Company issued 498,360
+ shares of common stock to the ESOP in exchange for a ten-year note of approximately
+ $5.0 million, which has been recorded as Unearned shares issued to employee
+ stock ownership plan within stockholders equity. As shares are released
+ from collateral, the Company will report compensation expense equal to the current
+ market price of the shares. ESOP compensation expense included in salaries and benefits
+ was $617,000 and $497,000 for the nine months ended June 30, 2007 (unaudited) and
+ 2006 (unaudited), and $681,000 and $615,000 for the years ended September 30, 2006
+ and 2005, respectively. Dividends on allocated ESOP shares reduce retained earnings;
+ dividends on unallocated ESOP shares reduce principal or interest on the ESOP loan.
+
+F-28
+
+ESOP share activity is summarized in the
+ following table:
+
+ 
+ 
+
+Unreleased
+ESOP
+Shares
+ 
+
+Fair Value
+of Unreleased
+Shares
+ 
+
+Allocated
+and
+Released
+Shares
+ 
+ 
+Total
+
+ESOP
+shares
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ ESOP shares
+ issued on December 06, 2004
+ 
+ 
+498,360
+ 
+ 
+ 
+$
+4,983,600
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+498,360
+
+ Allocation
+ on September 30, 2005
+ 
+ 
+(49,836
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+49,836
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ Balance at
+ September 30, 2005
+ 
+ 
+448,524
+ 
+ 
+ 
+$
+5,696,300
+ 
+ 
+ 
+49,836
+ 
+ 
+ 
+498,360
+
+ Allocation
+ on September 30, 2006
+ 
+ 
+(49,836
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+49,836
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ Balance at
+ September 30, 2006
+ 
+ 
+398,688
+ 
+ 
+ 
+$
+6,199,600
+ 
+ 
+ 
+99,672
+ 
+ 
+ 
+498,360
+
+ Allocation
+ as of June 30, 2007
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ Balance at
+ June 30, 2007 (unaudited)
+ 
+ 
+398,688
+ 
+ 
+ 
+$
+6,614,200
+ 
+ 
+ 
+99,672
+ 
+ 
+ 
+498,360
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Note 11 - Commitments and Contingencies
+
+Lease commitments:
+The Company has entered into noncancelable
+ operating leases for land and buildings that require future minimum rental payments
+ in excess of one year as of June 30, 2007. Certain lease payments may be adjusted
+ periodically in accordance with changes in the Consumer Price Index. The estimated
+ future minimum annual rental payments, exclusive of taxes and other charges, are
+ summarized as follows:
+
+ 
+ 
+
+Nine months ending
+June 30, 2007
+(unaudited)
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(in thousands)
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+2007
+ 
+ 
+$
+ 115
+ 
+
+2008
+ 
+ 
+ 
+466
+ 
+
+2009
+ 
+ 
+ 
+468
+ 
+
+2010
+ 
+ 
+ 
+430
+ 
+
+2011
+ 
+ 
+ 
+121
+ 
+
+2012
+ 
+ 
+ 
+56
+ 
+
+Thereafter
+ 
+ 
+ 
+578
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ 
+ 
+$
+2,234
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total rent expense was $345,000 and $325,000
+ for the nine months ended June 30, 2007 (unaudited) and 2006 (unaudited), and was
+ $434,000, $388,000 and $373,000 for the years ended September 30, 2006, 2005, and
+ 2004, respectively. The Company also leases office space to others on a month-to-month
+ basis. Total rental income was $24,000 and $24,000 for the nine months ended June
+ 30, 2007 (unaudited) and 2006 (unaudited), and was $34,000, $43,000 and $36,000
+ for the years ended September 30, 2006, 2005, and 2004, respectively.
+
+Commitments to extend credit:
+In the normal course of business, the Company
+ makes various commitments and incurs certain contingent liabilities that are not
+ presented in the accompanying financial statements. The commitments and contingent
+ liabilities include various guarantees and commitments to extend credit. Commitments
+ to extend credit are agreements to lend to a customer as long as there is no violation
+ of any condition established in the agreement. Commitments generally have fixed
+ expiration dates or other termination clauses and may require payment of a fee.
+ Because many of the commitments are expected to expire without being drawn upon,
+ the total commitment amounts do not necessarily
+
+F-29
+
+represent future cash requirements.
+ The Company evaluates each customer s creditworthiness on a case-by-case basis. The amount of collateral obtained,
+ if it is deemed necessary by the Company upon extension of the credit, is based
+ on management s credit evaluation of the borrower. Collateral held varies but
+ may include securities, accounts receivable, inventory, fixed assets, and/or real
+ estate properties. The distribution of commitments to extend credit approximates
+ the distribution of loans outstanding.
+
+The following summarizes commitments to
+ extend credit as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+ 
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Unfunded
+ commitments under lines of credit and letters of credit
+
+ 
+ 
+$
+35,582
+ 
+ 
+ 
+$
+30,984
+ 
+ 
+ 
+$
+25,115
+ 
+
+Undisbursed
+ balance of loans closed
+ 
+ 
+ 
+10,348
+ 
+ 
+ 
+ 
+22,973
+ 
+ 
+ 
+ 
+15,871
+ 
+
+Commitments
+ to originate loans:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fixed
+ rate
+
+ 
+ 
+ 
+10,933
+ 
+ 
+ 
+ 
+12,034
+ 
+ 
+ 
+ 
+12,533
+ 
+
+Adjustable
+ rate
+
+ 
+ 
+ 
+7,175
+ 
+ 
+ 
+ 
+7,878
+ 
+ 
+ 
+ 
+7,367
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Total
+ commitments
+
+ 
+ 
+$
+64,038
+ 
+ 
+ 
+$
+73,869
+ 
+ 
+ 
+$
+60,886
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Commitments to originate
+fixed-rate mortgages have the following interest rates: $536,000 at less than
+six percent, $6.9 million with rates in the 6.00 to 6.99% range, and $2.9 million with rates
+7.00% and more. The remaining $618,000 of fixed-rate commitments are for
+consumer loans. These loans have rates from 7.75% to 18% depending on whether
+or not there is collateral and the type of collateral provided.
+
+Most of the Bank s business activity
+ is with customers located in the State of Idaho. Loans to one borrower are generally
+ limited, by federal banking regulation, to 15% of the Bank s regulatory capital.
+ As of June 30, 2007 (unaudited), September 30, 2006 and 2005, the Bank had no individual
+ industry concentrations of credit risk.
+
+In connection
+ with certain asset sales, the Bank typically makes representations and warranties
+ about the underlying assets conforming to specified guidelines. If the underlying
+ assets do not conform to the specifications, the Bank may have an obligation to
+ repurchase the assets or indemnify the purchaser against loss. As of June 30, 2007
+ (unaudited), loans under warranty totaled $196.1 million, which substantially represents
+ the unpaid principal balance of the Company s residential mortgage loans serviced
+ for investors. The Bank believes that the potential for loss under these arrangements
+ is remote. Accordingly, no contingent liability is recorded in the financial statements.
+
+Note 12 - Related Party Transactions
+
+In the normal course of business, the Company
+ makes loans to its executive officers, directors and companies affiliated with these
+ individuals. It is management s opinion that loans to the Company s officers
+ and directors have been made on substantially the same terms, including interest
+ rates and collateral, as those prevailing at the time for comparable transactions
+ with unrelated parties and have not involved more than normal risk of collectibility.
+ An analysis of activity with respect to loans receivable from directors, executive
+ officers, and their affiliates is as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+ 
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Beginning
+ balance
+
+ 
+ 
+$
+919
+ 
+ 
+ 
+$
+987
+ 
+ 
+ 
+$
+931
+ 
+
+Principal
+ advances
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8
+ 
+ 
+ 
+ 
+216
+ 
+
+Principal
+ repayments
+
+ 
+ 
+ 
+(37
+)
+ 
+ 
+ 
+(76
+)
+ 
+ 
+ 
+(160
+)
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Balance,
+ end of year
+
+ 
+ 
+$
+882
+ 
+ 
+ 
+$
+919
+ 
+ 
+ 
+$
+987
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+F-30
+
+The Company also accepts deposits from its
+ executive officers, directors, and affiliated companies on substantially the same
+ terms as unrelated parties. The aggregate dollar amounts of these deposits were
+ $1.4 million, $1.1 million and $1.8 million at June 30, 2007, September 2006 and
+ 2005, respectively.
+
+Note 13 - Capital Requirement
+
+The Bank is subject to various regulatory
+ capital requirements administered by its primary federal regulator, the OTS. Failure
+ to meet the minimum regulatory capital requirements can initiate certain mandatory
+ and possible additional discretionary actions by regulators, that if undertaken,
+ could have a direct material effect on the Bank and the consolidated financial statements.
+ Under the regulatory capital adequacy guidelines and the regulatory framework for
+ prompt corrective action, the Bank must meet specific capital guidelines involving
+ quantitative measures of the Bank s assets, liabilities and certain off-balance-sheet
+ items as calculated under regulatory accounting practices. The Bank s capital
+ amounts and classifications under the prompt corrective action guidelines are also
+ subject to qualitative judgments by the regulators about components, risk weightings
+ and other factors.
+
+Quantitative measures established by regulation
+ to ensure capital adequacy require the Bank to maintain minimum amounts and ratios
+ of total risk-based capital and Tier I capital to risk-weighted assets (as defined
+ in the regulations), Tier I capital to adjusted total assets (as defined), and tangible
+ capital to adjusted total assets (as defined). As of June 30, 2007, the Bank meets
+ all of the capital adequacy requirements to which it is subject.
+
+The actual and required minimum capital
+ amounts and ratios are presented in the following table:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+To Be Well Capitalized
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+For Capital Adequacy
+ 
+
+Under Prompt Corrective
+
+ 
+ 
+
+Actual
+ 
+
+Purposes
+ 
+
+Action Provisions
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+Amount
+ 
+
+Ratio
+ 
+
+Amount
+ 
+
+Ratio
+ 
+
+Amount
+ 
+
+Ratio
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(dollars in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+June 30,
+ 2007 (unaudited):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total risk-based
+ capital (to risk-weighted assets)
+ 
+$
+95,063
+ 
+ 
+ 
+20.58
+%
+ 
+$
+36,954
+ 
+ 
+ 
+>8.0
+%
+ 
+$
+46,192
+ 
+ 
+>
+10.0
+%
+
+Tier 1 (core)
+ capital
+ 
+ 
+92,234
+ 
+ 
+ 
+12.97
+ 
+ 
+ 
+28,452
+ 
+ 
+ 
+>4.0
+ 
+ 
+ 
+35,565
+ 
+ 
+>
+5.0
+ 
+
+Tangible capital
+ (to tangible assets)
+ 
+ 
+92,234
+ 
+ 
+ 
+12.97
+ 
+ 
+ 
+14,226
+ 
+ 
+ 
+>2.0
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+N/A
+ 
+
+Tier 1 risk-based
+ capital (to risk-weighted assets)
+ 
+ 
+92,176
+ 
+ 
+ 
+19.95
+ 
+ 
+ 
+18,477
+ 
+ 
+ 
+>4.0
+ 
+ 
+ 
+27,715
+ 
+ 
+>
+6.0
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+September
+ 30, 2006:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total risk-based
+ capital (to risk-weighted assets)
+ 
+$
+90,230
+ 
+ 
+ 
+19.46
+%
+ 
+$
+37,099
+ 
+ 
+ 
+>8.0
+%
+ 
+$
+46,373
+ 
+ 
+>
+10.0
+%
+
+Tier 1 (core)
+ capital
+ 
+ 
+87,322
+ 
+ 
+ 
+11.77
+ 
+ 
+ 
+29,678
+ 
+ 
+ 
+>4.0
+ 
+ 
+ 
+37,097
+ 
+ 
+>
+5.0
+ 
+
+Tangible capital
+ (to tangible assets)
+ 
+ 
+87,322
+ 
+ 
+ 
+11.77
+ 
+ 
+ 
+14,839
+ 
+ 
+ 
+>2.0
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+N/A
+ 
+
+Tier 1 risk-based
+ capital (to risk-weighted assets)
+ 
+ 
+87,256
+ 
+ 
+ 
+18.82
+ 
+ 
+ 
+18,549
+ 
+ 
+ 
+>4.0
+ 
+ 
+ 
+27,824
+ 
+ 
+>
+6.0
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+F-31
+
+September
+ 30, 2005:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Total risk-based
+ capital (to risk-weighted assets)
+ 
+$
+83,178
+ 
+ 
+ 
+20.46
+%
+ 
+$
+32,518
+ 
+ 
+ 
+>8.0
+%
+ 
+$
+40,648
+ 
+ 
+>
+10.0
+%
+
+Tier 1 (core)
+ capital
+ 
+ 
+80,373
+ 
+ 
+ 
+12.00
+ 
+ 
+ 
+26,794
+ 
+ 
+ 
+>4.0
+ 
+ 
+ 
+33,493
+ 
+ 
+>
+5.0
+ 
+
+Tangible capital
+ (to tangible assets)
+ 
+ 
+80,373
+ 
+ 
+ 
+12.00
+ 
+ 
+ 
+13,397
+ 
+ 
+ 
+>2.0
+ 
+ 
+ 
+N/A
+ 
+ 
+ 
+N/A
+ 
+
+Tier 1 risk-based
+ capital (to risk-weighted assets)
+ 
+ 
+80,296
+ 
+ 
+ 
+19.75
+ 
+ 
+ 
+16,259
+ 
+ 
+ 
+>4.0
+ 
+ 
+ 
+24,389
+ 
+ 
+>
+6.0
+ 
+
+The following table is a reconciliation
+ of the Bank s capital, calculated according to generally accepted accounting
+ principles, to total Tier 1 and total Risk-based capital:
+
+ 
+ 
+ 
+ 
+ 
+ 
+September 30,
+
+ 
+ 
+June 30,
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+ 
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(in thousands)
+ 
+ 
+
+ 
+
+Equity
+ 
+$
+89,306
+ 
+ 
+ 
+ 
+$
+87,459
+ 
+ 
+$
+80,532
+ 
+
+Other comprehensive
+ income unrealized loss on securities
+ 
+ 
+3,155
+ 
+ 
+ 
+ 
+ 
+112
+ 
+ 
+ 
+108
+ 
+
+Mortgage servicing
+ rights, net
+ 
+ 
+(227
+)
+ 
+ 
+ 
+ 
+(249
+)
+ 
+ 
+(267
+)
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ Tier 1 capital
+
+ 
+ 
+92,234
+ 
+ 
+ 
+ 
+ 
+87,322
+ 
+ 
+ 
+80,373
+ 
+
+ 
+
+Allowance for loan losses
+
+ 
+ 
+2,748
+ 
+ 
+ 
+ 
+ 
+2,974
+ 
+ 
+ 
+2,882
+ 
+
+ 
+
+Liability for unfunded commitments
+
+ 
+ 
+139
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Low-level recourse
+
+ 
+ 
+(58
+)
+ 
+ 
+ 
+ 
+(66
+)
+
+ 
+ 
+(77
+)
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total Risk-based capital
+
+ 
+$
+95,063
+ 
+ 
+ 
+ 
+$
+90,230
+ 
+ 
+$
+83,178
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+OTS regulations place certain restrictions
+ on dividends paid by the Bank to the Company. Generally, savings institutions, such
+ as the Bank, that before and after the proposed distribution are well-capitalized,
+ may make capital distributions during any calendar year equal to up to 100% of net
+ income for the year-to-date plus retained net income for the two preceding years.
+ Savings institutions proposing to make any capital distribution need not submit
+ written notice to the OTS prior to such distribution unless they are a subsidiary
+ of a holding company or would not remain well-capitalized following the distribution.
+
+F-32
+
+Note 14 - Income Taxes
+
+The provision for income tax expense consisted
+ of the following:
+
+ 
+ 
+
+June 30,
+ 
+ 
+
+Year Ended September 30,
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+ 
+
+2006
+ 
+ 
+ 
+
+2006
+ 
+ 
+
+2005
+ 
+ 
+
+2004
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current
+ 
+$
+2,874
+ 
+ 
+$
+3,157
+ 
+ 
+ 
+$4,207
+ 
+ 
+$
+3,861
+ 
+ 
+$
+2,909
+ 
+
+Deferred
+ 
+ 
+(357
+)
+ 
+ 
+(340
+)
+ 
+ 
+(397
+)
+ 
+ 
+(951
+)
+ 
+ 
+(225
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Income
+ tax expense
+
+ 
+$
+2,517
+ 
+ 
+$
+2,817
+ 
+ 
+ 
+$3,810
+ 
+ 
+$
+2,910
+ 
+ 
+$
+2,684
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+The provision for income tax expense differs
+ from that computed at the statutory corporate tax rate as follows:
+
+ 
+ 
+June 30,
+ 
+ 
+ 
+
+Year Ended September 30,
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+ 
+2006
+ 
+ 
+
+2006
+ 
+
+2005
+ 
+2004
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(dollars in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal income
+ tax at statutory rates
+ 
+$
+2,242
+ 
+ 
+$
+2,506
+ 
+ 
+ 
+$3,407
+ 
+ 
+$
+2,786
+ 
+ 
+$
+2,505
+ 
+
+State income
+ taxes, net of federal benefit
+ 
+ 
+313
+ 
+ 
+ 
+350
+ 
+ 
+ 
+450
+ 
+ 
+ 
+411
+ 
+ 
+ 
+370
+ 
+
+Effect of
+ permanent differences
+ 
+ 
+(38
+)
+ 
+ 
+(39
+)
+ 
+ 
+(47
+)
+ 
+ 
+(287
+)
+ 
+ 
+(177
+)
+
+Other
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(14
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Income
+ tax expense
+
+ 
+$
+2,517
+ 
+ 
+$
+2,817
+ 
+ 
+ 
+$3,810
+ 
+ 
+$
+2,910
+ 
+ 
+$
+2,684
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+Effective rate
+
+ 
+ 
+38.2
+%
+ 
+ 
+38.2
+%
+ 
+ 
+38.0
+%
+ 
+ 
+35.5
+%
+ 
+ 
+36.4
+%
+
+Federal statutory rate
+
+ 
+ 
+34.0
+ 
+ 
+ 
+34.0
+ 
+ 
+ 
+34.0
+ 
+ 
+ 
+34.0
+ 
+ 
+ 
+34.0
+ 
+
+State statutory rate
+
+ 
+ 
+7.6
+ 
+ 
+ 
+7.6
+ 
+ 
+ 
+7.6
+ 
+ 
+ 
+7.6
+ 
+ 
+ 
+7.6
+ 
+
+F-33
+
+The tax effects of temporary differences
+ that give rise to significant portions of deferred tax assets and liabilities consist
+ of the following:
+
+ 
+ 
+ 
+ 
+ 
+
+September 30,
+ 
+
+ 
+ 
+
+June 30,
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+ 
+
+2006
+ 
+
+2005
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+
+Deferred tax
+ asset:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred
+ compensation
+
+ 
+$
+ 1,813
+ 
+ 
+ 
+$1,612
+ 
+ 
+$
+1,268
+ 
+
+Unrealized
+ loss on securities available for sale
+
+ 
+ 
+2,318
+ 
+ 
+ 
+118
+ 
+ 
+ 
+110
+ 
+
+Allowance
+ for loan losses
+
+ 
+ 
+1,240
+ 
+ 
+ 
+1,237
+ 
+ 
+ 
+1,199
+ 
+
+Charitable
+ contributions
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+366
+ 
+
+Equity
+ compensation
+
+ 
+ 
+351
+ 
+ 
+ 
+281
+ 
+ 
+ 
+ 
+ 
+
+Accrued
+ expenses
+
+ 
+ 
+211
+ 
+ 
+ 
+205
+ 
+ 
+ 
+223
+ 
+
+Other
+
+ 
+ 
+46
+ 
+ 
+ 
+67
+ 
+ 
+ 
+129
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ deferred tax asset
+
+ 
+ 
+5,979
+ 
+ 
+ 
+3,520
+ 
+ 
+ 
+3,295
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Deferred tax
+ liability:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Fixed
+ asset basis
+
+ 
+ 
+(383
+)
+ 
+ 
+(441
+)
+ 
+ 
+(570
+)
+
+Deferred
+ loan costs
+
+ 
+ 
+(599
+)
+ 
+ 
+(570
+)
+ 
+ 
+(531
+)
+
+Prepaid
+ expenses
+
+ 
+ 
+(155
+)
+ 
+ 
+(155
+)
+ 
+ 
+(142
+)
+
+Mortgage
+ servicing rights
+
+ 
+ 
+(956
+)
+ 
+ 
+(1,037
+)
+ 
+ 
+(1,111
+)
+
+FHLB
+ stock dividends
+
+ 
+ 
+(1,960
+)
+ 
+ 
+(1,960
+)
+ 
+ 
+(1,960
+)
+
+Other
+
+ 
+ 
+(169
+)
+ 
+ 
+(157
+)
+ 
+ 
+(186
+)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ deferred tax liability
+
+ 
+ 
+(4,222
+)
+ 
+ 
+(4,320
+)
+ 
+ 
+(4,500
+)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net
+ deferred tax asset (liability)
+
+ 
+$
+ 1,757
+ 
+ 
+ 
+$ (800
+)
+ 
+$
+(1,205
+)
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+Included in retained earnings at June 30,
+ 2007 and September 30, 2006 and 2005 is approximately $2.1 million in bad debt reserves
+ for which no deferred income tax liability has been recorded. This amount represents
+ allocations of income to bad debt deductions for tax purposes only. Reduction of
+ these reserves for purposes other than tax bad debt losses or adjustments arising
+ from carryback of net operating losses would create income for tax purposes, which
+ would be subject to the then-current corporate income tax rate. The unrecorded deferred
+ liability on this amount was approximately $900,000 at June 30, 2007 and September
+ 30, 2006 and 2005.
+
+Note 15 - Earnings Per Share
+
+Earnings per share ( EPS ) is
+ computed using the basic and diluted weighted average number of common shares outstanding
+ during the period. Basic EPS is computed by dividing the Company s net income
+ or loss by the weighted average number of common shares outstanding for the period.
+ Diluted EPS is computed by dividing net income or loss by diluted weighted average
+ shares outstanding, which include common stock equivalent shares outstanding using
+ the treasury stock method, unless such shares are anti-dilutive. Common stock equivalents
+ arise from assumed conversion of outstanding stock options and from assumed vesting
+ of shares awarded but not released under the Company s RRP plan. ESOP shares
+ are not considered outstanding for earnings per share purposes until they are committed
+ to be released.
+
+F-34
+
+The following table presents the computation
+ of basic and diluted earnings per share for the periods indicated:
+
+ 
+ 
+
+June 30,
+ 
+
+Year Ended September 30,
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+
+2006
+ 
+
+2005
+ 
+
+2004
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands, except share data)
+ 
+ 
+ 
+ 
+
+Basic earnings
+ per share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Income
+ available to common stockholders
+
+ 
+$
+4,076
+ 
+ 
+$
+4,554
+ 
+ 
+$
+6,212
+ 
+ 
+$
+5,283
+ 
+ 
+$
+4,684
+ 
+
+Weighted-average
+ common shares outstanding
+
+ 
+ 
+14,594,936
+ 
+ 
+ 
+14,478,701
+ 
+ 
+ 
+14,484,982
+ 
+ 
+ 
+14,696,071
+ 
+ 
+ 
+nm
+(1)
+
+Basic
+ earnings per share
+
+ 
+$
+0.28
+ 
+ 
+$
+0.31
+ 
+ 
+$
+0.43
+ 
+ 
+$
+0.36
+ 
+ 
+ 
+nm
+(1)(1)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Diluted earnings
+ per share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Income
+ available to common stockholders
+
+ 
+$
+4,076
+ 
+ 
+$
+4,554
+ 
+ 
+$
+6,212
+ 
+ 
+$
+5,283
+ 
+ 
+$
+4,684
+ 
+
+Weighted-average
+ common shares outstanding
+
+ 
+ 
+14,594,936
+ 
+ 
+ 
+14,478,701
+ 
+ 
+ 
+14,484,982
+ 
+ 
+ 
+14,696,071
+ 
+ 
+ 
+nm
+(1)
+
+Net
+ effect of dilutive stock options
+
+ 
+ 
+75,147
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+6,013
+ 
+ 
+ 
+nm
+(1)
+
+Net
+ effect of dilutive RRP awards
+
+ 
+ 
+46,082
+ 
+ 
+ 
+24,886
+ 
+ 
+ 
+34,796
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+nm
+(1)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Weighted-average
+ common shares outstanding and common stock equivalents
+
+ 
+ 
+14,716,165
+ 
+ 
+ 
+14,503,587
+ 
+ 
+ 
+14,519,778
+ 
+ 
+ 
+14,702,084
+ 
+ 
+ 
+nm
+(1)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Diluted
+ earnings per share
+
+ 
+$
+0.28
+ 
+ 
+$
+0.31
+ 
+ 
+$
+0.43
+ 
+ 
+$
+0.36
+ 
+ 
+ 
+nm
+(1)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1)
+ 
+Shares outstanding and earnings per share information are not meaningful.
+ The Company did not complete its minority stock offering until December 6, 2004.
+
+Note 16 - Fair Value of Financial Instruments
+
+The estimated fair values of the Company s financial instruments are as follows:
+
+ 
+ 
+ 
+
+September 30,
+
+ 
+June 30,
+ 
+
+ 
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+
+ 
+
+ 
+
+ 
+
+Carrying Amount
+ 
+
+Estimated Fair Value
+ 
+
+Carrying Amount
+ 
+
+Estimated Fair Value
+ 
+
+Carrying Amount
+ 
+
+Estimated Fair Value
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(in thousands)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Financial
+ Assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash
+ and cash equivalents
+
+ 
+$
+ 23,086
+ 
+ 
+ 
+$
+ 23,086
+ 
+ 
+ 
+$
+ 18,385
+ 
+ 
+ 
+$
+ 18,385
+ 
+ 
+ 
+$
+19,033
+ 
+ 
+ 
+$
+ 19,033
+ 
+
+Mortgage-backed
+ securities available for sale
+
+ 
+ 
+ 166,755
+ 
+ 
+ 
+ 
+ 166,755
+ 
+ 
+ 
+ 
+ 12,182
+ 
+ 
+ 
+ 
+ 12,182
+ 
+ 
+ 
+ 
+ 14,830
+ 
+ 
+ 
+ 
+ 14,830
+ 
+
+Mortgage-backed
+ securities held to maturity
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 183,279
+ 
+ 
+ 
+ 
+ 178,842
+ 
+ 
+ 
+ 
+ 180,974
+ 
+ 
+ 
+ 
+ 178,613
+ 
+
+Loans
+ receivable, net
+
+ 
+ 
+ 491,768
+ 
+ 
+ 
+ 
+ 487,743
+ 
+ 
+ 
+ 
+ 503,065
+ 
+ 
+ 
+ 
+ 493,624
+ 
+ 
+ 
+ 
+ 430,944
+ 
+ 
+ 
+ 
+ 413,728
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+FHLB
+ stock
+
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+ 9,591
+ 
+ 
+ 
+ 
+9,591
+ 
+ 
+ 
+ 
+ 9,591
+ 
+ 
+ 
+ 
+ 9,591
+ 
+ 
+ 
+ 
+ 9,591
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Financial
+ Liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Demand and
+ savings deposits
+ 
+ 
+191,603
+ 
+ 
+ 
+ 
+191,603
+ 
+ 
+ 
+ 
+196,557
+ 
+ 
+ 
+ 
+196,557
+ 
+ 
+ 
+ 
+198,860
+ 
+ 
+ 
+ 
+198,860
+ 
+
+Certificates
+ of deposit
+
+ 
+ 
+ 227,095
+ 
+ 
+ 
+ 
+ 225,779
+ 
+ 
+ 
+ 
+ 233,724
+ 
+ 
+ 
+ 
+ 232,169
+ 
+ 
+ 
+ 
+ 197,465
+ 
+ 
+ 
+ 
+ 195,672
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+FHLB
+ advances
+
+ 
+ 
+ 189,264
+ 
+ 
+ 
+ 
+ 186,413
+ 
+ 
+ 
+ 
+ 210,759
+ 
+ 
+ 
+ 
+ 214,270
+ 
+ 
+ 
+ 
+ 175,932
+ 
+ 
+ 
+ 
+ 173,845
+ 
+
+F-35
+
+The following methods and assumptions were
+ used to estimate the fair value of each class of financial instruments:
+
+Cash and cash equivalents:
+The carrying amount approximates fair value.
+
+Mortgage-backed securities available
+ for sale and held to maturity:
+The fair values of mortgage-backed
+ securities are based on quoted market prices or dealer quotes. If a quoted market
+ price is not available, fair value is estimated using quoted market prices for similar
+ securities.
+
+Federal Home Loan Bank stock:
+The carrying value of FHLB stock approximates fair value based on the
+ respective redemption provisions.
+
+Loans receivable:
+
+For variable-rate loans that re-price frequently and have no significant change in
+ credit risk, fair values are based on carrying values. Fair values for commercial
+ real estate and commercial loans with maturities beyond one year are estimated using
+ a discounted cash flow analysis, utilizing interest rates currently being offered
+ for loans with similar terms to borrowers of similar credit quality. Loans with
+ maturities less than one year are estimated to have a fair value equal to the carrying
+ value. Fair values for impaired loans are estimated using discounted cash flow analysis
+ or underlying collateral values, where applicable.
+
+Deposits:
+The fair
+ value of demand deposits, savings accounts and certain money market deposits is
+ the amount payable on demand at the reporting date. The fair value of fixed-maturity
+ certificates of deposit maturing beyond one year is estimated using discounted cash
+ flow analysis using the rates currently offered for deposits of similar remaining
+ maturities. Certificates with maturities less than one year are valued at carrying
+ values.
+
+Off-balance-sheet instruments:
+Fair values of off-balance-sheet lending commitments are based on
+ fees currently charged to enter into similar agreements, taking into account the
+ remaining terms of the agreements and the borrower s credit standing. The fair
+ value of the fees at September 30, 2006 and 2005 were insignificant.
+
+Note 17 - Parent Only Financial Information
+
+Home Federal Bancorp, Inc. was formed to
+ serve as the stock holding company for the Bank pursuant to the Bank s mutual
+ holding company reorganization. For periods prior to December 6, 2004, the Audited
+ Consolidated Financial Statements filed as a part of this annual report are those
+ of the Bank as a federal mutual savings and loan association and its wholly-owned
+ subsidiary, Idaho Home Service Corporation.
+
+F-36
+
+The following are the condensed financial
+ statements for Home Federal Bancorp (parent company only):
+
+BALANCE
+ SHEET
+
+June 30,
+ 
+
+September 30,
+ 
+
+September 30,
+
+(In thousands)
+
+2007
+ 
+
+2006
+ 
+
+2005
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ASSETS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash
+ and amounts due from depository institutions
+
+ 
+$
+ 2,978
+ 
+ 
+ 
+$
+ 2,099
+ 
+ 
+ 
+$
+ 177
+ 
+
+Mortgage-backed
+ securities available for sale, at fair value
+
+ 
+ 
+16,891
+ 
+ 
+ 
+ 
+4,817
+ 
+ 
+ 
+ 
+6,093
+ 
+
+Mortgage-backed
+ securities held to maturity, at cost
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+12,865
+ 
+ 
+ 
+ 
+14,680
+ 
+
+Investment
+ in the Bank
+
+ 
+ 
+89,306
+ 
+ 
+ 
+ 
+87,459
+ 
+ 
+ 
+ 
+80,532
+ 
+
+Other
+ assets
+
+ 
+ 
+823
+ 
+ 
+ 
+ 
+653
+ 
+ 
+ 
+ 
+873
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+TOTAL
+ ASSETS
+
+ 
+$
+109,998
+ 
+ 
+ 
+$
+107,893
+ 
+ 
+ 
+$
+102,355
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+LIABILITIES
+ AND STOCKHOLDERS EQUITY
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Other
+ liabilities
+
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 24
+ 
+ 
+ 
+$
+ 988
+ 
+
+Stockholders equity
+
+ 
+ 
+109,998
+ 
+ 
+ 
+ 
+107,869
+ 
+ 
+ 
+ 
+101,367
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+TOTAL
+ LIABILITIES AND STOCKHOLDERS EQUITY
+
+ 
+$
+109,998
+ 
+ 
+ 
+$
+107,893
+ 
+ 
+ 
+$
+102,355
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+STATEMENTS
+ OF INCOME
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In thousands)
+
+ 
+
+Nine Months Ended June 30,
+ 
+ 
+ 
+
+Year Ended September 30,
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+ 
+
+2006
+ 
+ 
+
+2006
+ 
+ 
+
+2005
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Income:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Investment
+ interest
+
+ 
+$
+ 56
+ 
+ 
+$
+ 17
+ 
+ 
+$
+36
+ 
+ 
+$
+ 24
+ 
+
+Mortgage-backed
+ security interest
+
+ 
+ 
+581
+ 
+ 
+ 
+591
+ 
+ 
+ 
+773
+ 
+ 
+ 
+712
+ 
+
+Other
+ income
+
+ 
+ 
+82
+ 
+ 
+ 
+91
+ 
+ 
+ 
+119
+ 
+ 
+ 
+131
+ 
+
+Dividend
+ income from the Bank
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ income
+
+ 
+ 
+719
+ 
+ 
+ 
+699
+ 
+ 
+ 
+928
+ 
+ 
+ 
+867
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Expense:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Professional
+ services
+
+ 
+ 
+102
+ 
+ 
+ 
+120
+ 
+ 
+ 
+156
+ 
+ 
+ 
+207
+ 
+
+Charitable
+ contribution to Foundation
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,825
+ 
+
+Other
+
+ 
+ 
+164
+ 
+ 
+ 
+176
+ 
+ 
+ 
+228
+ 
+ 
+ 
+160
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Total
+ expense
+
+ 
+ 
+266
+ 
+ 
+ 
+296
+ 
+ 
+ 
+384
+ 
+ 
+ 
+2,192
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Income
+ (loss) before income taxes and equity in undistributed earnings in the Bank
+
+ 
+ 
+453
+ 
+ 
+ 
+403
+ 
+ 
+ 
+544
+ 
+ 
+ 
+(1,325
+)
+
+Income tax
+ expense (benefit)
+ 
+ 
+134
+ 
+ 
+ 
+114
+ 
+ 
+ 
+154
+ 
+ 
+ 
+(536
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+INCOME (LOSS)
+ OF PARENT COMPANY
+ 
+ 
+319
+ 
+ 
+ 
+289
+ 
+ 
+ 
+390
+ 
+ 
+ 
+(789
+)
+
+EQUITY IN
+ UNDISTRIBUTED INCOME OF THE BANK
+ 
+ 
+3,757
+ 
+ 
+ 
+4,265
+ 
+ 
+ 
+5,822
+ 
+ 
+ 
+6,072
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+NET INCOME
+ 
+$
+4,076
+ 
+ 
+$
+4,554
+ 
+ 
+$
+6,212
+ 
+ 
+$
+5,283
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+F-37
+
+STATEMENT OF CASH FLOWS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(In thousands)
+
+ 
+
+Nine Months Ended June 30,
+ 
+ 
+
+Year Ended September 30,
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+2007
+ 
+
+2006
+ 
+ 
+
+2006
+ 
+ 
+
+2005
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+
+(unaudited)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+CASH FLOWS
+ FROM OPERATING ACTIVITIES:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Net income
+ 
+$
+ 4,076
+ 
+ 
+$
+ 4,554
+ 
+ 
+$
+ 6,212
+ 
+ 
+$
+ 5,283
+ 
+
+Adjustments
+ to reconcile net income to cash provided by operating activities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Equity
+ in undistributed earnings of the Bank
+
+ 
+ 
+(3,757
+)
+ 
+ 
+(4,265
+)
+ 
+ 
+(5,822
+)
+ 
+ 
+(6,072
+)
+
+Net
+ amortization of premiums on investments
+
+ 
+ 
+12
+ 
+ 
+ 
+13
+ 
+ 
+ 
+17
+ 
+ 
+ 
+19
+ 
+
+Provision
+ for deferred income taxes
+
+ 
+ 
+ 
+ 
+ 
+ 
+229
+ 
+ 
+ 
+343
+ 
+ 
+ 
+(343
+)
+
+Loss
+ on sale of securities available for sale
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+11
+ 
+
+ESOP
+ shares committed to be released
+
+ 
+ 
+326
+ 
+ 
+ 
+311
+ 
+ 
+ 
+416
+ 
+ 
+ 
+434
+ 
+
+Non-cash
+ contribution to Foundation
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+1,460
+ 
+
+Change
+ in assets and liabilities:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Other
+ assets
+
+ 
+ 
+321
+ 
+ 
+ 
+572
+ 
+ 
+ 
+218
+ 
+ 
+ 
+(676
+)
+
+Other
+ liabilities
+
+ 
+ 
+(347
+)
+ 
+ 
+(441
+)
+ 
+ 
+ 
+ 
+ 
+ 
+70
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net
+ cash provided by operating activities
+
+ 
+ 
+631
+ 
+ 
+ 
+973
+ 
+ 
+ 
+1,384
+ 
+ 
+ 
+186
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+CASH FLOWS
+ FROM INVESTING ACTIVITIES:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Proceeds
+ from maturity of mortgage-backed securities held to maturity
+
+ 
+ 
+854
+ 
+ 
+ 
+1,339
+ 
+ 
+ 
+1,810
+ 
+ 
+ 
+1,395
+ 
+
+Purchase
+ of mortgage-backed securities held to maturity
+
+ 
+ 
+(2,102
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(16,080
+)
+
+Proceeds
+ from maturity of mortgage-backed securities available for sale
+
+ 
+ 
+1,599
+ 
+ 
+ 
+974
+ 
+ 
+ 
+1,250
+ 
+ 
+ 
+2,323
+ 
+
+Purchase
+ of mortgage-backed securities available for sale
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(8,536
+)
+
+Loan
+ originations and principal collections, net
+
+ 
+ 
+2
+ 
+ 
+ 
+2
+ 
+ 
+ 
+3
+ 
+ 
+ 
+(198
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net
+ cash provided (used) by investing activities
+
+ 
+ 
+353
+ 
+ 
+ 
+2,315
+ 
+ 
+ 
+3,063
+ 
+ 
+ 
+(21,096
+)
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+CASH FLOWS
+ FROM FINANCING ACTIVITIES:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Repurchase
+ of common stock
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,902
+)
+
+Investment
+ in subsidiary
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(29,288
+)
+
+Dividends
+ paid
+
+ 
+ 
+(959
+)
+ 
+ 
+(910
+)
+ 
+ 
+(1,225
+)
+ 
+ 
+(564
+)
+
+Proceeds
+ from exercise of stock options
+
+ 
+ 
+854
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Intercompany
+ borrowing, net
+
+ 
+ 
+ 
+ 
+ 
+ 
+(1,300
+)
+ 
+ 
+(1,300
+)
+ 
+ 
+1,300
+ 
+
+Capitalization
+ of Home Federal MHC
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(50
+)
+
+Net
+ proceeds from stock issuance
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+53,591
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+Net
+ cash (used) provided by financing activities
+
+ 
+ 
+(105
+)
+ 
+ 
+(2,210
+)
+ 
+ 
+(2,525
+)
+ 
+ 
+21,087
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+NET INCREASE
+ IN CASH AND CASH EQUIVALENTS
+ 
+ 
+879
+ 
+ 
+ 
+1,078
+ 
+ 
+ 
+1,922
+ 
+ 
+ 
+177
+ 
+
+CASH AND CASH
+ EQUIVALENTS, BEGINNING OF PERIOD
+ 
+ 
+2,099
+ 
+ 
+ 
+177
+ 
+ 
+ 
+177
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+CASH AND CASH
+ EQUIVALENTS, END OF PERIOD
+ 
+$
+ 2,978
+ 
+ 
+$
+ 1,255
+ 
+ 
+$
+ 2,099
+ 
+ 
+$
+ 177
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+F-38
+
+Note 18 - Selected Quarterly Financial
+ Data (unaudited)
+(In thousands, except share data)
+
+ 
+
+Quarter Ended
+
+ 
+ 
+
+ 
+
+ 
+
+December 31,
+2006
+ 
+
+March 31,
+2007
+ 
+
+June 30,
+2007
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Interest and
+ dividend income
+ 
+$
+10,872
+ 
+ 
+ 
+$
+10,738
+ 
+ 
+ 
+$
+10,650
+ 
+
+Interest expense
+ 
+ 
+5,373
+ 
+ 
+ 
+ 
+5,377
+ 
+ 
+ 
+ 
+5,338
+ 
+
+Net interest
+ income
+ 
+ 
+5,499
+ 
+ 
+ 
+ 
+5,361
+ 
+ 
+ 
+ 
+5,312
+ 
+
+Provision
+ for loan losses
+ 
+ 
+71
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Non-interest
+ income
+ 
+ 
+2,883
+ 
+ 
+ 
+ 
+2,761
+ 
+ 
+ 
+ 
+2,982
+ 
+
+Non-interest
+ expense
+ 
+ 
+6,246
+ 
+ 
+ 
+ 
+6,094
+ 
+ 
+ 
+ 
+5,794
+ 
+
+Income before
+ income taxes
+ 
+ 
+2,065
+ 
+ 
+ 
+ 
+2,028
+ 
+ 
+ 
+ 
+2,500
+ 
+
+Income tax
+ expense
+ 
+ 
+796
+ 
+ 
+ 
+ 
+787
+ 
+ 
+ 
+ 
+934
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ income
+
+ 
+$
+ 1,269
+ 
+ 
+ 
+$
+ 1,241
+ 
+ 
+ 
+$
+ 1,566
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Basic earnings
+ per share(1)
+ 
+$
+0.09
+ 
+ 
+ 
+$
+0.09
+ 
+ 
+ 
+$
+0.11
+ 
+
+Diluted earnings
+ per share(1)
+ 
+$
+0.09
+ 
+ 
+ 
+$
+0.08
+ 
+ 
+ 
+$
+0.11
+ 
+
+ 
+
+Quarter Ended
+
+ 
+ 
+
+ 
+
+ 
+
+December 31,
+ 
+
+March 31,
+ 
+
+June 30,
+ 
+
+September 30,
+
+ 
+
+2005
+ 
+
+2006
+ 
+
+2006
+ 
+
+2006
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Interest and
+ dividend income
+ 
+$
+9,331
+ 
+ 
+ 
+$
+9,575
+ 
+ 
+ 
+$
+10,387
+ 
+ 
+ 
+$
+10,620
+ 
+
+Interest expense
+ 
+ 
+3,349
+ 
+ 
+ 
+ 
+3,941
+ 
+ 
+ 
+ 
+4,593
+ 
+ 
+ 
+ 
+5,034
+ 
+
+Net interest
+ income
+ 
+ 
+5,982
+ 
+ 
+ 
+ 
+5,634
+ 
+ 
+ 
+ 
+5,794
+ 
+ 
+ 
+ 
+5,586
+ 
+
+Provision
+ for loan losses
+ 
+ 
+55
+ 
+ 
+ 
+ 
+90
+ 
+ 
+ 
+ 
+175
+ 
+ 
+ 
+ 
+(182
+)
+
+Non-interest
+ income
+ 
+ 
+2,801
+ 
+ 
+ 
+ 
+2,489
+ 
+ 
+ 
+ 
+3,053
+ 
+ 
+ 
+ 
+2,766
+ 
+
+Non-interest
+ expense
+ 
+ 
+5,880
+ 
+ 
+ 
+ 
+6,051
+ 
+ 
+ 
+ 
+6,131
+ 
+ 
+ 
+ 
+5,883
+ 
+
+Income before
+ income taxes
+ 
+ 
+2,848
+ 
+ 
+ 
+ 
+1,982
+ 
+ 
+ 
+ 
+2,541
+ 
+ 
+ 
+ 
+2,651
+ 
+
+Income tax
+ expense
+ 
+ 
+1,088
+ 
+ 
+ 
+ 
+749
+ 
+ 
+ 
+ 
+980
+ 
+ 
+ 
+ 
+993
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ income
+
+ 
+$
+1,760
+ 
+ 
+ 
+$
+1,233
+ 
+ 
+ 
+$
+ 1,561
+ 
+ 
+ 
+$
+ 1,658
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Basic earnings
+ per share(1)
+ 
+$
+0.12
+ 
+ 
+ 
+$
+0.09
+ 
+ 
+ 
+$
+0.11
+ 
+ 
+ 
+$
+0.11
+ 
+
+Diluted earnings
+ per share(1)
+ 
+$
+0.12
+ 
+ 
+ 
+$
+0.09
+ 
+ 
+ 
+$
+0.11
+ 
+ 
+ 
+$
+0.11
+ 
+
+ 
+ 
+
+Quarter Ended
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+December 31,
+ 
+
+March 31,
+ 
+
+June 30,
+ 
+
+September 30,
+
+ 
+
+2004
+ 
+
+2005
+ 
+
+2005
+ 
+
+2005
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Interest and
+ dividend income
+ 
+$
+7,675
+ 
+ 
+ 
+$
+8,407
+ 
+ 
+ 
+$
+8,748
+ 
+ 
+ 
+$
+9,080
+ 
+
+Interest expense
+ 
+ 
+2,686
+ 
+ 
+ 
+ 
+2,913
+ 
+ 
+ 
+ 
+3,133
+ 
+ 
+ 
+ 
+3,499
+ 
+
+Net interest
+ income
+ 
+ 
+4,989
+ 
+ 
+ 
+ 
+5,494
+ 
+ 
+ 
+ 
+5,615
+ 
+ 
+ 
+ 
+5,581
+ 
+
+Provision
+ for loan losses
+ 
+ 
+59
+ 
+ 
+ 
+ 
+236
+ 
+ 
+ 
+ 
+161
+ 
+ 
+ 
+ 
+ 
+ 
+
+Non-interest
+ income
+ 
+ 
+2,217
+ 
+ 
+ 
+ 
+2,641
+ 
+ 
+ 
+ 
+2,692
+ 
+ 
+ 
+ 
+2,578
+ 
+
+Non-interest
+ expense
+ 
+ 
+7,057
+ 
+ 
+ 
+ 
+5,193
+ 
+ 
+ 
+ 
+5,546
+ 
+ 
+ 
+ 
+5,362
+ 
+
+Income before
+ income taxes
+ 
+ 
+90
+ 
+ 
+ 
+ 
+2,706
+ 
+ 
+ 
+ 
+2,600
+ 
+ 
+ 
+ 
+2,797
+ 
+
+Income tax
+ expense
+ 
+ 
+16
+ 
+ 
+ 
+ 
+1,032
+ 
+ 
+ 
+ 
+802
+ 
+ 
+ 
+ 
+1,060
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Net
+ income
+
+ 
+$
+ 74
+ 
+ 
+ 
+$
+1,674
+ 
+ 
+ 
+$
+1,798
+ 
+ 
+ 
+$
+1,737
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Basic earnings
+ per share(1)
+ 
+ 
+nm
+ 
+ 
+ 
+$
+0.11
+ 
+ 
+ 
+$
+0.12
+ 
+ 
+ 
+$
+0.12
+ 
+
+Diluted earnings
+ per share(1)
+ 
+ 
+nm
+ 
+ 
+ 
+$
+0.11
+ 
+ 
+ 
+$
+0.12
+ 
+ 
+ 
+$
+0.12
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+(1) Quarterly earnings per share may vary from year-to-date or annual
+ earnings per share due to rounding.
+
+F-39
+
+Note 19 - Subsequent Event
+
+On May 11, 2007, the Boards of Directors
+ of Home Federal MHC, the Company and the Bank unanimously adopted a Plan of Conversion
+ and Reorganization (the "Plan of Conversion"), pursuant to which the mutual holding
+ company will convert to the stock form of organization. Pursuant to the Plan of
+ Conversion, (i) the Mutual Holding Company will convert to stock form, (ii) the
+ Mutual Holding Company and the Company will merge into the Bank and the Bank will
+ become a wholly owned subsidiary of a newly chartered stock company (the "Holding
+ Company"), (iii) the shares of common stock of the Company held by persons other
+ than the Mutual Holding Company will be converted into shares of common stock of
+ the Holding Company pursuant to an exchange ratio designed to preserve the percentage
+ ownership interests of such persons, and (iv) the Holding Company will offer and
+ sell shares of its common stock to certain depositors of the Bank, residents of
+ Bank s local community and shareholders of the Company and others in the manner
+ and subject to the priorities set forth in the Plan of Conversion. The exchange
+ ratio and the amount of stock sold will be based on an appraisal of the Company.
+ The highest priority will be depositors with qualifying deposits as of March 31,
+ 2006.
+
+The transactions contemplated by the Plan
+ of Conversion are subject to approval of the Company s shareholders (including
+ the approval of a majority of the shares held by persons other than the Mutual Holding
+ Company), the Bank s depositors and regulatory agencies. Proxy and offering
+ materials setting forth detailed information relating to the Plan of Conversion
+ will be sent to the Bank s depositors and shareholders of the Company for their
+ consideration in a few months. The Company anticipates that the transactions will
+ be completed in the fourth quarter of the 2007 calendar year.
+
+Conversion costs will be
+deferred and deducted from the proceeds of the shares sold in the offering. If
+the conversion transaction is not completed, all costs will be charged to
+expense. As of June 30, 2007 there were $14,000 in conversion costs which have
+been deferred.
+
+After the conversion, the Bank s deposits
+ will continue to be insured by the Federal Deposit Insurance Corporation, and the
+ Bank will maintain its membership in the Federal Home Loan Bank System. The Company
+ will be a savings and loan holding company regulated by the Office of Thrift Supervision.
+
+Depositors will continue to hold accounts
+ in the Bank identical as to dollar amount, rate of return and general terms (other
+ than voting and liquidation rights). Borrowers loans will be unaffected by
+ the conversion and will remain contractually fixed as they existed prior to the
+ conversion. The normal business of the Bank is accepting deposits and making loans
+ and will continue without interruption in its existing offices.
+
+F-40
+
+You should rely only on the information
+ contained in this prospectus. We have not authorized anyone to provide you with
+ information that is different. If the laws of your state or other jurisdiction prohibit
+ us from offering our common stock to you, then this prospectus does not constitute
+ an offer to sell or a solicitation of an offer to buy any of our common stock. Neither
+ the delivery of this prospectus nor any sale hereunder shall imply that there has
+ been no change in our affairs since any of the dates as of which information is
+ furnished herein or since the date hereof.
+
+13,800,000 Shares for
+ Sale
+(Anticipated Maximum,
+Subject to Increase)
+
+HOME FEDERAL BANCORP, INC.
+
+(Proposed Holding Company for Home Federal Bank)
+
+COMMON STOCK
+
+PROSPECTUS
+
+KEEFE,
+ BRUYETTE WOODS
+
+Until the later of _________ __, 2007 or
+ 25 days after the commencement of the Syndicated Community Offering, if any, which
+ is later, all dealers effecting transactions in our common stock may be required
+ to deliver a prospectus. This is in addition to the obligation of dealers to deliver
+ a prospectus when acting as underwriters and with respect to any unsold allotments
+ or subscriptions.
+
+PART II INFORMATION
+ NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and
+ Distribution
+
+ 
+Legal fees and expenses
+ 
+$
+250,000
+
+ 
+Securities
+ marketing legal fees
+ 
+ 
+55,000
+
+ 
+EDGAR, copying,
+ printing, postage and mailing
+ 
+ 
+518,000
+
+ 
+Appraisal
+ preparation fees and expenses
+ 
+ 
+110,000
+
+ 
+Accounting
+ fees and expenses
+ 
+ 
+110,000
+
+ 
+Securities
+ marketing fees and expenses
+ 
+ 
+4,370,000
+
+ 
+Data processing
+ fees and expenses
+ 
+ 
+35,000
+
+ 
+SEC registration
+ fee
+ 
+ 
+13,000
+
+ 
+Blue Sky filing
+ fees and expenses
+ 
+ 
+10,000
+
+ 
+Office of
+ Thrift Supervision filing fee
+ 
+ 
+12,000
+
+ 
+NASDAQ fairness
+ filing
+ 
+ 
+30,000
+
+ 
+Stock transfer
+ agent and regular fees and expenses
+ 
+ 
+50,000
+
+ 
+Other expenses
+ - Certificate printing, telephone/stock center, exchange agent
+ 
+ 
+50,000
+
+ 
+ 
+ 
+
+ 
+Total
+
+ 
+$
+ 5,613,000
+
+ 
+ 
+ 
+
+Item 14. Indemnification of Directors
+ and Officers
+
+In accordance
+ with the Maryland law, Article 12 of new Home Federal Bancorp, Inc. s Articles
+ of Incorporation and provides as follows:
+
+ARTICLE 12. Indemnification of Directors
+ and Officers.
+
+A. Indemnification. The Corporation shall indemnify: (1) its current and former directors and officers,
+ whether serving the Corporation or at its request any other entity, to the fullest
+ extent required or permitted by the MGCL now or hereafter in force, including the
+ advancement of expenses under the procedures and to the fullest extent permitted
+ by law; and (2) other employees and agents to such extent as shall be authorized
+ by the Board of Directors and permitted by law; provided, however, that, except
+ as provided in Section B hereof with respect to proceedings to enforce rights to
+ indemnification, the Corporation shall indemnify any such indemnitee in connection
+ with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding
+ (or part thereof) was authorized by the Board of Directors of the Corporation.
+
+B. Procedure. If a claim under Section A of this Article 12 is not paid in full by the Corporation
+ within 60 days after a written claim has been received by the Corporation, except
+ in the case of a claim for an advancement of expenses, in which case the applicable
+ period shall be 20 days, the indemnitee may at any time thereafter bring suit against
+ the Corporation to recover the unpaid amount of the claim. If successful in whole
+ or in part in any such suit, or in a suit brought by the Corporation to recover
+ an advancement of expenses pursuant to the terms of an undertaking, the indemnitee
+ shall also be entitled to be reimbursed the expense of prosecuting or defending
+ such suit. It shall be a defense to any action for advancement of expenses that
+ the Corporation has not received both: (1) an undertaking as required by law to
+ repay such advances in the event it shall ultimately be determined that the standard
+ of conduct has not been met; and (2) a written affirmation by the indemnitee of
+ his good faith belief that the standard of conduct necessary for indemnification
+ by the Corporation has been met. In addition: (1) in any suit brought by the indemnitee
+ to enforce a right to indemnification hereunder (but not in a suit brought by the
+ indemnitee to enforce a right to an advancement of expenses) it shall be a defense
+ that; and (2) in any suit by the Corporation to recover an advancement of expenses
+ pursuant to the terms of an undertaking the Corporation shall be entitled to recover
+ such expenses upon a final adjudication that, the indemnitee has not met the applicable
+ standard for indemnification set forth in the MGCL. Neither the failure of the Corporation
+ (including its Board of Directors, independent legal counsel, or its stockholders)
+ to have made a determination prior to the commencement of such suit that indemnification
+ of the indemnitee is proper in the circumstances because the indemnitee has met
+ the applicable standard of conduct set forth in the MGCL, nor an actual determination
+ by the Corporation (including its Board of
+
+II - 1
+
+Directors, independent legal counsel, or
+ its stockholders) that the indemnitee has not met such applicable standard of conduct,
+ shall create a presumption that the indemnitee has not met the applicable standard
+ of conduct or, in the case of such a suit brought by the indemnitee, be a defense
+ to such suit. In any suit brought by the indemnitee to enforce a right to indemnification
+ or to an advancement of expenses hereunder, or by the Corporation to recover an
+ advancement of expenses pursuant to the terms of an undertaking, the burden of proving
+ that the indemnitee is not entitled to be indemnified, or to such advancement of
+ expenses, under this Article 12 or otherwise shall be on the Corporation.
+
+C. Non-Exclusivity. The rights to indemnification and to the advancement of expenses conferred in
+ this Article 12 shall not be exclusive of any other right which any person may have
+ or hereafter acquire under any statute, the Charter, the Corporation s Bylaws,
+ any agreement, any vote of stockholders or the Board of Directors, or otherwise.
+
+D. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and
+ any director, officer, employee or agent of the Corporation or another corporation,
+ partnership, joint venture, trust or other enterprise against any expense, liability
+ or loss, whether or not the Corporation would have the power to indemnify such person
+ against such expense, liability or loss under the MGCL.
+
+E. Miscellaneous. The Corporation shall not be liable for any payment under this Article 12 in
+ connection with a claim made by any indemnitee to the extent such indemnitee has
+ otherwise actually received payment under any insurance policy, agreement, or otherwise,
+ of the amounts otherwise indemnifiable hereunder. The rights to indemnification
+ and to the advancement of expenses conferred in Sections A and B of this Article
+ 12 shall be contract rights and such rights shall continue as to an indemnitee who
+ has ceased to be a director or officer and shall inure to the benefit of the indemnitee s heirs, executors and administrators.
+
+Any repeal
+ or modification of this Article 12 shall not in any way diminish any rights to indemnification
+ or advancement of expenses of such director or officer or the obligations of the
+ Corporation arising hereunder with respect to events occurring, or claims made,
+ while this Article 12 is in force.
+
+Item 15. Recent Sales of Unregistered
+ Securities
+
+Not Applicable.
+
+Item 16. Exhibits and Financial Statement
+ Schedules
+
+The financial
+ statements and exhibits filed as part of this registration statement are as follows:
+
+(a)
+ 
+Exhibits
+
+ 
+ 
+ 
+
+1.1
+ 
+Engagement
+ Letter with Keefe, Bruyette & Woods, Inc. (a)
+
+ 
+ 
+ 
+
+1.2
+ 
+Form of proposed
+ Agency Agreement with Keefe, Bruyette & Woods, Inc. (a) 
+
+ 
+ 
+ 
+
+2
+ 
+Amended Plan
+ of Conversion and Reorganization (a)
+
+ 
+ 
+ 
+
+3.1
+ 
+Articles of
+ Incorporation of (New) Home Federal Bancorp, Inc. (a)
+
+ 
+ 
+ 
+
+3.2
+ 
+Bylaws of
+ (New) Home Federal Bancorp, Inc. (a)
+
+ 
+ 
+ 
+
+4
+ 
+Form of Certificate
+ for Common Stock of (New) Home Federal Bancorp, Inc. (a)
+
+ 
+ 
+ 
+
+5
+ 
+Opinion of
+ Breyer & Associates PC regarding legality of securities registered (a)
+
+ 
+ 
+ 
+
+8.1
+ 
+Federal Tax
+ Opinion of Silver Freedman & Taff, L.L.P.
+
+II - 2
+
+8.2
+ 
+State Tax
+ Opinion of Munther Goodrum Sperry, Chartered (a) 
+
+ 
+ 
+ 
+
+8.3
+ 
+Opinion of
+ RP Financial, LC. as to the value of subscription rights (a)
+
+ 
+ 
+ 
+
+10.1
+ 
+Form of Employment
+ Agreement for President and Chief Executive Officer with Home Federal Bank (b)
+
+ 
+ 
+ 
+
+10.2
+ 
+Form of Employment
+ Agreement for President and Chief Executive Officer with Home Federal Bancorp, Inc.
+ (b)
+
+ 
+ 
+ 
+
+10.3
+ 
+Employment
+ Agreement entered into by Home Federal Bank with Len E. Williams (c)
+
+ 
+ 
+ 
+
+10.3
+ 
+Form of Severance
+ Agreement for Executive Officers (b)
+
+ 
+ 
+ 
+
+10.4
+ 
+Form of Employee
+ Severance Compensation Plan (a)
+
+ 
+ 
+ 
+
+10.5
+ 
+Form of Director
+ Indexed Retirement Agreement (b)
+
+ 
+ 
+ 
+
+10.6
+ 
+Form of Director
+ Deferred Incentive Agreement (b)
+
+ 
+ 
+ 
+
+10.7
+ 
+Form of Split
+ Dollar Agreement (b)
+
+ 
+ 
+ 
+
+10.8
+ 
+Form of Executive
+ Deferred Incentive Agreement, and amendment thereto (b)
+
+ 
+ 
+ 
+
+10.9
+ 
+Form of Amended
+ and Restated Salary Continuation Agreement (b)
+
+ 
+ 
+ 
+
+10.10
+ 
+2005 Stock
+ Option and Incentive Plan and Form of Incentive Stock Option Agreement and Non-Qualified
+ Stock Option Agreement (d)
+
+ 
+ 
+ 
+
+10.11
+ 
+2005 Recognition
+ and Retention Plan and Form of Award Agreement (d)
+
+ 
+ 
+ 
+
+10.12
+ 
+Form of Director
+ Retirement Plan entered into by Home Federal Bank with each of its directors (e)
+
+ 
+ 
+ 
+
+10.13
+ 
+Transition
+ Agreement with Daniel L. Stevens (f)
+
+ 
+ 
+ 
+
+10.14
+ 
+Agreement
+ Regarding Terms of Employment Offer with Len E. Williams (f)
+
+ 
+ 
+ 
+
+21
+ 
+Subsidiaries
+ of the Registrant (a)
+
+ 
+ 
+ 
+
+23.1
+ 
+Consent of
+ Moss Adams LLP
+
+ 
+ 
+ 
+
+23.2
+ 
+Consent of
+ Breyer & Associates PC (contained in opinion included as Exhibit 5) (a)
+
+ 
+ 
+ 
+
+23.3
+ 
+Consent of
+ Silver Freedman & Taff, L.L.P. as to its Federal Tax Opinion (contained in
+ opinion included as Exhibit 8.1)
+
+ 
+ 
+ 
+
+23.4
+ 
+Consent of
+ Penland Munther Goodrum, Chartered as to its State Tax Opinion (contained in opinion
+ included as Exhibit 8.2) (a) 
+
+ 
+ 
+ 
+
+23.5
+ 
+Consent of
+ RP Financial, LC. (a)
+
+ 
+ 
+ 
+
+24
+ 
+Power of Attorney
+ (included in Signature Page of this Registration Statement) (a)
+
+ 
+ 
+ 
+
+99.1
+ 
+Order and
+ Certification Form (a)
+
+II - 3
+
+99.2
+ 
+Solicitation
+ and Marketing Materials (a)
+
+ 
+ 
+ 
+
+99.3
+ 
+Appraisal
+ Agreement with RP Financial, LC. (a)
+
+ 
+ 
+ 
+
+99.4
+ 
+Appraisal
+ Report of RP Financial, LC. (g)
+
+ 
+ 
+ 
+
+99.5
+ 
+Form of proxy
+ statement and proxy for depositors of Home Federal Bank (a)
+
+ 
+ 
+ 
+
+(a)
+ 
+Previously filed.
+
+(b)
+ 
+Incorporated
+ by reference from Home Federal Bancorp, Inc. s Registration Statement on Form
+ S-1, as amended, and as initially filed with the Securities and Exchange Commission
+ on March 19, 2004 (333-35817).
+
+(c)
+ 
+Incorporated
+ by reference from Home Federal Bancorp, Inc. s Current Report on Form 8-K dated
+ as of November 6, 2006 and filed with the SEC on November 6, 2006.
+
+(d)
+ 
+Incorporated
+ by reference from Home Federal Bancorp, Inc s Registration Statement on Form
+ S-8 as filed with the SEC on August 25, 2005 (333-127858)
+
+(e)
+ 
+Incorporated
+ by reference from Home Federal Bancorp, Inc. s Current Report on Form 8-K dated
+ as of October 21, 2005 and filed with the SEC on November 10, 2005.
+
+(f)
+ 
+Incorporated
+ by reference from Home Federal Bancorp, Inc. s Current Report on Form 8-K dated
+ as of August 21, 2006 and filed with the SEC on August 22, 2006.
+
+(g)
+ 
+Excludes certain
+ tabular and statistical information pursuant to a hardship exemption request made
+ under Rule 202 of Regulation S-T.
+
+II - 4
+
+(b) Financial
+ Statement Schedules
+
+HOME FEDERAL BANCORP, INC.
+ AND SUBSIDIARY
+
+INDEX TO CONSOLIDATED FINANCIAL
+ STATEMENTS
+
+ 
+ 
+ 
+Page
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+Report
+ of Independent Registered Public Accounting Firm
+
+ 
+F-2
+
+ 
+ 
+ 
+ 
+
+ 
+Consolidated
+ Balance Sheets as of June 30, 2007 (unaudited) and September 30, 2006 and 2005
+
+ 
+F-4
+
+ 
+ 
+ 
+ 
+
+ 
+Consolidated
+ Statements of Income for the Nine Months Ended June 30, 2007 (unaudited) and 2006
+ (unaudited) and For the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-5
+
+ 
+ 
+ 
+ 
+
+ 
+Consolidated
+ Statements of Stockholders Equity for the Nine Months Ended June 30, 2007
+ (unaudited) and For the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-6
+
+ 
+ 
+ 
+ 
+
+ 
+Consolidated
+ Statements of Cash Flows for the Nine Months Ended June 30, 2007 (unaudited) and
+ 2006 (unaudited) and For the Years Ended September 30, 2006, 2005 and 2004
+
+ 
+F-8
+
+ 
+ 
+ 
+ 
+
+ 
+Selected
+ Notes to Consolidated Financial Statements
+
+ 
+F-10
+
+All schedules
+ are omitted because the required information is not applicable or is included in
+ the Consolidated Financial Statements and related Notes.
+
+The financial
+ statements of new Home Federal Bancorp, Inc. have been omitted because new Home
+ Federal Bancorp, Inc. has not yet issued any stock, has no assets or liabilities,
+ and has not conducted any business other than that of an organizational nature.
+
+Item 17. Undertakings
+
+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;
+
+(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 Securities and Exchange Commission pursuant to Rule 424(b) if, in
+ the aggregate, the changes in volume and price represent no more than 20 percent
+ change in the maximum aggregate offering price set forth in the
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001414048_cgen_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001414048_cgen_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..eb993ce659d4b3d38d5055adb60b9a32a690fb3c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001414048_cgen_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS We are being represented by Latham & Watkins LLP with respect to certain legal matters as to United States federal securities and New York State law. The underwriters are being represented by Simpson Thacher & Bartlett LLP with respect to certain legal matters as to United States federal securities and New York State law. The validity of the ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Conyers Dill & Pearman. Certain legal matters as to Chinese law will be passed upon for us by Grandall Legal Group (Shanghai) and for the underwriters by Fangda Partners. Latham & Watkins LLP may rely upon Conyers Dill & Pearman with respect to matters governed by Cayman Islands law and Grandall Legal Group (Shanghai) with respect to matters governed by Chinese law. Simpson Thacher & Bartlett LLP may rely upon Fangda Partners with respect to matters governed by Chinese law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001414592_akela_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001414592_akela_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..51a5c9854a4bce260574d112c8ecf2f8564c00d7
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001414592_akela_legal_matters.txt
@@ -0,0 +1 @@
+Six Months Ended June 30, 2007 WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC, Washington, D.C. 20549, a registration statement on Form F-1 under the Securities Act, with respect to our common shares offered hereby. This prospectus, which forms part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Some items are omitted in accordance with the rules and regulations of the SEC. For further information about us and our common shares, we refer you to the registration statement and the exhibits and schedules to the registration statement filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit are qualified in all respects by reference to the actual text of the exhibit. You may read and copy the registration statement, including the exhibits and schedules to the registration statement, at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at www.sec.gov, from which you can electronically access the registration statement, including the exhibits and schedules to the registration statement. We are a foreign private issuer as defined under Rule 3b-4 under of the Exchange Act. As a result, although upon completion of the offering we will become subject to the informational requirements of the Exchange Act, as long as we qualify as a foreign private issuer, we will be exempt from certain informational requirements of the Exchange Act which domestic issuers are subject to, including the proxy rules under Section 14 of the Exchange Act and the insider reporting and short-profit provisions under Section 16 of the Exchange Act. We will also be subject to the full informational requirements of the securities commissions in certain of the provinces of Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the Canadian provincial securities commissions. These filings are electronically available from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent of the SEC's electronic document gathering and retrieval system. We also intend to furnish our shareholders with annual reports containing consolidated financial statements audited by an independent registered public accounting firm. Actual Pro forma(4) (unaudited) (In thousands, except share and per share amounts) Consolidated Statements of Operations: Pharma revenues $ 1,042 $ 2,566 $ 2,281 $ 11,809 $ 4,358 $ 5,105 Pharma operating costs and expenses: Cost of sales 6,828 2,580 2,768 Selling, general and administrative 4,633 7,523 10,251 14,234 6,761 7,377 Research and development 9,710 9,580 13,356 16,956 11,851 8,251 Operating leases 811 821 1,168 1,465 1,621 1,651 Impairment of property and equipment(3) 3,523 3,523 Restructuring(3) 335 335 264 264 Foreign exchange loss (gain) 98 83 1,047 1,047 (779 ) (779 ) Interest on long-term debt 95 1,647 785 905 97 113 Interest income (38 ) (530 ) (547 ) (425 ) (425 ) Segment earnings (loss) from Pharma operations before undernoted (14,305 ) (17,050 ) (27,654 ) (32,937 ) (17,612 ) (14,115 ) Change in fair value of derivative-related liability and warrants (669 ) 1,204 1,204 Net earnings (loss) before income taxes from Pharma operations (14,305 ) (16,381 ) (28,858 ) (34,141 ) (17,612 ) (14,115 ) Total revenues 19,353 38,333 25,438 11,809 4,358 5,105 Net earnings (loss) before income taxes (11,278 ) (11,683 ) (26,350) (2) (34,141 ) (17,612 ) (14,115 ) Net earnings (loss) (11,913 ) (11,132 ) (804 ) (34,207 ) (17,750 ) (14,253 ) Earnings (loss) per share basic and diluted $ (2.23 ) $ (1.41 ) $ (0.08 ) $ (3.04 ) $ (1.52 ) $ (1.22 ) Basic and diluted weighted average common shares 5,338,366 7,905,772 10,388,586 11,251,377 11,674,505 11,674,505 At December 31, (unaudited) (in thousands) Selected Balance Sheet Data: Cash and cash equivalents $ 10,024 $ 13,989 $ 35,304 $ 12,120 (5) Total assets $ 37,963 $ 60,734 $ 39,252 $ 39,897 Long-term obligations and redeemable common shares $ 9,512 $ 20,075 $ 4,736 $ 9,739 Share capital $ 20,976 $ 35,714 $ 42,456 $ 42,508 Accumulated deficit $ (13,859 ) $ (24,991 ) $ (25,795 ) $ (43,545 ) Total stockholders' equity $ 17,949 $ 18,753 $ 26,236 $ 9,449 PRO FORMA CONSOLIDATED SUMMARIZED INFORMATION We disposed of LRI through a series of transactions in 2006 and acquired PharmaForm on January 25, 2007. Our consolidated financial statements reflect these transactions from the dates at which they occurred in 2006 and 2007, respectively. The pro forma summarized consolidated statement of operations for the year ended December 31, 2006 and the six-month period ended June 30, 2007 give effect to the disposition of LRI and the acquisition of PharmaForm as if both of these transactions had taken place on January 1, 2006. The pro forma summarized consolidated statements of operations are not necessarily indicative of the results of operations that would have been realized for the year and interim period presented, does not purport to project our results of operation for any future periods, and does not include the expected benefits and cost savings that may arise from the business acquisition. The pro forma summarized financial information should be read in conjunction with our consolidated financial statements for the year ended December 31, 2006 and June 30, 2007 and the financial statements of PharmaForm for the year ended December 31, 2006 and our unaudited pro forma consolidated financial results of operations for the year ended December 31, 2006 and the six months ended June 30, 2007. Year Ended December 31, 2006 Six Months Ended June 30, 2007 Net earnings (loss) $ (34,207 ) $ (14,253 ) Our Operating Results As a result of the LRI Spin-off, our business operations are distinctly different from our historical operating results as reflected in our 2006 and prior consolidated financial statements and related notes thereto included elsewhere in this prospectus. This is principally due to the fact that the preclinical contract research services business, which we disposed of in the LRI Spin-off, provided a revenue and expense base substantially different from our continuing operations. In addition, the acquisition of PharmaForm resulted in a new revenue and cost base starting in late January 2007. You are also encouraged to review our unaudited pro forma financial information, included elsewhere in this prospectus, which reflects our consolidated financial results for the year ended December 31, 2006 and the six months ended June 30, 2007 had we effected the LRI Spin-off and the PharmaForm acquisition as of January 1, 2006. We have summarized this information below to assist your understanding of our current business. Pro Forma Financial Information Year Ended December 31, 2006 Six Months Ended June 30, 2007 Net earnings (loss) $ (34,207 ) $ (14,253 ) Our results of operations for the six months ended June 30, 2007 include the operations of PharmaForm since the date of acquisition on January 25, 2007. All amounts are presented in thousands of U.S. dollars unless otherwise noted. Six Months Ended June 30, 2006 (unaudited) Six Months Ended June 30, 2007 (unaudited) Pharma Segment (unaudited) Warrants issued as settlement for additional compensation to agents 192 8 Issuance of common shares in connection with business acquisitions 4,772 1,160 1,069 4,379 Settlement of convertible debentures through issuance of common shares 5,264 3,607 Common shares issued of principal vendors of LAB Pharma Oy 2,909 2,212 Due to Scantox shareholders settled with cash held in escrow 475 Property and equipment financed through capital leases 26 1,314 463 618 Services rendered in exchange of shares 24 52 Issuance of common shares in connection with acquisition of customer list Contract Research Segment Consolidated Consolidated (unaudited) Accounts receivable $ (1,166 ) $ 484 $ (1,585 ) $ (3,726 ) $ (22 ) Receivable from collaborative agreement (10,828 ) Work in progress (726 ) (206 ) 168 24 Research tax credits receivable 818 (341 ) 697 617 Prepaid expenses (128 ) (424 ) (5,097 ) (514 ) (1,396 ) Accounts payable and accrued liabilities 1,610 1,632 2,676 2,367 (311 ) Income taxes payable 285 Deferred revenue 499 927 2,622 691 11,739 Long-term work in progress 30 Total assets $ 58,382 $ 39,897 Total long-term liabilities (excluding long-term deferred revenue) $ 24,357 $ 5,360 Co-development revenue $ 360 $ 583 $ Change Operating leases. Operating leases included a charge for the early termination of our lease agreement in Finland. On March 1, 2007, our Finnish subsidiary agreed to an early termination of their lease agreement. The agreement required a lump-sum payment of $2.8 million which included $1.9 million covering the base rent for the period from February 1, 2007 to September 30, 2008, $0.3 million for maintenance costs and the repayment of the unsecured long-term debt of $0.6 million. The lump-sum payment for rent and maintenance costs less the monthly rent charges for July 1, 2007 to October 31, 2007, the cease-use date, was expensed in 2007. Restructuring expense. We recorded approximately $0.3 million in restructuring expense in the six-month period ended June 30, 2007 associated with changes in the estimate of severance expense associated with the downsizing of our Finnish operations. Foreign exchange gains and losses. Although our functional currency is the U.S. dollar, a significant portion of our assets and liabilities are in Canadian dollars and Euros. Foreign exchange gains during the six months ended June 30, 2007 reflect the strengthening of the Euro and Canadian dollar against the U.S. dollar. Foreign exchange losses from the prior year reflect the foreign exchange loss component on the early settlement of a convertible debenture during 2006. Interest income. Interest income related to interest earned on invested cash balances. The increase in interest income was due to an increase in invested cash balances. Interest expense. Long-term interest expense of $0.7 million for the first six months of 2006 included $0.4 million of interest on a convertible debenture. By August 3, 2006, this debenture had been fully converted into 659,777 of our common shares resulting in lower interest expense in 2007. Change in fair value of derivative related liability and warrants. The change in fair value of derivative related liability and warrants during the six months ended June 30, 2006 reflects a $1.2 million loss related to the partial settlement of the convertible debenture and an additional $0.3 million charge for the change in fair value of embedded derivatives and detachable warrants associated with this debt instrument. In August 2006, we issued 659,777 common shares to settle the outstanding principal of the convertible debenture. Fiscal Year Ended December 31, 2006 compared to Fiscal Year Ended December 31, 2005 We have summarized below relevant financial information for our Pharma business for the twelve-month periods ended December 31, 2006, 2005 and 2004. All amounts are presented in thousands of U.S. dollars unless otherwise noted. Percent Change (unaudited) Expenditures for segment property and equipment and intangible assets Contract Research Services $ 2,144 $ 14,169 $ 1,685 $ 1,169 Pharma 10,607 498 1,122 27 Corporate 33 65 501 2005 vs 2004 2006 vs 2005 The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. $ (in thousands) Net assets acquired Current assets, including cash of $0.4 million $ 2,036 Property and equipment 2,680 In process research and development 3,600 Intangible assets Non-competition agreement 1,400 FDA/DEA 1,000 Customer contracts and relationships 2,000 Goodwill 2,280 Current liabilities (1,682 ) Long-term liabilities (331 ) $ 12,983 Consideration Cash $ 7,500 862,791 common shares 4,379 Transaction costs 1,104 $ 12,983 Contractual Obligations The aggregate maturities of the contractual obligations are as follows: Payment due by period 2011+ Total (in thousands) Operating lease obligations $ 428 $ 407 $ 259 $ $ $ 1,094 Service contract obligations 9 9 Management fee obligations 236 236 236 157 865 Consulting agreements 574 599 560 560 607 2,900 Clinical study obligations 2,647 2,647 Net earnings (loss) $ (804 ) $ (28,120 ) (28,924 ) $ (unaudited) Finland $ 147 $ 4,058 $ 159 Canada 395 10,643 406 Barbados 518 (1,915 ) 579 Denmark 10,285 Hungary 4,194 United States Total $ 4,444 $ 2,007 $ 1,457 $ 1,119 $ 5,383 $ 14,410 Our Finnish subsidiary has received certain low interest loans and subsidies from Tekes, a Finnish governmental agency. Following our decision to transfer certain activities from Finland to our facilities in Austin, Texas, we recently have been notified that this agency is reviewing loans and subsidies previously granted to us totalling 2,556 and 954, respectively. Discussions with the agency are ongoing and we cannot, at this time, determine if such review will lead to changes to the terms of the original agreement or demands for repayment of all or a portion of amounts received. Accordingly, all loans received from Tekes continue to be presented as long-term debt in accordance with the original terms of the agreement and no additional provision has been made with respect to this matter. At June 30, 2007, we had commitments to buy foreign currencies using foreign exchange contracts as follows: Buy or Sell Notional Amount Exchange Rate Maturity (unaudited) 2007 $ 1,456 $ 1,270 2008 218 2009 238 2010 260 2011 Notional US$ Equivalent 1,600 $ 2,299 Investing activities Acquisition of PharmaForm, net of cash (7,076 ) Proceeds from disposal of LAB Research Inc. (note 3) 50,490 Fees on sale of LAB Research Inc. (note 3) (5,185 ) Deferred corporate transaction costs (851 ) (1,403 ) Business acquisition, net of cash acquired 490 (5,003 ) Payment to TRC shareholders (384 ) Costs related to acquisition of LAB Denmark (39 ) Cash balance transferred to LAB Research Inc. upon sale (847 ) Payment of holdback payable (54 ) Additions to property and equipment (2,535 ) (2,350 ) (1,830 ) (1,120 ) (869 ) Proceeds from disposal of property and equipment 36 Additions to intangible assets (31 ) (270 ) (391 ) (55 ) Other assets 6 (1,225 ) (150 ) (1,844 ) 328 (16 ) MANAGEMENT Directors and Executive Officers Directors The following table sets forth, for each of our directors, his name, place of residence, age, principal occupation and the period during which he has served as a director of our Company. Each director holds office until the next annual meeting or until his successor is elected or appointed. The Canada Business Corporations Act requires that at least 25% of our directors are Canadian residents. Name and Principal Residence Age Principal Occupation (398 ) (1,700 ) 30,768 (2,891 ) Director Since Strategic Development of Biovail. Mr. Reininghaus retired from Biovail in March 2005 and relinquished his board seat in June 2005. Maurice St. Jacques, Ph.D., Director. Professor St. Jacques received a B.Sc. from the University of Ottawa and a Ph.D. (Chemistry-NMR) from the University of California at Los Angeles. He is presently a Professor in the University of Montreal Chemistry Department, and has also served as Chairman of the Chemistry Department, Vice-Dean of the Faculty of Graduate Studies, Associate Vice-Rector for Research and Vice-Rector for Research and Planning. Professor St. Jacques was responsible for setting up the Office of University Industry Liaison, and he has been a Board Member of many interdisciplinary research centers. Throughout his career, he has been involved in the financial planning and management of various public and private research based initiatives. He retired from the University of Montreal at the end of 2006. Robert O. Williams, III, Ph.D., Director. Dr. Williams received his B.Sc. in Biology from Texas A&M University in 1979 and in 1986 earned his Ph.D. in Pharmaceutics from the University of Texas at Austin. After earning his Ph.D., Dr. Williams served as an executive at various pharmaceutical companies before joining the faculty of the pharmaceutics department of the University of Texas at Austin, where he has instructed since 1995. Dr. Williams has authored and co-authored hundreds of articles and abstracts in the pharmaceuticals sciences area. In addition to his academic responsibilities, Dr. Williams served as the President of PharmaForm from 1996 through 2006 and serves as a consultant to us on intellectual property matters. Executive Officers The following table sets forth, for each of our executive officers, his or her name, municipality of residence, age, and position(s) held with us. Name and Principal Residence Age Position(s) Held (unaudited) Deferred income tax assets Non-capital losses $ 12,540 $ 13,612 $ 18,844 Share issue costs and deferred financing fees 741 740 746 Research and development expenses 4,216 4,507 4,549 Property and equipment 414 Other 200 334 Compensation of Executive Officers Summary Compensation Table The following table presents compensation information in Canadian dollars for our fiscal years ended December 31, 2006, 2005 and 2004 paid to or accrued for our Chief Executive Officer, our Chief Financial Officer, and our other executive officers whose total cash compensation exceeded $100,000 during the year ended December 31, 2006, who we refer to as our named executive officers. No information is provided for Josef Bossart, Richard Martin, Barbara Lead, or Roman Denk, as none of these executives was employed by us prior to 2007. Long-Term Compensation Awards Shares Underlying Number of Options Granted Annual Compensation(1) Name Other Annual Compensation All Other Compensation Year Salary Bonus Halvor Jaeger, M.D.(2) 2006 2005 2004 $ $ $ 375,000 325,000 300,000 $ $ $ 2,700,725 168,750 135,000 (3) $ 56,000 10,714 12,857 8,571 $ $ 102,263 48,884 (6) Stephen Lermer(4) 2006 $ 206,293 $ 62,434 56,460 64,285 Andrew Reiter(5) 2006 2005 2004 $ $ $ 175,000 145,833 14,269 $ $ $ 317,000 32,229 3,452 (3) 21,428 20,357 7,142 $ $ 12,000 12,000 (7) Taneli Jouhikainen 2006 2005 2004 $ $ $ 199,318 165,990 177,859 $ $ $ 63,782 29,878 34,796 5,714 17,500 45,428 $ $ $ 12,642 12,653 12,363 (7) The following table sets forth stock options granted under the Plan during the fiscal year ended December 31, 2006 to each of our executive officers: Option Grants During the Year Ended December 31, 2006 Name Securities Under Options Granted(1) Total revenue $ % of Total Options Granted to Employees in 2006 Exercise Price (C$/Security) Consideration 718,339 common shares 4,772 Cash Market Value of Securities Underlying Options on Date of Grant (C$/Security) Current income taxes Canadian federal 1,201 1,410 1,379 185 138 Canadian provincial 779 Foreign 35 353 Expiration Date Operating expenses Cost of sales 8,828 20,477 12,857 11,236 2,580 Selling, general and administrative 9,501 15,653 16,763 9,319 6,761 Research and development 9,710 9,580 13,356 5,097 11,851 Operating leases 2,239 2,620 1,894 1,275 1,621 Impairment of property and equipment (note 15) 3,523 Restructuring charges (note 15) 335 264 Foreign exchange loss (gain) (45 ) (14 ) 1,069 (1)The securities underlying the options granted are common shares. (2)Mr. Palka was our Vice President, Corporate Services until his termination on December 31, 2006. His severance agreement provides for payments of C$120,000 and C$24,000, representing, respectively, nine months of salary and a bonus payment for 2006. The following table sets forth details of the value of unexercised options on an aggregated basis as of December 31, 2006: Aggregate Option Exercises During 2006 and Option Values at December 31, 2006 Name Securities Acquired on Exercise (#) Aggregate Value Realized ($) Unexercised Options at December 31, 2006 (#) Exercisable/ Unexercisable Value of Unexercised In-the-Money Options at December 31, 2006(1) ($) Exercisable/ Unexercisable Dr. Halvor Jaeger Nil Nil 32,143/0 Nil/Nil Stephen Lermer Nil Nil 0/64,285 Nil/Nil Andrew Reiter Nil Nil 22,738/26,190 Nil/Nil Taneli Jouhikainen Nil Nil 61,429/7,413 Nil/Nil Hanns-Christian Palka(2) Nil Nil 32,738/11,904 Nil/Nil Equity Compensation Plan Information The following table sets forth certain information concerning our equity compensation plans as of October 31, 2007: Plan Category Number of securities to be issued upon exercise of outstanding options (A) Weighted-average exercise price of outstanding options (B) PRINCIPAL SHAREHOLDERS The following table sets forth information regarding beneficial ownership of our common shares as of October 31, 2007 by: each person known by us to be the beneficial owner of more than 5 percent of our common shares; our executive officers; our directors; and all of our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Unless otherwise noted below, the address of the persons and entities listed in the table is c/o Akela Pharma Inc., 11400 Burnet Road, Suite 4010, Austin, Texas 78758. In computing the number of common shares beneficially owned by a person and the percentage ownership of that person, we deemed outstanding common shares subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of October 31, 2007. We did not deem these shares outstanding, however, for purposes of computing the percentage ownership of any other person. As of October 31, 2007, there are 67 U.S. record holders holding 22.0% of the common shares. The table below lists the applicable percentage ownership based on 11,768,294 common shares outstanding as of October 31, 2007. The number of common shares to be outstanding after the closing of this offering is expected to be 13,768,294 if the minimum, and 15,614,294 if the maximum, number of common shares offered hereby are sold. Before the Offering After the Offering Name of Beneficial Owner Shares Beneficially Owned Percentage of Shares Outstanding 822 268 554 LRI Customer contracts and relationships 2,913 Shares Beneficially Owned Percentage of Shares Outstanding(1) Minimum Percentage of Shares Outstanding(1) Maximum Directors and Officers Peter Barrett(4) 1,006,949 8.56 1,006,949 6.45 7.32 Yves Glaude Hans-Rainer Hoffmann(5) 24,045 * 24,045 * * Halvor Jaeger(6) 1,269,496 10.79 1,269,496 8.13 8.94 G nter Knorr(7) 34,282 * 34,282 * * Rolf Reininghaus(8) 11,606 * 11,606 * * Maurice St. Jacques(9) 34,691 * 34,691 * * Roman Denk Barbara Lead Josef Bossart Taneli Jouhikainen(10) 75,658 * 75,658 * * Stephen Lermer(11) 17,856 * 17,856 * * Richard Martin Andrew Reiter(12) 31,289 * 31,289 * * Robert O. Williams III 350,649 2.98 350,649 2.25 2.55 Directors & Officers as a group (15 persons) 2,856,521 24.28 2,856,521 18.29 20.50 MARKET INFORMATION Our common shares are traded on the Toronto Stock Exchange under the symbol "AKL". We have applied to have our common shares listed on The NASDAQ Global Market under the symbol "AKLA". As of October 31, 2007, there were 299 holders of record of our outstanding common shares, of which there are 67 holders in the United States holding approximately 22% of our outstanding common shares. The following table sets forth, for the periods indicated, the high and low closing prices per common share in Canadian dollars and the average daily trading volume for our common shares on the Toronto Stock Exchange. However, you should not view this presentation as an indication that the market price of our common shares will continue at such levels. C$ Share Price Average Daily Trading Volume High $ 4,987 $ 4,590 $ Low SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of our common shares in the public market could adversely affect prevailing market prices from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common shares in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. United States Resale Restrictions Based on shares outstanding as of October 31, 2007, we expect common shares outstanding of 13,768,294 if the 2,000,000 minimum shares are sold and 15,614,294 if the 3,846,000 maximum shares are sold assuming no exercise of outstanding options or warrants. Of these outstanding shares, all shares sold in this offering and 7,630,404 shares previously sold by us outside the United States pursuant to Regulation S under the Securities Act, other than shares subject to lock-up agreements or otherwise subject to restrictions under applicable securities laws (including shares held by affiliates), will be freely tradable without restrictions or further registration under the Securities Act. The remaining 3,138,143 common shares are restricted securities as defined under Rule 144. Restricted securities may be sold in the public market only if registered, if sold outside the United States pursuant to Regulation S under the Securities Act, or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 of the Securities Act, which are summarized below. Taking into account the lock-up agreements described below, the number of shares that will be available for sale in the public market under the provisions of Rules 144, 144(k) and 701 and Regulation S will be as follows: Number of Shares Eligible for Sale in Public Market Days After Date of this Prospectus 3,894 1,242 1,055 717 607 7,515 Long-term debt obligations and associated interest 550 765 402 Minimum Maximum Comment UNDERWRITING Our common shares are being offered in the United States by Oppenheimer & Co. Inc., and Broadpoint Capital, Inc. and such other registered dealers as may be designated by the underwriters. Subject to applicable law, the underwriters may offer the common shares outside of the United States. Oppenheimer & Co. Inc. and Broadpoint Capital, Inc. are acting as representatives for the several underwriters. The underwriters have made no commitment to purchase all or any part of the common shares offered but have agreed to use their best efforts to sell a minimum number of common shares equating to gross proceeds of $13,000,000 and a maximum number of common shares equating to gross proceeds of $24,999,000 by December 9, 2007 (subject to an extension to December 23, 2007 on agreement between us and the underwriters). Assuming an offering price of $6.50, we will offer a minimum of 2,000,000 and a maximum of 3,846,000 common shares in this offering. All proceeds received from investors will be deposited into a non-interest bearing escrow account with American Stock Transfer and Trust Company, as escrow agent. Unless $13,000,000 in proceeds (representing the sale of 2,000,000 common shares at the assumed initial offering price of $6.50) are on deposit in the escrow account, the offering will terminate and all proceeds will be promptly refunded to investors by the escrow agent, without deduction or interest. Investors will have no right to the return of their funds during the escrow period. All payments for the shares of common stock must be made payable to American Stock Transfer and Trust Company, Escrow Agent for Akela Pharma Inc. and mailed or delivered to JP Morgan Chase, 55 Water Street, New York, New York 10041, with such additional information as instructed by the underwriters. The underwriters are offering the common shares, subject to prior sale and subject to approval of legal matters by their counsel, including the validity of the common shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Public Offering Price, Underwriting Fees and Expenses and Offering Expenses The underwriters have advised us that they propose to offer for sale our common shares to the public at the initial public offering price set forth on the cover page of this prospectus. The underwriters may change the initial public offering price and other selling terms if at least an aggregate of $13,000,000 of gross proceeds are not committed prior to the termination of the offering period. We have agreed to pay to the underwriters a non-accountable aggregate expense allowance of 6.5% of the gross proceeds of the offering, of which no amount has been paid as of the date of this prospectus. We have also agreed to issue the underwriters a common share purchase warrant for the purchase of common shares in an amount equal to 2% of the aggregate amount of common shares sold in the offering. Such common share purchase warrant will be immediately exercisable for a period of five years from the date of the closing of the offering and will be exercisable at the offering price. We have also agreed to pay expenses of counsel retained by the underwriters not in excess of $25,000. The following table shows the initial public offering price, underwriting fees and proceeds before expenses to the Company. Public Offering Price Underwriting Fees Proceeds, before expenses, to us Purchasers of the common shares offered by this prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price on the cover page of this prospectus. Expenses Related to this Offering Set forth below is an itemization of the total expenses, excluding underwriting fees, which are expected to be incurred in connection with the offer and sale of our common shares. With the exception of the SEC registration fee and the Financial Industry Regulatory Authority filing fee, all amounts are estimates. We estimate that we will pay approximately $3.8 million of expenses for this offering, consisting of the following: SEC registration fee $ 1,216 Financial Industry Regulatory Authority filing fee 7,450 NASDAQ Global Market listing fee 100,000 Accounting fees and expenses 1,200,000 Legal fees and expenses 1,500,000 Printing, mailing and administrative fees 700,000 Transfer agent and registrar fees 100,000 Miscellaneous 191,334 Other Gain on disposal of LAB Research Inc. (note 3) 32,759 Share in net income of a company subject to significant influence 265 Change in fair value of derivative-related liability and warrants (note 11) 669 (1,204 ) (1,554 ) Interest on long-term debt (398 ) (2,407 ) (1,582 ) (1,381 ) (97 ) Interest income 38 530 44 (unaudited) Revenues $ 1,042 $ 2,566 $ 2,281 $ 360 $ 4,358 Cost of sales (2,580 ) Selling, general and administrative (4,633 ) (7,523 ) (10,251 ) (2,240 ) (6,761 ) Research and development (9,710 ) (9,580 ) (13,356 ) (5,097 ) (11,851 ) Operating leases (811 ) (821 ) (1,168 ) (473 ) (1,621 ) Impairment of property and equipment (3,523 ) Restructuring (335 ) (264 ) Foreign exchange gain (loss) (98 ) (83 ) (1,047 ) (414 ) 779 Interest expense (95 ) (1,647 ) (785 ) (706 ) (97 ) Interest income 38 530 44 Earnings (loss) before undernoted items (17,940 ) (592 ) 4,105 (14,427 ) Other (income) expense: Interest on long-term debt (97 ) (16 ) (113 ) Interest income 425 Akela Pharma Inc. Consolidated Balance Sheets (in thousands of U.S. dollars) December 31, Consideration Cash 4,571 Balance of sale held in escrow and paid on March 31, 2006 Net increase (decrease) in cash and cash equivalents 5,025 2,590 22,171 (10,609 ) (24,618 ) Cash and cash equivalents Beginning of period 4,363 10,024 13,989 13,989 35,304 Effect of exchange rate changes 636 1,375 (856 ) Total assets $ 60,734 $ 39,252 $ 39,897 Total liabilities 41,981 13,016 26,069 Redeemable common shares (862,791 common shares outstanding with no par value at June 30, 2007) (note 22) 4,379 Stockholders' Equity Share capital (9,997,476, 10,891,218 and 10,900,146 common shares outstanding with no par value at December 31, 2005 and 2006 and June 30, 2007 (unaudited) (note 13)) 35,714 42,456 42,508 Warrants (note 13) 1,571 95 488 Additional paid-in capital 4,883 6,862 7,380 Accumulated other comprehensive income 1,576 2,618 2,618 Accumulated deficit (24,991 ) (25,795 ) (43,545 ) Total stockholders' equity 18,753 26,236 9,449 Total liabilities and stockholders' equity $ 60,734 $ 39,252 $ 39,897 Akela Pharma Inc. Consolidated Statements of Operations (in thousands of U.S. dollars, except share and per share data) Years Ended December 31, Six Months Ended June 30, Current liabilities Accounts payable and accrued liabilities $ 3,674 $ 4,941 $ 6,996 Income taxes payable 277 Deferred revenue 1,192 1,606 1,477 Current portion of long-term debt 1,456 1,270 Current portion of convertible debenture 1,298 Due to selling shareholders of LAB Denmark (unaudited) Revenues Research services $ 18,311 $ 35,767 $ 23,157 $ 20,301 $ Pharma 1,042 2,566 2,281 4,358 19,353 38,333 25,438 20,301 4,358 30,233 48,316 49,797 27,290 22,298 Earnings (loss) before undernoted items (10,880 ) (9,983 ) (24,359 ) (6,989 ) (17,940 ) Total current liabilities 19,765 8,280 9,743 Deferred revenue 10,966 Long-term debt (note 10) 16,933 4,248 5,360 Convertible debenture (note 11) 1,353 Deferred income taxes (note 12) 2,141 Warrants (note 11) 720 Balance June 30, 2007 (unaudited) 10,900,146 $ 42,508 $ $ 7,380 $ Accounts payable and accrued liabilities 2,578 2,363 4,941 4,941 Income taxes 277 277 277 Deferred revenue 1,354 252 1,606 1,606 Current portion of long-term debt 1,456 1,456 1,456 Long-term debt 4,248 4,248 4,248 Warrants 488 488 Earnings (loss) before income taxes (11,278 ) (11,683 ) 6,409 (9,880 ) (17,612 ) Net earnings (loss) for the year $ (11,913 ) $ (11,132 ) $ (804 ) $ (10,065 ) $ (17,750 ) Basic and diluted loss per common share (note 16) $ (2.23 ) $ (1.41 ) $ (0.08 ) $ (1.00 ) $ (1.52 ) Basic and diluted weighted average common shares (note 16) 5,338,366 7,905,772 10,388,586 10,076,525 11,674,505 Comprehensive earnings (loss) $ (9,274 ) $ (12,174 ) $ (890 ) $ (9,449 ) $ (17,750 ) Akela Pharma Inc. Consolidated Statements of Stockholders' Equity (in thousands of U.S. dollars, except share data) Number of shares Share capital Share capital issuable Additional paid-in capital Warrants Accumulated deficit Accumulated other comprehensive income Total stockholders' equity (635 ) Balance December 31, 2003 4,777,065 $ 9,075 $ $ 2,240 $ 1,509 $ (1,946 ) $ (21 ) $ 10,857 Fair value of broker warrants issued as compensation to agents 192 192 Expiration of broker units 177 (177 ) Stock-based compensation 755 755 Issued in connection with acquisition of LAB Pharma 718,339 4,772 4,772 Issued in connection with private placements, net of issuance costs of $741 988,462 4,184 1,098 5,282 Other issuances for cash 520,089 2,909 2,909 Shares issuable to principal vendors of LAB Pharma 2,212 2,212 Shares issuable for purchase of a customer list 208 208 Exercise of warrants 1,429 10 10 Issued in connection with services rendered 3,571 26 26 Foreign currency translation adjustment 2,639 2,639 Net loss for the year (11,913 ) (11,913 ) Revenues $ 35,767 $ 2,566 $ $ 2,566 $ 38,333 Cost of sales 20,477 20,477 Selling, general and administrative 8,130 3,331 4,192 7,523 15,653 Research and development 9,580 9,580 9,580 Operating leases 1,799 809 12 821 2,620 Interest expense 760 114 1,533 1,647 2,407 Interest income (38 ) (38 ) (38 ) Foreign exchange (97 ) (48 ) 131 83 (14 ) Segment earnings (loss) 4,698 (11,220 ) (5,830 ) (17,050 ) (12,352 ) Change in fair value of derivative-related liability and warrants (669 ) (669 ) (669 ) Income tax (provision) recovery 636 (85 ) (85 ) Balance December 31, 2004 7,008,955 $ 20,976 $ 2,420 $ 3,172 $ 2,622 $ (13,859 ) $ 2,618 $ 17,949 Fair value of broker warrants issued as compensation to agents 8 8 Stock-based compensation 379 379 Expiration of brokers units 196 (196 ) Expiration of warrants 1,136 (1,136 ) Issued in connection with private placements, net of issuance costs of $1,235 2,321,437 11,158 273 11,431 Shares issued to principal vendors of LAB Pharma 372,768 2,212 (2,212 ) Issued in connection with the purchase of a customer list 28,571 208 (208 ) Issued in connection with the acquisition of Seyvika 265,745 1,160 1,160 Foreign currency translation adjustment (1,042 ) (1,042 ) Net loss for the year (11,132 ) (11,132 ) Number of shares Share capital Share capital issuable Additional paid-in capital Warrants Accumulated deficit Accumulated other comprehensive income Total stockholders' equity Balance forward 9,997,476 $ 35,714 $ $ 4,883 $ 1,571 $ (24,991 ) $ 1,576 $ 18,753 Stock-based compensation 619 619 Expiration of broker units 177 (177 ) Expiration of warrants 1,276 (1,276 ) Shares issued on settlement of convertible debentures 659,778 5,264 5,264 Milestone payment, net of services rendered of $39 192,617 1,069 1,069 Other 2,857 25 25 Exercise of warrants 15,714 145 (23 ) 122 Exercise of options 22,776 239 (93 ) 146 Foreign currency translation adjustment (86 ) (86 ) Disposal of LAB Research Inc. 1,128 1,128 Net loss for the year (804 ) (804 ) Balance December 31, 2006 10,891,218 $ 42,456 $ $ 6,862 $ 95 $ (25,795 ) $ 2,618 $ 26,236 Services rendered in exchange for shares 8,928 52 52 Expiration of warrants 95 (95 ) Reclass of warrant liability on January 1, 2007 as a result of change in functional currency (note 11) 488 488 Stock-based compensation 423 423 Net loss (17,750 ) (17,750 ) Liabilities Current liabilities Bank loan $ 371 $ $ Accounts payable 4,904 2,624 3,166 Accrued liabilities 4,924 2,317 3,830 Income taxes payable 277 Deferred revenue 5,209 1,606 1,477 Current portion of long-term debt (note 10) 2,002 1,456 1,270 Current portion of convertible debenture (note 11) 1,298 Due to selling shareholders of LAB Denmark 465 Deferred income taxes (note 12) Akela Pharma Inc. Consolidated Statements of Cash Flows (in thousands of U.S. dollars) Years Ended December 31, Six Months Ended June 30, $ 4,744 $ (4,829 ) (6,404 ) (18,806 ) (6,707 ) (14,305 ) Financing activities Restricted cash (600 ) Proceeds from exercise of stock options and warrants 10 269 294 Proceeds from private placements 6,023 12,666 Share issuance costs (741 ) (1,235 ) Proceeds from issue of convertible debentures 4,374 4,958 Repayment of convertible debentures (891 ) (458 ) (507 ) Deferred financing fees (436 ) (316 ) Proceeds from issuance of long-term debt 3,984 2,151 1,423 628 1,200 Repayment of long-term debt (569 ) (4,401 ) (1,309 ) (1,114 ) (1,860 ) Repayment of capital leases (257 ) Proceeds from bank loan 357 197 (184 ) Repayments under bank credit facilities (334 ) (44 ) (381 ) Proceeds from finance obligation under sale-lease back transaction 5,158 Fees on sale-lease back transaction (250 ) 12,311 17,896 (259 ) (883 ) (1,260 ) (2,457 ) (8,902 ) 41,236 (3,019 ) (9,053 ) Cash and cash equivalents End of period $ 10,024 $ 13,989 $ 35,304 $ 3,813 $ 12,120 Akela Pharma Inc. Notes to Consolidated Financial Statements (in thousands of U.S. dollars, except share and per share data) 1. Nature of operations Until August 2006, Akela Pharma Inc., formerly LAB International Inc., (the "Company") was a fully integrated drug development company operating in two distinct business units. The Pharma business unit ("Pharma") continues the development of novel therapeutics and platforms with a focus on inhalation delivery. Pharma's drug development activities were supported by the scientific expertise, infrastructure and cash flows derived from the Company's second business unit, LAB Research Inc. ("LRI"), a pre-clinical contract research services organization with operations in North America and Europe. In August 2006, the Company sold a majority interest in LRI as part of a public offering for this segment. In September and November 2006, the Company sold its remaining interests in LRI. In total, the Company realized aggregate proceeds of $50,490 (C$56,891) from the disposal of its entire interest in LRI. Following these disposal transactions, the Company is now exclusively a drug development company, whose primary business activity is the development of therapeutics and platforms with a focus on inhalation delivery. Subsequent to year-end the Company acquired Formulation Technologies, L.L.C. (see note 22), and the shareholders approved a change in the name of the Company to Akela Pharma Inc. The following summarizes financial information for the ongoing combined Pharma and corporate segments (see also note 21 Segment disclosures): Years Ended December 31, Six Months Ended June 30, $ 3,735 $ Segment loss $ (14,305 ) $ (17,050 ) $ (27,654 ) $ (8,526 ) $ (17,612 ) $ 1,064 $ 401 $ December 31, $ 17,774 $ 39,252 $ 39,897 6,629 8,280 9,743 Deferred revenue 10,966 Long-term debt 3,824 4,248 5,360 Convertible debenture 1,353 Deferred income taxes Warrants 720 488 Derivative-related liability 1,069 Equity 4,179 26,236 13,828 $ 17,774 $ 39,252 $ 39,897 The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation is based upon management's best estimate of the relative fair values of the identifiable assets acquired and liabilities assumed. Assets acquired and liabilities assumed Current assets $ 3,058 Property and equipment 8,433 Customer contracts and relationships 3,156 Current liabilities, including bank indebtedness of $53 (2,894 ) Long-term debt (4,467 ) Deferred income taxes (2,283 ) Net assets acquired for cash 5,003 $ 5,003 The transaction was accounted for as the acquisition of net assets by the Company. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. Assets acquired and liabilities assumed Current assets, including cash and cash equivalents of $851 $ 1,021 Acquired in-process research and development 4,341 Property and equipment 4,036 Current liabilities (1,573 ) Long-term liabilities (2,063 ) Debentures (629 ) Net assets acquired for cash 5,133 $ 5,133 The licensing agreement covers the European Union, Eastern Europe, Russia, the Middle East and Africa. The Company and Janssen will collaborate to develop the product for the initial indication of break-through cancer pain. The Company will manufacture and Janssen will market and distribute the product. Under the terms of the agreement, the Company received a signing free of $10.8 million ( 8.0 million) which has been deferred and is being recognized ratably over the estimated development period. The Company can receive up to an additional $33.6 million ( 25.0 million) for meeting certain development and regulatory milestones. The Company could also receive certain payments upon the achievement of certain commercial milestones and royalty revenues and revenues from the sales of the product to Janssen. The signing fee of $10.8 million was received in July 2007 and is included in "receivable from collaborative agreement" in the consolidated balance sheets at June 30, 2007 as it was due upon signing (unaudited). For the period ended June 30, 2007, the Company recognized $583 of revenues on all of its development and license agreements (unaudited). 6. Accounts receivable December 31, 1,329 1,347 2,861 Buy 500 1.443 7/3/07 $ 722 Buy 600 1.428 9/4/07 $ 857 Buy 500 1.440 8/1/07 $ Buy 500 1.443 7/3/07 $ 722 Buy 600 1.428 9/4/07 $ 857 Buy 500 1.440 8/1/07 $ Bank loan 371 371 Accounts payable and accrued liabilities 6,154 1,817 1,857 3,674 9,828 Deferred revenue 4,017 760 432 1,192 5,209 Current portion of long-term debt 2,002 1,298 (1,298 ) 2,002 Current portion of convertible debenture 1,298 1,298 1,298 Due to selling shareholders of LAB Denmark 465 465 465 Deferred income taxes current 592 592 Long-term debt 13,109 2,506 1,318 3,824 16,933 Convertible debenture 1,353 1,353 1,353 Deferred income taxes 2,141 2,141 Warrants 720 720 5,820 $ 7,149 $ 1,347 $ 2,861 ( 200) from Ferrer as full and final settlement of amounts owing under the fentanyl development agreement. (2)In 2004, the Company entered into a funding agreement with Tekes, a Finnish governmental body, which provides government assistance for the research and development of the Company's inhalation products. The Company is eligible to receive funding of up to 50% of eligible project costs to a maximum of $5,218 ( 4,500), of which 30% or $1,565 ( 1,350) will represent a grant and 70% or $3,653 ( 3,150) will take the form of a loan. Refer to note 10. During the year, the Company submitted claims under the agreement with Tekes of $2,195 ( 1,420) (2005 $2,545 ( 2,044)), of which $105 ( 79) were receivable at year-end. Of the total claim, $372 (2005 $746) was recorded as a reduction of research and development expenses and $1,805 (2005 $1,799) was recorded as a liability in capital loans. 7. Property and equipment December 31, 2005 Cost Accumulated amortization Net 24,931 4,620 20,311 $ 29,675 $ 5,227 $ 24,448 December 31, 2006 Cost Accumulated amortization Net June 30, 2007 (unaudited) Cost Accumulated amortization Net $ 8,676 $ 5,108 $ 3,568 $ 5,401 $ Depreciation expense related to assets under capital leases amounted to $170 in 2006 (2005 $193) and $15 for the six months ended June 30, 2007 (2006 $145) (unaudited). In December 2006, an impairment charge of $3,523 (C$3,996) was recorded against Pharma's property and equipment (note 15). 8. Intangible assets December 31, 2005 Cost Accumulated amortization Net (unaudited) Assets Current assets Cash and cash equivalents $ 13,989 $ 35,304 $ 12,120 Cash held in escrow 465 Accounts receivable (note 6) 7,149 1,347 2,861 Receivable from collaborative agreement (note 5) 10,828 Work in progress 1,990 Research tax credits receivable 1,146 Prepaid expenses 1,085 713 (unaudited) Current assets Cash $ 11,249 $ 35,304 $ 12,120 Accounts receivable 1,329 1,347 2,861 Receivable from collaborative agreement 10,828 Other current assets 285 713 December 31, 2006 Cost Accumulated amortization Net its face value using the effective interest method over the three-year term of the Note. Following is a summary of the allocation of the proceeds among the various elements for accounting purposes: Net proceeds received $ 4,811 Less: Fair value of warrant June 30, 2007 (unaudited) Cost Accumulated amortization Net Amortization expense related to intangible assets over the next five years is estimated at approximately $1,100 per year. 9. Other assets December 31, 1,410 At December 31, 2006 corporate transaction costs relate to direct and incremental costs incurred in connection with the acquisition of Formulation Technologies, L.L.C. which was acquired on January 25, 2007 (note 22). Deferred corporate transaction costs at June 30, 2007 relate to costs incurred in connection with a proposed share listing and financing in the US. 10. Long-term debt December 31, Total current assets 25,824 37,364 26,585 Restricted cash 600 Property and equipment (note 7) 24,448 397 3,568 Goodwill 2,280 Intangible assets (note 8) 3,085 663 4,633 Other assets (note 9) 1,468 12,863 37,364 26,585 Restricted cash 600 Property and equipment 4,137 397 3,568 Goodwill 2,280 Intangible assets 554 663 4,633 Other assets 220 58 $ 1,468 $ Cash and cash equivalents $ $ 209 $ 35,095 35,304 $ 35,304 Accounts receivable 1,083 264 1,347 1,347 Prepaid expenses 563 150 713 713 Property and equipment 397 397 397 Intangible assets 663 663 663 Other assets 828 828 Obligation under capital leases bearing interest at 10.5% and repayable in monthly installments of $1, maturing in December 2009 27 Long-term debt in Canadian dollars, unsecured, bearing interest at 13.9%, repayable in monthly installments until October 2025* 6,188 18,935 5,704 6,630 Less: Current portion 2,002 1,456 1,270 $ 16,933 $ 4,248 $ 5,360 $ 5,704 $ 6,630 Residual amount allocated to the Note $ 2,495 12. Income taxes The income tax provision (recovery) differs from the amount computed by applying the combined Canadian federal and Quebec provincial tax rate to earnings (loss) before income taxes. The reasons for the difference and the related tax effects are as follows: Years Ended December 31, Six Months Ended June 30, (unaudited) Earnings (loss) before income taxes $ (11,278 ) $ (11,683 ) $ 6,409 $ (9,880 ) $ (17,612 ) (Provision for) recovery of income taxes Current (1,236 ) (1,763 ) (2,520 ) (1,062 ) (138 ) Deferred 601 2,314 (4,693 ) The provision for (recovery of) income taxes is composed of the following: Years ended December 31, Six months ended June 30, Deferred income taxes Canadian federal (675 ) (1,815 ) 4,769 (877 ) Canadian provincial 86 (234 ) Foreign (12 ) (265 ) (76 ) $ (601 ) $ (2,314 ) $ 4,693 $ (877 ) $ The deferred income tax balances are summarized as follows: Years ended December 31, 18,111 19,193 24,476 Less: Valuation allowance (11,563 ) (19,193 ) (24,414 ) 6,548 62 Deferred income tax liabilities Property and equipment (2,009 ) (62 ) Intangible assets (615 ) Work in progress (592 ) Other assets (156 ) Net deferred income tax assets 3,176 Presented as Long-term assets 5,909 Current liabilities (592 ) Long-term liabilities (2,141 ) $ 3,176 $ $ (unaudited) Cash flows from Operating activities Net loss for the year $ (11,913 ) $ (11,132 ) $ (804 ) $ (10,065 ) $ (17,750 ) Adjustments for Amortization of property and equipment 1,302 2,694 2,194 1,548 409 Amortization of intangible assets 67 443 393 316 558 Amortization of other assets 7 5 266 11 Change in fair value of derivative-related liability and warrants (669 ) 1,204 1,554 Accretion expense on convertible debentures 786 495 509 Stock-based compensation 755 379 619 355 423 Impairment of property and equipment 3,523 Intellectual property and R&D acquired in exchange for shares 4,591 1,288 1,017 Gain on disposal of LAB Research Inc. (note 3) (32,759 ) Share in net income of a company subject to significant influence (265 ) Gain on disposal of long-term investment (129 ) Services rendered in exchange for shares 26 24 24 52 Unrealized foreign exchange loss (gain) (170 ) 957 459 (779 ) Deferred income taxes (601 ) (2,314 ) 4,693 (877 ) In-process research and development expense 3,600 Changes in operating assets and liabilities (note 18(a)) $ At December 31, 2006 the Company has accumulated scientific research and experimental development expenditures and non-capital losses which are available to reduce future years' taxable income. Details of the available deductions, before valuation allowance, are as follows: Canadian Federal Canadian Provincial Foreign Scientific research and experimental development expenditures Available indefinitely $ 20,376 $ $ Non-capital losses expiring 2011 5,818 2012 4,955 2013 6,848 2014 5,098 2015 2,423 2,404 8,455 2016 16,364 At June 30, 2007 accumulated scientific research and experimental development expenditures and non-capital losses which are available to reduce future years' taxable income before valuation allowance, are as follows: Canadian Federal Canadian Provincial Foreign (unaudited) Private placements Common shares Warrants issued Date Number of units issued Number issued Number issued Strike price Maturity 12/30/04 988,462 988,462 494,231 $8.68 (C$10.15) 12/30/06 01/13/05 207,653 207,653 103,826 $8.68 (C$10.15) 12/30/06 01/17/05 114,286 114,286 57,142 $8.68 (C$10.15) 01/17/07 12/12/05 1,999,498 Share issue costs incurred in connection with the private placements were settled by a combination of cash and the issuance of broker units (giving the right to purchase one common share of the Company and one-half warrant of the Company) or broker warrants (giving the right to purchase one common share of the Company) at a set price at any time before the expiration date. Broker units/Broker warrants issued Date Nature of instrument issued Exercisable for Number issued Strike price Maturity 12/30/04 Broker units One common share and one-half warrant 69,192 $6.30 (C$7.35) 12/30/06 01/13/05 Broker warrants One common share 2,250 $6.30 (C$7.35) 12/30/06 01/17/05 Broker warrants One common share 1,000 $6.30 (C$7.35) 01/17/07 The allocation of the gross proceeds, received pursuant to each private placement, between the common shares and the warrants issued has been determined based on their relative fair values. The fair value of the warrant and the broker units and broker warrants issued in each private placement was determined using the Black-Scholes option pricing model using the assumptions summarized below. All of these broker units and broker warrants have since expired unexercised. Issue date Dividend yield Expected volatility Risk-free interest rate Expected life (years) Fair value per warrant On December 18, 2004, the Company entered into a marketing agreement with a counterparty whose chief executive officer is a member of the board of directors. Under the agreement, a customer list was purchased and paid for by the issuance of 28,571 common shares with a fair value of $208 (C$254). The shares were issued on April 5, 2005. On January 25, 2005, the Company entered into an agreement in connection with investor relation services. Services were rendered and 2,857 shares were issued on June 5, 2006 for a fair value of $25 (C$27). On October 16, 2006, the Company issued 192,617 common shares (2005 - 265,745) in connection with research and development milestones attained relating to calcitone gene-related peptide which was acquired as part of the Seyvika transaction. The common shares had an aggregate market value of $1,069 (C$1,173) (2005 $1,160 (C$1,443)) at the date of issuance. The share issuance cost for services rendered was $39 (C$44). During the six month period ended June 30, 2007, the Company issued 862,791 common shares in connection with the PharmaForm acquisition (see note 22) and incurred $54 thousand in expense associated with 8,928 shares of common stock issued to an outside consultant for services rendered (unaudited). Warrants and broker units As of December 31, 2006, the following warrants were outstanding: Warrants Broker units/warrants Exercise price Expiration 57,142(1) $8.68 (C$10.15) 17-Jan-07 1,000(1) $6.30 (C$7.35) 17-Jan-07 1(2) $7.70 22-Apr-10 57,143 1,000 Changes in options outstanding under the Company's stock option plan for the years ended December 31, 2004, 2005 and 2006 were as follows: Number Weighted average exercise price (C) Weighted average contractual term Aggregate intrinsic value Balance December 31, 2003 283,992 $ 9.38 9.19 $ 56 Granted 346,857 7.63 Cancelled/forfeited (34,178 ) 11.83 Balance December 31, 2004 596,671 8.19 8.63 268 Granted 243,761 6.79 Cancelled/forfeited (86,614 ) 7.56 Balance December 31, 2005 753,818 7.84 7.60 12 Granted 269,393 7.70 Cancelled/forfeited (57,626 ) 7.49 Exercised (22,776 ) 7.28 Balance December 31, 2006 942,809 7.84 7.31 2 Granted 265,714 6.51 Cancelled/forfeited (42,857 ) 9.45 The following table summarizes information about stock options outstanding and exercisable at December 31, 2006 and the six months ended June 30, 2007 (unaudited): Exercise price(C) Options outstanding Options exercisable Weighted average remaining contractual life (years) December 31, 2006 $5.60-6.29 14,286 4,762 9.84 6.30-6.99 262,363 161,846 7.67 7.00-7.69 349,156 298,204 8.06 7.70-8.39 20,059 15,774 7.97 8.40-9.03 155,278 140,436 5.57 10.50-11.19 113,096 91,667 5.56 11.20-11.83 28,571 9.34 942,809 712,689 7.31 June 30, 2007 (unaudited) $5.60-6.29 14,286 14,286 9.35 6.30-6.99 325,934 198,731 5.83 7.00-7.69 551,299 310,585 8.38 7.70-8.39 20,059 15,774 7.49 8.40-9.03 126,707 123,849 6.78 10.50-11.19 98,810 77,381 7.74 11.20-11.83 28,571 8.84 1,165,666 740,606 7.44 Subsequent to December 31, 2006, 265,714 options were granted at an exercised price of C$7.28 per share and 42,857 options with an exercise price of C$10.01 per share were cancelled. Non-vested options Number of options Weighted average grant-date fair value Balance January 1, 2006 223,464 $ 3.64 Granted 269,392 3.57 Vested (213,290 ) 3.64 Cancelled/forfeited (49,446 ) 4.62 Balance December 31, 2006 230,120 3.85 Granted 265,714 4.06 Vested (70,774 ) 4.20 Balance June 30, 2007 (unaudited) 425,060 $ 4.15 At December 31, 2006, there was $520 of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the Plan. That cost is expected to be recognized over a weighted average period of 1.52 years. The total fair value of shares vested during the year ended December 31, 2006 was $1,457. The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Years Ended December 31, June 30, (unaudited) Risk-free interest rate 4.01 % 3.24 % 3.86 % 4.15 % 3.13 % Expected volatility 65.00 53.45 68.00 65.00 59.00 Expected life in years 5 5 5 6 5 Expected dividend yield The following table summarizes the weighted average grant-date fair value per share for options granted during the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007 (unaudited): Number of options Weighted average grant-date fair value On March 5, 2007, the Finnish subsidiary and its landlord agreed to an early termination of their lease agreement. The agreement requires a lump-sum payment of $2,780 ( 2,130) which includes $1,896 ( 1,452) covering the base rent for the period from February 1, 2007 to September 30, 2008, $306 ( 236) for maintenance costs for the period from February 1, 2007 to September 30, 2008 and the repayment of the unsecured long-term debt of $577 ( 442), including related accrued interest of $50 ( 38). The lump-sum payment for rent and maintenance costs less $557 ( 416) representing monthly rent charges for the period from July 1, 2007 to October 31, 2007, the cease-use date, was charged to operating lease expense in 2007 (unaudited). 16. Earnings per share Basic and diluted earnings per share for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007 (unaudited) are computed as follows (in thousands, except per share data): Years Ended December 31, Six Months Ended June 30, (unaudited) Net loss $ (11,913 ) $ (11,132 ) $ (804 ) $ (10,065 ) $ (17,750 ) Basic and diluted weighted average number of common shares outstanding (in thousands) 5,338 7,906 10,389 10,077 11,675 Basic and diluted loss per share $ (2.23 ) $ (1.41 ) $ (0.08 ) $ (1.00 ) $ (1.52 ) Because the Company incurred losses in 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007, the earnings per share impact of the following stock options, warrants and convertible debentures is considered anti-dilutive and have therefore been excluded from the calculations above: Stock Options Warrants Broker Units Convertible Debentures* additional one-year periods. In the event the Members employment is terminated without cause by the Company or for "Good Reason", as defined in the agreements, the Members are entitled to continuation of their base salary, without modification, for the remainder of the initial or renewal term, whichever is applicable, cash payment for any vacation or leave accrued through the date of termination, and vesting and exercisability of any unvested stock grants or options granted subsequent to commencement of the employment agreement. 18. Supplemental cash flow disclosure and other information a)Changes in operating assets and liabilities: Years ended December 31, Six months ended June 30, b)Cash paid for: Years ended December 31, Six months ended June 30, c)Non-cash transactions: Years ended December 31, Six months ended June 30, $ 8,107 $ 4,694 $ 6,796 $ 4,724 $ 4,431 d)Cash and cash equivalents: Years ended December 31, Six months ended June 30, (unaudited) Term deposit, bearing interest at 2% $ 1,121 $ $ $ $ Cash balances with banks 3,911 3,841 35,304 2,420 12,120 Money market fund 4,992 10,148 1,318 $ 10,024 $ 13,989 $ 35,304 $ 3,738 $ 12,120 b)Foreign currency risk The Company is subject to foreign currency exchange risk as its revenues are primarily received in U.S. dollars and other currencies, while a significant portion of its expenses are paid in Canadian dollars. Its consolidated profitability could therefore be affected by the Canadian/U.S. dollar exchange rate and other exchange rates relative to the Canadian dollar, which exchange rates may fluctuate over time and cannot be accurately predicted. From time to time, the Company engages in the use of derivative financial instruments to manage its currency exposure. As of December 31, 2005 and 2006, the Company had not entered into any derivative financial instruments. At June 30, 2007, the Company had commitments to buy foreign currencies using foreign exchange contracts as follows (unaudited): Buy or Sell: Notional Amount Exchange Rate Maturity Notional US$ Equivalent 1,600 $ 2,299 The fair value of the capital loan from the Finnish governmental body approximates its carrying values because interest is based on market-related variable rates. The fair value of the other long-term debt is as follows: Years Ended December 31, (unaudited) Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Long-term debt in euros ( 404) $ 478 $ 478 $ 533 $ 533 $ $ Long-term debt in euros ( 700) $ 829 $ 829 $ 923 $ 923 $ 947 $ 947 Capital loan in euros ( 199) $ 223 $ 223 $ 249 $ 186 $ 255 $ 255 LRI long-term debt $ 15,130 $ 15,130 $ $ $ $ Warrants $ 720 $ 720 $ 488 $ 488 $ $ Derivative related liability $ 1,069 $ 1,069 $ $ $ $ Convertible debenture $ 2,651 $ 4,347 $ $ $ $ Note payable $ $ $ $ $ 1,200 $ 1,200 Capital lease obligation $ $ $ $ $ 123 $ 123 21. Segment disclosures Prior to January 1, 2007, the Company had three reportable segments: Contract Research Services, which was sold on August 3, 2006 (note 3), Pharma and Corporate. The activities of the operating segments are described in note 1 to these consolidated financial statements. The Corporate segment is responsible for the Company's financial and corporate direction, and also includes general expenses which cannot be directly attributed to a specific segment. The reporting on the segmented financial information does not include management fees charged by Corporate to the other segments. Effective January 1, 2007, following the corporate reorganization and business acquisition described in notes 3 and 22, the Company only operates in one reportable segment, Pharma. Segmented financial information is as follows: Year Ended December 31, 2004 Contract Research Services Pharma Corporate Sub-total Pharma and Corporate Total Net earnings (loss) $ 2,383 $ (10,802 ) $ (3,494 ) $ (14,296 ) $ (11,913 ) Year Ended December 31, 2005 Contract Research Services Pharma Corporate Sub-total Pharma and Corporate Total Net earnings (loss) $ 5,334 $ (11,305 ) $ (5,161 ) $ (16,466 ) $ (11,132 ) Year Ended December 31, 2006 Contract Research Services Pharma Corporate Sub-total Pharma and Corporate Total Revenues $ 23,157 $ 2,249 $ 32 $ 2,281 $ 25,438 Cost of sales 12,857 12,857 Selling, general and administrative 6,512 2,198 8,053 10,251 16,763 Research and development 13,356 13,356 13,356 Operating leases 726 1,025 143 1,168 1,894 Interest expense 797 122 663 785 1,582 Interest income (530 ) (530 ) (530 ) Foreign exchange 22 680 367 1,047 1,069 Impairment of property and equipment 3,523 3,523 3,523 Restructuring 335 335 335 Segment earnings (loss) 2,243 (18,990 ) (8,664 ) (27,654 ) (25,411 ) Gain on disposal of LRI 32,759 32,759 32,759 Share in net income of investee company 265 265 265 Change in fair value of derivative-related liability and warrants (1,204 ) (1,204 ) (1,204 ) Income tax provision (2,612 ) (66 ) (4,535 ) (4,601 ) (7,213 ) Net earnings (loss) $ (369 ) $ (19,056 ) $ 18,621 $ (435 ) $ (804 ) Six Months Ended June 30, 2006 Contract Research Services Pharma Corporate Sub-total Pharma and Corporate Total (unaudited) Revenues $ 19,941 $ 360 $ $ 360 $ 20,301 Cost of sales 11,236 11,236 Selling, general and administrative 7,079 1,227 1,013 2,240 9,319 Research and development 5,097 5,097 5,097 Operating leases 802 424 49 473 1,275 Interest expense 675 61 645 706 1,381 Interest income (33 ) (11 ) (44 ) (44 ) Foreign exchange (51 ) 354 60 414 363 Segment earnings (loss) 200 (6,770 ) (1,756 ) (8,526 ) (8,326 ) Change in fair value of derivative-related liability and warrants (1,554 ) (1,554 ) (1,554 ) Income tax provision (185 ) (185 ) Revenues were derived from customers located in the following geographic areas: Years Ended December 31, Six Months Ended June 30, $ 19,353 $ 38,333 $ 25,438 $ 20,301 $ 4,358 Segment assets and liabilities are as follows: December 31, 2005 Contract Research Services Pharma Corporate Sub-total Pharma and Corporate Total Cash and cash equivalents $ 2,740 $ 142 $ 11,107 11,249 $ 13,989 Cash held in escrow 465 465 Accounts receivable 5,820 1,242 87 1,329 7,149 Work in progress 1,990 1,990 Research tax credits receivable 1,205 (59 ) (59 ) 1,146 Prepaid expenses 741 205 139 344 1,085 Property and equipment 20,311 3,614 523 4,137 24,448 Intangible assets 2,531 181 373 554 3,085 Other assets 1,248 220 220 1,468 Deferred income taxes 5,909 5,909 42,960 5,325 12,449 17,774 60,734 28,386 6,381 7,214 13,595 41,981 Equity 14,574 (1,056 ) 5,235 4,179 18,753 $ 42,960 $ 5,325 $ 12,449 $ 17,774 $ 60,734 December 31, 2006 Contract Research Services Pharma Corporate Sub-total Pharma and Corporate Total 1,855 37,397 39,252 39,252 9,636 3,380 13,016 13,016 Equity (7,781 ) 34,017 26,236 26,236 $ $ 1,855 $ 37,397 $ 39,252 $ 39,252 Property and equipment, intangible assets and goodwill by geographic areas are as follows: December 31, $ 1,060 $ 27,533 $ 10,481 Years Ended December 31, $ 12,784 $ 14,732 $ 3,308 $ 1,431 Expenditures for segment property and equipment for the Contract Research Services segment include long-lived assets purchased through the acquisition of LAB Denmark. 22. Subsequent events (a)Acquisition of PharmaForm On January 25, 2007, the Company completed the acquisition of all of the outstanding membership interests of Formulation Technologies, L.L.C. doing business as "PharmaForm" a privately held company headquartered in Austin, Texas. The aggregate purchase price amounted to $12,983 including $7,500 of cash and 862,791 common shares valued at $4,379. The value of the shares was based on the market price over a reasonable period before and after the date the business combination was agreed to and announced. Under the agreement, additional consideration is payable by the Company upon completion of certain milestones relating to PharmaForm's drug development programs. In total, the maximum contingent consideration payable by the Company is approximately $13 million, most of which is payable in common shares. All obligations to make contingent payments will terminate on January 25, 2012 (60 months following the closing date). Contingent payments made in the future will be accounted for as goodwill. The acquisition of PharmaForm added FDA and DEA approved specialized drug formulation and manufacturing capabilities and unique patent pending abuse deterrent and transmucosal drug delivery systems. The results of PharmaForm are consolidated from the date of acquisition. The Company is in the process of finalizing the valuation of the net assets acquired; thus, the allocation of the purchase price is subject to final modifications. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The purchase price is based upon management's best estimate of the fair values of the identifiable assets acquired and liabilities assumed. Net assets acquired Current assets, including cash of $424 $ 2,036 Property and equipment 2,680 In-process research and development 3,600 Non-competition agreement 1,400 FDA/DEA certifications 1,000 Customer contracts and relationships 2,000 Goodwill 2,280 Current liabilities (1,682 ) Long-term liabilities (331 ) $ 12,983 Consideration Cash $ 7,500 862,791 common shares 4,379 Transaction costs 1,104 $ 12,983 The following unaudited pro forma financial information reflects the consolidated results of operations as if the acquisition of PharmaForm had taken place on January 1, 2007. The pro forma financial information is not necessarily indicative of the results of operations as it would have been, had the transactions been reflected on the assumed date. No effect has been given for synergies that may have been realized through the acquisition. Six Months Ended June 30, 2007 FORMULATION TECHNOLOGIES, L.L.C. Balance Sheets December 31, Assets Current assets: Cash $ 347,716 $ 1,950,212 Trade accounts receivable, net of allowance of $0 and $51,500 1,626,670 845,806 Unbilled accounts receivable 659,568 254,529 Prepaid expenses 15,249 50,084 Other current assets 60,996 29,774 Total current assets 2,710,199 3,130,405 Property and equipment, net 1,637,214 2,625,884 $ 4,347,413 $ 5,756,289 Liabilities and Members' Equity Current liabilities: Accounts payable $ 335,520 $ 314,396 Accrued payroll 67,082 92,169 Accrued expenses 36,499 27,042 Deferred revenue 343,333 421,017 Current portion of long-term debt and capital lease 88,654 334,849 Total current liabilities 871,088 1,189,473 Deferred rent 76,921 96,419 Deferred revenue, less current portion 281,250 156,250 Long-term debt and capital lease, less current portion 847,875 1,114,183 Total liabilities 2,077,134 2,556,325 Members' equity 2,270,279 3,199,964 $ 4,347,413 $ 5,756,289 FORMULATION TECHNOLOGIES, L.L.C. Statements of Operations Years Ended December 31, Revenues $ 6,391,018 $ 9,527,507 Operating expenses: Research and development 4,686,341 6,827,881 Selling, general and administrative 1,337,943 2,331,165 Total operating expense 6,024,284 9,159,046 Income from operations 366,734 368,461 Interest income (expense): Interest income 2,354 16,937 Interest expense (81,722 ) (119,713 ) Total interest income (expense) (79,368 ) (102,776 ) Net income $ 287,366 $ 265,685 FORMULATION TECHNOLOGIES, L.L.C. Statements of Members' Equity Years ended December 31, 2005 and 2006 Balance at December 31, 2004 $ 1,886,620 Distributions (707 ) Transfer of members' interests 97,000 Net income 287,366 Balance at December 31, 2005 2,270,279 Distributions (110,000 ) Transfer of members' interests 774,000 Net income 265,685 Balance at December 31, 2006 $ 3,199,964 FORMULATION TECHNOLOGIES, L.L.C. Statements of Cash Flows Years Ended December 31, Cash flows from operating activities: Net income $ 287,366 $ 265,685 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 271,788 391,889 Provision for bad debt 51,500 Equity based compensation expense 97,000 774,000 Accretion of deferred rent 22,787 19,498 Accretion of interest on note and capital lease 5,749 8,633 Changes in operating assets and liabilities: Trade accounts receivable (540,306 ) 729,364 Unbilled accounts receivable (314,365 ) 405,039 Prepaid expenses and other current assets 40,506 (3,613 ) Accounts payable 163,331 (21,124 ) Accrued payroll and accrued expenses 36,501 15,630 Deferred revenue 619,027 (47,316 ) Net cash provided by operating activities 689,384 2,589,185 Cash flows from investing activities: Capital expenditures (264,104 ) (1,041,712 ) Deposit on equipment (54,412 ) Net cash used in investing activities (318,516 ) (1,041,712 ) Cash flows from financing activities: Proceeds from issuance of long-term debt 379,633 Repayments of long-term debt and capital leases (82,377 ) (214,610 ) Distributions to members (707 ) (110,000 ) Net cash provided by (used in) financing activities (83,084 ) 55,023 Net change in cash 287,784 1,602,496 Cash, beginning of year 59,932 347,716 Cash, end of year $ 347,716 $ 1,950,212 Supplemental disclosure of cash flow information Cash paid during the year for interest $ 77,054 $ 111,079 Supplemental disclosure of non-cash activities Assets acquired through capital lease $ $ 178,740 Assets acquired through equipment loan $ $ 160,107 (2) Property and Equipment Property and equipment consists of the following: December 31, Estimated Useful Life (Years) Total property and equipment 2,485,759 3,866,318 Less: accumulated depreciation and amortization (848,545 ) (1,240,434 ) Property and equipment, net $ 1,637,214 $ 2,625,884 (3) Long-Term Debt and Capital Lease Long-term debt and capital lease consists of the following: December 31, Equipment loans, 7.75% interest rate, secured by equipment, repayable in 36 monthly installments of $9,678 $ $ 278,636 Equipment loans, interest at Wall Street Journal Prime rate plus 1% (9.25%), secured by all of the Company's assets, repayable in 98 monthly installments of $13,484, net of unamortized issuance costs of $19,249 and $24,509 in 2006 and 2005, respectively 936,529 854,680 Note payable, 7.05% interest rate, repayable in 35 monthly installments of $7,116 133,603 Capital lease obligation, 7.5% interest rate, secured by the related laboratory equipment, net of discount of $12,797 182,113 Total long-term debt and capital leases 936,529 1,449,032 Less current portion of long-term debt and capital leases (88,654 ) (334,849 ) Net long-term debt and capital leases $ 847,875 $ 1,114,183 The stated principal repayments for all indebtedness as of December 31, 2006 are as follows: Year Amount Rental expense recorded by the Company was approximately $297,000 and $282,000 in 2006 and 2005, respectively. The aggregate minimum rental commitments under noncancelable operating leases for the periods shown at December 31, 2006, are as follows: Year Operating Leases $ 721,560 AKELA PHARMA INC. Pro Forma Consolidated Statement of Operations (Unaudited) Year ended December 31, 2006 (in thousands of US dollars, except per share data) Akela Disposal of LRI (Note 2) Subtotal Acquisition of PharmaForm (Note 2) Pro Forma adjustments (Note 3) Notes Pro Forma consolidated Revenues $ 25,438 $ (23,157 ) $ 2,281 $ 9,528 $ $ 11,809 Expenses: Cost of sales 12,857 (12,857 ) 6,828 (c) 6,828 Selling, general and administrative 16,763 (6,512 ) 10,251 2,331 1,333 (b) 14,234 (297 ) (c) 616 (d) Research and development 13,356 13,356 6,828 3,600 (a) 16,956 (6,828 ) (c) Operating leases 1,894 (726 ) 1,168 297 (c) 1,465 Impairment of property and equipment 3,523 3,523 3,523 Restructuring 335 335 335 Foreign exchange 1,069 (22 ) 1,047 1,047 49,797 20,117 29,680 9,159 5,549 44,388 Earnings (loss) before undernoted items (24,359 ) (3,040 ) (27,399 ) 369 (5,549 ) (32,579 ) Other (income) expense: Gain on disposal of LAB Research Inc. (32,759 ) 32,759 Share in net income of company subject to significant influence (265 ) 265 Interest on long-term debt 1,582 (797 ) 785 120 905 Interest income (530 ) (530 ) (17 ) (547 ) Change in fair value of derivative related liability and warrants 1,204 1,204 1,204 Earnings (loss) before income taxes 6,409 (35,267 ) (28,858 ) 266 (5,549 ) (34,141 ) (Provision for) recovery of income taxes: Current (2,520 ) 2,454 (66 ) (66 ) Deferred (4,693 ) 4,693 (7,213 ) 7,147 (66 ) (66 ) Basic and diluted loss per common share $ (0.08 ) $ $ (2.80 ) $ $ $ (3.04 ) Basic and diluted weighted average common shares 10,338,586 10,338,586 862,791 11,251,377 AKELA PHARMA INC. Pro Forma Consolidated Statement of Operations (Unaudited) Six months ended June 30, 2007 (in thousands of US dollars, except per share data) Akela Acquisition of PharmaForm (Note 2) Pro Forma Adjustment (Note 3) Notes Pro Forma consolidated Revenues $ 4,358 $ 747 $ $ 5,105 Expenses: Cost of sales 2,580 188 2,768 Selling, general and administrative 6,761 1,121 111 (b) 7,377 (616 ) (d) Research and development 11,851 (3,600 ) (a) 8,251 Operating leases 1,621 30 1,651 Restructuring charges 264 264 Foreign exchange (779 ) (779 ) 22,298 1,339 (4,105 ) 19,532 Earnings (loss) before income taxes (17,612 ) (608 ) 4,105 (14,115 ) Provision for income taxes: Current (138 ) (138 ) Deferred (138 ) (138 ) Net earnings (loss) $ (17,750 ) $ (608 ) $ 4,105 $ (14,253 ) Basic and diluted loss per common share $ (1.52 ) $ $ $ (1.22 ) Basic and diluted weighted average common shares 11,674,505 11,674,505 (Date of acquisition) Net assets acquired: Current assets, including cash of $424 at date of acquisition $ 2,036 Property and equipment 2,680 In-process research and development 3,600 Intangible assets: Non-competition agreement 1,400 FDA/DEA certifications 1,000 Customer contracts and relationships 2,000 Goodwill 2,280 Current liabilities (1,682 ) Long-term debt (331 ) Deferred income taxes $ 12,983 Consideration: Cash $ 7,500 862,791 common shares 4,379 Transaction costs 1,104 $ 12,983 Through and including December , 2007 (the 25th day after the date of this prospectus), U.S. Federal securities law may require all dealers effecting transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscription. Maximum of 3,846,000 Common Shares Minimum of 2,000,000 Common Shares AKELA PHARMA INC. Common Shares OPPENHEIMER & CO. BROADPOINT. The date of this prospectus is , 2007. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS Included in the prospectus, under the heading "Management Limitations of Liability and Indemnification." ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES Pursuant to an agreement dated December 23, 2003 (the Focus Acquisition Agreement) between the Company, two Finnish institutional investors, and the Finnish subsidiary of Schering AG, effective January 1, 2004, we acquired Focus Inhalation Oy (Focus) (renamed LAB Pharma Oy). As consideration, we issued 361,196 common shares to the Focus shareholders, and agreed to issue an additional 571,428 common shares upon the achievement of development milestones related to Fentanyl TAIFUN , of which 357,143 were subsequently issued in 2004. During 2004, we received 4 million euros from the two previous institutional shareholders of Focus in exchange for non-interest bearing non-secured convertible debt, all of which was subsequently converted into 892,857 common shares by February 2005. 520,089 shares were issued in 2004 and 372,768 shares were issued in February, 2005. All of these securities were issued to non-U.S. institutional investors outside the United States in reliance upon Regulation S under the Securities Act. On December 18, 2004, we entered into a marketing agreement with LTS Lohmann Therapy System A.G., a German corporation, pursuant to which we purchased a customer list in exchange for 28,571 common shares with a fair market value at such date of C$254,000. Such shares were subsequently issued on April 5, 2005 in reliance upon an exemption from the registration requirements of the Securities Act in accordance with Regulation S thereunder. On December 30, 2004, we completed the first closing of a private placement by issuing 988,462 units at C$7.35 for gross proceeds of C$7,265,200. On January 13, 2005, we completed the second closing of the private placement by issuing an additional 207,653 units for gross proceeds of C$1,526,000. The majority of shares delivered at the first closing were to institutional investors, but most shares delivered at the second closing were to individuals. Of the dozens of buyers, fewer than five were located in the United States. Each unit consisted of one common share and one-half of one share purchase warrant. Each whole warrant was exercisable to purchase one common share for C$10.15 until December 30, 2006. Dlouhy Merchant Group Inc., Jennings Capital Inc., Octagon Capital Corporation and PowerOne Capital Markets Limited, the agents for the private placement, received a commission of C$602,276 (7% of the gross proceeds) along with brokers warrants which were exercisable to acquire 81,942 common shares (7% of the total number of units sold) at C$7.35 per share until December 30, 2006. During 2006, 8,571 warrants were exercised. The remaining warrants and the broker warrants expired unexercised. On January 17, 2005, we completed a private placement of 114,286 units at C$7.35 per unit for gross proceeds of C$840,000. Three institutional investors and one individual purchased shares, all of whom were located outside of the United States. Each unit consisted of one common share and one-half of one share purchase warrant. Each whole warrant was exercisable to purchase one common share for C$10.15 until January 17, 2007. Kingsdale Capital Markets Inc. and Kingsdale Capital Partners Inc., the agents for the private placement, received a commission of C$22,050 and broker warrants exercisable to acquire 1,000 common shares at C$7.35 per share until January 17, 2007. The broker warrants expired unexercised. On January 25, 2005, we entered into an agreement with a U.S. investor relations services company pursuant to which 2,857 shares were issued on June 5, 2006 for a fair market value of C$27,000. The shares were issued in reliance upon an exemption from the registration requirements of the Securities Act in accordance with Section 4(2) thereof and Regulation D thereunder. II-1 On April 27, 2005, we issued to Laurus Master Fund, Ltd. (Laurus) a secured convertible term note (the Secured Note) in the principal amount of $5 million (C$6.2 million). The Secured Note bore interest at the prime rate published in the Wall Street Journal plus 2% (subject to reduction in certain events), had a term of three years, was secured by the shares of LAB Denmark and LAB Hungary and was convertible into common shares at a price of $5.95 per share. Principal repayments commenced in September 2005 and were subject to mandatory conversion provided that the market price of the common shares for the five days preceding repayment was equal to or greater than 115% of the conversion price and did not exceed a specified percentage of the aggregate dollar trading volume. In connection with this transaction, we issued a share purchase warrant exercisable to purchase 252,898 common shares for five years at a price of $7.70 per share. The aggregate number of common shares that we issue pursuant to the Secured Note and the Warrant cannot exceed 1,933,059. Laurus retained 3% of the principal amount as compensation and an additional $150,000 was paid in related agent fees. During 2006, the unpaid balance of the Secured Note was settled for 659,777 common shares having an approximate value of $3,926,000. The securities were issued to an institutional accredited investor in reliance upon exemptions from the registration requirements of the Securities Act in accordance with Section 4(2) thereof and Regulation D thereunder. On December 12, 2005, we raised gross proceeds of C$12.3 million through the non-brokered private placement of 1,999,498 common shares at a price of C$6.16 per share. The common shares were purchased equally by investment funds managed by Great Point Partners, LLC of Greenwich, Connecticut and Atlas Venture of Waltham, Massachusetts. Oppenheimer & Co. Inc. of New York, New York acted as financial advisor to the Company and received advisory fees of C$872,000. The securities were issued to institutional accredited investors in reliance upon exemptions from the registration requirements of the Securities Act in accordance with Section 4(2) thereof and Regulation D thereunder. On October 16, 2006, we issued to non-U.S. persons 192,617 common shares with a fair market value of C$1,173,000 in connection with research and development milestones attained relating to the calcitonin gene related peptide that we acquired in September 2003. During 2005, 265,745 common shares with a fair market value of C$1,443,000 were issued to the same non-U.S. persons upon achievement of earlier milestones. All such common shares were issued in reliance upon exemptions from the registration requirements of the Securities Act in accordance with Regulation S thereunder. In January 2007, we issued 3,571 common shares, as payment in lieu of cash, to Global Business Partners, AG, a Swiss corporation, for investor relations services rendered. On January 25, 2007, we issued 862,791 common shares at an ascribed value of $5.075 per share to six accredited investors in connection with the acquisition of all outstanding membership interests of PharmaForm. The common shares were issued in reliance upon exemptions from the registration requirements of the Securities Act in accordance with Section 4(2) thereof and Regulation D thereunder. II-2 ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits The following exhibits are filed as part of this Registration Statement. Exhibit No. Description 1.1 Form of Underwriting Agreement.** 1.2 Form of Escrow Agreement.** 3.1 Articles of Continuance of the Registrant.* 3.2 Bylaws of the Registrant.* 4.1 Specimen of common share certificates.* 4.2 Form of Subscription Agreement, dated December 12, 2005, among the Company and the investors named therein.* 4.3 Form of Registration Rights Agreement, dated December 12, 2005, by and between the Company and each investor named therein.* 4.4 2007 Stock Incentive Plan.* 4.5 Stock Option Plan.* 4.6 Form of Lock-up Agreement.* 5.1 Opinion of Gowling Lafleur Henderson LLP.* 10.1 Development and Manufacturing Agreement, dated January 20, 2003, by and between the Company and Medifiq Healthcare (f/k/a Perlos Oy).* 10.2 Funding Agreement, dated November 16, 2004, by and between LAB Pharma Oy, a wholly-owned subsidiary of the Company and TEKES, a Finnish funding agency for technology and innovation.* 10.3 Funding Agreement, dated October 15, 2005, by and between LAB Pharma Oy, a wholly-owned subsidiary of the Company and TEKES, a Finnish funding agency for technology and innovation.* 10.4 Purchase and Sale Agreement, dated January 10, 2007, among the Company and Daniel J. Bates, John J. Koleng, Jr., Feng Zhang, Michael M. Crowley, James W. McGinity and Robert O. Williams, III.* 10.5 Exclusive license, Development and Supply Agreement, dated June 20, 2007, by and among LAB Pharma Oy, LAB International SRL and Janssen Pharmaceutica N.V.* 14.1 Code of Ethics and Business Conduct.* 21.1 Subsidiaries of the Registrant.* 23.1 Consent of KPMG LLP. 23.2 Consent of KPMG LLP. 23.3 Consent of Gowling Lafleur Henderson LLP (included in Exhibit 5.1).* 24.1 Power of Attorney as set forth on the signature page of this registration statement.* 99.1 Audit Committee Charter.* 99.2 Compensation Committee Charter.* 99.3 Corporate Governance Committee Charter.* 99.4 Nominating Committee Charter.* 99.5 Qualified Legal Compliance Committee Charter.* *Previously filed. **To be filed by amendment. Confidential Treatment requested for certain portions of this agreement. II-3 (b) Financial Statement Schedules All schedules have been omitted because the information required to be set forth therein is not applicable or has been included in the Consolidated Financial Statements and notes thereto. ITEM 9. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Amendment No. 3 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Qu bec, Canada, on this 9th day of November, 2007. AKELA PHARMA INC. By: /s/ ANDREW REITER Andrew Reiter Chief Financial Officer Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ ANDREW REITER* Halvor Jaeger Chief Executive Officer; Director (principal executive officer) November 9, 2007 /s/ ANDREW REITER Andrew Reiter Chief Financial Officer (principal financial officer) November 9, 2007 /s/ ANDREW REITER* Richard Martin Vice President Finance (principal accounting officer) November 9, 2007 /s/ ANDREW REITER* Peter Barrett Director November 9, 2007 /s/ ANDREW REITER* Yves Glaude Director November 9, 2007 /s/ ANDREW REITER* Hans-Rainer Hoffmann Director November 9, 2007 /s/ ANDREW REITER* G nter Knorr Director November 9, 2007 /s/ ANDREW REITER* Rolf Reininghaus Director November 9, 2007 II-5 /s/ ANDREW REITER* Maurice St. Jacques Director November 9, 2007 /s/ ANDREW REITER* Robert O. Williams III Director November 9, 2007 /s/ ANDREW REITER Andrew Reiter Authorized Representative in the United States November 9, 2007 *Attorney-in-Fact II-6 EXHIBIT INDEX Exhibit No. Description 1.1 Form of Underwriting Agreement.** 1.2 Form of Escrow Agreement** 3.1 Articles of Continuance of the Registrant.* 3.2 Bylaws of the Registrant.* 4.1 Specimen of common share certificates.* 4.2 Form of Subscription Agreement, dated December 12, 2005, among the Company and the investors named therein.* 4.3 Form of Registration Rights Agreement, dated December 12, 2005, by and between the Company and each investor named therein.* 4.4 2007 Stock Incentive Plan.* 4.5 Stock Option Plan.* 4.6 Form of Lock-up Agreement.* 5.1 Opinion of Gowling Lafleur Henderson LLP.* 10.1 Development and Manufacturing Agreement, dated January 20, 2003, by and between the Company and Medifiq Healthcare (f/k/a Perlos Oy).* 10.2 Funding Agreement, dated November 16, 2004, by and between LAB Pharma Oy, a wholly-owned subsidiary of the Company and TEKES, a Finnish funding agency for technology and innovation.* 10.3 Funding Agreement, dated October 15, 2005, by and between LAB Pharma Oy, a wholly-owned subsidiary of the Company and TEKES, a Finnish funding agency for technology and innovation.* 10.4 Purchase and Sale Agreement, dated January 10, 2007, among the Company and Daniel J. Bates, John J. Koleng, Jr., Feng Zhang, Michael M. Crowley, James W. McGinity and Robert O. Williams, III.* 10.5 Exclusive License, Development and Supply Agreement by and among LAB Pharma Oy, LAB International SRL and Janssen Pharmaceutica N.V.* 14.1 Code of Ethics and Business Conduct.* 21.1 Subsidiaries of the Registrant.* 23.1 Consent of KPMG LLP. 23.2 Consent of KPMG LLP. 23.3 Consent of Gowling Lafleur Henderson LLP (included in Exhibit 5.1).* 24.1 Power of Attorney as set forth on the signature page of this registration statement.* 99.1 Audit Committee Charter.* 99.2 Compensation Committee Charter.* 99.3 Corporate Governance Committee Charter.* 99.4 Nominating Committee Charter.* 99.5 Qualified Legal Compliance Committee Charter.* *Previously filed. **To be filed by amendment. Confidential Treatment requested for certain portions of this agreement. June 30, SUMMARY CONSOLIDATED FINANCIAL DATA In the table below, we provide a summary of our consolidated financial data. We have prepared this data using our audited consolidated financial information as of and for the year ended December 31, 2006, our unaudited consolidated financial information as of and for the six months ended June 30, 2007 and our unaudited pro forma consolidated financial information for the six months ended June 30, 2007. Our pro forma consolidated statement of operations for the year ended December 31, 2006 and the six months ended June 30, 2007 reflects the impact on our financial statements of the disposal of our pre-clinical contract research services business in 2006 and our acquisition of PharmaForm in January 2007 as if these events had occurred as of January 1, 2006. You should read this data together with our audited and unaudited consolidated financial statements, the unaudited pro forma consolidated financial information, including the respective related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The summary consolidated balance sheet data is presented on an actual basis and on an as adjusted basis to reflect the sale of a minimum of 2,000,000 and a maximum of 3,846,000 common shares offered at the assumed initial public offering price of $6.50 per share, after deducting underwriting fees and estimated offering expenses, such price representing the U.S. dollar equivalent of the closing price of our common stock on the Toronto Stock Exchange on November 6, 2007. Since the scope of our continuing business is substantially different from that conducted by us prior to January 1, 2007 as reflected in our historical consolidated financial statements included in this prospectus, you should not view our historical consolidated financial statements or the financial data derived therefrom as predictive of our future financial position or results of operations. Year Ended December 31, Our loss for the six-month period ended June 30, 2007 was $17.8 million compared to $10.1 million in the corresponding period in 2006. The period-over-period increase in the net loss was due to a higher rate of spending on research and development, higher selling, general and administrative expenses, offset by contract services revenues generated from the acquisition of PharmaForm as discussed below. Revenues. We derive our revenues from licensing and co-development agreements and through providing contract research services such as drug formulation, drug development and limited run drug manufacturing for pharmaceutical and biotech companies. Revenues for the six months ended June 30, 2007 and 2006 are as follows: Long-term debt repayments for the next five years and thereafter are as follows: December 31, Six Months Ended June 30, Six Months Ended June 30, At June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30, and other intangible assets; thus the allocation of the purchase price is subject to final modifications. January 25, 2007 $ 228,950 2008 242,118 TABLE OF CONTENTS Prospectus Summary 4 The Offering 8 Summary Consolidated Financial Data 9 Special Note Regarding Forward-Looking Statements 10 Enforceability of Civil Liabilities 11 Risk Factors 12 Use of Proceeds 42 Dividend Policy 43 Capitalization 43 Dilution 44 Selected Consolidated Financial Data 46 Pro Forma Consolidated Summarized Information 48 Management's Discussion and Analysis of Financial Condition and Results of Operations 50 Our Business 73 Management 102 Certain Relationships and Related-Party Transactions 117 Principal Shareholders 118 Capital Structure 120 Market Information 126 Shares Eligible For Future Sale 127 Material United States Federal Income Tax Consequences and Certain Canadian Income Tax Considerations 130 Underwriting 139 Legal Matters 143
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001414850_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001414850_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b1482abca52fa2c33b4440c0a1793979263476f2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001414850_china_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to the United States federal and New York law in connection with this offering will be passed upon for us by Simpson Thacher Bartlett LLP. The underwriters are being represented by Sullivan Cromwell LLP with respect to matters of U.S. federal and New York State law. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Conyers Dill Pearman. Legal matters as to PRC law will be passed upon for us by Haiwen Partners and for the underwriters by Commerce Finance Law Offices. Simpson Thacher Bartlett LLP may rely upon Conyers Dill Pearman with respect to matters governed by Cayman Islands law and Haiwen Partners with respect to matters governed by PRC law. Sullivan Cromwell LLP may rely upon Commerce Finance Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001415310_commoditie_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001415310_commoditie_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a2bd232cf4a6b91efbd38f8d5bf8ebbec617779f
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001415310_commoditie_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Clifford Chance US LLP has advised the Managing Owner in connection with the Shares being offered hereby. Clifford Chance US LLP also advises the Managing Owner with respect to its responsibilities as managing owner of, and with respect to matters relating to, the Trust, each Fund and the Master Trust and each Master Fund. Clifford Chance US LLP has also represented the Trust and the Master Trust in connection with the legality of the Shares being offered hereby. Clifford Chance US LLP has prepared the sections Material U.S. Federal Income Tax Considerations and Purchases By Employee Benefit Plans with respect to ERISA. No counsel has been engaged to act on behalf of the Shareholders with respect to matters relating to the Trust or any Fund. Certain opinions of counsel have been filed with the SEC as exhibits to the Registration Statement of which this Prospectus is a part.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001415877_kanders_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001415877_kanders_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..800788d74843a5f8c403ccb8b77c5591877ca6bb
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001415877_kanders_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Kane Kessler, P.C., New York, New York is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, as amended, and as such, will pass upon the validity of the securities offered in this prospectus. In connection with this offering, Bingham McCutchen LLP, New York, New York, is acting as counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001418225_wsp_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001418225_wsp_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cf21870429f414b85a33bd0c98de71ee2091fa98
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001418225_wsp_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters We are represented by Latham & Watkins LLP, Hong Kong, with respect to certain legal matters as to United States federal securities and New York State law. The underwriters are represented by Davis Polk & Wardwell, Hong Kong, with respect to certain legal matters as to United States federal securities and New York State law. The validity of the ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Conyers Dill & Pearman, Hong Kong. Certain legal matters as to PRC law will be passed upon for us by Jingtian & Gongcheng, Beijing, and for the underwriters by Commerce & Finance Law Offices, Beijing. Latham & Watkins LLP may rely upon Conyers Dill & Pearman with respect to matters governed by Cayman Islands law and Jingtian & Gongcheng with respect to matters governed by PRC law. Davis Polk & Wardwell may rely upon Conyers Dill & Pearman with respect to matters governed by Cayman Islands law and Commerce & Finance Law Offices with respect to matters governed by PRC law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001418463_aldabra-4_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001418463_aldabra-4_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f72d74d0ecba01ba9b2d52e2bd737fbc116cef77
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001418463_aldabra-4_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is passed upon for us by Graubard Miller, New York, New York. Akin Gump Strauss Hauer Feld LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001418464_aldabra-3_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001418464_aldabra-3_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..44ff88673954eaa11a689ac6a8b85744bca72d16
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001418464_aldabra-3_legal_matters.txt
@@ -0,0 +1 @@
+legal matters by counsel and to other conditions. The underwriters are obligated to purchase all of the units (other than those covered by the over-allotment option described below) if they purchase any of the units. The underwriters propose to offer some of the units directly to the public at the public offering price set forth on the cover page of this prospectus and some of the units to dealers at the public offering price less a concession not to exceed $ per unit. If all of the units are not sold at the initial offering price, the representative may change the public offering price and the other selling terms. Citigroup Global Markets Inc. has advised us that the underwriters do not intend sales to discretionary accounts to exceed five percent of the total number of units offered by them. We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 7,500,000 additional units at the public offering price less the underwriting discount. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional units approximately proportionate to that underwriter s initial purchase commitment. We and our executive officers and directors have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup Global Markets Inc., offer, sell, contract to sell, transfer, pledge, dispose of or hedge, directly or indirectly, any of our units, warrants, shares or any other securities convertible into or exchangeable for our common stock. Citigroup Global Markets Inc. in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. The 180-day lock-up period will be automatically extended if: (1) during the last 17 days of the 180-day period we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the 180-day period, we announce that we will release earnings results during the 16-day period following the last day of the 180-day period, in which case the restrictions will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or event. Our initial stockholders and other holders of founders units will place their founders units and sponsors warrants into an escrow account maintained by Continental, Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions, these securities will not be transferable during the escrow period and will not be released from escrow until, in the case of (i) the founders units, one year after the consummation of the initial business combination or earlier if the over-allotment option is not exercised in full or in part, but only to the extent necessary to have up to 1,875,000 founders units cancelled as described above or if, following a business combination (a) the last sales price of our common stock equals or exceeds $18.00 per share for any trading days within any 30-day trading period or (b) we consummate a subsequent liquidation, merger, stock exchange or similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property; and (ii) the sponsors warrants, the 60th day after the initial business combination. Table of Contents
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CIK0001422115_china_legal_matters.txt b/parsed_sections/legal_matters/2007/CIK0001422115_china_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4f9b75b622fc66eef13e65cd5bbdb2d2cec2863d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CIK0001422115_china_legal_matters.txt
@@ -0,0 +1,1760 @@
+LEGAL MATTERS
+
+ The
+validity of the securities offered in this prospectus are being passed upon for
+us by Reitler Brown & Rosenblatt LLC. Loeb & Loeb
+LLP is acting as counsel for the underwriters in this offering. 
+
+EXPERTS
+
+ The
+financial statements of China Pacific Acquisition Corp. as of September 30, 2007
+and for the period from June 20, 2007 (inception) to September 30, 2007
+ have been included herein and in the registration statement in reliance upon
+ the Report of e-Fang Accountancy Corp., & CPA, City of Industry, California,
+independent registered public accounting firm, appearing elsewhere herein, and
+upon the authority of said firm as experts in accounting and auditing. 
+
+ The
+office of e-Fang Accountancy is
+located at 17800 Castleton Street, Suite 208, City of Industry, California
+91748.
+
+WHERE YOU CAN FIND ADDITIONAL INFORMATION
+
+ We
+have filed with the SEC a registration statement on Form S-1, which includes
+exhibits, schedules and amendments, under the Securities Act, with respect to
+this offering of our securities. Although this prospectus, which forms a part
+of the registration statement, contains all material information included in
+the registration statement, parts of the registration statement have been
+omitted as permitted by rules and regulations of the SEC. We refer you to the
+registration statement and its exhibits for further information about us, our
+securities and this offering. The registration statement and its exhibits, as
+well as our other reports filed with the SEC, can be inspected and copied at
+the SEC s public reference room at 450 Fifth Street, N.W., Washington, D.C.
+20549-1004. The public may obtain information about the operation of the public
+reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
+maintains a web site at http://www.sec.gov which contains the Form S-1 and
+other reports, proxy and information statements and information regarding
+issuers that file electronically with the SEC. 
+
+- 99 -
+
+INDEX TO FINANCIAL STATEMENTS
+
+CHINA PACIFIC ACQUISITION CORP. 
+
+(a corporation in the development stage)
+
+ 
+
+ 
+
+ 
+
+Report of Independent Registered Public
+Accounting Firm
+
+ 
+
+F-2
+
+ 
+
+ 
+
+ 
+
+Financial
+ Statements
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance
+ sheet as of September 30, 2007
+
+ 
+
+F-3
+
+ 
+
+ 
+
+ 
+
+Statement
+ of operations for the period from June 20,
+ 2007 (date of inception) to September 30, 2007
+
+ 
+
+F-4
+
+ 
+
+ 
+
+ 
+
+Statement
+ of stockholders equity for the period from June 20,
+ 2007 (date of inception) to September 30, 2007
+
+ 
+
+F-5
+
+ 
+
+ 
+
+ 
+
+Statement
+ of cash flows for the period from June 20,
+ 2007 (date of inception) to September 30, 2007
+
+ 
+
+F-6
+
+ 
+
+ 
+
+ 
+
+Notes to Financial Statements
+
+ 
+
+F-7 F-12
+
+F-1
+
+REPORT
+OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+
+To the Board of Directors and Stockholders of 
+
+China Pacific Acquisition Corp.
+
+We have audited the accompanying balance
+sheet of China Pacific Acquisition Corp. (a development stage company) (the
+ Company ) as of September 30, 2007, and the related statements of
+operations, stockholders equity and cash flows for the period from June
+20, 2007 (date of inception) through September 30, 2007.
+These financial statements are the responsibility of the Company s
+management. Our responsibility is to
+express an opinion on this financial statement based on our audit.
+
+We conducted our audit in accordance with the
+standards of the Public Company Accounting Oversight Board (United States).
+Those standards require that we plan and perform the audit to obtain reasonable
+assurance about whether the financial statements are free of material
+misstatement. An audit also includes examining, on a test basis, evidence
+supporting the amounts and disclosures in the financial statements, assessing
+the accounting principles used and significant estimates made by management, as
+well as evaluating the overall financial statement presentation. We believe that our audit provides a
+reasonable basis for our opinion. 
+
+In our opinion, the
+financial statements referred to above present fairly, in all material
+respects, the financial position of China Pacific Acquisition Corp. as of
+September 30, 2007, and the results of its operations and its cash flows for
+ the period from June 20, 2007 (date of inception) through September 30, 2007
+ in conformity with accounting principles generally accepted in the United
+States of America.
+
+The accompanying financial statements have been
+prepared assuming the Company will continue as a going concern. As discussed in
+Note 1 to the financial statements, the Company has generated no revenue
+and its business plan is dependent on completion of a financing transaction. If
+it is unsuccessful in completing a financing transaction, it would raise
+substantial doubt about the Company s ability to continue as a going concern.
+The financial statements do not include any adjustments that might result from
+the outcome of this uncertainty. 
+
+e-Fang Accountancy Corp., & CPA
+
+Certified Public Accountants
+
+City of Industry, USA
+
+December 20, 2007
+
+F-2
+
+China
+Pacific Acquisition Corp.
+
+(a
+development stage company)
+
+Balance
+Sheet
+
+September 30 ,
+2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ASSETS
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Current assets
+
+ 
+
+ 
+
+ 
+
+ 
+
+Cash
+
+ 
+
+$
+
+25,423
+
+ 
+
+ Deferred offering costs 
+ 
+ 
+ 16,355
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total current
+ assets
+
+ 
+
+ 
+
+41,778
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total assets
+
+ 
+
+$
+
+41,778
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+LIABILITIES
+ AND STOCKHOLDERS EQUITY
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Current liabilities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accounts
+ payable and accrued liabilities
+ 
+ $
+ 17,155
+
+ 
+
+ Notes payable to stockholders
+ 
+ 
+ 1,159
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total current
+ liabilities
+
+ 
+
+ $
+
+18,314
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Stockholders equity
+
+ 
+
+ 
+
+ 
+
+ 
+
+Preferred stock,
+ $0.0005 par value, 5,000,000 shares authorized, none issued and outstanding
+
+ 
+
+ 
+
+ 
+
+ 
+
+Common
+ stock, $0.0005 par value, 50,000,000 shares authorized, 2,156,250 shares
+ issued and outstanding
+
+ 
+
+ 
+
+1,078
+
+ 
+
+Additional
+ paid-in capital
+
+ 
+
+ 
+
+23,922
+
+ 
+
+Deficit
+ accumulated during the development stage
+
+ 
+
+ 
+
+1,536
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total stockholders equity
+
+ 
+
+ 
+
+23,464
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Total liabilities and stockholders 
+ equity 
+
+ 
+
+$
+
+41,778
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The
+accompanying notes are an integral part of the financial statements.
+
+F-3
+
+China
+Pacific Acquisition Corp.
+
+(a
+development stage company)
+
+Statement
+of Operations
+
+For the
+Period from June 20, 2007 (Inception) through September 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Expenses and other operating items:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+General and administrative expenses
+
+ 
+
+$
+
+736
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+
+ Franchise taxes
+
+ 
+
+ 
+
+ 800
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net loss
+
+ 
+
+$
+
+(1,536
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Basic and diluted net loss per share
+
+ 
+
+ 
+
+(0.00
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Weighted Average Shares Outstanding - Basic and
+ Diluted
+
+ 
+
+ 
+
+2,156,250
+
+ 
+
+ The
+accompanying notes are an integral part of the financial statements.
+
+F-4
+
+China
+Pacific Acquisition Corp.
+
+(a
+development stage company)
+
+Statement
+of Stockholders Equity
+
+For the
+Period from June 20, 2007 (Inception) through September 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Additional 
+
+ Paid-in 
+
+ Capital
+
+ 
+
+Deficit 
+
+ Accumulated 
+
+ During the 
+
+ Development 
+
+ Stage
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Stockholders 
+
+ Equity
+
+ 
+
+ 
+
+ 
+
+Common Stock
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Shares
+
+ 
+
+Amount
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Initial capital
+ from founding stockholders
+
+ 
+
+ 
+
+2,156,250
+
+ 
+
+$
+
+1,078
+
+ 
+
+$
+
+23,922
+
+ 
+
+$
+
+ 
+
+ 
+
+$
+
+25,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Net loss during
+ the development stage
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+(1,536
+
+)
+
+ 
+
+(1,536
+
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Balance as of
+ September 30, 2007
+
+ 
+
+ 
+
+2,156,250
+
+ 
+
+$
+
+1,078
+
+ 
+
+$
+
+23,922
+
+ 
+
+$
+
+(736
+
+)
+
+$
+
+23,464
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The
+accompanying notes are an integral part of the financial statements.
+
+F-5
+
+China
+ Pacific Acquisition Corp.
+
+(a
+development stage company)
+
+Statement
+of Cash Flows
+
+For the
+Period from June 20, 2007 (Inception) through September 30, 2007
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ Cash flows from operating
+ activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ Net
+ loss
+
+ 
+
+ $
+
+ (1,536
+
+ )
+
+ 
+
+ 
+ Adjustments
+ to reconcile net loss to net cash provided by operating activities: 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ Increase
+ in accounts payable and accrued liabilities
+ 
+ 
+ 17,155
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ Net
+ cash provided by operating activities
+
+ 
+
+ 
+
+ 15,619
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ Cash flows from investing activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ Net
+ cash used by investing activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ Cash flows from financing activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ Proceeds
+ from note payable to stockholders 
+
+ 
+
+ 
+
+ 1,159
+
+ 
+
+ 
+
+ 
+ Proceeds
+ from sale of common stock
+
+ 
+
+ 
+
+ 25,000
+
+ 
+
+ 
+
+ 
+ Increase
+ in deferred offering costs 
+ 
+ 
+ 16,355
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ Net
+ cash provided by financing activities
+
+ 
+
+ 
+
+ 9,804
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ Net increase in cash
+
+ 
+
+ 
+
+ 25,423
+
+ 
+
+ 
+
+ 
+ Cash at beginning of period 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ Cash at end of period 
+
+ 
+
+ $
+
+ 25,423
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ The
+accompanying notes are an integral part of the financial statements.
+
+F-6
+
+China Pacific Acquisition Corp.
+
+(a development stage company)
+
+Notes to Financial Statements
+
+As of September 30, 2007
+
+Note 1 Organization and Nature of Business Operations 
+
+China Pacific Acquisition Corp. (the Company ) is
+ a Delaware blank check company incorporated on June 20, 2007 for the purpose
+ of acquiring, through a stock exchange, asset acquisition or other similar
+business combination ( Business Combination is defined as the acquisition
+of a target business), or control, through contractual arrangements, an operating
+business having its primary operations in the People s Republic of China
+(a Business
+Combination ). The Company s efforts in identifying a prospective target
+business will not be limited to a particular industry. 
+
+The Company has neither engaged in any operations nor
+generated revenue. The Company is considered to be in the development stage and
+is subject to the risks associated with activities of development stage
+companies. As such, the Company s operating results relate to organizational
+activities through September 30, 2007, and its ability to begin planned
+operations is dependent upon the completion of a financing transaction. The
+Company has selected December 31 as its fiscal year end. 
+
+The Company s ability to commence operations is
+contingent upon obtaining adequate financial resources through a proposed
+public offering ( Proposed Offering ) which is discussed in Note 3. The
+Company s management has broad discretion with respect to the specific
+application of the net proceeds of the proposed initial public offering of its
+Units (as described in Note 3), although
+substantially all of the net proceeds of the Proposed Offering are intended to
+be generally applied toward a Business Combination. Furthermore, there is no
+assurance that the Company will be able to successfully effect a Business
+Combination. Upon the closing of the Proposed Offering, at least ninety percent
+(90%) of the net proceeds, after payment of certain amounts to the underwriter,
+will be held in a trust account ( Trust Fund ) and invested in government
+securities until the earlier of (i) the consummation of its first Business
+Combination or (ii) the distribution of the Trust Fund as described
+below. The remaining proceeds may be used to pay for business, legal and
+accounting due diligence on prospective acquisitions and continuing general and
+administrative expenses. The Company, after signing a definitive agreement for
+the acquisition of a Business Combination, will submit such transaction for
+stockholder approval. In the event that holders of 30% or more of the shares
+issued in the Proposed Offering vote against the Business Combination, the
+Business Combination will not be consummated. However, the persons who were
+stockholders prior to the Proposed Offering (the Founding Stockholders ) will
+participate in any liquidation distribution only with respect to any shares of
+the common stock acquired in connection with or following the Proposed
+Offering. 
+
+F-7
+
+China Pacific Acquisition Corp.
+
+(a development stage company)
+
+Notes to Financial Statements-(Continued)
+
+The Company will seek stockholder approval before it
+will effect any Business Combination, even if the Business Combination would
+ not ordinarily require stockholder approval under applicable law. In connection
+ with the stockholder vote required to approve any Business Combination, the
+Company s existing stockholders including all of the Company s
+officers, directors and advisors have agreed to vote the shares of common stock
+acquired by them prior to the initial public offering in favor of any Business
+Combination or extension of the period to consummate a Business Combination.
+ Public Stockholders is defined as the holders of common stock sold
+as part of the units in the Proposed Offering or in the aftermarket. The Company
+will consummate its Business Combination only if a majority of the shares of
+common stock voted by the Public Stockholders are voted in favor of the
+Company s Business Combination and Public Stockholders owning no more than
+one share less than 30% of the shares sold in the Public Offering, on a
+cumulative basis, including any stockholders who previously exercised their
+redemption rights in connection with the special meeting of the Public Stockholders
+for the purpose of approving the extended period, if any, exercise their redemption
+rights. If a majority of the shares of common stock voted by the Public
+Stockholders are not voted in favor of a proposed initial Business Combination
+but 24 months has not yet passed since closing of the Proposed Offering, the
+Company may combine with another Target Business meeting the fair market value
+criterion described above. 
+
+Public Stockholders voting against a Business
+Combination will be entitled to convert their stock into a pro rata share of
+the total amount on deposit in the Trust Fund, and including any interest
+earned on their portion of the Trust Fund, net of up to half of the interest
+earned on the Trust Fund each calendar month which may be released to the
+Company to cover a portion of the Company s operating expenses, income taxes
+payable thereon and the underwriting discount if a Business Combination is
+approved and completed. Public Stockholders who convert their stock into their
+share of the trust account will continue to have the right to exercise any
+Warrants they may hold. 
+
+The Company will dissolve and promptly distribute only
+to its Public Stockholders the amount in the Trust Fund, less any income taxes
+payable on interest income, plus any remaining net assets if the Company does
+not effect a Business Combination within (i) 18 months after consummation of
+ the Proposed Offering, (ii) 24 months after consummation of the Proposed
+ Offering, if the Company has entered into a letter of intent or definitive
+ agreement with respect to a Business Combination within 18 months after the
+ consummation of the Proposed Offering, or (iii) 36 months after consummation
+ of the Proposed Offering if the stockholders consent to extending the time
+ period in which the Company is obligated to consummate a Business Combination
+ as described in the prospectus. In the event of dissolution, it is likely
+ that the per share value of the residual assets remaining available for distribution
+ (including Trust Fund assets) will be less than the initial public offering
+ price per share in the Proposed Offering (assuming no value is attributed
+ to the Warrants contained in the units to be offered in the Proposed Offering
+ discussed in Note 3.) 
+
+Going concern consideration As indicated in the
+accompanying financial statements, at September 30, 2007, the Company had $25,423
+ in cash. Further, the Company has incurred and expects to continue to incur
+significant costs in pursuit of its financing and acquisition plans. Management s
+plans to address this uncertainty through a Proposed Offering are discussed in
+Note 3. There is no assurance that the Company s plans to raise capital
+or to consummate a Business Combination will be successful or successful within
+the target business acquisition period. These factors, among others, raise
+substantial doubt about the Company s ability to continue operations as
+a going concern.
+
+F-8
+
+China Pacific Acquisition Corp.
+
+(a development stage company)
+
+Notes to Financial Statements-(Continued)
+
+ 
+
+Note 2 Liquidity 
+
+ The accompanying financial statements
+ have been prepared on a going concern basis, which contemplates the realization
+ of assets and the satisfaction of liabilities in the normal course of business.
+ For the period from inception (June 20, 2007) through September 30, 2007,
+ the Company incurred a net loss of 1,536, and had only 25,423 in
+ cash and liabilities of 18,314.
+These factors raise substantial doubt about the Company s ability to continue
+as a going concern. 
+
+ The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company s continuation as a going concern is dependent upon the success of its financing and acquisition plans. Management s plans to address this uncertainty through a Proposed Offering are discussed in Note 3. There is no assurance that the Company s plans to raise capital or to consummate a Business Combination will be successful or successful within the target business acquisition period. These factors, among others, raise substantial doubt about the Company s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. 
+
+Note 3 Summary of Significant Accounting Policies 
+
+Use of Estimates 
+
+The preparation of financial statements in conformity
+with accounting principles generally accepted in the United States of America
+requires management to make estimates and assumptions that affect the reported
+amounts of assets and liabilities and disclosure of contingent assets and
+liabilities at the date of the financial statements and the reported amounts of
+expenses during the reporting period. Actual results could differ from those
+estimates. Management believes that its estimates are reasonable.
+
+Loss per Common Share
+
+Loss per share is computed by dividing net loss
+applicable to common stockholders by the weighted average number of common
+shares outstanding for the period. 
+
+Income Taxes
+
+The Company follows the liability method of accounting
+for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
+Under this method, deferred income taxes are recorded based upon the difference
+between the financial reporting and tax bases of assets and liabilities and are
+measured using the enacted tax rates and laws that will be in effect when the
+underlying assets or liabilities are recovered or settled. Due to the nature of
+the operations to date, the Company has recognized no deferred tax asset or
+liability.
+
+Deferred offering costs
+
+The costs associated with the Company s proposed
+initial public offering have been recorded as deferred offering costs and will
+reduce additional paid in capital if the offering is successful. Should the
+offering not be consummated, the deferred offering costs will be recognized as
+a charge to operations.
+
+Recently issued accounting pronouncements
+
+The Company does not believe that any recently issued,
+but not yet effective, accounting pronouncements if currently adopted would
+have a material effect on the accompanying financial statements.
+
+F-9
+
+China Pacific Acquisition Corp.
+
+(a development stage company)
+
+Notes to Financial Statements-(Continued)
+
+Note 4 Proposed Public Offering 
+
+The Proposed Offering calls for the Company to offer
+for public sale 8,625,000 units ( Units ), including 1,125,000 Units
+which may be issued on exercise of a 45-day option granted to the Underwriter
+to cover over-allotments (if any), at a price of $8.00 per unit. Each Unit
+consists of one share of the Company s common stock, $0.0005 par value,
+and one warrant. Each warrant will entitle the holder to purchase from the Company
+one share of common stock at an exercise price of $6.00, or at the holder s
+option, such warrant holder may exercise the warrant on a net issuance or cashless 
+basis in lieu of paying the cash exercise price if the warrants are redeemed,
+as described in the prospectus, commencing the later of the completion of a Business
+Combination with a Target Business or one year from the date of this prospectus
+and expiring five years from the date of this prospectus, unless earlier redeemed.
+The warrants will be redeemable at the Company s
+option, at a price of $0.01 per warrant upon 30 days written notice after
+the warrants become exercisable, only in the event that the last sale price of
+the common stock is at least $11.50 per share for any 20 trading days within
+a 30 trading day period ending on the third business day prior to the date on
+which notice of redemption is given. 
+
+In accordance with the Warrant Agreement between the
+Company and Continental Stock Transfer & Trust Company related to the
+warrants, the Company is only required to use its best efforts to effect the
+registration of the shares of common stock underlying the Warrants. The Company
+will not be obligated to deliver securities, and there are no contractual
+penalties for failure to deliver securities, if a registration statement is not
+effective at the time of exercise. Additionally, in the event that a
+registration statement is not effective at the time of exercise, the holder of
+such warrant shall not be entitled to exercise such warrant and in no event
+(whether in the case of a registration statement not being effective or
+otherwise) will the Company be required to net cash settle the warrant
+exercise. Consequently, the warrants may expire unexercised.
+
+Note 5 Note Payable to Stockholders and Related Party
+Transactions 
+
+On June 20, 2007, the Company s existing stockholders and
+ directors agreed to advance the Company up to $500,000 under a credit facility
+ evidenced by a non-interest bearing promissory note. The note is repayable
+ on the earlier of (i) June 20, 2008 or, (ii) the date on which the offering
+ is consummated. Due to the short-term nature of the note, the fair value
+ of the note approximated its carrying amount. As of September 30, 2007, $1,159
+ was outstanding.
+
+The Company has agreed to pay up to $7,500 per month
+for office space and general and administrative services to SBI-e2 Capital. Such services will commence on the effective date of the
+registration statement for the Proposed Offering and continuing until the
+earlier to occur of (i) the consummation by the Company of a Business
+Combination, or (ii) twenty-four months from the effective date. 
+
+The Company s directors have agreed to acquire, in a private
+ placement prior to the completion of the Proposal Offering, warrants to purchase
+ 1,200,000 shares of common stock at an exercise price of $6.00 per share.
+ Proceeds from this private placement are expected to be $1,200,000. 
+
+F-10
+
+China Pacific Acquisition Corp.
+
+(a development stage company)
+
+Notes to Financial Statements-(Continued)
+
+Note 5 Note Payable to Stockholders and Related Party
+Transactions (Continued)
+
+The directors further agreed that they will
+not sell or transfer these warrants until after the Company consummates a
+Business Combination. 
+
+Note 6 Common Stock
+
+On June 20, 2007, 2,156,250 shares of common stock, par
+value $0.0005, were issued to two directors of the Company, in exchange
+for $25,000, or approximately $0.012 per share. The Company will redeem, for
+ no consideration, that number of shares of common stock held by its existing
+ stockholders, up to a maximum of 281,250 shares, necessary to ensure that
+ the number of shares of common stock such existing stockholders hold prior
+ to the offering, exclusive of shares underlying the private placement warrants
+ or any securities purchased in the aftermarket, equals 20% of the outstanding
+ shares of common stock immediately after this offering and the exercise,
+ if any, of the underwriters over-allotment option.
+
+Note 7 Commitments
+
+The Company has engaged WR Hambrecht + Co, LLC ( Hambrecht )
+as the lead underwriter of the Proposed Offering. Hambrecht s underwriting fee
+will be equal to 7% of the public offering price. Of this amount, 4% will be
+paid at the closing of the Proposed Offering. The remainder, equal to 3% of the
+gross proceeds of this offering will be deferred and will be paid only upon the
+consummation of a Business Combination.
+
+In addition, the Company has agreed that upon completion of the
+Proposed Offering it will issue an option to the representative of the
+underwriters to purchase up to a total of 750,000 units at a per-unit
+offering price of $10, as additional compensation, for $100. The units issuable
+upon the exercise of this option are identical to those being offered in the
+Proposed Offering, except that the warrants included in the underwriter s
+option have an exercise price of $7.50, are not redeemable and contain cashless
+exercise provisions, as described in the prospectus. This option is exercisable
+commencing on the later of the consummation of a Business Combination and one
+year from the date of the prospectus and expiring five years from the date of
+the prospectus and may be exercised on a net issuance or cashless basis.
+The option may not be sold, transferred, assigned, pledged or hypothecated for
+a one-year period (including the foregoing 180-day period) following the date
+of the prospectus. However, the option may be transferred to any underwriter
+and selected dealer participating in the offering and their bona fide officers
+or partners. 
+
+The holders of the option will have demand and
+piggy-back registration rights for periods of five and seven years,
+respectively, from the date of the prospectus with respect to registration of
+the securities directly and indirectly issuable upon exercise of the option.
+The exercise price and number of units issuable upon exercise of the option may
+be adjusted in certain circumstances, including in the event of a stock
+dividend, recapitalization, reorganization, merger or consolidation. However,
+the option will not be adjusted for issuances at a price below its exercise
+price. 
+
+The Company will account for the representative s
+purchase option as a cost of raising capital 
+
+F-11
+
+China Pacific Acquisition Corp.
+
+(a development stage company)
+
+Notes to Financial Statements-(Continued)
+
+and will include the instrument as equity in its
+financial statements. Accordingly, there will be no impact on the Company s
+financial position or results of operations, except for the recording of the
+$100 proceeds from the sale. The Company has estimated, based upon a trinomial
+model, that the fair value of the purchase option on the date of sale is $2.45 per unit or an aggregate of $1,837,500, using an expected
+life of five years, volatility of 33.78%, and a risk-free rate of 5.10%.
+However, because the Units do not have a trading history, the volatility
+assumption is based on information currently available to management. The
+volatility estimate is derived using five-year historical stock prices for the
+447 companies with market capitalization of less than $400 million drawn from
+the Shanghai Stock Exchange Composite Index. The Company believes the
+volatility estimate calculated from this index is a reasonable benchmark to use
+in estimating the expected volatility of the Units; however, the use of an
+index to estimate volatility may not necessarily be representative of the
+volatility of the underlying securities. Although an expected life of five
+years was used in this calculation, if the Company does not consummate a
+Business Combination within the prescribed time period and liquidates, the
+option will become worthless.
+
+F-12
+
+No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful.
+
+TABLE OF CONTENTS
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+Page
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CODI-PC_compass_legal_matters.txt b/parsed_sections/legal_matters/2007/CODI-PC_compass_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..39bb69040f03ab90dd48ca5b7c6310e0a41104ce
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CODI-PC_compass_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Richards, Layton Finger, P.A., Wilmington, Delaware; Squire, Sanders Dempsey L.L.P., Cincinnati, Ohio will pass upon certain other matters, including with respect to federal income tax matters addressed herein. Attorneys at Squire, Sanders Dempsey L.L.P. beneficially own an aggregate of approximately 44,500 shares of the trust. Certain legal matters will be passed upon on behalf of the underwriters by Alston Bird LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CVLT_commvault_legal_matters.txt b/parsed_sections/legal_matters/2007/CVLT_commvault_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..821b49973f5814053bd1b81cf84c8a167f06996d
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CVLT_commvault_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with the sale of the shares of common stock offered hereby will be passed upon for us by Mayer, Brown, Rowe Maw LLP, Chicago, Illinois. The underwriters have been represented by Cravath, Swaine Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/CVV_cvd_legal_matters.txt b/parsed_sections/legal_matters/2007/CVV_cvd_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b3fed980c07347320d061f4351f9a4cc686cc111
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/CVV_cvd_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed on for us by Ruskin Moscou Faltischek, P.C. Legal matters in connection with this offering will be passed upon for Collins Stewart LLC (formerly known as C.E. Unterberg, Towbin, LLC) by Kramer Levin Naftalis & Frankel LLP.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/DDD_3d_legal_matters.txt b/parsed_sections/legal_matters/2007/DDD_3d_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f522ac928b35978e65d53b812834f6e18dc0dd54
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/DDD_3d_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Robert M. Grace, Jr., our Vice President, General Counsel and Secretary. As of July 31, 2007, Mr. Grace beneficially owned 40,112 shares of our common stock and also beneficially owned options to purchase an additional 40,000 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/DHT_dht_legal_matters.txt b/parsed_sections/legal_matters/2007/DHT_dht_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2f1471cbf0a20726716f8adce56c05b5b2500fdc
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/DHT_dht_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common stock offered hereby and certain other matters relating to Marshall Islands law will be passed upon for us by Reeder & Simpson PC. Certain other legal matters relating to United States law will be passed upon for us by Cravath, Swaine & Moore LLP, New York, New York. Certain legal matters will be passed upon for any underwriters, dealers or agents by Simpson Thacher & Bartlett LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/DHX_dhi-group_legal_matters.txt b/parsed_sections/legal_matters/2007/DHX_dhi-group_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8d2b65e144b4023dcc3f528a6b292f0ee2ed9954
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/DHX_dhi-group_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, will pass on the validity of the common stock offered by this prospectus for us. Davis Polk & Wardwell will pass upon the validity of the common stock for the underwriters. Paul, Weiss, Rifkind, Wharton & Garrison LLP has represented the General Atlantic Stockholders and their related parties from time to time. Davis Polk & Wardwell has represented the Quadrangle Stockholders and their related parties from time to time.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/EIG_employers_legal_matters.txt b/parsed_sections/legal_matters/2007/EIG_employers_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bec0accda482d1f890589b15d68f0862d76f3022
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/EIG_employers_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this offering will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. The validity of the shares of our common stock offered hereby and certain other matters will be passed upon for us by Lionel Sawyer & Collins, Las Vegas, Nevada. Debevoise & Plimpton LLP, New York, New York, is acting as legal counsel to the underwriters.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/ENSG_ensign_legal_matters.txt b/parsed_sections/legal_matters/2007/ENSG_ensign_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1981135382154bae66d8e58b3d4ea4d9f3c64e9c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/ENSG_ensign_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Dorsey & Whitney LLP, Irvine, California. Certain legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Heller Ehrman LLP, San Diego, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/EVR_evercore_legal_matters.txt b/parsed_sections/legal_matters/2007/EVR_evercore_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1db918eaa4e003308c7220a074665eca870b4bdf
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/EVR_evercore_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the Class A common stock will be passed upon for us by Simpson Thacher & Bartlett LLP, New York, New York. An investment vehicle composed of certain partners of Simpson Thacher & Bartlett LLP, members of their families, related parties and others own an interest representing less than 1% of the capital commitments of investment funds managed by Evercore. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilmer Cutler Pickering Hale and Dorr LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/FSLR_first_legal_matters.txt b/parsed_sections/legal_matters/2007/FSLR_first_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9f89d2b96c216acf90b08db90fd58b59893a42c0
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/FSLR_first_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus and certain legal matters will be passed upon for us by Cravath, Swaine Moore LLP, New York, New York. Certain legal matters will be passed upon on behalf of the underwriters by Shearman Sterling LLP, Menlo Park, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/GLDD_great_legal_matters.txt b/parsed_sections/legal_matters/2007/GLDD_great_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..270fc9c8218bb628f753310a3dddfde8b10b3491
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/GLDD_great_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock offered pursuant to this prospectus was passed upon by Kirkland & Ellis LLP (a partnership that includes professional corporations), Chicago, Illinois. Kirkland & Ellis LLP represents Madison Dearborn Capital Partners IV, L.P. and entities affiliated with it in connection with various legal matters. Certain partners of Kirkland & Ellis LLP are members of Randolph Street Partners VI, an investment partnership that owns less than 1% of the Company and which is a selling stockholder in this offering, and certain partners of Kirkland & Ellis LLP are members of an investment partnership that is an investor in entities affiliated with Madison Dearborn Capital Partners IV, L.P. Legal matters in connection with this offering will be passed upon for the underwriters by Sidley Austin LLP, Chicago, Illinois.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/GLRE_greenlight_legal_matters.txt b/parsed_sections/legal_matters/2007/GLRE_greenlight_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fb4063669c1bf761c7071a0af64c08e5402bbafb
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/GLRE_greenlight_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain matters as to U.S. law in connection with this offering will be passed upon for us by Akin Gump Strauss Hauer & Feld LLP. Legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP as to U.S. law. The validity of the Class A Ordinary Shares under Cayman Islands law will be passed upon for us by Turner & Roulstone, Attorneys-at-Law, George Town, Grand Cayman.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/GSIT_gsi_legal_matters.txt b/parsed_sections/legal_matters/2007/GSIT_gsi_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5f5f479ec816ec42f0b66cecf316f2b589b4c6ec
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/GSIT_gsi_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by DLA Piper US LLP, East Palo Alto, California. Certain legal matters relating to the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/G_genpact_legal_matters.txt b/parsed_sections/legal_matters/2007/G_genpact_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bd0a56de46d642b23a071b51e785b9c3b560a76c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/G_genpact_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of our common shares offered hereby will be passed on by Appleby, our Bermuda counsel. Certain U.S. securities law matters in connection with this offering will be passed upon for us by Cravath, Swaine & Moore LLP, our U.S. counsel, and for the underwriters by Davis Polk & Wardwell.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/III_informatio_legal_matters.txt b/parsed_sections/legal_matters/2007/III_informatio_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ce0d5c892654bb8aa2ee404f753e29700e7523d2
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/III_informatio_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Kaye Scholer LLP, New York, New York. Kramer Levin Naftalis & Frankel LLP, New York, New York, is acting as counsel for the underwriters in this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/KALU_kaiser_legal_matters.txt b/parsed_sections/legal_matters/2007/KALU_kaiser_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..28d960c6ba1131ccb68fd6c1e34eb522042072ec
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/KALU_kaiser_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the shares of common stock offered by this prospectus will be passed upon for our company by Jones Day, Dallas, Texas. The underwriters have been represented by Davis Polk Wardwell, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/LULU_lululemon_legal_matters.txt b/parsed_sections/legal_matters/2007/LULU_lululemon_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..279bd2667c80b1f4a5983ed949d41fce5d69d1bc
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/LULU_lululemon_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of our common stock offered hereby will be passed upon for us by Pepper Hamilton LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher Bartlett LLP, Palo Alto, California. Certain matters regarding Canadian law will be passed upon for us by McCarthy T trault LLP, and for the underwriters by Osler, Hoskin Harcourt LLP. As at the date hereof, the partners and associates of McCarthy T trault LLP and the partners and associates of Osler, Hoskin Harcourt LLP, as a group, beneficially own directly or indirectly less than 1% of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/MASI_masimo_legal_matters.txt b/parsed_sections/legal_matters/2007/MASI_masimo_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..50d7efa7779ac06f8bb39d5d9995c2f3fe929b77
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/MASI_masimo_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Paul, Hastings, Janofsky & Walker LLP, Costa Mesa, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, Costa Mesa, California. Certain attorneys of Paul, Hastings, Janofsky & Walker LLP may purchase in the aggregate up to 6,500 shares of our common stock in this offering through the directed share program, which is more fully discussed under the caption Underwriting. Certain employees of Latham & Watkins LLP own shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/MDGL_madrigal_legal_matters.txt b/parsed_sections/legal_matters/2007/MDGL_madrigal_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0e34ce7df50df3768b8aaf0d25c6c2e2c4b8cd20
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/MDGL_madrigal_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered by us in this offering will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. Ropes & Gray LLP, Boston, Massachusetts, has acted as counsel for the underwriters in connection with certain legal matters related to this offering.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/MLCO_melco_legal_matters.txt b/parsed_sections/legal_matters/2007/MLCO_melco_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b480516db67290b16654c01b37bc682ef68e765a
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/MLCO_melco_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to the United States federal and New York law in connection with this offering will be passed upon for us by Debevoise & Plimpton LLP. Certain legal matters as to the United States federal and New York law in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Walkers. Legal matters as to Macau law will be passed upon for us by Manuela Ant nio Law Office and for the underwriters by Henrique Saldanha, Advogados & Not rios. Debevoise & Plimpton LLP may rely upon Walkers with respect to matters governed by Cayman Islands law and Manuela Ant nio Law Office with respect to matters governed by Macau law. Skadden, Arps, Slate, Meagher & Flom LLP may rely upon Walkers with respect to matters governed by Cayman Islands law and Henrique Saldanha, Advogados & Not rios, with respect to matters governed by Macau law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/NCMI_national_legal_matters.txt b/parsed_sections/legal_matters/2007/NCMI_national_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7d9b99359264eae63d9f6e79c34562cab1810bfb
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/NCMI_national_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS We are represented by Holme Roberts & Owen LLP, Denver, Colorado, who will pass upon the validity of the shares of common stock offered hereby. The underwriters are represented by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/NMM_navios_legal_matters.txt b/parsed_sections/legal_matters/2007/NMM_navios_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8548002af5f781b4e4169d4375d8cb904db9d3fc
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/NMM_navios_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters The validity of the common units and certain other legal matters with respect to the laws of the Republic of the Marshall Islands will be passed upon for us by our counsel as to Marshall Islands law, Reeder & Simpson P.C. Certain tax matters will be passed upon for us by Reeder & Simpson P.C. and Vinson & Elkins L.L.P., New York, New York. Certain other legal matters will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York, and by Vinson & Elkins L.L.P., New York, New York. Certain matters with respect to this offering will be passed upon for the underwriters by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Vinson & Elkins L.L.P. and Fried, Frank, Harris, Shriver & Jacobson LLP may rely on the opinion of Reeder & Simpson P.C., for all matters of Marshall Islands law. Fried, Frank, Harris, Shriver & Jacobson LLP has performed legal services for Navios Maritime and its subsidiaries from time to time.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/OESX_orion_legal_matters.txt b/parsed_sections/legal_matters/2007/OESX_orion_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5f5aff034b3f0191dbbb88837877b4b80b51f5cd
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/OESX_orion_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the common stock offered by us in this offering will be passed upon for us by the law firm of Foley Lardner LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by the law firm of Latham Watkins LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/ORN_orion_legal_matters.txt b/parsed_sections/legal_matters/2007/ORN_orion_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..355ac8398bc7d21fc3eb76b50130d1b4b7766613
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/ORN_orion_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Vinson Elkins L.L.P., Austin, Texas will pass upon the validity of the shares of our common stock offered by the selling shareholders under this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/PODD_insulet_legal_matters.txt b/parsed_sections/legal_matters/2007/PODD_insulet_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1c76ea0a17a742d4a4a52a3a8c3b023c95cec0f1
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/PODD_insulet_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters in connection with this offering will be passed upon for the underwriters by Cahill Gordon Reindel LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/POSC_positron_legal_matters.txt b/parsed_sections/legal_matters/2007/POSC_positron_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..233ab5d62ded4cc53a7b3f7ecdf175dc56acc4e9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/POSC_positron_legal_matters.txt
@@ -0,0 +1 @@
+Table of Contents In June 2006, the Company and Quantum Molecular Pharmaceuticals Inc., a Canadian radiopharmaceutical corporation ( QMP ) acquired all of the operating assets of IS2 Medical Systems Inc., a developer and manufacturer of nuclear imaging devices based in Ottawa, Ontario, Canada ( IS2 ) through a minority-owned subsidiary of the Company, Imaging PET Technologies, Inc. ( IPT ). The Company and Quantum held 49.9% and 50.1%, respectively, of the total registered capital of IPT. However, in January 2007, the Company acquired Quantum s interest in IPT in exchange for preferred stock and the extinguishment of a note payable due the Company from QMP. IS2 develops, builds and services gamma cameras that offer clinical users high quality performance specifications in the industry. IS2 s signature product is its PulseCDC compact digital cardiac camera. Over 150 cameras have been sold, primarily in Canada. On December 28, 2005, the Company entered into a Memorandum of Understanding with Imagin Diagnostic Centres, Inc. ( IMAGIN ) and QMP. The Memorandum provided for the parties to form a joint venture to be called Quantum Molecular Technologies JV (the QMT JV ). Initially, the joint venture was owned 20%, 29% and 51% by the Company, IMAGIN and QMP, respectively. On May 8, 2006, the Company amended certain aspects of the QMT JV. Whereas the Company originally held 20% of the interests of the QMT JV, Quantum and IMAGIN assigned 100% of their interest to the Company in exchange for the preferred stock of the Company. On April 13, 2006, the QMT JV incorporated under the name Quantum Molecular Technologies, Inc. ( QMT ) and acquired certain intangible assets in the form of capitalized research and development costs from IMAGIN for a note payable. Using concepts and research and development activities conceived and to be implemented by Dr. Irving Weinberg, an exclusive consultant to QMP, QMT is developing certain next generation technologies including PET-enabled surgical tools and solid-state photo detector technology, which have implications in both molecular imaging and PET and which could have further application in the military and aerospace segments. The first solid-state detector technology patent has been filed by QMT. The Company will have the right to manufacture and sell any PET products developed by QMT in exchange for royalty payments still to be negotiated. Imaging Pet Technologies Business Acquisition On January 26, 2007, the Company executed and consummated a Securities Purchase Agreement (the Agreement ) with Imagin Diagnostic Centres, Inc. ( IMAGIN ), to acquire 11,523,000 shares of common stock of Imaging Pet Technologies, Inc. ( IPT ). The Shares represented approximately a 50.1% of IPT s issued and outstanding common stock. As a result of the acquisition of the Shares, the Company owns 100% of the common stock of IPT. As consideration for the shares, the Company and IMAGIN agreed to cancel a promissory note in the principal amount of $2,400,000 made by IMAGIN subsidiary, QMP and later assigned to IMAGIN. As of the date of the Agreement, the Company had been advised by IMAGIN that it had acquired all of QMP s interest in IPT as well as QMP's other holdings of the Company's related securities. Comparison of the Results of Operations for the Three Months ended June 30, 2007 and 2006 The Company experienced a net loss of $1,107,000 for the three months ended June 30, 2007 compared to a loss of $3,115,000 for the same quarter in 2006. Contributing to the significantly greater loss for the three month period in 2006 was a loss from derivative liabilities of $1,887,000. Revenues - Revenues from the sales of IPT s gamma cameras were $454,000 for the three months ended June 30, 2007. The Company did not have any system sales for the same period in 2006. Service revenue for the quarter was $415,000 as compared to $266,000 for the same period in 2006. The increase of 56% is due in large part to service revenue from IPT. Service revenue for Positron Corporation alone decreased to $173,000 as two customers did not renew their service contracts. Gross profit for the three months ended June 30, 2007 and 2006, was $246,000 and 86,000, respectively. Cost of sales related to the IPT systems was $413,000. Costs of service and component sales for the three months ended June 30, 2007 increased by $30,000 to $210,000 as compared to $180,000 for the same period in 2006. The increase is attributed to additional service contracts from the IPT business. Table of Contents NEUSOFT POSITRON MEDICAL SYSTEMS CO., LTD. CONDENSED BALANCE SHEETS DECEMBER 31, 2006 (In thousands) 2006 2005 ASSETS Current assets: Cash and cash equivalents $ 220 $ 1,295 Other current assets 504 4 Total current assets 724 1,299 Intangibles and other assets 653 646 Total assets $ 1,377 $ 1,945 Current liabilities: Other current liabilities (55 ) 3 Total current liabilities (55 ) 3 Capital 1,432 1,942 Total liabilities and capital $ 1,377 $ 1,945 NEUSOFT POSITRON MEDICAL SYSTEMS CO., LTD. CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 AND 2005 (in thousands) 2006 2005 Revenue $ -- $ -- Expense General and administrative expense 575 61 Total expense 575 61 Net loss $ (575 ) $ (61 ) 7. Property and Equipment Property and equipment at December 31, 2006 and 2005 consisted of the following (in thousands): 2006 2005 Furniture and fixtures $ 130 $ 161 Computers and peripherals 74 318 Machinery and equipment 26 134 Subtotal 230 613 Less accumulated depreciation (166 ) (493 ) Total $ 64 $ 120 F- Table of Contents Operating Expenses - Operating expenses increased $402,000 to $1,338,000 for the three months ended June 30, 2007 from $936,000 for the same period in 2006. Operating expenses for IPT alone during the current quarter were $807,000. Research and development costs for the three months ended June 30, 2007 were $451,000 compared to $116,000 for the three months ended June 30, 2006. For the three months ended June 30, 2007, IPT incurred $106,000 in research costs related to improvements and developments of gamma cameras while QMT had research expense of $210,000. QMT is developing certain next generation technologies including PET-enabled surgical tools and solid-state photo detector technology, which may have implications in both molecular imaging and PET and which could have further application in the military and aerospace segments. Positron s research and development costs of $135,000 were mostly costs associated with the NPMS joint venture and related costs of manufacturing modernization at the Company s Houston facility. Sales and marketing expense for the three months ended June 30, 2007 decreased to $317,000 from $375,000 for the same period in 2006. The decrease occurred despite the addition of IPT s costs. The Company has significantly reduced sales and marketing costs since no further manufacturing of PET systems is being done at the Houston facility. Manufacturing and plant modernization efforts are currently taking place in conjunction with the NPMS joint venture. On a consolidated basis, general and administrative expenses remained virtually unchanged during the three months ended June 30, 2007 as compared to the same period in 2006, $467,000 and $470,000, respectively. However, expenses at Positron Corporation in Houston decreased by $291,000 to $179,000 for the quarter ended June 30, 2007 compared to $470,000 for the quarter ended June 30, 2006. In large part, the decrease is due to management s overall cost reduction efforts. Also, during the second quarter of 2006, the Company incurred higher consulting and professional fees related to a private placement and the acquisition of IPT. General and administrative expenses at IPT were $288,000. Stock based compensation for the three months ended June 30, 2007 was $103,000. For the three months ended June 30, 2006, the application of variable accounting rules resulted in a $25,000 reversal of previously recorded stock based compensation. Other Income (Expenses) -.Interest expense of $41,000 for the three months ended June 30, 2007 was a decrease from $301,000 in interest expense during the same period in 2006, which was primarily interest on convertible debentures to affiliated entities. The debentures were all converted to shares of the Company s Series B Preferred Stock in September 2006. The Company also recorded derivative gains of $22,000 during the second quarter of 2007 as compared to a derivative loss of $1,887,000 for the same period in 2006, when the related debentures were issued. For the three months ended June 30, 2006, the Company recorded equity in the losses of NPMS $77,000. No loss was recorded during the three months ended June 30, 2007 as the investment had been written down to zero under the equity method of accounting during the first quarter of 2007. Comparison of the Results of Operations for the Six Months ended June 30, 2007 and 2006 For the six months ended June 30, 2007, the Company had a net loss of $2,226,000 compared to a net loss of $4,271,000 for the same quarter in 2006. Contributing to the significantly greater loss for the six month period in 2006 was a loss from derivative liabilities of $1,887,000, higher interest expense and equity in losses of joint ventures. Revenues - Revenues from the sales of IPT s gamma cameras were $1,429,000 for the six months ended June 30, 2007. The Company did not consolidate IPT s accounts for the same period in 2006. Service revenues for the current six month period were $641,000 as compared to $464,000 for the same period in 2006. The increase of 38% is due in large part to service revenue from IPT. Service revenue for Positron Corporation alone decreased to $367,000 as two customers did not renew their service contracts. Gross profit for the six months ended June 30, 2007 and 2006, was $625,000 and 136,000, respectively. The increase in gross profits results from the sales and service from IPT gamma cameras. Gross margins were consistent at 30% and 29% for the six months ended June 30, 2007 and 2006, respectively. Table of Contents 8. Other Assets Other assets at December 31, 2006 and 2005 consisted of the following (in thousands): 2006 2005 Field service parts and supplies $ 17 $ 45 Intangible assets 57 -- Deferred loan costs 178 12 Total $ 252 $ 57 The Company expensed $134,000 of excess field service parts and supplies in 2005. 9. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities at December 31, 2006 and 2005 consisted of the following (in thousands): 2006 2005 Trade accounts payable $ 1,431 $ 441 Accrued royalties 373 352 Accrued interest 44 260 Sales taxes payable 260 236 Accrued compensation 249 159 Accrued property taxes 65 113 Accrued professional fees 92 80 Insurance premiums payable -- 43 Accrued warranty costs 113 10 Total $ 2,627 $ 1,694 Accrued compensation includes severance payments payable to the Company's former Chief Executive Officer, Gary H. Brooks. Mr. Brooks resigned effective September 29, 2005. In connection with his resignation, the Company agreed to make severance payments to Mr. Brooks of $18,583.33 per month for a period of six months, and to extend the expiration date of options held by Mr. Brooks through September 30, 2006, and warrants held by Mr. Brooks until the later of (i) October 31, 2007 for 7,000,000 warrants and June 2009 for 500,000 warrants, and (ii) the date on which a registration statement filed with the Securities Exchange Commission permitting a sale of the shares underlying such warrants shall have become effective and shall have remained effective for a period of six months. Unpaid severance obligations at December 31, 2006 and 2005 total approximately $ 55,000 and $ 97,000, respectively. In March 2007, the Company fully paid all severance amounts owed to Mr. Brooks F- Table of Contents Operating Expenses - Operating expenses increased $940,000 to $2,772,000 for the six months ended June 30, 2007 from $1,832,000 for the same period in 2006. Operating expenses for IPT alone during the six month period in 2007 were $1,644,000. Research and development costs for the six months ended June 30, 2007 were $804,000 compared to $260,000 for the six months ended June 30, 2006. IPT incurred $211,000 in research costs related to improvements and developments of gamma cameras while QMT had research expense of $333,000. Positron s research and development costs of $260,000 were mostly costs associated with the NPMS joint venture and related costs of manufacturing modernization at the Company s Houston facility. Sales and marketing expense for the six months ended June 30, 2007 increased to $586,000 from $445,000 for the same period in 2006. The increase in sales and marketing expenses results from the addition of IPT s expenses of $397,000 during the period. Positron Corporation in Houston, significantly reduced sales and marketing costs since manufacturing of PET systems is being done at that facility. For the six months ended June 30, 2007 Positron Corporation incurred $123,000 in sales and marketing expenses. General and administrative expenses increased $270,000 to $1,176,000 for the six months ended June 30, 2007 from $906,000 for the six months ended June 30, 2006. However, expenses at Positron Corporation in Houston decreased by $368,000 to $538,000 for the six months ended June 30, 2007. The reduction in the Houston facility comes as a result of an overall plan by management to reduce costs. During the six months ended June 30, 2006 significant professional and consulting fees were incurred in conjunction with the issuance of convertible debentures, a private placement and the acquisition of IPT. Stock based compensation for the six months ended June 30, 2007 and 2006 was $206,000 and $221,000, respectively. Other Income (Expenses) - Interest expense of $73,000 for the six months ended June 30, 2007 was a decrease from $570,000 in interest expense during the same period in 2006, which was primarily interest on convertible debentures to affiliated entities. The debentures were all converted to shares of the Company s Series B Preferred Stock in September 2006. The Company also recorded derivative losses of $12,000 during the second quarter of 2007 as compared to derivative losses of $1,887,000 for the same period in 2006, when the related convertible debentures issued. For the six months ended June 30, 2007 and 2006 the Company recorded equity in the losses of NPMS of $23,000 and $118,000, respectively. The current period charge of $23,000 reduces the book value of the Company s investment in NPMS to zero. Table of Contents 10. Convertible Notes Payable to Affiliated Entities Notes payable to affiliated entities at December 31, 2006 and 2005 consisted of the following (in thousands): 2006 2005 IMAGIN Diagnostic Centres, Inc., less discount of $610 $ -- $ 1,723 Solaris Opportunity Fund, L.P., less discount of $280 -- 120 Total $ -- $ 1,843 IMAGIN Diagnostic Centres, Inc. Financing Agreements dated May 21, 2004 On May 26, 2004 and June 17, 2004, the Company sold two separate secured convertible promissory notes under a Note Purchase Agreement dated May 21, 2004, to IMAGIN Diagnostic Centres, Inc. ( IMAGIN ) in the principal amounts of $400,000 and $300,000, respectively. Interest is charged on the outstanding principal at the rate of ten percent (10%) per annum and is payable annually to the extent of positive cash flow on the anniversary dates of these notes. The principal and any unpaid interest were to be paid on the earlier to occur of May 21, 2006 or when declared due and payable by IMAGIN upon occurrence of an event of default. The notes were initially convertible into new shares of Series C Preferred Stock that, in turn are convertible into an aggregate of 35,000,000 shares of the Company s common stock. These notes were collateralized by all of the assets of the Company. Principal of $700,000 has been advanced related to these notes. An additional $70,000 in accrued interest on these notes was converted to loan principal on May 21, 2005. On October 21, 2005, IMAGIN converted loan principal of $770,000 on promissory notes into 770,000 shares of Series C Preferred Stock. On March 17, 2006, IMAGIN Diagnostic Centres, Inc. assigned to Positron Acquisition Corp. its interest in 770,000 shares of the Company s Series C Preferred Stock, 4,026,000 shares of the Company s common stock and the Company s secured convertible notes in the aggregate principal amount of $696,850, which are convertible into 696,850 shares of the Company s Series D Preferred Stock and in turn are convertible into 27,874,000 shares of the Company s common stock. Positron Acquisition Corporation is a wholly-owned subsidiary of Imagin Molecular Corporation, Inc. ( IMGM ), an affiliate of the Company through common ownership. IMAGIN is a significant shareholder of both the Company and IMGM. In a second stage of the financing IMAGIN agreed to purchase additional secured convertible promissory notes in the aggregate principal amount of $1,300,000. These notes were to be purchased over a six and a half month period, commencing July 15, 2004. These notes were due and payable on May 21, 2006. These notes were initially convertible into new shares of Series D Preferred Stock that, in turn was convertible into an aggregate of 52,000,000 shares of the Company s common stock. As of June 30, 2005, principal of $1,208,500 had been advanced related to these notes. On June 30, 2005, IMAGIN converted $575,000 of these promissory notes into shares of Series D Preferred Stock that, in turn were converted into 23,000,000 shares of the Company s common stock. This conversion reduced the principal owed under these promissory notes from $1,208,500 to $633,500. As a result of these financing agreements, several agreements were also reached involving option and warrants contracts for the purchase of common stock of the Company. The Company agreed to exchange 917,068 outstanding options currently held by its employees for new options that are exercisable for the purchase of common stock at a price of $0.02 per share. The new options issued to the employees are subject to four year vesting in equal monthly installments. This re-pricing will require the Company to apply the variable accounting rules established in Interpretation No. 44 of the Financial Accounting Standards Board ( FIN 44 ) to these options and record changes in compensation based upon movements in the stock price. The Company recognized $13,000 and $10,100 in compensation related to the re-pricing of options in 2004 and 2005, respectively, in accordance with the variable accounting rules established in FIN 44. The market value of the Company s common stock increased to $0.09 per share at December 31, 2005, resulting in an intrinsic value of $0.07 per share. F- Table of Contents Comparison of the Results of Operations for years ended December 31, 2006 and 2005. Consolidated results of operations for the year ending December 31, 2006 include; full year operations of Positron; the operations of Positron s wholly-owned subsidiary, IPT, for the period October 1 December 31, 2006; and the operations of Positron s wholly-owned subsidiary, QMT, from April 13 December 31, 2006. Revenues - The Company generated sales of systems in 2006 of $1,268,000 including approximately $850,000 of sales of IS2 gamma cameras. Positron system sales include two refurbished PET systems. The Company did not generate any revenue from system sales in 2005. Service and upgrade revenue in 2006 was $945,000, an increase of 24% or $183,000 over revenues of $762,000 in 2005. Sales of parts and materials to NPMS accounted for $180,000 of the increase. Costs of Revenues - Costs of revenues increased by $135,000 to $1,423,000 during the year ended December 31, 2006 from $1,288,000 in the prior year. Costs of system sales were $689,000 in 2006. The Company incurred service revenue costs of $721,000 and $621,000 in 2006 and 2005, respectively. The16% increase over the prior year is due in part to the warranty expiration of one system which was then moved to a service contract In addition, the Company experienced several problems with one particular machine which resulted in significant services costs. In 2005 the Company expensed $656,000 of excess inventory and field service parts as it ceased manufacturing activities at its Houston facility. Table of Contents The Company agreed to re-price the outstanding warrants currently held by its President & CEO for the purchase of 3,500,000 shares of common stock at $0.02 per share. The Company recognized $350,000 in compensation expense in 2004 and reversed $105,000 in compensation expense in 2005, in accordance with the variable accounting rules established in FIN 44. The market value of the Company s common stock increased to $0.09 per share at December 31, 2005, resulting in an intrinsic value of $0.07 per share. The Company agreed to issue a new warrant to its President & CEO for the purchase of 4,000,000 shares of common stock at $0.02 per share. The Company agreed to re-price outstanding warrants for the purchase of 9,150,000 shares of common stock. These warrants have been surrendered and new warrants will be issued to the same third party holders for the purchase of 4,575,000 shares of common stock at $0.02 per share. New warrants for the purchase of 4,575,000 shares of common stock at $0.02 per share (the remaining half of the surrendered warrants) will also be issued to IMAGIN. Financing Agreements dated August 8, 2005 On August 8, 2005, the Company sold to IMAGIN 10% secured convertible promissory notes under a Note Purchase Agreement, dated the same date, in the aggregate principal amount of $400,000. As of December 31, 2005, IMAGIN has purchased $400,000 of these notes. These notes are due and payable on August 7, 2008. These notes are convertible into an aggregate of 20,000,000 shares of the Company s common stock. In accordance with generally accepted accounting principals in the event the conversion price is less than the Company s stock price at the date of the agreement, the difference is considered to be a beneficial conversion feature and is amortized over the period from the date of issuance to the stated maturity date. The fair value of the common stock at the commitment date of $1,200,000 less the $400,000 in loan proceeds, results in intrinsic value of $800,000 for the beneficial conversion feature. However, the beneficial conversion feature is limited to the $400,000 proceeds of the debt. Due to the fact that there were not enough common shares available to facilitate the conversion of the debt into common stock on August 8, 2005, no beneficial conversion feature was recorded for this transaction. Financing Agreements dated October 31, 2005 On October 31, 2005, the Company sold to IMAGIN 10% secured convertible promissory notes under a Note Purchase Agreement, dated the same date, in the aggregate principal amount of $400,000. As of December 31, 2005, IMAGIN has purchased $300,000 of these notes. In January 2006, the Company received the final $100,000 for the purchase of the notes. These notes are due and payable on October 31, 2008. These notes are convertible into an aggregate of 20,000,000 shares of the Company s common stock. Full convertibility of the notes into shares of common stock will require an amendment to the Company s Articles of Incorporation which must be approved by the shareholders. In accordance with generally accepted accounting principals in the event the conversion price is less than the Company s stock price at the date of the agreement, the difference is considered to be a beneficial conversion feature and is amortized over the period from the date of issuance to the stated maturity date. The fair value of the common stock at the commitment date of $1,800,000 less the $300,000 in loan proceeds, results in intrinsic value of $1,500,000 for the beneficial conversion feature. However, the beneficial conversion feature is limited to the $300,000 of the debt. Due to the fact that there were not enough common shares available to facilitate the conversion of the debt into common stock on October 31, 2005, no beneficial conversion feature was recorded for this transaction. Solaris Opportunity Fund, L.P. Financing Agreements dated February 28, 2005 On February 28, 2005, the Company entered into a series of agreements with a related party, Solaris Opportunity Fund ( Solaris ) pursuant to which Solaris agreed to purchase an aggregate of $1,000,000 face amount of the Company s 10% secured convertible promissory notes. As of December 31, 2005, Solaris has purchased $1,000,000 of these notes. These notes are due and payable on March 6, 2007. The notes were initially convertible into new shares of Series E Preferred Stock that, in turn are convertible into an aggregate of 22,000,000 shares of the Company s common stock F- Table of Contents Operating Expenses - The Company s operating expenses increased $2,077,000 to $4,603,000 for the year ended December 31, 2006 from $2,526,000 in 2005. Selling, general and administrative expenses increased $500,000 to $2,639,000 from $2,139,000 in the prior year. The acquisition of IPT is the primary reason for the increase. IPT s selling, general and administrative expenses in 2006 were $401,000. Positron s selling, general and administrative costs were $2,104,000, a decrease of 1.6% from the prior year. Positron recorded expenses of $471,000 related to shares of its common stock that were issued for services performed, the majority of which was issued to firms promoting Positron common stock to the market place. Positron s selling, general and administrative salary expense decreased to $383,000 in 2006 from $778,000 in 2005. The decrease is a result of overall cost reduction efforts on the part of Positron s management. Research and development expenses increased $719,000 to $1,165,000 from $446,000 in the prior year. IPT s research and developments costs were $166,000 and QMT s were $418,000. IPT continues improvement and development of the IS2 gamma cameras. QMT is developing certain next generation technologies including PET-enabled surgical tools and solid-state photo detector technology, which have implications in both molecular imaging and PET and which could have further application in the military and aerospace segments. Positron s research and development costs increased 30% to $581,000 in 2006 from $446,000 in 2005. The increase is due primarily to costs associated with the NPMS joint venture and related costs of manufacturing modernization at the Company s Houston facility. Operating expenses in 2006 include a charge for impairment of the intangible asset recorded upon the acquisition of QMT. The impaired asset acquired consisted of capitalized patent and research and development costs. The Company wrote off the entire asset totaling $369,000. Stock based compensation expense for the year ended December 31, 2006 was $430,000 and resulted primarily from the immediate vesting of 6,000,000 of the 11,500,000 options granted on November 16, 2006 to officers and directors of the Company, and stock based compensation expense related to 7,500,000 options issued in December of 2005 by the Company to Joseph Oliverio, Positron s President and Chief Executive Officer. Of Mr. Oliverio s options, 2,000,000 vested immediately, 2,000,000 vested in December 2006 and 3,500,000 vest in December 2007. The 2006 compensation also includes expense for the vesting of outstanding options granted to employees prior to 2005. For the year ended December 31, 2005 the Company reversed expense related to stock based compensation by $59,000. The reversal resulted from the application of the variable accounting rules to the re-pricing of certain warrants and options, which preceded the application of FASB 123(R). Other Income (Expenses) -.Interest expense of $860,000 for the year ended December 31, 2006 is a decrease from $985,000 in interest expense during 2005, but only includes nine months of interest on all convertible debentures to affiliated entities including IMAGIN, PAC, Solaris and Quantum. The debentures were all converted to shares of the Company s Series B Preferred Stock in September 2006. The Company also issued $1,500,000 of new convertible secured debentures in 2006. Interest expense in 2006 includes amortization of loan costs, debt discounts and beneficial conversion features of the new convertible debenture. The Company also recorded derivative losses of $1,784,000 resulting from embedded derivatives with the issuance of convertible debentures. For the year ended December 31, 2006 the Company recorded equity in the losses of joint ventures, IPT and NPMS, of $373,000. NPMS did not have any operating activity during 2005. Income Taxes There is no provision for income taxes due to ongoing operating losses. As of December 31, 2006, we had net operating loss carryforwards of approximately $18,000,000 for Federal reporting purposes. These amounts expire at various times through 2026. See Note 14 to the Notes to the Consolidated Financial Statements. The Company has provided a full valuation allowance against the net deferred tax assets at December 31, 2006 and 2005. Extraordinary Gain The Company recorded an extraordinary gain on the acquisition of IS2 by IPT. The extraordinary gain is the excess of the net assets acquired over the purchase price paid for IS2. The extraordinary gain recognized for the year ended December 31, 2006 was $241,000. Table of Contents In accordance with generally accepted accounting principles in the event the conversion price is less than the Company s stock price at the date of the agreement, the difference is considered to be a beneficial conversion feature and is amortized over the period from the date of issuance to the stated maturity date. On February 28, 2005, enough common shares were available to facilitate the conversion of substantially all of the debt into common stock. The fair value of the related Series E Preferred Stock at the commitment date of $2,200,000 less the $1,000,000 in loan proceeds, results in an intrinsic value of $1,200,000 for the beneficial conversion feature. However, the beneficial conversion feature is limited to the $1,000,000 proceeds of the debt. The balance of the unamortized discount was approximately $604,000 at December 31, 2005. During 2006 this convertible note payable was sold to IMAGIN. Financing Agreements dated June 27, 2005 On June 27, 2005, the Company entered into a series of agreements with Solaris pursuant to which Solaris agreed to purchase an aggregate of $400,000 face amount of the Company s 10% secured convertible promissory notes. As of December 31, 2005, Solaris has purchased $400,000 of these notes. These notes are due and payable on March 6, 2007. The notes are initially convertible into new shares of Series F Preferred Stock that, in turn are convertible into an aggregate of 20,000,000 shares of the Company s common stock. In accordance with generally accepted accounting principles in the event the conversion price is less than the Company s stock price at the date of the agreement, the difference is considered to be a beneficial conversion feature and is amortized over the period from the date of issuance to the stated maturity date. On June 27, 2005, enough common shares were available to facilitate the conversion of all of the debt into common stock. The fair value of the related Series F Preferred Stock at the commitment date of $1,600,000 less the $400,000 in loan proceeds, results in an intrinsic value of $1,200,000 for the beneficial conversion feature. However, the beneficial conversion feature is limited to the $400,000 proceeds of the debt. The balance of the unamortized discount was approximately $280,000 at December 31, 2005. During 2006 this convertible note payable was sold to QMP. Conversion of Notes Payable to Series B Preferred Stock In 2006, the Company converted all outstanding convertible notes payable and accrued interest due to affiliated entities to Series B Preferred Stock (see note 13). Following is a description of each conversion: The Company and IMAGIN converted principal and interest of $1,164,192 outstanding upon the Series E Convertible Promissory Notes and principal and interest of $877,669 of Convertible Secured Notes into 690,930.5 shares of Series B Preferred Stock. The Company and Positron Acquisition Corp. converted principal and interest of $818,066 outstanding upon the Series D Secured Convertible Promissory Notes and 770,000 shares of Series C Preferred Stock into 762,358 shares of Series B Preferred Stock. Positron Acquisition Corp. subsequently converted 40,000 shares of Series B Preferred Stock into 4,000,000 shares of the Company s Common Stock. The Company and QMP converted principal and interest of $453,144 outstanding upon the Series F Secured Convertible Promissory Notes into 226,572 shares of Series B Preferred Stock. The Company has been advised by IMAGIN that it had acquired all of QMP s interest in the securities of the Company. F- Table of Contents Net Operating Loss - For the year ended December 31, 2006, the Company had a net loss of $6,586,000, or $0.08 per share, of which $5,657,000 was from domestic operations and $929,000 was generated in Canada, compared to a net loss of $3,806,000, or $0.06 per share, for the year ended December 31, 2005. The increase is due to increases in research and development and selling and general and administrative costs primarily from the acquisition of IS2, and derivative losses from the issuance of convertible debentures. Increase in net loss per share in 2006 was offset in part by a significant increase in the weighted average number of shares outstanding of 81,508,000 in 2006 as compared to 65,044,000 in 2005. Liquidity and Capital Reserves The Company had cash and cash equivalents of $173,000 on June 30, 2007. On the same date, accounts payable and accrued liabilities outstanding totaled $2,568,000. The Company sold $1,429,000 of gamma cameras through IPT but did not sell any PET imaging systems during the six month period ended June 30, 2007. Increased camera sales, sales of imaging systems and/or additional debt or equity financings will eventually be necessary to resolve the Company s liquidity issues and allow it to continue to operate as a going concern. However, there is no assurance that the Company will be successful in selling new systems or securing additional debt or equity financing. Since inception, the Company has expended substantial resources on research and development. Consequently, we have sustained substantial losses. Due to the limited number of systems sold or placed into service each year, revenues have fluctuated significantly from year to year. The Company had an accumulated deficit of $71,051,000 at June 30, 2007. The Company will need to increase system sales and apply the research and development advancements to achieve profitability in the future. Through the Company s joint venture with Neusoft Medical Systems PET system cost of goods and labor will be significantly lower. In addition, the Company expects increased revenue from its IPT SPECT camera subsidiary to come from new sales campaigns and service division. The Company expects that these developments will have a positive impact on the PET, PET/CT and SPECT device products, sales & service volumes and increased net margins. The Company s current financial condition raises doubt as to its ability to continue as a going concern. The report of the Company s independent public accountants, which accompanied the financial statements for the year ended December 31, 2006, was qualified with respect to that risk. If the Company is unable to obtain debt or equity financing to meet its cash needs it may have to severely limit or cease business activities or may seek protection from creditors under the bankruptcy laws. Related Party Transactions IMAGIN Transaction Financing Agreements dated May 21, 2004 On May 26, 2004 and June 17, 2004, the Company sold two separate secured convertible promissory notes under a Note Purchase Agreement dated May 21, 2004, to IMAGIN in the principal amounts of $400,000 and $300,000, respectively. Interest accrued on the outstanding principal at the rate of ten percent (10%) per annum and was payable annually to the extent of positive cash flow on the anniversary dates of these notes. The principal and any unpaid interest were due on the earlier to occur of May 21, 2006 or when declared due and payable by IMAGIN upon occurrence of an event of default. The notes were initially convertible into new shares of Series C Preferred Stock that, in turn was convertible into an aggregate of 35,000,000 shares of the Company s common stock. These notes were collateralized by all of the assets of the Company. On October 21, 2005, $770,000 in principal and accrued and unpaid interest were converted into 770,000 shares of Series C Preferred Stock. These shares of Series C Preferred Stock were subsequently assigned by IMAGIN to Positron Acquisition Corp. In a second stage of the May 2004 financing IMAGIN agreed to purchase additional secured convertible promissory notes in the aggregate principal amount of $1,300,000. These notes were to be purchased over a six and a half month period, commencing July 15, 2004 and were due and payable on May 21, 2006. These notes were initially convertible into new shares of Series D Preferred Stock that, in turn is convertible into an aggregate of 52,000,000 shares of the Company s common stock. As of June 30, 2005, principal of $1,208,500 had been advanced related to these notes. On June 30, 2005, IMAGIN converted $575,000 of these promissory notes into shares of Series D Preferred Stock that, in turn were converted into 23,000,000 shares of the Company s common stock. This conversion reduced the principal owed under these promissory notes from $1,208,500 to $633,500. The remaining $633,500 of principal convertible notes plus notes for $63,350 in accrued interest was assigned by IMAGIN to Positron Acquisition Corp, a wholly-owned subsidiary of Imagin Molecular Corporation, an affiliate of the Company. Table of Contents 11. Secured Convertible Notes Payable Pursuant to the terms of a Security Agreement and a Registration Rights Agreement (the Agreements ) dated May 23, 2006, the Company agreed to issue to private investors (the Investors ) callable secured convertible notes (the Debentures ) in the amount of $2,000,000, with interest at the rate of 6% annually. The Debentures are convertible into shares of the Company s Common Stock as the product of the Applicable Percentage and the average of the lowest three (3) trading prices for the common stock during the twenty (20) day period prior to conversion. Applicable Percentage is 50%; provided, however that the percentage shall be increased to (i) 55% in the event that a Registration Statement is filed within thirty days of the closing of the transaction and (ii) 65% in the event the Registration Statement becomes effective within one hundred and twenty days of the closing of the transaction. The Company filed a Registration Statement on June 20, 2006. The Company may repay principal and interest in cash in the event that the price of the Company s Common Stock is below $0.20 on the last business day of a month. Pursuant to the terms of the Agreements, the Company issued to the Investors warrants to purchase 30,000,000 shares of Common Stock at an exercise price of $0.15 per share. These warrants are exercisable seven (7) years from the closing of the transaction. On May 23, 2006 the Company issued Debentures in the amount of $700,000 with a maturity date of May 23, 2009. On June 21, 2006 the Company issued Debentures in the amount of $600,000 with a maturity date of June 21, 2009. Pursuant to the terms of the Agreements, the Company shall issue Debentures and receive the third traunch in the amount of $700,000 when the Registration Statement is declared effective by the Securities and Exchange Commission. Legal and other fees incurred in conjunction with the Debentures issued on May 23, 2006 and June 21, 2006 were $130,000 and $90,000, respectively and are being amortized over the maturity periods of the Debentures. As a result of the beneficial conversion features contained in the Convertible Debentures, the derivatives embedded in the Debentures have been classified as derivative liabilities. Fair value of the embedded derivatives is determined using the Black Sholes Valuation Method. The combined liabilities recorded for the year ended December 31, 2006 totaled $2,164,400. Of such amount, $380,600 was recorded as debt discount and is being amortized over the term of the Debentures and $1,783,400 was charged to loss on derivative obligations. The Company recorded a gain on derivative obligations of $73,000 for the three months ended December 31, 2006. Additionally, the Company recorded a discount of $919,400 against the Convertible Debentures for the fair market value of the warrants issued. The discount, which was recorded as an increase to additional paid-in capital, is being amortized to interest expense over the term of the Debentures, utilizing the effective interest method 12. Options and Warrants Options 1999 Employee Stock Option Plan Effective June 15, 1999, the shareholders of the Company adopted the 1999 Stock Option Plan (the 1999 Plan ) and terminated the 1994 Stock Option Plan, effective October 6, 1999. The 1994 Plan provided for the grant of options to officers, directors, key employees and consultants of the Company. The 1999 Plan provides for the grant of options to officers, employees (including employee directors) and consultants. The 1999 Plan is administered by the Board of Directors. The administrator is authorized to determine the terms of each option granted under the plan, including the number of shares, exercise price, term and exercisability. Options granted under the plan may be incentive stock options or nonqualified stock options. The exercise price of incentive stock options may not be less than 100% of the fair market value of the common stock as of the date of grant (110% of the fair market value in the case an optionee owns more than 10% of the total combined voting power of all classes of Positron capital stock). Options may not be exercised more than ten years after the date of grant (five years in the case of 10% stockholders). The Board has authorized 4,000,000 shares of Common Stock for issuance under the 1999 Plan. As of December 31, 2006, 225,000 options are outstanding, of which 152,396 are vested. F- Table of Contents In September 2006 the convertible instruments discussed above were converted to shares of Positron Corporation Series B Preferred Stock. See discussion below. Financing Agreements dated August 8, 2005 On August 8, 2005, the Company sold to IMAGIN 10% secured convertible promissory notes under a Note Purchase Agreement, dated the same date, in the aggregate principal amount of $400,000. As of September 30, 2005, IMAGIN has purchased $400,000 of these notes. These notes are due and payable on August 7, 2008. These notes are convertible into an aggregate of 20,000,000 shares of the Company s common stock. Pursuant to the terms of the agreements, the Company granted to IMAGIN a security interest in all of its assets to secure payment of the convertible promissory notes. The security interest is subordinate to the security interest previously granted in the same collateral to IMAGIN and Solaris. In September 2006 the convertible instruments discussed above were converted to shares of Positron Corporation Series B Preferred Stock. See discussion below. Financing Agreements dated October 31, 2005 On October 31, 2005, the Company sold to IMAGIN 10% secured convertible promissory notes under a Note Purchase Agreement, dated the same date, in the aggregate principal amount of $400,000. As of January 2006, IMAGIN has purchased $400,000 of these notes. These notes are due and payable on October 31, 2008. These notes are convertible into an aggregate of 20,000,000 shares of the Company s common stock. Pursuant to the terms of the agreements, the Company granted to IMAGIN a security interest in all of its assets to secure payment of the convertible promissory notes. The security interest is subordinate to the security interest previously granted in the same collateral to IMAGIN and Solaris. In September 2006 the convertible instruments discussed above were converted to shares of Positron Corporation Series B Preferred Stock. See discussion below. Transactions with Solaris Opportunity Fund, L.P. Financing Agreements dated February 28, 2005 On February 28, 2005, the Company entered into a series of agreements with Solaris pursuant to which Solaris agreed to purchase an aggregate of $1,000,000 face amount of the Company s 10% secured convertible promissory notes. As of September 30, 2005, Solaris had purchased all $1,000,000 of these notes. These notes are due and payable on March 6, 2007. The notes were initially convertible into new shares of Series E Preferred Stock that, in turn are convertible into an aggregate of 22,000,000 shares of the Company s common stock. Pursuant to the terms of the agreements, the Company granted to Solaris a security interest in all of its assets to secure payment of the convertible promissory notes. The security interest is subordinate to the security interest previously granted in the same collateral to IMAGIN. During 2006 Solaris sold the $1,000,000 principal amount of these notes to IMAGIN. In September 2006 the convertible instruments discussed above were converted to shares of Positron Corporation Series B Preferred Stock. See discussion below Financing Agreements dated June 27, 2005 On June 27, 2005, the Company entered into a series of agreements with Solaris pursuant to which Solaris agreed to purchase an aggregate of $400,000 face amount of the Company s 10% secured convertible promissory notes. As of September 30, 2005, Solaris had purchased all $400,000 of these notes. These notes were due and payable on March 6, 2007. The notes are initially convertible into new shares of Series F Preferred Stock that, in turn are convertible into an aggregate of 20,000,000 shares of the Company s common stock. Pursuant to the terms of the agreements, the Company granted to Solaris a security interest in all of its assets to secure payment of the convertible promissory notes. The security interest is subordinate to the security interest previously granted in the same collateral to IMAGIN and Solaris. Table of Contents Non-Employee Directors Stock Option Plan Effective October 6, 1999, the shareholders of the Company approved the 1999 Non-Employee Directors Stock Option Plan (the Directors Plan ) which provides for the automatic grant of an option to purchase 25,000 shares of common stock to non-employee directors upon their election or appointment to the Board, and subsequent annual grants also in the amount of 25,000 shares of common stock. The exercise price of the options is 85% of the fair market value of the common stock on the date of grant. The Directors Plan is administered by the Board. Options granted under the Directors Plan become exercisable in one of two ways: either in four equal annual installments, commencing on the first anniversary of the date of grant, or immediately but subject to the Company s right to repurchase, which repurchase right lapses in four equal annual installments, commencing on the first anniversary of the date of grant. To the extent that an option is not exercisable on the date that a director ceases to be a director of the Company, the unexercisable portion terminates. The Board has authorized 500,000 shares of Common Stock for issuance under the 1999 Plan. As of December 31, 2006, 250,000 fully vested options remain outstanding under the Directors' Plan. 1999 Stock Bonus Incentive Plan In October 1999 the Board adopted an Employee Stock Bonus Incentive Plan (the Stock Bonus Plan ), effective November 1, 1999. The Stock Bonus Plan provides for the grant of bonus shares to any Positron employee or consultant to recognize exceptional service and performance beyond the service recognized by the employee s salary or consultant s fee. The Board has authorized up to an aggregate of 1,000,000 shares of common stock for issuance as bonus awards under the Stock Bonus Plan. The Stock Bonus Plan is currently administered by the Board. Each grant of bonus shares is in an amount determined by the Board, up to a maximum of the participant s salary. The shares become exercisable according to a schedule to be established by the Board at the time of grant. A total of 316,000 shares have been issued under the Stock Bonus Plan at December 31, 2006. 1999 Employee Stock Purchase Plan The shareholders of the Company approved the 1999 Employee Stock Purchase Plan (the Purchase Plan ) in October 1999. A total of 500,000 shares of common stock have been reserved for issuance under the Purchase Plan, none of which has yet been issued. The Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during offering periods of up to 27 months. Offering periods generally will begin on the first trading day of a calendar quarter. The initial offering period began on January 1, 2000. The price at which stock is purchased under the Purchase Plan will be equal to 85% of the fair market value of common stock on the first or last day of the offering period, whichever is lower. No shares have been issued under the Purchase Plan at December 31, 2006. Amended and Restated 2005 Stock Incentive Plan Positron's Board administers the Amended and Restated 2005 Stock Incentive Plan ("2005 Plan"), which was adopted by the Board effective November 18, 2005 and approved by the shareholders at the 2006 Annual Meeting. The 2005 Plan provides for the grant of options and stock to directors, officers, employees and consultants. The administrator is authorized to determine the terms of each award granted under the plan, including the number of shares, exercise price, term and exercisability. Options granted under the plan may be incentive stock options or nonqualified stock options. The exercise price of incentive stock options may not be less than 100% of the fair market value of the Common Stock as of the date of grant (110% of the fair market value in the case of an optionee who owns more than 10% of the total combined voting power of all classes of the Company's capital stock). Options may not be exercised more than ten years after the date of grant (five years in the case of 10% shareholders). Upon termination of employment for any reason other than death or disability, each option may be exercised for a period of 90 days, to the extent it is exercisable on the date of termination. In the case of a termination due to death or disability, an option will remain exercisable for a period of one year, to the extent it is exercisable on the date of termination. A total of 40,000,000 shares of Common Stock have been authorized for issuance under the 2005 Plan. As of December 31, 2006, a total of 19,000,000 options have been granted under the 2005 Plan, none of which have been exercised, and of which 10,000,000 are fully vested. F- Table of Contents During 2006 Solaris sold the principal amount of these notes to Quantum Molecular Pharmaceuticals, Inc. ( QMP ). In September 2006 the convertible instruments discussed above were converted to shares of Positron Corporation Series B Preferred Stock. See discussion below Conversion To Series B Preferred Stock On September 30, 2006 the Board of Directors authorized a new series of preferred stock designated Series B Preferred Stock. The number of shares authorized was 9,000,000. Each share of Series B Preferred Stock $1.00 par value is convertible into 100 shares of the Company s Common Stock. The Series B Preferred Stock is senior to the Company s Common Stock and junior in priority to the Company s A and G Preferred Stock in liquidation. Holders of the Series B Preferred Stock are entitled to 100 votes per share on all matters requiring shareholder vote. While Series B Preferred Stock is outstanding no Common Stock dividends may be paid or declared by the Company. The Series B Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $1.00 per share. As of December 31, 2006, 5,739,860.5 shares of Series B Preferred Stock were outstanding. The Company and IMAGIN, Inc converted principal and interest of $1,164,192 outstanding upon the Series E Convertible Promissory Notes and principal and interest of $877,669 of Convertible Secured Notes into 690,930.5 shares of Series B Preferred Stock. The Company and Positron Acquisition Corp. converted principal and interest of $818,066 outstanding upon the Series D Secured Convertible Promissory Notes and 770,000 shares of Series C Preferred Stock into 762,358 shares of Series B Preferred Stock. Positron Acquisition Corp. subsequently converted 40,000 shares of Series B Preferred Stock into 4,000,000 shares of the Company s Common Stock. The Company and QMP converted principal and interest of $453,144 outstanding upon the Series F Secured Convertible Promissory Notes into 226,572 shares of Series B Preferred Stock. Acquisition of IMAGIN Interest in IPT On January 26, 2007, the Company executed and consummated a Securities Purchase Agreement (the Agreement ) with IMAGIN, to acquire 11,523,000 shares of common stock of IPT. The Shares represented approximately a 50.1% of IPT s issued and outstanding common stock. As a result of the acquisition of the Shares, the Company owns 100% of the common stock of IPT. As consideration for the shares, the Company and IMAGIN agreed to cancel a promissory note in the principal amount of $2,400,000 made by IMAGIN subsidiary, Quantum and later assigned to IMAGIN. As of the date of the Agreement, the Company had been advised by IMAGIN that it had acquired all of QMP s interest in IPT as well as QMP's other holdings of the Company's related securities. Immediately following the acquisition of the Shares, IPT acquired all of the outstanding capital stock of the Company s wholly-owned subsidiary, QMT. The purchase price of the acquisition was $2,800,000, in the form of a promissory note made in favor of the Company, payable on or before July 1, 2008, and secured by a pledge of all of the issued and outstanding shares of QMT New Accounting Pronouncements In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which will require entities that voluntarily make a change in accounting principle to apply that change retroactively to prior periods' financial statements unless this would be impracticable. SFAS No. 154supersedes Accounting Principles Board Opinion No. 20, "Accounting Changes"("APB No. 20"), which previously required that most voluntary changes in accounting principle be recognized by including in the current period's net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between "retrospective application" of an accounting principle and the "restatement" of financial statements to reflect the correction of an error. Another significant change in practice under SFA No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The provisions of SFAS No. 154 did not impact the Company's consolidated financial statements. Table of Contents 2006 Stock Incentive Plan On April 10, 2006, the Company s Board of Directors adopted a 2006 Stock Incentive Plan ( 2006 Plan ). The 2006 Plan is administered by the Board and provides for the direct issuance of stock and grants of nonqualified stock options to directors, officers, employees and consultants. The administrator is authorized to determine the terms of each award granted under the plan, including the number of shares, exercise price, term and exercisability. Stock and options may be granted for services rendered or to be rendered. A total of 5,000,000 shares of common stock have been authorized for issuance under the 2006 Plan. The Company issued 3,870,000 shares of common stock to consultants under the 2006 Plan. Accordingly the Company recorded consulting expense equal to the fair market value of the shares issued of $470,900 for the year ended December 31, 2006. A summary of stock option activity is as follows: Shares Issuable Under Outstanding Options Price Range or Weighted Average Exercise Price Balance at December 31, 2004 1,722,272 $ 0.32 Granted 7,625,000 $ 0.03 - $0.12 Forfeited (597,272 ) $ 0.02 - $4.13 Balance at December 31, 2005 8,750,000 $ 0.05 Granted 11,575,000 $ 0.05- $0..06 Forfeited (325,000 ) $ 0.01 - $2.63 Exercised (500,000 ) $ 0.05 Balance at December 31, 2006 19,500,000 $ 0.06 Following is a summary of stock options outstanding at December 31, 2006 and 2005. Options Outstanding Options Exercisable Range of Exercise Price Shares Weighted Average Remaining Term (in Years) Weighted Average Exercise Price Shares Weighted Average Exercise Price $0.020 75,000 3.63 $ 0.02 48,438 $ 0.02 $0.050 7,500,000 4.00 $ 0.05 4,000,000 $ 0.05 $0.060 11,500,000 4.00 $ 0.06 6,000,000 $ 0.06 $0.111 25,000 4.25 $ 0.11 25,000 $ 0.11 $0.077 25,000 5.00 $ 0.08 25,000 $ 0.08 $0.010 - $0.050 175,000 7.06 $ 0.04 128,958 $ 0.02 $0.034 - $0.119 50,000 7.25 $ 0.09 50,000 $ 0.09 $0.102 50,000 8.00 $ 0.10 50,000 $ 0.10 $0.043 25,000 8.67 $ 0.04 25,000 $ 0.04 $0.09 75,000 9.00 $ 0.09 75,000 $ 0.09 Balance at 12/31/2006 19,500,000 $ 0.06 10,427,396 $ 0.06 Balance at 12/31/2005 8,750,000 $ 0.05 $ 3,050,625 $ 0.05 F- Table of Contents In June 2006, the FASB released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation procedures, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. This interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this interpretation is adopted. The provisions of FIN 48 are not expected to have a material effect the Company's consolidated financial statements. Critical Accounting Policies In response to the Securities and Exchange Commission s Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have identified critical accounting policies based upon the significance of the accounting policy to our overall financial statement presentation, as well as the complexity of the accounting policy and our use of estimates and subjective assessments. We have concluded our critical accounting policies are as follows: Inventory Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method of inventory valuation. Revenue Recognition Revenues from POSICAMTM system contracts, IPT s PulseCDC compact digital cardiac camera (sold under the IS2 brand name) and other nuclear imaging devices are recognized when all significant costs have been incurred and the system has been shipped to the customer. Revenues from maintenance contracts are recognized over the term of the contract. Service revenues are recognized upon performance of the services. Information Regarding and Factors Affecting Forward Looking Statements The Company is including the following cautionary statement in this Annual Report on Form 10-KSB to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward looking statements made by, or on behalf of the Company. Forward looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward looking statements. The Company s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management s examination of historical operating trends, data contained in the Company s records and other data available from third parties, but there can be no assurance that management s expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward looking statements: the ability of the Company to attain widespread market acceptance of its POSICAM systems; the ability of the Company to obtain acceptable forms and amounts of financing to fund future operations; demand for the Company s services; and competitive factors. The Company disclaims any obligation to update any forward looking statements to reflect events or circumstances after the date hereof. Table of Contents The Company recognized $10,100 in compensation related to the re-pricing of options in 2005 For all of the Company s stock-based compensation plans, the fair value of each grant was estimated at the date of grant using the Black-Scholes option-pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero, as the Company has not paid cash dividends to date and does not currently expect to pay cash dividends) and the expected term of the option. Expected volatilities utilized in the model are based mainly on the historical volatility of the Company s stock price over a period commensurate with the expected life of the share option as well as other factors. The risk-free interest rate is derived from the zero-coupon U.S. government issues with a remaining term equal to the expected life at the time of grant. Fair market value using the Black-Scholes option-pricing model for the year ended December 31, 2006 was determined using the following assumptions: Expected life (years) 3-10 Risk free rate of return 4.65%-4.75 % Dividend yield 0 Expected volatility 230 % Warrants A summary of warrant activity is as follows: Number of Shares Exercise Price Weighted Average Exercise Price Balance at December 31, 2004 18,150,000 $ 0.05 - $2.40 $ 0.23 Issues and expirations in 2005 -- -- -- Balance at December 31, 2005 18,150,000 $ 0.23 New warrants issued with Series G Preferred Stock 10,224,100 $ 0.10 $ 0.10 New warrants issued with secured convertible debentures 30,000,000 $ 0.15 $ 0.15 Balance at December 31, 2006 58,374,100 $ 0.12 F- Table of Contents The Company s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management s examination of historical operating trends, data contained in the Company s records and other data available from third parties, but there can be no assurance that management s expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward looking statements: the ability of the Company to attain widespread market acceptance of its POSICAM systems; the ability of the Company to obtain acceptable forms and amounts of financing to fund future operations; demand for the Company s services; and competitive factors. The Company disclaims any obligation to update any forward looking statements to reflect events or circumstances after the date hereof. Off-Balance Sheet Arrangements We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. Quantitative and Qualitative Disclosures about Market Risk Our exposure to market risk is confined to our cash equivalents. We have invested in high-quality financial instruments, primarily money market funds, federal agency notes and asset-backed securities, which we believe are subject to limited credit risks. The effective duration of the portfolio is less than three months, and no individual investment has an effective duration in excess of one year. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe we have any material exposure to interest rate risk arising from our investments. We have granted restricted stock awards to some of our employees that will vest in October 2006. We will record compensation expense for these restricted stock awards grants upon vesting equal to the fair value of the underlying shares. Employees As of June 30, 2007, we had ten (10) full-time employees and three (3) consultants: four (4) in engineering, one (1) in customer support, four (4) in manufacturing, four (4) in the executive and administration department. None of our employees are subject to a collective bargaining agreement. We have not experienced any work stoppages and believe our relationships with our employees to be good. Facilities Our principal office is located at 1304 Langham Creek Drive, Suite 310, Houston, Texas. The lease expired on March 31, 2004 and has continued on a month-to-month basis since, at a monthly rent of $4,671.00 Legal Proceedings We are currently not a party to any legal proceedings. Table of Contents All outstanding warrants are currently exercisable. A summary of outstanding stock warrants at December 31, 2006 follows: Number of Common Stock Equivalents Expiration Date Remaining Contractual Life (Years) Exercise Price 3,825,000 (a) -- $ 0.02 250,000 January 2007 0.1 $ 2.40 500,000 October 2007 0.8 $ 0.02 1,250,000 March 2008 1.3 $ 0.25 10,224,000 April 2008 1.3 $ 0.10 3,750,000 June 2009 2.5 $ 0.02 8,575,000 May 2010 3.4 $ 0.02 30,000,000 May 2013 6.4 $ 0.15 58,374,100 (a) Warrants expire on the date on which a registration statement filed with the Securities Exchange Commission permitting a sale of the shares issuable upon exercise of the warrant shall have become effective and shall have remained effective for a period of six months. 13. Preferred Stock The Company s Articles of Incorporation authorize the Board of Directors to issue 10,000,000 shares of preferred stock from time to time in one or more series. The Board subsequently authorized an additional 9,000,000 shares designated as Series B Preferred Stock. The Board of Directors is authorized to determine, prior to issuing any such series of preferred stock and without any vote or action by the shareholders, the rights, preferences, privileges and restrictions of the shares of such series, including dividend rights, voting rights, terms of redemption, the provisions of any purchase, retirement or sinking fund to be provided for the shares of any series, conversion and exchange rights, the preferences upon any distribution of the assets of the Company, including in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, and the preferences and relative rights among each series of preferred stock. Series A Preferred Stock In February, March and May of 1996, the Company issued 3,075,318 shares of Series A 8% Cumulative Convertible Redeemable Preferred Stock $1.00 par value ( Series A Preferred Stock ) and Redeemable common stock Purchase Warrants to purchase 1,537,696 shares of the Company s Common Stock. The net proceeds of the private placement were approximately $2,972,000. Subject to adjustment based on issuance of shares at less than fair market value, each share of the Series A Preferred Stock was initially convertible into one share of common stock. Each Redeemable common stock Purchase Warrant is exercisable at a price of $2.00 per share of common stock. Eight percent (8%) dividends on the Series A Preferred Stock may be paid in cash or in Series A Preferred Stock at the discretion of the Company. The Series A Preferred Stock is senior to the Company s common stock in liquidation. Holders of the Series A Preferred stock may vote on an as if converted basis on any matter requiring shareholder vote. While the Series A Preferred Stock is outstanding or any dividends thereon remain unpaid, no common stock dividends may be paid or declared by the Company. The Series A Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time subsequent to March 1998 at a price of $1.46 per share plus any undeclared and/or unpaid dividends to the date of redemption. Redemption requires at least 30 days advanced notice and notice may only be given if the Company s common stock has closed above $2.00 per share for the twenty consecutive trading days prior to the notice. F- Table of Contents MANAGEMENT Executive Officers and Directors Our executive officers and directors and their respective ages as of August 28, 2007 are as follows: Directors and Executive Officers The following table sets forth for each director of the Company the current executive officers of the Company and the director nominee, their ages and present positions with the Company: Name Age Position with the Company Patrick G. Rooney 43 Chairman of the Board Joseph G. Oliverio 36 President and Director Corey N. Conn 43 CFO and EVP Operations Sachio Okamura 54 Director Dr. Anthony (Tony) C. Nicholls 57 Director Each of the nominees, directors and named current executive officers of the Company has been engaged in the principal occupations set forth below during the past five (5) years. Patrick G. Rooney. Mr. Rooney has served as Chairman of the Company since July 26, 2004. Since March 2003, Mr. Rooney has been the Managing Director of Solaris Opportunity Fund L.P., an investing/trading hedge fund. Through years 1985-2000, Patrick G. Rooney and/or Rooney Trading was a member of The Chicago Board of Options Exchange, The Chicago Board of Trade and The Chicago Mercantile Exchange. In September 1998 through March 2003, Mr. Rooney managed Digital Age Ventures, Ltd., a venture capital investment company. Mr. Rooney attended Wagner College of New York from 1980 through 1984. Joseph G. Oliverio. Mr. Oliverio has served as President of the Company since December 27, 2005. Prior to becoming President of the Company, Mr. Oliverio was the Chief Operating Officer of Michael E. Merhige, M.D., LLC, a well known coronary disease reversal and prevention center. Mr. Oliverio earned an MBA from the University of Phoenix and a BS in Nuclear Medicine Technology from State University of New York at Buffalo, and is a certified nuclear medicine technologist. Mr. Oliverio has performed more than 13,000 combined heart and cancer PET scans using Positron devices and brings to the Company a valuable combination of business, clinical and technical skill sets. Mr. Oliverio has been involved with the Company in various capacities since 1995. Mr. Oliverio has also joined the Board of Directors of Neusoft-Positron Medical Systems Co., Ltd., a joint venture with Neusoft Medical Systems of China that will manufacture the Company's PET and PET/CT products. Corey N. Conn. Mr. Conn was appointed by the Board of Directors to serve as Chief Financial Officer and Executive Vice President of Operations in Operations. Mr. Conn brings over 15 years of experience in developing and managing information services companies. Mr. Conn currently is President of Imagin Molecular Corporation, a holding company whose focus is developing and acquiring equity positions in companies associated with Medical Imaging. Mr. Conn was Vice President of Business Development at iXL, an e-business and e-transformations services provider from 1995 - 1999 and also served as Managing Director of Virtual Partnerships, LLC, a business development and business strategy consulting firm from 1999 - 2004. Table of Contents As of December 31, 2006 and 2005, stated dividends that are undeclared and unpaid on the Series A Preferred Stock total approximately $485,000 and $448,000. The Company anticipates that such dividends, if and when declared, will be paid in shares of Series A Preferred Stock. Series B Preferred Stock On September 30, 2006 the Board of Directors authorized a new series of preferred stock designated Series B Preferred Stock. The number of shares authorized was 9,000,000. Each share of Series B Preferred Stock $1.00 par value is convertible into 100 shares of the Company s Common Stock. The Series B Preferred Stock is senior to the Company s Common Stock and junior in priority to the Company s A, C, D, E and G Preferred Stock in liquidation. Holders of the Series B Preferred Stock are entitled to 100 votes per share on all matters requiring shareholder vote. While Series B Preferred Stock is outstanding no Common Stock dividends may be paid or declared by the Company. The Series B Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $1.00 per share. As of December 31, 2006, 5,739,860.5 shares of Series B Preferred Stock were outstanding. Series C Preferred Stock The Company has designated 840,000 shares as Series C 6% Cumulative Convertible Redeemable Preferred Stock $1.00 par value ( Series C Preferred Stock ). Each share of the Series C Preferred Stock is convertible into 50 shares of Common Stock. Six percent dividends accrue on the Series C Preferred Stock and may be paid in cash or in Common Stock depending on the Company's operating cash flow. The Series C Preferred Stock is senior to the Company's Common Stock and junior in priority to the Company's Series A Preferred Stock in liquidation. Holders of the Series C Preferred Stock are entitled to 130 votes per share on any matter requiring shareholder vote. While the Series C Preferred Stock is outstanding or any dividends thereon remain unpaid, no Common Stock dividends may be paid or declared by the Company. The Series C Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $1.00 per share plus any undeclared and/or unpaid dividends to the date of redemption. On October 21, 2005, IMAGIN converted loan principal of $770,000 on promissory notes into 770,000 shares of Series C Preferred Stock $1.00 par value ( Series C Preferred Stock ). On September 30, 2006, the Company and Positron Acquisition Corp. converted principal and interest of $818,066 outstanding upon the Series D Secured Convertible Promissory Notes and 770,000 shares of Series C Preferred Stock into 762,358 shares of Series B Preferred Stock. Positron Acquisition Corp. subsequently converted 40,000 shares of Series B Preferred Stock into 4,000,000 shares of the Company s Common Stock. As of December 31, 2006 there were no outstanding shares of Series C Preferred Stock. Series D Preferred Stock The Company has designated 1,560,000 shares of preferred stock as 6% Cumulative Convertible Redeemable Series D Preferred Stock $1.00 par value. Each share of the Series D Preferred Stock is convertible into 40 shares of Common Stock. Six percent dividends accrue on the Series D Preferred Stock and may be paid in cash or in Common Stock depending on the Company's operating cash flow. The Series D Preferred Stock is senior to the Company's Common Stock and junior in priority to the Company's Series A and C Preferred Stock in liquidation. Except as required by law and in the case of various actions affecting the rights of the Series D Preferred Stock, holders of the Series D Preferred Stock are not entitled to vote on matters requiring shareholder vote. While the Series D Preferred Stock is outstanding or any dividends thereon remain unpaid, no Common Stock dividends may be paid or declared by the Company. The Series D Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $1.00 per share plus any undeclared and/or unpaid dividends to the date of redemption. The Company has issued 10% secured convertible promissory notes in the principal amount of $696,850, which remain outstanding and are convertible into 696,850 shares of Series D Preferred Stock. F- Table of Contents Sachio Okamura. Mr. Okamura has served as a director since his appointment to the Board of the Company on April 1, 2001. Mr. Okamura has performed bio-medical consulting services for Okamura Associates, Inc. from 1993 through the present date. These consulting services have included regulatory, distribution, licensing, joint venture, investment, merger and acquisition activities involving businesses in the United States and Japan. Mr. Okamura was in charge of bio-medical business development for various offices of Mitsubishi Corporation from 1978 through 1993. Mr. Okamura received a BS in Biochemistry in 1975 from the University of California, Davis and a Master of International Business from the American Graduate School of International Management in 1978. Dr. Anthony (Tony) C. Nicholls. Dr. Nicholls was nominated for election to the Board of Directors by the vote of the Board of Directors. Dr. Nicholls is currently CEO of L3Technology Ltd in England, a company formed to commercialize patented medical technology developed in UK government research laboratories. Additionally, he is Chairman of the Alpha Omega Hospital Management Trust Ltd (London, UK) which undertakes the construction and management of cancer treatment "Centres of Excellence" and a Director of European Diagnostics plc (London UK) a company developing products for patient point-of-care testing. Until 2002, Dr Nicholls was Chairman and CEO of FAS Medical Ltd, a company primarily involved in the management of central venous catheterization complications. Prior to working with FAS Medical Ltd., Dr. Nicholls was the Head of Microbiology and Immunology at the Midhurst Medical Research Institute in the UK. Dr. Nicholls is a graduate of the University of Birmingham School of Medical Sciences and has a Ph.D. in Immunology. Term of Office Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board. The following table sets forth the compensation paid or accrued during the year ended December 31, 2004 to our president and chief executive officer and to our three executive officers whose salary exceeded $100,000 for 2004. EXECUTIVE COMPENSATION Summary Compensation Table The following Summary Compensation Table shows certain compensation information for each of the Named Executive Officers. Compensation data is shown for the years ended December 31, 2006, 2005 and 2004. This information includes the dollar value of base salaries, bonus awards, the number of stock options granted, and certain other compensation, if any, whether paid or deferred. Annual Compensation Long-Term Compensation Awards Name and Principal Position Year Salary (a) Bonus Other Annual Compensation Restricted Stock Awards Options/ SARs LTIP Payouts All Other Compensation Patrick G. Rooney 2006 -- -- -- -- 5,000,000 -- $ 110,000 Chairman of the Board 2005 -- -- -- -- -- -- $ 10,000 Joseph G. Oliverio 2006 $ 135,000 -- -- -- -- -- -- President 2005 -- -- -- -- 7,500,000 -- -- J. David Wilson 2006 -- -- -- -- -- -- -- Chief Executive Officer 2005 -- -- -- -- -- -- -- Corey N. Conn 2006 $ 96,000 -- -- -- 4,000,000 -- -- Chief Financial Officer 2005 $ 25,000 Timothy M. Gabel 2006 $ 74,000 1,500,000 Vice President of Operations Gary H. Brooks (b) 2006 -- -- -- -- -- -- -- President, CEO, CFO 2005 $ 190,000 -- -- -- -- -- $ 111,500 and Secretary 2004 $ 223,000 -- -- -- 500,000 -- $ 1,900 Griffith L. Miller II (c) 2006 $ 55,000 -- -- -- -- -- -- President, COO and CFO 2005 $ 105,000 -- -- -- -- -- -- 2004 $ 94,000 -- -- -- -- -- -- David S. Yeh (d) 2006 -- -- -- -- -- -- -- Executive V.P. Sales & 2005 $ 130,000 -- -- -- -- -- -- Marketing 2004 $ 119,000 Table of Contents On September 30, 2006, the Company and Positron Acquisition Corp. converted principal and interest of $818,066 outstanding upon the Series D Secured Convertible Promissory Notes and 770,000 shares of Series C Preferred Stock into 762,358 shares of Series B Preferred Stock. Positron Acquisition Corp. subsequently converted 40,000 shares of Series B Preferred Stock into 4,000,000 shares of the Company s Common Stock. As of December 31, 2006 there were no outstanding shares of Series D Preferred Stock. Series E Preferred Stock The Company has designated 1,200,000 shares of preferred stock as 6% Cumulative Convertible Redeemable Series E Preferred Stock $1.00 par value. Each share of the Series E Preferred Stock is convertible into 22 shares of Common Stock. Six percent dividends accrue on the Series E Preferred Stock and may be paid in cash or in Common Stock depending on the Company's operating cash flow. The Series E Preferred Stock is senior to the Company's Common Stock and junior in priority to the Company's Series A, C and D Preferred Stock in liquidation. Except as required by law and in the case of various actions affecting the rights of the Series E Preferred Stock, holders of the Series E Preferred Stock are not entitled to vote on matters requiring shareholder vote. While the Series E Preferred Stock is outstanding or any dividends thereon remain unpaid, no Common Stock dividends may be paid or declared by the Company. The Series E Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $1.00 per share plus any undeclared and/or unpaid dividends to the date of redemption. The Company has issued 10% secured convertible promissory notes in the principal amount of $1,000,000, which are convertible into 1,000,000 shares of Series E Preferred Stock. On September 30, 2006, the Company and IMAGIN converted principal and interest of $1,164,192 outstanding upon the Series E Convertible Promissory Notes and principal and interest of $877,669 of Convertible Secured Notes into 690,930.5 shares of Series B Preferred Stock. As of December 31, 2006 there were no outstanding shares of Series E Preferred Stock. Series F Preferred Stock The Company has designated 600,000 shares of preferred stock as Series F Preferred Stock $1.00 par value. Each share of the Series F Preferred Stock is convertible into 50 shares of Common Stock. Six percent dividends accrue on the Series F Preferred Stock and may be paid in cash or in Common Stock depending on the Company's operating cash flow. The Series F Preferred Stock is senior to the Company's Common Stock and junior in priority to the Company's Series A, C, D and E Preferred Stock in liquidation. Except as required by law and in the case of various actions affecting the rights of the Series F Preferred Stock, holders of the Series F Preferred Stock are not entitled to vote on matters requiring shareholder vote. While the Series F Preferred Stock is outstanding or any dividends thereon remain unpaid, no Common Stock dividends may be paid or declared by the Company. The Series F Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $1.00 per share plus any undeclared and/or unpaid dividends to the date of redemption. The Company has issued 10% secured convertible promissory notes in the principal amount of $400,000, which are convertible into 400,000 shares of Series F Preferred Stock. On September 30, 2006, the Company and QMP converted principal and interest of $453,144 outstanding upon the Series F Secured Convertible Promissory Notes into 226,572 shares of Series B Preferred Stock. As of December 31, 2006 there were no outstanding shares of Series F Preferred Stock. F- Table of Contents (a) Amounts shown include cash compensation earned with respect to the year shown above. (b) Compensation for Mr. Brooks in 2005 includes regular compensation of $167,000 and $23,000 of vacation pay through September 29, 2005. All other compensation for Mr. Brooks includes an $111,500 severance obligation. (c) Mr. Miller resigned in August 2006. Compensation for Mr. Miller in 2005 includes regular compensation of $97,500 and $7,500 of vacation pay. (d) Mr. Yeh served as an officer of the Company from July 2004 through July 2005. Employment Agreements Effective December 27, 2005, the Company entered into an employment agreement with Joseph G. Oliverio, President of the Company. Under the Agreement, Mr. Oliverio receives an initial base salary of $150,000. Mr. Oliverio also received an option grant exercisable for 7,500,000 shares of Common Stock at an exercise price of $0.05 per share. On the date of grant of the option 2,000,000 shares vested, with an additional 2,000,000 shares vesting on December 27, 2006 and the remainder vesting on December 27, 2007. Mr. Oliverio is entitled to 6 months severance if terminated "without cause". Option Grants in Last Fiscal Year During 2006, the Company issued 11,575,000 stock options to officers and directors, 75,000 of which were issued in accordance with the Company s Non-Employee Director Stock Option Plan and 11,500,000 in accordance with the Amended and Restated 2005 Stock Incentive Plan. Equity Compensation Plan Information The following table summarizes share and exercise information about the Company's equity compensation plans as of August 28, 2007. Table of Contents Series G Preferred Stock In 2006, the Company issued 204,482 Units in a private placement. Each Unit consists of one share of a new series of preferred stock designated Series G Preferred Stock and a warrant exercisable for 50 shares of common stock (the "Units"). The purchase price was $5.50 per Unit, with $5.00 of the Unit purchase price allocated to the purchase of the share of Series G Preferred Stock and $0.50 allocated to the purchase of the warrant, for a total offering amount of $1,124,650. The net proceeds of the private placement were approximately $1,096,000. The Company has designated 3,000,000 shares of preferred stock as Series G Preferred Stock $1.00 par value. Each share of Series G Preferred Stock is convertible into 100 shares of common stock. Eight percent dividends accrue on the Series G Preferred Stock and may be paid in cash or in Common Stock in the Company's discretion. The Series G Preferred Stock is senior to the Company's common stock and junior in priority to the Registrant's Series A, C, D, E and F Preferred Stock in liquidation. Except as required by law and in the case of various actions affecting the rights of the Series G Preferred Stock, holders of the Series G Preferred Stock are not entitled to vote on matters requiring shareholder vote. While the Series G Preferred Stock is outstanding or any dividends thereon remain unpaid, no common stock dividends may be paid or declared by the Company. The Series G Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $5.00 per share plus any undeclared and/or unpaid dividends to the date of redemption. As of December 31, 2006, stated dividends that are undeclared and unpaid on the Series G Preferred Stock total approximately $16,000. 14. Income Taxes The Company has incurred losses since its inception and, therefore, has not been subject to federal income taxes. As of December 31, 2006, the Company had net operating loss ( NOL ) carryforwards for income tax purposes of approximately $18,000,000, which expire in 2007 through 2026. Under the provisions of Section 382 of the Internal Revenue Code the greater than 50% ownership changes that occurred in the Company in connection with the Imatron Transaction and in connection with the private placement of the Company s common stock limited the Company s ability to utilize its NOL carryforward to reduce future taxable income and related tax liabilities. The composition of deferred tax assets and the related tax effects at December 31, 2006 are as follows (in thousands): 2006 2005 Deferred tax assets: Net operating losses: Domestic $ 5,835 $ 4,980 Foreign 196 -- Stock option compensation 172 -- Accrued liabilities and reserves 198 251 Inventory basis difference 68 95 6,469 5,326 Valuation allowance (6,469 ) (5,326 ) Total deferred tax assets $ -- $ -- The difference between the income tax benefit in the accompanying statement of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax loss is as follows (amounts in thousands): 2006 2005 Amount % Amount % Benefit for income tax at federal statutory rate $ 2,321 34.0 $ 1,294 34.0 Expenses not deductible for tax purposes (901 ) (13.2 ) (325 ) (8.5 ) Statutory rate difference - foreign subsidiary (203 ) (3.0 ) -- -- Other (74 ) (1.1 ) -- -- Change in valuation allowance (1,143 ) (16.7 ) __ (969) (25.5 ) $ -- -- $ -- -- F- Table of Contents Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities included in 1st column) All Equity Compensation Plans Approved by Security Holders 19,500,000 $ 0.06 26,814,000 (1) (1) Includes 3,275,000 shares available for issuance under the 1999 Stock Option Plan, 225,000 shares available for issuance under the 1999 Non-Employee Directors' Plan, 684,000 shares available for issuance under the 1999 Stock Bonus Incentive Plan, 500,000 shares available under the 1999 Employee Stock Purchase Plan, 21,000,000 shares available under the 2005 Amended and Restated Stock Incentive Plan and 1,130,000 available under the 2006 Stock Incentive Plan SUMMARY OF EQUITY COMPENSATION PLANS Equity-Based Compensation Key Employee Incentive Compensation. The Company has an incentive compensation plan for certain key employees and it s Chairman. The incentive compensation plan provides for annual bonus payments based upon achievement of certain corporate objectives as determined by the Company's Compensation Committee, subject to the approval of the Board of Directors. During 2006, the Company did not pay any bonus pursuant to the incentive compensation plan. 1999 Employee Stock Option Plan Positron's Board administers the 1999 Employee Stock Option Plan ("1999 Plan"), which was adopted by the Board effective June 15, 1999. The 1999 Plan provides for the grant of options to officers, employees (including employee directors) and consultants. The administrator is authorized to determine the terms of each option granted under the plan, including the number of shares, exercise price, term and exercisability. Options granted under the plan may be incentive stock options or nonqualified stock options. The exercise price of incentive stock options may not be less than 100% of the fair market value of the Common Stock as of the date of grant (110% of the fair market value in the case of an optionee who owns more than 10% of the total combined voting power of all classes of the Company's capital stock). Options may not be exercised more than ten years after the date of grant (five years in the case of 10% shareholders). Upon termination of employment for any reason other than death or disability, each option may be exercised for a period of 90 days, to the extent it is exercisable on the date of termination. In the case of a termination due to death or disability, an option will remain exercisable for a period of one year, to the extent it is exercisable on the date of termination. The Board has authorized up to an aggregate of 4,000,000 shares of Common Stock for issuance under the 1999 Plan. As of August 28, 2007, 225,000 options are outstanding, of which 152,396 are vested. Table of Contents 15. 401(k) Plan The Positron Corporation 401(k) Plan and Trust (the Plan ) covers all of the Company s employees who are United States citizens, at least 21 years of age and have completed at least one quarter of service with the Company. Pursuant to the Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and have the amount of such reduction contributed to the Plan. The Plan provides for the Company to make contributions in an amount equal to 25 percent of the participant s deferral contributions, up to 6 percent of the employee s compensation, as defined in the Plan agreement. The Company made no contributions in 2006 and 2005. The Board of Directors of the Company may authorize additional discretionary contributions; however, no such contributions were by the Company in 2006 or 2005. 16. Related Party Transactions Affiliated Companies In September 2006, the Company sold a refurbished HZL PET Imaging machine to Imagin Nuclear Partners ( INP ), a wholly-owned subsidiary of Imagin Molecular Corporation, an affiliate of the Company. The sales price of the machine was $200,000. The Company also billed $18,000 for time and expense related to installation. As of December 31, 2006 INP owes the Company $185,385. In 2006 sales to NPMS approximated $180,000. As of December 31, 2006 the Company has a receivable in the amount of $179,053 due from NPMS, for parts and materials purchased on behalf of the joint venture. Key Employee Incentive Compensation The Company has an incentive compensation plan for certain key employees and it s Chairman. The incentive compensation plan provides for annual bonus payments based upon achievement of certain corporate objectives as determined by the Company s compensation committee, subject to the approval of the board of directors. During 2006 the Company did not pay any bonus pursuant to the incentive compensation plan. 17. Commitments and Contingencies Employment Agreement Effective December 27, 2005, the Company entered into an employment agreement with Joseph G. Oliverio, President of the Company. Under the Agreement, Mr. Oliverio receives an initial base salary of $100,000 per annum which increases to $150,000 per annum on March 1, 2006. Mr. Oliverio also received an option grant exercisable for 7,500,000 shares of Common Stock at an exercise price of $0.05 per share. On the date of grant of the option 2,000,000 shares vested, with an additional 2,000,000 shares vesting on December 27, 2006 and the remainder on December 27, 2007. Mr. Oliverio is entitled to six months severance upon a termination "without cause". F- Table of Contents Non-Employee Directors' Stock Option Plan The 1999 Non-Employee Directors' Stock Option Plan ("Directors' Plan") provides for the automatic grant of an option to purchase 25,000 shares of Common Stock to non-employee directors upon their election or appointment to the Board, and subsequent annual grants also in the amount of 25,000 shares of Common Stock. The exercise price of the options is 85% of the fair market value of the Common Stock on the date of grant. The Directors' Plan is administered by the Board. Options granted under the Directors' Plan become exercisable in one of two ways: either in four equal annual installments, commencing on the first anniversary of the date of grant, or immediately but subject to the Company's right to repurchase, which repurchase right lapses in four equal annual installments, commencing on the first anniversary of the date of grant. To the extent that an option is not exercisable on the date that a director ceases to be a director of the Company, the unexercisable portion terminates. The Board has authorized up to an aggregate of 500,000 shares of Common Stock for issuance under the Directors' Plan. As of August 28, 2007, 250,000 fully vested options remain outstanding under the Directors' Plan. 1999 Stock Bonus Incentive Plan In October 1999, the Board adopted an Employee Stock Bonus Incentive Plan, which provides for the grant of bonus shares to any Company employee or consultant to recognize exceptional service and performance beyond the service recognized by the employee's salary or consultant's fee. The Board has authorized up to an aggregate of 1,000,000 shares of Common Stock for issuance as bonus awards under the Stock Bonus Plan. The Stock Bonus Plan is currently administered by the Board. Each grant of bonus shares is in an amount determined by the Board, up to a maximum of the participant's salary. The shares become exercisable according to a schedule to be established by the Board at the time of grant. As of August 28, 2007, 316,000 shares of Common Stock have been granted under the 1999 Stock Bonus Incentive Plan. 1999 Employee Stock Purchase Plan The Company's 1999 Employee Stock Purchase Plan ("Purchase Plan") was adopted by the Board of Directors and approved by the shareholders in 1999. A total of 500,000 shares of Common Stock have been reserved for issuance under the Purchase Plan, none of which has yet been issued. The Purchase Plan permits eligible employees to purchase Common Stock at a discount through payroll deductions during offering periods of up to 27 months. Offering periods generally will begin on the first trading day of a calendar quarter. The initial offering period began on January 1, 2000. The price at which stock is purchased under the Purchase Plan will be equal to 85% of the fair market value of Common Stock on the first or last day of the offering period, whichever is lower. No shares have been issued under the Purchase Plan at August 28, 2007. Amended and Restated 2005 Stock Incentive Plan Positron's Board administers the Amended and Restated 2005 Stock Incentive Plan ("2005 Plan"), which was adopted by the Board effective November 18, 2005. The 2005 Plan provides for the grant of options and stock to directors, officers, employees and consultants. The administrator is authorized to determine the terms of each award granted under the plan, including the number of shares, exercise price, term and exercisability. Options granted under the plan may be incentive stock options or nonqualified stock options. The exercise price of incentive stock options may not be less than 100% of the fair market value of the Common Stock as of the date of grant (110% of the fair market value in the case of an optionee who owns more than 10% of the total combined voting power of all classes of the Company's capital stock). Options may not be exercised more than ten years after the date of grant (five years in the case of 10% shareholders). Upon termination of employment for any reason other than death or disability, each option may be exercised for a period of 90 days; to the extent it is exercisable on the date of termination. In the case of a termination due to death or disability, an option will remain exercisable for a period of one year; to the extent it is exercisable on the date of termination. A total of 40,000,000 shares of Common Stock have been authorized for issuance under the 2005 Plan. As of August 28 2007, a total of 19,000,000 options have been granted under the 2005 Plan, none of which have been exercised, and of which 10,000,000 are fully vested. Table of Contents Royalty Agreements The Company acquired the know-how and patent rights for Positron Imaging from three entities: the Clayton Foundation, K. Lance Gould (formerly a director) and Nizar A. Mullani (also formerly a director.) Pursuant to agreements with each of them, the Company was obligated to pay royalties of up to 4.0% in the aggregate of gross revenues from sales, uses, leases, licensing or rentals of the relevant technology. Royalty obligations amounting to approximately $373,000 and $352,000 were included in liabilities at December 31, 2006 and 2005, respectively. Lease Agreements The Company operates in leased facilities under three separate operating leases, two of which are on a month-to-month basis and a third, for the IS2 facility in Canada, expires July 31, 2008. The rental rate for the month-to-month leased facilities was $5,600. Monthly rental charges for the IS2 facility were $8,300. The cost of leasing the Company s operating facility amounted to approximately $125,000 and $56,000 in 2006 and 2005, respectively. At December 31, 2006, approximate future minimum rental payments under operating leases are as follows: 2007 $ 97,480 2008 58,745 $ 156,225 Litigation From time to time the Company may be involved in various legal actions in the normal course of business for which the Company maintains insurance. The Company is currently not aware of any material litigation affecting the Company. 18. Loss Per Share The following information details the computation of basic and diluted loss per share: Year Ended December 31, (In thousands, except for per share data) 2006 2005 Numerator: Basic and diluted net loss: $ (6,586 ) $ (3,806 ) Denominator: Denominator for basic earnings per share-weighted average shares 81,508 65,044 Effect of dilutive securities Convertible Series A Preferred Stock -- -- Stock Warrants -- -- Stock Options -- -- Denominator for diluted earnings per share-adjusted weighted Average shares and assumed conversions 81,508 65,044 Basic and diluted loss per common share $ (0.08 ) $ (0.06 ) F- Table of Contents 2006 Stock Incentive Plan Positron's Board administers the 2006 Stock Incentive Plan ("2006 Plan"), which was adopted by the Board effective April 10, 2006. The 2006 Plan provides for the direct issuance of stock and grants of nonqualified stock options to directors, officers, employees and consultants. The administrator is authorized to determine the terms of each award granted under the plan, including the number of shares, exercise price, term and exercisability. Stock and options may be granted for services rendered or to be rendered. Options may not be exercised more than ten years after the date of grant. Upon termination of employment for any reason other than death or disability, each option may be exercised for a period of 90 days, to the extent it is exercisable on the date of termination. In the case of a termination due to death or disability, an option will remain exercisable for a period of one year, to the extent it is exercisable on the date of termination. A total of 5,000,000 shares of Common Stock have been authorized for issuance under the 2006 Plan. As of August 28, 2007, all 5,000,000 shares had been issued to consultants under the 2006 Plan. 2007 Omnibus Securities and Incentive Plan Positron's Board administers the 2007 Omnibus Securities and Incentive Plan ("2007 Plan"), which was adopted by the Board effective July 1, 2007. The 2007 Plan provides for the direct issuance of incentive stock options, non-qualified stock options, performance share awards, restricted stock awards, unrestricted stock awards or any combination thereof. to directors, officers, employees and consultants. The administrator is authorized to determine the terms of each award granted under the plan, including the number of shares, exercise price, term and exercisability. Stock and options may be granted for services rendered or to be rendered. Upon termination of employment for any reason other than death or disability, each option may be exercised for a period of 90 days, to the extent it is exercisable on the date of termination. In the case of a termination due to death or disability, an option will remain exercisable for a period of one year, to the extent it is exercisable on the date of termination. A total of 5,000,000 shares of Common Stock have been authorized for issuance under the 2007 Plan. As of August 28, 2007 no shares had been issued to consultants under the 2007 Plan. 401(k) Savings Plan The Company has a 401(k) Retirement Plan and Trust (the "401(k) Plan") which became effective as of January 1, 1989. Employees of the Company who have completed one-quarter year of service and have attained age 21 are eligible to participate in the 401(k) Plan. Subject to certain statutory limitations, a participant may elect to have his or her compensation reduced by up to 20% and have the Company contribute such amounts to the 401(k) Plan on his or her behalf ("Deferral Contributions"). The Company makes contributions in an amount equal to 25% of the participant's Deferral Contributions up to 6% of his/her compensation ("Employer Contributions"). Additionally, the Company may make such additional contributions, as it shall determine each year in its discretion. All Deferral and Employer Contributions made on behalf of a participant are allocated to his/her individual accounts and such participant is permitted to direct the investment of such accounts. A participant is fully vested in the current value of that portion of his/her accounts attributable to Deferral Contributions. A participant's interest in that portion of his/her accounts attributable to Employer Contributions is generally fully vested after five years of employment. Distributions under the 401(k) Plan are made upon termination of employment, retirement, disability and death. In addition, participants may make withdrawals in the event of severe hardship or after the participant attains age fifty-nine and one-half. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, so that contributions made under the 401(k) Plan, and income earned on contributions, are not taxable to participants until withdrawal from the 401(k) Plan. The Company did not make any contributions to the 401(k) Plan on behalf of employees in the year ended December 31, 2006. Policy with Respect to $1 Million Deduction Limit It is the Company's policy, where practical, to avail itself of all proper deductions under the Internal Revenue Code. Amendments to the Internal Revenue in 1993, limit, in certain circumstances, the deductibility of compensation in excess of $1 million paid to each of the five highest paid executives in one year. The total compensation of the executive officers did not exceed this deduction limitation in fiscal year 2006 or 2005. Table of Contents All common stock equivalents in the years ended December 31, 2006 and 2005 were excluded from the above calculation as their effect was anti-dilutive. 19. Segment Information and Major Customers The Company has operations in the United States and Canada. Selected financial data by geographic area was as follows (in thousands): 2006 2005 United States: Revenues $ 1,295 $ 762 Operating expenses 3,114 2,526 Net loss (5,657 ) (3,806 ) Canada: Revenues $ 918 -- Operating expenses 1,489 -- Net loss (929 ) -- The Company believes that all of its material operations are conducted in the servicing and sales of medical imaging devices and it currently reports as a single segment. During the years ended December 31, 2006 and 2005 the Company had a limited number of customers as follows: 2006 2005 Number of customers 18 8 Customers accounting for more than 10% of revenues -- 5 Percent of revenues derived from largest customer 9 % 28 % Percent of revenues derived from second largest customer 8 % 15 % 20. Subsequent Events Acquisition of IMAGIN Interest in IPT On January 26, 2007, the Company executed and consummated a Securities Purchase Agreement (the Agreement ) with IMAGIN, to acquire 11,523,000 shares of common stock IPT. The Shares represented approximately a 50.1% of IPT s issued and outstanding common stock. As a result of the acquisition of the Shares, the Company owns 100% of the common stock of IPT. As consideration for the shares, the Company and IMAGIN agreed to cancel a promissory note in the principal amount of $2,400,000 made by IMAGIN subsidiary, QMP and later assigned to IMAGIN. As of the date of the Agreement, the Company had been advised by IMAGIN that it had acquired all of QMP s interest in IPT as well as QMP's other holdings of the Company's related securities. Immediately following the acquisition of the Shares, IPT acquired all of the outstanding capital stock of the Company s wholly-owned subsidiary, QMT. The purchase price of the acquisition was $2,800,000, in the form of a promissory note made in favor of the Company, payable on or before July 1, 2008, and secured by a pledge of all of the issued and outstanding shares of QMT. Newly Formed Subsidiary On March 26, 2007, the Company formed Homeland Radiation Detection Systems, Inc., a Texas corporation and wholly-owned subsidiary ( HRDS ) HRDS has filed a provisional patent for production of a device that is capable of detecting illicit radioactive sources at a distance which the Company intends to develop and market for homeland security applications. Severance Obligation In March 2007, the Company paid Gary Brooks, the Company s former Chief Executive Officer, $58,325 as full settlement of the Company s severance obligation to Mr. Brooks pursuant to the severance agreement dated September 29, 2005. The Company has no further amounts due to Mr. Brooks under the severance agreement. F- Table of Contents LEGAL MATTERS The validity of the shares being offered hereby is being passed upon for us by Levy & Boonshoft, P.C. We received certain advice from our legal counsel in connection with the matters described herein. Such legal advice is solely for our benefit and not for any stockholder or prospective investor. Purchasers of the shares offered hereby are not entitled to rely on any such advice and should not consider any such counsel to represent them or their interests.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/PRTS_carparts_legal_matters.txt b/parsed_sections/legal_matters/2007/PRTS_carparts_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..614ef7018977cbbd01282d8d6cca5296d78b4ac9
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/PRTS_carparts_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Dorsey & Whitney LLP, Irvine, California. Legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Howard Rice Nemerovski Canady Falk & Rabkin, A Professional Corporation, San Francisco, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/SMCI_super_legal_matters.txt b/parsed_sections/legal_matters/2007/SMCI_super_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..67aeb4df29853775e572d4f2138f0e6e711a7473
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/SMCI_super_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the common stock offered will be passed upon for us by DLA Piper US LLP, East Palo Alto, California. Selected legal matters relating to this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/SPR_spirit_legal_matters.txt b/parsed_sections/legal_matters/2007/SPR_spirit_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cb1995bafe8785689ac7ce27caf1d90a4df77de1
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/SPR_spirit_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the shares of class A common stock offered hereby and certain other legal matters will be passed upon for us by Kaye Scholer LLP, New York, New York. The underwriters have been represented by Cravath, Swaine Moore LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/TFSL_tfs_legal_matters.txt b/parsed_sections/legal_matters/2007/TFSL_tfs_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..900b3af00657575dbbbd702d3c2b8cb78451c0e1
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/TFSL_tfs_legal_matters.txt
@@ -0,0 +1 @@
+legal matters regarding the stock offering will be passed upon for Sandler O Neill & Partners, L.P. by Muldoon Murphy & Aguggia LLP, Washington, D.C.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/TMUSZ_t-mobile_legal_matters.txt b/parsed_sections/legal_matters/2007/TMUSZ_t-mobile_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f4017ca96f1321b03114bd16023edc4c710e514c
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/TMUSZ_t-mobile_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters in connection with this rescission offer will be passed upon for us by Baker Botts L.L.P., Dallas, Texas.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/TRS_trimas_legal_matters.txt b/parsed_sections/legal_matters/2007/TRS_trimas_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ddbef6abce8086dee7dc103f5946a3f82a8e1828
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/TRS_trimas_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of common stock offered by this prospectus have been passed upon for us by Cahill Gordon & Reindel LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/ULTA_ulta_legal_matters.txt b/parsed_sections/legal_matters/2007/ULTA_ulta_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..24a33a30bccdeec79260a11502bf1a43ef821008
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/ULTA_ulta_legal_matters.txt
@@ -0,0 +1 @@
+Legal matters The validity of the common stock offered hereby will be passed upon for us by Latham Watkins LLP, Chicago, Illinois, and for the underwriters by Winston Strawn LLP, Chicago, Illinois. Latham Watkins LLP holds 27,106 shares of our common stock and a partner of Latham Watkins LLP and members of his family have an interest, through a living trust and a trust for the benefit of his children, in 64,822 shares of our common stock.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/UNG_united_legal_matters.txt b/parsed_sections/legal_matters/2007/UNG_united_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..870ebe954581438d66b268decfa2997d9921b122
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/UNG_united_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters Litigation and Claims Within the past 5 years of the date of this Prospectus, there have been no material administrative, civil or criminal actions against the General Partner, underwriter, or any principal or affiliate of either of them. This includes any actions pending, on appeal, concluded, threatened, or otherwise known to them. Legal Opinion Sutherland Asbill & Brennan LLP is counsel to advise USNG and the General Partner with respect to the preparation of units being offered hereby and has passed upon the validity of the units being issued hereunder. Sutherland Asbill & Brennan LLP has also provided the General Partner with its opinion with respect to federal income tax matters addressed herein. Experts The General Partner engaged an independent registered public accounting firm to audit USNG. Spicer Jeffries, LLP, an independent registered public accounting firm, has audited the financial statements of United States Natural Gas Fund, LP, at December 31, 2006 appearing in this Prospectus and in the registration statement and have been included herein in reliance upon the report of March 12, 2007 given on its authority of such firm as experts in accounting and auditing.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/USO_united_legal_matters.txt b/parsed_sections/legal_matters/2007/USO_united_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..45fe2ac4fe51077c335e13b2c6d94b6c98a9b9d5
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/USO_united_legal_matters.txt
@@ -0,0 +1 @@
+Legal Matters report containing an account statement, which will include a statement of income (loss) and a statement of changes in NAV, for the prescribed period. In addition, the account statement will disclose any material business dealings between the partnership, General Partner, commodity trading advisor (if any), futures commission merchant, or the principals thereof that previously have not been disclosed in the this Prospectus or any amendment thereto, other account statements or annual reports. USOF will provide information to its unitholders to the extent required by applicable SEC, CFTC, and American Stock Exchange requirements. An issuer, such as USOF, of exchange-traded securities may not always readily know the identities of the investors who own those securities. USOF will post the same information that would otherwise be provided in USOF s reports to limited partners described above including its monthly account statements, which will include, without limitation, USOF s NAV, on USOF s website (www.unitedstatesoilfund.com). Fiscal Year The fiscal year of USOF will initially be the calendar year. The General Partner may select an alternate fiscal year. Governing Law; Consent to Delaware Jurisdiction The rights of the General Partner, USOF, DTC (as registered owner of USOF s global certificate for units) and the unitholders, are governed by the laws of the State of Delaware. The General Partner, USOF and DTC and, by accepting units, each DTC Participant and each unitholder, consents to the jurisdiction of the courts of the State of Delaware and any federal courts located in Delaware. Such consent in not required for any person to assert a claim of Delaware jurisdiction over the General Partner or USOF. Legal Matters Litigation and Claims Within the past 5 years of the date of this Prospectus, there have been no material administrative, civil or criminal actions against the General Partner, underwriter, or any principal or affiliate of either of them. This includes any actions pending, on appeal, concluded, threatened, or otherwise known to them. Legal Opinion Sutherland Asbill & Brennan LLP is counsel to advise USOF and the General Partner with respect to the preparation of units being offered hereby and will pass upon the validity of the units being issued hereunder. Sutherland Asbill & Brennan LLP has also provided the General Partner with its opinion with respect to federal income tax matters addressed herein. Experts The General Partner, with the approval of its audit committee, engaged an independent registered public accounting firm to audit USOF. Spicer Jeffries LLP an independent registered public accounting firm, has audited the financial statements of United States Oil Fund, LP, at December 31, 2005 and of Victoria Bay Asset Management, LLC, at December 31, 2005, appearing in this Prospectus and in the registration statement and have been included herein in reliance upon the report of Spicer Jeffries LLP, given on its authority of such firm as experts in accounting and auditing.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/VNDA_vanda_legal_matters.txt b/parsed_sections/legal_matters/2007/VNDA_vanda_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5f86f7597c2eeba60386a1f5da9b61e429349bba
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/VNDA_vanda_legal_matters.txt
@@ -0,0 +1,18440 @@
+Legal
+ matters
+
+ 
+
+ Gunderson Dettmer Stough Villeneuve Franklin 
+ Hachigian, LLP will pass upon the validity of the common stock
+ offered by this prospectus. Hoffman, Warnick 
+ D Alessandro LLC, will pass upon certain intellectual
+ property matters. Davis Polk Wardwell will pass upon
+ certain legal matters for the underwriters.
+
+ 
+
+ Experts
+
+ 
+
+ The consolidated financial statements for the period from
+ March 13, 2003 (date of inception) to December 31,
+ 2003, and for the years ended December 31, 2004 and 2005
+ included in this prospectus have been so included in reliance on
+ the report of PricewaterhouseCoopers LLP, an independent
+ registered public accounting firm, given on the authority of
+ said firm as experts in auditing and accounting.
+
+ 
+
+ Where you can
+ find more information
+
+ 
+
+ We have filed with the Securities and Exchange Commission (SEC),
+ Washington, D.C. 20549, a registration statement on
+ Form S-1
+ under the Securities Act of 1933, with respect to our common
+ stock offered hereby. This prospectus, which forms part of the
+ registration statement, does not contain all of the information
+ set forth in the registration statement and the exhibits and
+ schedules to the registration statement. Some items are omitted
+ in accordance with the rules and regulations of the SEC. For
+ further information about us and our common stock, we refer you
+ to the registration statement and the exhibits and schedules to
+ the registration statement filed as part of the registration
+ statement, as well as the reports and other information that we
+ have filed with the SEC. Statements contained in this prospectus
+ as to the contents of any contract or other document filed as an
+ exhibit are qualified in all respects by reference to the actual
+ text of the exhibit. You may read and copy the registration
+ statement, including the exhibits and schedules to the
+ registration statement, as well as the reports and other
+ information we have filed with the SEC, at the SEC s Public
+ Reference Room at 100 F Street N.E., Washington, D.C.
+ 20549. You can obtain information on the operation of the Public
+ Reference Room by calling the SEC at
+ 1-800-SEC-0330.
+ In addition, the SEC maintains an Internet site at
+ www.sec.gov, from which you can electronically access the
+ registration statement, including the exhibits and schedules to
+ the registration statement.
+
+ 
+
+ 114
+
+ 
+
+ 
+
+ Index to
+ consolidated financial statements
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage
+ company)
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ Page(s)
+
+ 
+
+ Report of
+ Independent Registered Public Accounting Firm
+
+ 
+
+ 
+
+ F-2
+
+ Consolidated financial
+ statements December 31, 2004 and 2005
+ 
+
+ 
+
+ 
+
+ 
+
+ Balance
+ sheets
+
+ 
+
+ 
+
+ F-3
+
+ Statements of
+ operations
+
+ 
+
+ 
+
+ F-4
+
+ Statements of
+ changes in stockholders equity
+
+ 
+
+ 
+
+ F-5
+
+ Statements of cash
+ flows
+
+ 
+
+ 
+
+ F-7
+
+ Notes to
+ consolidated financial statements
+
+ 
+
+ 
+
+ F-8
+
+ Condensed Consolidated Financial
+ Statements (unaudited) December 31, 2005 and
+ September 30, 2006
+ 
+
+ 
+
+ 
+
+ 
+
+ Balance
+ sheets
+
+ 
+
+ 
+
+ F-32
+
+ Statements of
+ operations
+
+ 
+
+ 
+
+ F-33
+
+ Statements of cash
+ flows
+
+ 
+
+ 
+
+ F-35
+
+ Notes to condensed
+ consolidated financial statements
+
+ 
+
+ 
+
+ F-36
+
+ 
+
+ F-1
+
+ 
+
+ 
+
+ Report of
+ Independent Registered Public Accounting Firm
+
+ 
+
+ To the Board of Directors and Stockholders of
+
+ Vanda Pharmaceuticals Inc. (A development stage company):
+
+ 
+
+ In our opinion, the accompanying consolidated balance sheets and
+ the related consolidated statements of operations, changes in
+ stockholders equity and cash flows present fairly, in all
+ material respects, the financial position of Vanda
+ Pharmaceuticals Inc. and its subsidiary (a development stage
+ company) at December 31, 2004 and 2005, and the results of
+ operations and cash flows for the period from March 13,
+ 2003 (date of inception) to December 31, 2003 and the years
+ ended December 31, 2004 and 2005 and for the period from
+ March 13, 2003 (date of inception) to December 31,
+ 2005 in conformity with accounting principles generally accepted
+ in the United States of America. These financial statements are
+ the responsibility of the Company s management; our
+ responsibility is to express an opinion on these financial
+ statements based on our audits. We conducted our audits of these
+ statements in accordance with the standards of the Public
+ Company Accounting Oversight Board (United States). Those
+ standards require that we plan and perform the audit to obtain
+ reasonable assurance about whether the financial statements are
+ free of material misstatement. An audit includes examining, on a
+ test basis, evidence supporting the amounts and disclosures in
+ the financial statements, assessing the accounting principles
+ used and significant estimates made by management, and
+ evaluating the overall financial statement presentation. We
+ believe that our audits provide a reasonable basis for our
+ opinion.
+
+ 
+
+ /s/ PricewaterhouseCoopers
+ LLP
+
+ McLean, Virginia
+
+ February 15, 2006, except for Note 8
+
+ as to which the date is April 12, 2006
+
+ 
+
+ F-2
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Consolidated
+ Balance Sheets
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 2004
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Assets
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Current assets
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash and cash equivalents
+ 
+
+ 
+
+ $
+
+ 16,259,770
+
+ 
+
+ 
+
+ $
+
+ 21,012,815
+
+ 
+
+ Short-term investments
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 10,141,189
+
+ 
+
+ Prepaid expenses and other current
+ assets
+ 
+
+ 
+
+ 
+
+ 190,604
+
+ 
+
+ 
+
+ 
+
+ 2,217,960
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total current assets
+ 
+
+ 
+
+ 
+
+ 16,450,374
+
+ 
+
+ 
+
+ 
+
+ 33,371,964
+
+ 
+
+ Property and equipment, net
+ 
+
+ 
+
+ 
+
+ 1,251,867
+
+ 
+
+ 
+
+ 
+
+ 1,110,576
+
+ 
+
+ Deposits
+ 
+
+ 
+
+ 
+
+ 50,000
+
+ 
+
+ 
+
+ 
+
+ 840,000
+
+ 
+
+ Restricted cash
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 430,230
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total assets
+ 
+
+ 
+
+ $
+
+ 17,752,241
+
+ 
+
+ 
+
+ $
+
+ 35,752,770
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Liabilities and
+ stockholders 
+ equity
+ 
+
+ Current liabilities
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accounts payable
+ 
+
+ 
+
+ $
+
+ 718,606
+
+ 
+
+ 
+
+ $
+
+ 2,254,897
+
+ 
+
+ Accrued liabilities
+ 
+
+ 
+
+ 
+
+ 689,428
+
+ 
+
+ 
+
+ 
+
+ 2,528,091
+
+ 
+
+ Deferred rent and credit on lease
+ concession, current
+ 
+
+ 
+
+ 
+
+ 3,549
+
+ 
+
+ 
+
+ 
+
+ 8,131
+
+ 
+
+ Current portion of long-term debt
+ 
+
+ 
+
+ 
+
+ 173,929
+
+ 
+
+ 
+
+ 
+
+ 142,461
+
+ 
+
+ Current portion of capital lease
+ 
+
+ 
+
+ 
+
+ 37,241
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Deferred grant revenue
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 129,950
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total current liabilities
+ 
+
+ 
+
+ 
+
+ 1,622,753
+
+ 
+
+ 
+
+ 
+
+ 5,063,530
+
+ 
+
+ Deferred rent and credit on lease
+ concession, less current portion
+ 
+
+ 
+
+ 
+
+ 30,371
+
+ 
+
+ 
+
+ 
+
+ 24,433
+
+ 
+
+ Long-term debt, less current portion
+ 
+
+ 
+
+ 
+
+ 142,487
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Capital lease, less current portion
+ 
+
+ 
+
+ 
+
+ 13,043
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total liabilities
+ 
+
+ 
+
+ 
+
+ 1,808,654
+
+ 
+
+ 
+
+ 
+
+ 5,087,963
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Commitments
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Stockholders equity
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Series A Preferred
+ Stock, $0.001 par value; 10,000,000 shares authorized,
+ issued and outstanding at December 31, 2004 and 2005,
+ respectively; liquidation preference of $10,000,000
+ 
+
+ 
+
+ 
+
+ 9,963,541
+
+ 
+
+ 
+
+ 
+
+ 9,963,541
+
+ 
+
+ Series B Preferred
+ Stock, $0.001 par value; 42,276,437 shares authorized;
+ 15,040,654 and 42,276,437 shares issued and outstanding at
+ December 31, 2004 and 2005, respectively; liquidation
+ preference of $52,000,018
+ 
+
+ 
+
+ 
+
+ 18,345,023
+
+ 
+
+ 
+
+ 
+
+ 51,831,646
+
+ 
+
+ Common stock, $0.001 par
+ value; 50,000,000 and 70,000,000 shares authorized and
+ 3,020 and 98,945 shares issued and outstanding at
+ December 31, 2004 and 2005, respectively
+ 
+
+ 
+
+ 
+
+ 3
+
+ 
+
+ 
+
+ 
+
+ 99
+
+ 
+
+ Additional paid-in capital
+ 
+
+ 
+
+ 
+
+ 340,637
+
+ 
+
+ 
+
+ 
+
+ 23,982,981
+
+ 
+
+ Deferred stock-based compensation
+ 
+
+ 
+
+ 
+
+ (257,934
+
+ )
+
+ 
+
+ 
+
+ (18,766,443
+
+ )
+
+ Accumulated other comprehensive loss
+ 
+
+ 
+
+ 
+
+ (2,576
+
+ )
+
+ 
+
+ 
+
+ (17,609
+
+ )
+
+ Deficit accumulated during the
+ development stage
+ 
+
+ 
+
+ 
+
+ (12,445,107
+
+ )
+
+ 
+
+ 
+
+ (36,329,408
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total stockholders equity
+ 
+
+ 
+
+ $
+
+ 15,943,587
+
+ 
+
+ 
+
+ $
+
+ 30,664,807
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total liabilities and
+ stockholders equity
+ 
+
+ 
+
+ $
+
+ 17,752,241
+
+ 
+
+ 
+
+ $
+
+ 35,752,770
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes are an
+ integral part of these consolidated financial
+ statements.
+
+ 
+
+ F-3
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Consolidated
+ Statements of Operations
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ Year ended 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 2003
+
+ 
+
+ 2004
+
+ 
+
+ 2005
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ Revenues from services
+ 
+
+ 
+
+ $
+
+ 47,565
+
+ 
+
+ 
+
+ $
+
+ 33,980
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 81,545
+
+ 
+
+ Operating expenses:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Research and development
+ 
+
+ 
+
+ 
+
+ 2,010,532
+
+ 
+
+ 
+
+ 
+
+ 7,442,983
+
+ 
+
+ 
+
+ 
+
+ 16,890,615
+
+ 
+
+ 
+
+ 
+
+ 26,344,130
+
+ 
+
+ General and administrative
+ 
+
+ 
+
+ 
+
+ 1,052,659
+
+ 
+
+ 
+
+ 
+
+ 2,119,394
+
+ 
+
+ 
+
+ 
+
+ 7,396,038
+
+ 
+
+ 
+
+ 
+
+ 10,568,091
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total operating expenses
+ 
+
+ 
+
+ 
+
+ 3,063,191
+
+ 
+
+ 
+
+ 
+
+ 9,562,377
+
+ 
+
+ 
+
+ 
+
+ 24,286,653
+
+ 
+
+ 
+
+ 
+
+ 36,912,221
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Loss from operations
+ 
+
+ 
+
+ 
+
+ (3,015,626
+
+ )
+
+ 
+
+ 
+
+ (9,528,397
+
+ )
+
+ 
+
+ 
+
+ (24,286,653
+
+ )
+
+ 
+
+ 
+
+ (36,830,676
+
+ )
+
+ Other income (expense):
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Interest income
+ 
+
+ 
+
+ 
+
+ 52,595
+
+ 
+
+ 
+
+ 
+
+ 100,785
+
+ 
+
+ 
+
+ 
+
+ 435,537
+
+ 
+
+ 
+
+ 
+
+ 588,917
+
+ 
+
+ Interest expense
+ 
+
+ 
+
+ 
+
+ (8,090
+
+ )
+
+ 
+
+ 
+
+ (41,934
+
+ )
+
+ 
+
+ 
+
+ (25,629
+
+ )
+
+ 
+
+ 
+
+ (75,653
+
+ )
+
+ Other income
+ 
+
+ 
+
+ 
+
+ 300
+
+ 
+
+ 
+
+ 
+
+ 209
+
+ 
+
+ 
+
+ 
+
+ 93
+
+ 
+
+ 
+
+ 
+
+ 602
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total other income
+ 
+
+ 
+
+ 
+
+ 44,805
+
+ 
+
+ 
+
+ 
+
+ 59,060
+
+ 
+
+ 
+
+ 
+
+ 410,001
+
+ 
+
+ 
+
+ 
+
+ 513,866
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Loss before tax provision
+ 
+
+ 
+
+ 
+
+ (2,970,821
+
+ )
+
+ 
+
+ 
+
+ (9,469,337
+
+ )
+
+ 
+
+ 
+
+ (23,876,652
+
+ )
+
+ 
+
+ 
+
+ (36,316,810
+
+ )
+
+ Tax provision
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 4,949
+
+ 
+
+ 
+
+ 
+
+ 7,649
+
+ 
+
+ 
+
+ 
+
+ 12,598
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ 
+
+ (2,970,821
+
+ )
+
+ 
+
+ 
+
+ (9,474,286
+
+ )
+
+ 
+
+ 
+
+ (23,884,301
+
+ )
+
+ 
+
+ 
+
+ (36,329,408
+
+ )
+
+ Beneficial conversion
+ feature deemed dividend to preferred stockholders
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (33,486,623
+
+ )
+
+ 
+
+ 
+
+ (33,486,623
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss attributable to common
+ stockholders
+ 
+
+ 
+
+ $
+
+ (2,970,821
+
+ )
+
+ 
+
+ $
+
+ (9,474,286
+
+ )
+
+ 
+
+ $
+
+ (57,370,924
+
+ )
+
+ 
+
+ $
+
+ (69,816,031
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic and diluted net loss per
+ share attributable to common stockholders
+ 
+
+ 
+
+ $
+
+ (983.72
+
+ )
+
+ 
+
+ $
+
+ (3,137.18
+
+ )
+
+ 
+
+ $
+
+ (3,374.33
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shares used in calculation of basic
+ and diluted net loss per share attributable to common
+ stockholders
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 
+
+ 17,002
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes are an
+ integral part of these consolidated financial
+ statements.
+
+ 
+
+ F-4
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Statements
+ of Changes in Stockholders Equity
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Deficit
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accumulated
+
+ 
+
+ 
+
+ accumulated
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Series A
+
+ 
+
+ 
+
+ Series B
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Additional
+
+ 
+
+ 
+
+ Deferred
+
+ 
+
+ 
+
+ other
+
+ 
+
+ 
+
+ during the
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ preferred
+ stock
+
+ 
+
+ preferred
+ stock
+
+ 
+
+ Common
+ stock
+
+ 
+
+ paid-in
+
+ 
+
+ 
+
+ stock-based
+
+ 
+
+ 
+
+ comprehensive
+
+ 
+
+ 
+
+ development
+
+ 
+
+ 
+
+ Comprehensive
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ capital
+
+ 
+
+ compensation
+
+ 
+
+ loss
+
+ 
+
+ stage
+
+ 
+
+ loss
+
+ 
+
+ Total
+
+ 
+
+ 
+
+ Balances at March 13, 2003
+ (Inception)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ Issuance of Series A Preferred
+ Stock, net of issuance costs of $36,459
+ 
+
+ 
+
+ 
+
+ 10,000,000
+
+ 
+
+ 
+
+ 9,963,541
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 9,963,541
+
+ 
+
+ Issuance of Class A Common
+ Stock
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 3
+
+ 
+
+ 
+
+ 3,997
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 4,000
+
+ 
+
+ Issuance of warrants in connection
+ with capital lease
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 12,628
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 12,628
+
+ 
+
+ Comprehensive loss:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (2,970,821
+
+ )
+
+ 
+
+ 
+
+ (2,970,821
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cumulative translation adjustment
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (2,315
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (2,315
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Comprehensive loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (2,973,136
+
+ )
+
+ 
+
+ 
+
+ (2,973,136
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Balances at December 31,
+ 2003
+
+ 
+
+ 
+
+ 10,000,000
+
+ 
+
+ 
+
+ 9,963,541
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 3
+
+ 
+
+ 
+
+ 16,625
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (2,315
+
+ )
+
+ 
+
+ 
+
+ (2,970,821
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 7,007,033
+
+ 
+
+ Issuance of Series B Preferred
+ Stock, net of issuance costs of $154,982
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 15,040,654
+
+ 
+
+ 
+
+ 18,345,023
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 18,345,023
+
+ 
+
+ Issuance of warrants in connection
+ with consulting services
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 27,945
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 27,945
+
+ 
+
+ Deferred compensation associated
+ with stock options grants
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 281,130
+
+ 
+
+ 
+
+ (281,130
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Amortization of deferred
+ stock-based compensation
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 23,196
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 23,196
+
+ 
+
+ Expense related to accelerated
+ unvested stock options
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 14,937
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 14,937
+
+ 
+
+ Comprehensive loss:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (9,474,286
+
+ )
+
+ 
+
+ 
+
+ (9,474,286
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cumulative translation adjustment
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (261
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (261
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Comprehensive loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (9,474,547
+
+ )
+
+ 
+
+ 
+
+ (9,474,547
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ F-5
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Statements
+ of Changes in Stockholders Equity (continued)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Deficit
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accumulated
+
+ 
+
+ 
+
+ accumulated
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Series A
+
+ 
+
+ 
+
+ Series B
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Additional
+
+ 
+
+ 
+
+ Deferred
+
+ 
+
+ 
+
+ other
+
+ 
+
+ 
+
+ during the
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ preferred
+ stock
+
+ 
+
+ preferred
+ stock
+
+ 
+
+ Common
+ stock
+
+ 
+
+ paid-in
+
+ 
+
+ 
+
+ stock-based
+
+ 
+
+ 
+
+ comprehensive
+
+ 
+
+ 
+
+ development
+
+ 
+
+ 
+
+ Comprehensive
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ capital
+
+ 
+
+ compensation
+
+ 
+
+ loss
+
+ 
+
+ stage
+
+ 
+
+ loss
+
+ 
+
+ Total
+
+ 
+
+ 
+
+ Balances at December 31,
+ 2004
+
+ 
+
+ 
+
+ 10,000,000
+
+ 
+
+ 
+
+ 9,963,541
+
+ 
+
+ 
+
+ 15,040,654
+
+ 
+
+ 
+
+ 18,345,023
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 3
+
+ 
+
+ 
+
+ 340,637
+
+ 
+
+ 
+
+ 
+
+ (257,934
+
+ )
+
+ 
+
+ 
+
+ (2,576
+
+ )
+
+ 
+
+ 
+
+ (12,445,107
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 15,943,587
+
+ 
+
+ Issuance of Series B Preferred
+ Stock net of issuance costs of $13,391
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 27,235,783
+
+ 
+
+ 
+
+ 33,486,623
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 33,486,623
+
+ 
+
+ Issuance of common stock from
+ exercised stock options
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 95,925
+
+ 
+
+ 
+
+ 96
+
+ 
+
+ 
+
+ 31,658
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 31,754
+
+ 
+
+ Deferred compensation associated
+ with stock options grants
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 18,788,385
+
+ 
+
+ 
+
+ 
+
+ (18,788,385
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Deferred compensation associated
+ with remeasurement of unvested stock grants
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 1,702,625
+
+ 
+
+ 
+
+ 
+
+ (1,702,625
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Expense related to remeasurement of
+ stock options
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 3,119,676
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 3,119,676
+
+ 
+
+ Amortization of deferred
+ stock-based compensation
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 1,982,501
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 1,982,501
+
+ 
+
+ Beneficial conversion
+ feature deemed dividend on issuance of Series B
+ Preferred Stock
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 33,486,623
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 33,486,623
+
+ 
+
+ Beneficial conversion
+ feature accretion of beneficial conversion feature for
+ Series B Preferred Stock
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (33,486,623
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (33,486,623
+
+ )
+
+ Comprehensive loss:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (23,884,301
+
+ )
+
+ 
+
+ 
+
+ (23,884,301
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cumulative translation adjustment
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (17,711
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (17,711
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Unrealized gains on short-term
+ investments
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2,678
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2,678
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Comprehensive loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (23,899,334
+
+ )
+
+ 
+
+ 
+
+ (23,899,334
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Balances at December 31,
+ 2005
+
+ 
+
+ 
+
+ 10,000,000
+
+ 
+
+ $
+
+ 9,963,541
+
+ 
+
+ 
+
+ 42,276,437
+
+ 
+
+ $
+
+ 51,831,646
+
+ 
+
+ 
+
+ 98,945
+
+ 
+
+ $
+
+ 99
+
+ 
+
+ $
+
+ 23,982,981
+
+ 
+
+ 
+
+ $
+
+ (18,766,443
+
+ )
+
+ 
+
+ $
+
+ (17,609
+
+ )
+
+ 
+
+ $
+
+ (36,329,408
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 30,664,807
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ F-6
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage
+ company)
+
+ Consolidated
+ Statements of Cash Flows
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ Year ended 
+
+ 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2003
+
+ 
+
+ 
+
+ 2004
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash flows from operating
+ activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ $
+
+ (2,970,821
+
+ )
+
+ 
+
+ $
+
+ (9,474,286
+
+ )
+
+ 
+
+ $
+
+ (23,884,301
+
+ )
+
+ 
+
+ $
+
+ (36,329,408
+
+ )
+
+ Adjustments to reconcile net loss
+ to net cash used in operating activities
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Depreciation and amortization
+ 
+
+ 
+
+ 
+
+ 79,891
+
+ 
+
+ 
+
+ 
+
+ 376,709
+
+ 
+
+ 
+
+ 
+
+ 423,828
+
+ 
+
+ 
+
+ 
+
+ 880,428
+
+ 
+
+ Stock-based compensation
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 66,078
+
+ 
+
+ 
+
+ 
+
+ 5,102,177
+
+ 
+
+ 
+
+ 
+
+ 5,168,255
+
+ 
+
+ Accretion of discount on investments
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (42,335
+
+ )
+
+ 
+
+ 
+
+ (42,335
+
+ )
+
+ Changes in assets and liabilities:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accounts receivable
+ 
+
+ 
+
+ 
+
+ (28,489
+
+ )
+
+ 
+
+ 
+
+ 28,489
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Prepaid expenses and other current
+ assets
+ 
+
+ 
+
+ 
+
+ (97,044
+
+ )
+
+ 
+
+ 
+
+ (93,024
+
+ )
+
+ 
+
+ 
+
+ (2,027,544
+
+ )
+
+ 
+
+ 
+
+ (2,217,960
+
+ )
+
+ Deposits
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (50,000
+
+ )
+
+ 
+
+ 
+
+ (790,000
+
+ )
+
+ 
+
+ 
+
+ (840,000
+
+ )
+
+ Accounts payable
+ 
+
+ 
+
+ 
+
+ 458,608
+
+ 
+
+ 
+
+ 
+
+ 415,506
+
+ 
+
+ 
+
+ 
+
+ 1,514,868
+
+ 
+
+ 
+
+ 
+
+ 2,254,897
+
+ 
+
+ Accrued expenses
+ 
+
+ 
+
+ 
+
+ 432,474
+
+ 
+
+ 
+
+ 
+
+ 99,335
+
+ 
+
+ 
+
+ 
+
+ 1,860,539
+
+ 
+
+ 
+
+ 
+
+ 2,528,091
+
+ 
+
+ Deferred grant revenue
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 129,950
+
+ 
+
+ 
+
+ 
+
+ 129,950
+
+ 
+
+ Deferred rent and credit on lease
+ concession
+ 
+
+ 
+
+ 
+
+ 17,661
+
+ 
+
+ 
+
+ 
+
+ 16,259
+
+ 
+
+ 
+
+ 
+
+ (1,356
+
+ )
+
+ 
+
+ 
+
+ 32,564
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash used in operating
+ activities
+ 
+
+ 
+
+ 
+
+ (2,107,720
+
+ )
+
+ 
+
+ 
+
+ (8,614,934
+
+ )
+
+ 
+
+ 
+
+ (17,714,174
+
+ )
+
+ 
+
+ 
+
+ (28,435,518
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash flows from investing
+ activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Purchases of property and equipment
+ 
+
+ 
+
+ 
+
+ (1,161,921
+
+ )
+
+ 
+
+ 
+
+ (414,531
+
+ )
+
+ 
+
+ 
+
+ (291,978
+
+ )
+
+ 
+
+ 
+
+ (1,868,430
+
+ )
+
+ Purchases of short-term investments
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (11,846,176
+
+ )
+
+ 
+
+ 
+
+ (11,846,176
+
+ )
+
+ Maturities of short-term investments
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 1,750,000
+
+ 
+
+ 
+
+ 
+
+ 1,750,000
+
+ 
+
+ Investments in restricted cash
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (430,230
+
+ )
+
+ 
+
+ 
+
+ (430,230
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash used in investing
+ activities
+ 
+
+ 
+
+ 
+
+ (1,161,921
+
+ )
+
+ 
+
+ 
+
+ (414,531
+
+ )
+
+ 
+
+ 
+
+ (10,818,384
+
+ )
+
+ 
+
+ 
+
+ (12,394,836
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash flows from financing
+ activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Proceeds from borrowings on note
+ payable
+ 
+
+ 
+
+ 
+
+ 515,147
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 515,147
+
+ 
+
+ Principal payments on obligations
+ under capital lease
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (42,887
+
+ )
+
+ 
+
+ 
+
+ (51,569
+
+ )
+
+ 
+
+ 
+
+ (94,456
+
+ )
+
+ Principal payments on note payable
+ 
+
+ 
+
+ 
+
+ (45,010
+
+ )
+
+ 
+
+ 
+
+ (156,446
+
+ )
+
+ 
+
+ 
+
+ (172,617
+
+ )
+
+ 
+
+ 
+
+ (374,073
+
+ )
+
+ Proceeds from the issuance of
+ preferred stock, net of issuance costs
+ 
+
+ 
+
+ 
+
+ 9,963,541
+
+ 
+
+ 
+
+ 
+
+ 18,345,023
+
+ 
+
+ 
+
+ 
+
+ 33,486,623
+
+ 
+
+ 
+
+ 
+
+ 61,795,187
+
+ 
+
+ Proceeds from exercise of stock
+ options
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 31,754
+
+ 
+
+ 
+
+ 
+
+ 31,754
+
+ 
+
+ Proceeds from issuance of common
+ stock
+ 
+
+ 
+
+ 
+
+ 4,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 4,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash provided by financing
+ activities
+ 
+
+ 
+
+ 
+
+ 10,437,678
+
+ 
+
+ 
+
+ 
+
+ 18,145,690
+
+ 
+
+ 
+
+ 
+
+ 33,294,191
+
+ 
+
+ 
+
+ 
+
+ 61,877,559
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Effect of foreign currency
+ translation
+ 
+
+ 
+
+ 
+
+ (2,315
+
+ )
+
+ 
+
+ 
+
+ (22,177
+
+ )
+
+ 
+
+ 
+
+ (8,588
+
+ )
+
+ 
+
+ 
+
+ (34,390
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net increase in cash and cash
+ equivalents
+ 
+
+ 
+
+ 
+
+ 7,165,722
+
+ 
+
+ 
+
+ 
+
+ 9,094,048
+
+ 
+
+ 
+
+ 
+
+ 4,753,045
+
+ 
+
+ 
+
+ 
+
+ 21,012,815
+
+ 
+
+ Cash and cash
+ equivalents
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Beginning of period
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 7,165,722
+
+ 
+
+ 
+
+ 
+
+ 16,259,770
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ End of period
+ 
+
+ 
+
+ $
+
+ 7,165,722
+
+ 
+
+ 
+
+ $
+
+ 16,259,770
+
+ 
+
+ 
+
+ $
+
+ 21,012,815
+
+ 
+
+ 
+
+ $
+
+ 21,012,815
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Supplemental
+ disclosure
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash payments for interest
+ 
+
+ 
+
+ $
+
+ 4,221
+
+ 
+
+ 
+
+ $
+
+ 41,354
+
+ 
+
+ 
+
+ $
+
+ 25,043
+
+ 
+
+ 
+
+ $
+
+ 70,618
+
+ 
+
+ Supplemental disclosure of
+ noncash financing activities
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Equipment acquired through
+ obligation under capital lease
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 95,305
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 95,305
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes are an
+ integral part of these consolidated financial
+ statements.
+
+ 
+
+ F-7
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Notes
+ to consolidated financial statements
+
+ Vanda Pharmaceuticals
+ Inc.
+
+ (A development stage
+ company)
+
+ Notes to consolidated financial
+ statements (continued)
+
+ 
+
+ 
+ 
+
+ 
+ 1. 
+
+ 
+ Business
+ organization and presentation
+
+ 
+
+ Business
+ organization
+
+ 
+
+ Vanda Pharmaceuticals Inc. ( Vanda or the
+ Company ) was founded in November 2002 and commenced
+ its operations on March 13, 2003. Vanda is a
+ biopharmaceutical company focused on the development and
+ commercialization of small molecule therapeutics, with exclusive
+ worldwide commercial rights to three product candidates in
+ clinical development for various central nervous system
+ disorders. The Company s lead product candidate,
+ iloperidone, is a compound for the treatment of schizophrenia
+ and bipolar disorder and is in a Phase III trial for
+ schizophrenia. The Company s second product candidate,
+ VEC-162, is a compound for the treatment of sleep and mood
+ disorders and has recently completed a Phase III trial for
+ transient insomnia. VEC-162 is also ready for Phase II
+ trials for the treatment of depression. The Company s third
+ product candidate, VSF-173, is a compound for the treatment of
+ excessive sleepiness and is ready for a Phase II trial.
+ Each of these product candidates benefits from new chemical
+ entity (NCE) patent protection and may offer substantial
+ advantages over approved therapies.
+
+ 
+
+ The Company expects to complete its Phase III trial for
+ iloperidone in the first half of 2007. If this trial is
+ successful, the Company will file a New Drug Application (NDA)
+ for approval with the Food and Drug Administration (FDA) later
+ that year. The Company recently completed an efficacy and safety
+ Phase III trial of VEC-162 for insomnia and announced
+ top-line results in a Phase III trial in November 2006. The
+ Company also expects to begin a Phase II trial of VSF-173
+ for excessive sleepiness in the second half of 2006.
+
+ 
+
+ Vanda Pharmaceuticals Pte. Ltd. ( Vanda
+ Singapore ) is a limited liability company domiciled and
+ incorporated in Singapore on February 24, 2003 as a
+ wholly-owned subsidiary of Vanda Pharmaceuticals Inc. Vanda
+ Singapore s principal activity is drug research using
+ genetic and genomic sciences.
+
+ 
+
+ Capital
+ resources
+
+ 
+
+ Although the Company was incorporated in November 2002, the
+ Company did not commence operations until March 13, 2003,
+ the date on which the Company first issued capital stock and
+ began incurring expenses. Prior to March 13, 2003, the
+ Company did not have any assets or liabilities, directly incur
+ any expenses, or indirectly incur any expenses by a related
+ party. Since its inception, the Company has devoted
+ substantially all of its efforts to business planning, research
+ and development, recruiting management and technical staff,
+ acquiring operating assets and raising capital. Accordingly, the
+ Company is considered to be in the development stage as defined
+ in Statement of Financial Accounting Standards (SFAS)
+ No. 7, Accounting and Reporting by Development Stage
+ Enterprises.
+
+ 
+
+ The Company s activities will necessitate significant uses
+ of working capital throughout 2006 and beyond. Additionally, the
+ Company s capital requirements will depend on many factors,
+ including the success of the Company s research and
+ development efforts, payments received under contractual
+ agreements with other parties, if any, and the status of
+ competitive products. The Company plans to continue financing
+ operations with the cash received from the private placement of
+ Series B Preferred Stock (see Note 8) and the
+ Company plans to seek additional sources of funding in 2006. The
+ Company s failure to raise additional capital, as and when
+
+ 
+
+ F-8
+
+ 
+
+ needed, could have a negative impact on the financial condition
+ and the ability of the Company to execute its business strategy.
+ In the absence of our ability to raise additional private equity
+ capital, we are also prepared and have the ability to curtail
+ our existing clinical trial commitments and extend them in such
+ a manner so that we have operating funds through the end of 2007.
+
+ 
+
+ Basis of
+ presentation
+
+ 
+
+ The accompanying consolidated financial statements include the
+ accounts of the Company and its wholly-owned subsidiary. All
+ inter-company balances and transactions have been eliminated.
+ The accompanying consolidated financial statements are prepared
+ in accordance with accounting principles generally accepted in
+ the United States of America.
+
+ 
+
+ Unaudited pro
+ forma balance sheet
+
+ 
+
+ The unaudited pro forma balance sheet gives effect to the
+ conversion of the Series A and B Preferred Stock in the
+ event of an initial public offering ( IPO ), as if it
+ occurred on December 31, 2005. The shares of the
+ Company s Series A and B Preferred Stock shall be
+ converted into common stock on a
+ 3.309755-to-one
+ basis automatically upon consummation of an IPO, after giving
+ effect to the reverse split of the Company s common stock
+ described in Note 8 below.
+
+ 
+
+ 
+ 
+
+ 
+ 2. 
+
+ 
+ Summary of
+ significant accounting policies
+
+ 
+
+ Cash and cash
+ equivalents
+
+ 
+
+ For purposes of the consolidated balance sheet and consolidated
+ statement of cash flows, cash equivalents represent all
+ highly-liquid investments with an original maturity date of
+ three months or less. At December 31, 2005, the Company
+ maintained all of its cash and cash equivalents in two financial
+ institutions. Deposits held with these institutions may exceed
+ the amount of insurance provided on such deposits. Generally,
+ these deposits may be redeemed upon demand, and the Company
+ believes there is minimal risk of losses on such cash balances.
+
+ 
+
+ Short-term
+ investments
+
+ 
+
+ The Company maintained highly-liquid investments throughout the
+ period ending December 31, 2005, which were classified as
+ available-for-sale
+ because they can be utilized for current operations. The
+ Company s investment policy requires the selection of
+ high-quality issuers, with bond ratings of AAA to A1+/P1. These
+ available-for-sale
+ securities are accounted for at their fair market value and
+ unrealized gains and losses on these securities, if any, are
+ included in accumulated other comprehensive loss in
+ stockholders equity. Interest and dividend income is
+ recorded when earned and included in interest income. Premiums
+ and discounts on short-term investments are amortized and
+ accreted to maturity and included in interest income. The
+ Company uses the specific identification method in computing
+ realized gains and losses on the sale of investments, which
+ would be included in the consolidated statements of operations
+ when generated. For the period from March 13, 2003
+ (inception) to December 31, 2003 and for the years ended
+ December 31, 2004 and 2005, the Company did not have any
+ realized gains or losses.
+
+ 
+
+ F-9
+
+ 
+
+ The following is a summary of the Company s
+ available-for-sale 
+ short-term investments as of December 31, 2005:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Gross
+
+ 
+
+ 
+
+ 
+
+ Gross
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Amortized
+
+ 
+
+ 
+
+ 
+
+ unrealized
+
+ 
+
+ 
+
+ 
+
+ unrealized
+
+ 
+
+ 
+
+ 
+
+ Fair market
+
+ 
+
+ 
+
+ 
+
+ 
+
+ cost
+
+ 
+
+ 
+
+ gains
+
+ 
+
+ 
+
+ losses
+
+ 
+
+ 
+
+ value
+
+ 
+
+ 
+
+ U.S. government agencies
+ 
+
+ 
+
+ $
+
+ 6,054,023
+
+ 
+
+ 
+
+ $
+
+ 847
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 6,054,870
+
+ 
+
+ U.S. corporate debt
+ 
+
+ 
+
+ 
+
+ 4,084,488
+
+ 
+
+ 
+
+ 
+
+ 1,831
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 4,086,319
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 10,138,511
+
+ 
+
+ 
+
+ $
+
+ 2,678
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 10,141,189
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Concentrations of
+ credit risk
+
+ 
+
+ Financial instruments which potentially subject the Company to
+ significant concentrations of credit risk consist primarily of
+ cash and cash equivalents and short-term investments. The
+ Company places its cash and cash equivalents and short-term
+ investments with highly-rated financial institutions.
+
+ 
+
+ Fair value of
+ financial instruments
+
+ 
+
+ The carrying amounts of the Company s financial
+ instruments, which include cash and cash equivalents, short-term
+ investments, and accounts payable, approximate their fair values
+ due to their short maturities. The fair value of the long-term
+ debt approximates its carrying value based on the variable
+ nature of interest rates and current market rates available to
+ the Company.
+
+ 
+
+ Property and
+ equipment
+
+ 
+
+ Property and equipment are stated at cost less accumulated
+ depreciation and amortization. Depreciation of property and
+ equipment is provided on a straight-line basis over the
+ estimated useful lives of the assets, generally three to seven
+ years. Amortization of leasehold improvements is provided on a
+ straight-line basis over the shorter of their estimated useful
+ life or the lease term. The costs of additions and betterments
+ are capitalized, and repairs and maintenance costs are charged
+ to operations in the period incurred.
+
+ 
+
+ Upon retirement or disposition of property and equipment, the
+ cost and accumulated depreciation are removed from the accounts
+ and any resulting gain or loss is reflected in general and
+ administrative expenses for that period.
+
+ 
+
+ Impairment of
+ long-lived assets
+
+ 
+
+ The Company assesses the recoverability of its long-lived assets
+ by determining whether the carrying value of such assets can be
+ recovered through undiscounted future operating cash flows. If
+ impairment is indicated, the Company measures the amount of such
+ impairment by comparing the fair value to the carrying value.
+ There have been no indicators of impairment through
+ December 31, 2005.
+
+ 
+
+ F-10
+
+ 
+
+ Restricted
+ cash
+
+ 
+
+ During 2005, in conjunction with the lease of the office and
+ laboratory space building, the Company provided the landlord
+ with a letter of credit, which was collateralized with a
+ restricted cash deposit in the amount of $430,230 (see
+ Note 6). The deposit is recorded as non-current restricted
+ cash at December 31, 2005.
+
+ 
+
+ Deferred grant
+ revenue
+
+ 
+
+ Vanda Singapore entered into an agreement with the Economic
+ Development Board of Singapore ( EDB ) to provide a
+ grant for a Development Project. During 2005, the Company
+ submitted its first asset-related claim with the EDB and
+ received a cash payment of $127,866. Given that the Company has
+ not met the conditions attached to the grant, the payment has
+ been recorded as deferred grant revenue on the balance sheet at
+ December 31, 2005. Management expects that a resolution is
+ likely to be reached with the EDB in the near future.
+
+ 
+
+ Translation of
+ foreign currency
+
+ 
+
+ The functional currency of the Company s wholly-owned
+ foreign subsidiary located in Singapore is the local currency.
+ Assets and liabilities of the Company s foreign subsidiary
+ are translated to United States dollars based on exchange rates
+ at the end of the reporting period. Income and expense items are
+ translated at weighted average exchange rates prevailing during
+ the reporting period. Translation adjustments are accumulated in
+ a separate component of stockholder s equity. Translation
+ gains or losses are included in the determination of operating
+ results.
+
+ 
+
+ Other
+ comprehensive income (loss)
+
+ 
+
+ SFAS No. 130, Reporting Comprehensive Income,
+ requires a full set of general-purpose financial statements
+ to include the reporting of comprehensive income. 
+ Other comprehensive loss is composed of two components, net loss
+ and other comprehensive income. At December 31, 2004 and
+ 2005, other comprehensive loss of $2,576 and $17,609,
+ respectively, consists of cumulative translation adjustments due
+ to foreign currency and unrealized gains on short-term
+ investments.
+
+ 
+
+ Revenue
+ recognition
+
+ 
+
+ Revenue is recognized upon delivery of products to customers.
+ Revenue earned under research and development contracts are
+ recognized in accordance with the proportional performance
+ method outlined in Staff Accounting Bulletin No. 104
+ whereby the extent of progress toward completion is measured on
+ the
+ cost-to-cost
+ basis; however, revenue recognized at any point will not exceed
+ the cash received. When the current estimates of total contract
+ revenue and contract cost indicate a loss, a provision for the
+ entire loss on the contract is made in the period which it
+ becomes probable. All costs related to these agreements are
+ expensed as incurred. Revenue is derived principally from
+ consulting agreements the Company entered into during its
+ start-up
+ phase to defray research costs. Vanda completed its obligations
+ under these agreements during the year ended December 31,
+ 2004, and no longer seeks such arrangements.
+
+ 
+
+ The Company will use the substantive milestone payment method
+ for its revenues recognition policy. Under this method, revenue
+ is recognized when all milestones to be received under
+ contractual arrangements are determined to be substantive,
+ at-risk and the culmination of an
+
+ 
+
+ F-11
+
+ 
+
+ earnings process. Substantive milestones are payments that are
+ conditioned upon an event requiring substantive effort, when the
+ amount of the milestone is reasonable relative to the time,
+ effort and risk involved in achieving the milestones and when
+ the milestones are reasonable relative to each other and the
+ amount of any up-front payment. If these criteria are not met,
+ the timing of the recognition of revenue from the milestone
+ payment may be deferred.
+
+ 
+
+ Research and
+ development expenses
+
+ 
+
+ Research and development costs are expensed as incurred and
+ include the cost of salaries, building costs, utilities,
+ allocation of indirect costs, and expenses to third parties who
+ conduct research and development, pursuant to development and
+ consulting agreements, on behalf of the Company. Costs related
+ to the acquisitions of intellectual property are expensed as
+ incurred since the underlying technology associated with these
+ acquisitions were made in connection with the Company s
+ research and development efforts and have no alternative future
+ use.
+
+ 
+
+ General and
+ administrative expenses
+
+ 
+
+ General and administrative costs are expensed as incurred and
+ consist primarily of salaries and other related costs for
+ personnel serving executive, finance, accounting, information
+ technology and human resource functions. Other costs include
+ facility costs not otherwise included in research and
+ development expense and professional fees for legal and
+ accounting services.
+
+ 
+
+ Interest income
+ and expense
+
+ 
+
+ Interest income consists of interest earned on the
+ Company s cash and cash equivalents and short-term
+ investments. Interest expense consists of interest incurred on
+ equipment debt.
+
+ 
+
+ Accounting for
+ stock-based compensation
+
+ 
+
+ As provided by SFAS No. 123, Accounting for
+ Stock-Based Compensation (SFAS 123), the Company has
+ elected to continue to account for its stock-based compensation
+ programs according to the provisions of Accounting Principles
+ Board Opinion No. 25, (APB 25) Accounting for
+ Stock Issued to Employees. Accordingly, compensation expense
+ has been recognized to the extent of employee or director
+ services rendered based on the intrinsic value of compensatory
+ options or shares granted under the plans. Under APB 25,
+ compensation expense is recognized over the vesting period of
+ the option to the extent that the fair value of the stock
+ exceeds the exercise price of the stock at the date of grant.
+
+ 
+
+ Variable stock-based compensation awards are amortized and
+ expensed in accordance with Financial Accounting Standards Board
+ ( FASB ) Interpretation No. 28, Accounting for
+ Stock Appreciation Rights and Other Variable Stock Option Plan
+ or Award Plans, an accelerated vesting model. Under this
+ model, all stock based employee compensation charges are
+ amortized over the vesting periods of the individual stock
+ awards.
+
+ 
+
+ Had the Company determined compensation cost based on the fair
+ value at the grant date for its stock options under
+ SFAS 123, the Company s net loss and basic and diluted
+ net loss
+
+ 
+
+ F-12
+
+ 
+
+ attributable to common stockholders per share would have been
+ changed to the following pro forma amounts:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ Year ended
+ December 31,
+
+ 
+
+ 
+
+ 2003
+
+ 
+
+ 2004
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ Net loss attributable to common
+ stockholders
+ 
+
+ 
+
+ $
+
+ (2,970,821
+
+ )
+
+ 
+
+ $
+
+ (9,474,286
+
+ )
+
+ 
+
+ $
+
+ (57,370,924
+
+ )
+
+ Add: Stock based employee
+ compensation expense included in net loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 38,133
+
+ 
+
+ 
+
+ 
+
+ 5,102,177
+
+ 
+
+ Less: Stock-based employee
+ compensation expense determined under SFAS 123
+ 
+
+ 
+
+ 
+
+ (33,160
+
+ )
+
+ 
+
+ 
+
+ (57,954
+
+ )
+
+ 
+
+ 
+
+ (5,167,246
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Pro forma net loss attributable to
+ common stockholders
+ 
+
+ 
+
+ $
+
+ (3,003,981
+
+ )
+
+ 
+
+ $
+
+ (9,494,107
+
+ )
+
+ 
+
+ $
+
+ (57,435,993
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss per share:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic and diluted, net loss
+ attributable to common stockholders as reported
+ 
+
+ 
+
+ $
+
+ (983.72
+
+ )
+
+ 
+
+ $
+
+ (3,137.18
+
+ )
+
+ 
+
+ $
+
+ (3,374.33
+
+ )
+
+ 
+
+ 
+
+ 
+
+ The weighted average fair value of an option granted during the
+ period from March 13, 2003 (inception) to December 31,
+ 2003 and years ended December 31, 2004 and 2005 was $1.06,
+ $3.97 and $14.89 respectively. The fair value of each option
+ grant is estimated on the date of the grant using the
+ Black-Scholes option pricing model with the following
+ assumptions for each year:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ Year ended
+ December 31,
+
+ 
+
+ 
+
+ 2003
+
+ 
+
+ 2004
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ Expected dividend yield
+ 
+
+ 
+
+ 
+
+ 0%
+
+ 
+
+ 
+
+ 
+
+ 0%
+
+ 
+
+ 
+
+ 0%
+
+ 
+
+ Expected volatility
+ 
+
+ 
+
+ 
+
+ 0%
+
+ 
+
+ 
+
+ 
+
+ 67%
+
+ 
+
+ 
+
+ 67%-68%
+
+ 
+
+ Expected term (years)
+ 
+
+ 
+
+ 
+
+ 10
+
+ 
+
+ 
+
+ 
+
+ 5
+
+ 
+
+ 
+
+ 5
+
+ 
+
+ Weighted average risk-free
+ interest rate
+ 
+
+ 
+
+ 
+
+ 3.65%
+
+ 
+
+ 
+
+ 
+
+ 3.42%
+
+ 
+
+ 
+
+ 4.00%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Given the lack of an active public market for our common stock,
+ the Company s board of directors determined the fair value
+ of the Company s common stock for stock option awards and
+ the Company did not employ a third party valuation firm to
+ determine fair value. In establishing the Company s
+ estimates of fair value, the Company considered the guidance set
+ forth in the AICPA Practice Guide, Valuation of
+ Privately-Held-Company Equity Securities Issued as
+ Compensation, and made retrospective determinations of fair
+ value. Information on stock
+
+ 
+
+ F-13
+
+ 
+
+ option grants, net of forfeitures, during the previous two years
+ ended December 31, 2005 is summarized as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Fair market
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ value estimate
+
+ 
+
+ 
+
+ 
+
+ Date
+ of
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Number
+ of
+
+ 
+
+ 
+
+ Exercise
+
+ 
+
+ 
+
+ per
+ common
+
+ 
+
+ 
+
+ Intrinsic
+ value
+
+ 
+
+ Issuance
+
+ 
+
+ Type of equity
+ issuance
+
+ 
+
+ options
+ granted
+
+ 
+
+ price(1)
+
+ 
+
+ share
+
+ 
+
+ per
+ share
+
+ 
+
+ 
+
+ 
+
+ 06/15/04
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 3,443
+
+ 
+
+ $
+
+ 0.33
+
+ 
+
+ $
+
+ 3.21
+
+ 
+
+ $
+
+ 2.88
+
+ 
+
+ 09/01/04
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 91,668
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 4.07
+
+ 
+
+ 
+
+ 3.74
+
+ 
+
+ 12/06/04
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 777
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 5.69
+
+ 
+
+ 
+
+ 5.36
+
+ 
+
+ 02/10/05
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 209,893
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 10.52
+
+ 
+
+ 
+
+ 10.19
+
+ 
+
+ 04/05/05
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 27,974
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 15.99
+
+ 
+
+ 
+
+ 15.66
+
+ 
+
+ 08/15/05
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 15,559
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 16.85
+
+ 
+
+ 
+
+ 16.52
+
+ 
+
+ 09/28/05
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 620,973
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 16.85
+
+ 
+
+ 
+
+ 16.52
+
+ 
+
+ 10/03/05
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 906
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 17.18
+
+ 
+
+ 
+
+ 16.85
+
+ 
+
+ 11/14/05
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 83,087
+
+ 
+
+ 
+
+ 0.83
+
+ 
+
+ 
+
+ 17.18
+
+ 
+
+ 
+
+ 16.35
+
+ 
+
+ 12/29/05
+
+ 
+
+ 
+
+ Employee Options
+ 
+
+ 
+
+ 
+
+ 358,847
+
+ 
+
+ 
+
+ 4.73
+
+ 
+
+ 
+
+ 17.18
+
+ 
+
+ 
+
+ 12.45
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ (1) 
+ 
+ The Company s board of directors approved a modification to
+ all outstanding stock option awards that were granted prior to
+ February 10, 2005, repricing the options from their
+ original exercise price of $1.32 to $0.33. According to
+ FIN 44, the result of such a modification is to account for
+ the modified stock option awards as variable from the date of
+ the modification to the date the awards are exercised,
+ forfeited, or cancelled. The Company remeasured the modified
+ awards that were outstanding at the end of each quarter during
+ the year ended December 31, 2005.
+
+ 
+
+ Stock
+ warrants
+
+ 
+
+ The Company accounts for warrants granted to consultants and
+ advisors under SFAS 123 and Emerging Issues Task Force
+ Issue 96-18,
+ Accounting for Equity Investments that are Issued to Other
+ Than Employees for Acquiring or in Conjunction with Selling
+ Goods or Services,
+ ( EITF 96-18 ).
+ As such, warrants granted to non-employees are periodically
+ re-measured and expense is incurred during their vesting terms.
+
+ 
+
+ Income
+ taxes
+
+ 
+
+ The Company accounts for income taxes under the liability method
+ in accordance with provisions of SFAS No. 109,
+ Accounting for Income Taxes, ( SFAS 109 )
+ which requires companies to account for deferred income taxes
+ using the asset and liability method. Under the asset and
+ liability method, current income tax expense or benefit is the
+ amount of income taxes expected to be payable or refundable for
+ the current year. A deferred income tax asset or liability is
+ recognized for future tax consequences attributable to
+ differences between the financial statement carrying amounts of
+ existing assets and liabilities and their respective tax bases
+ and tax credits and loss carryforwards. Deferred tax assets are
+ reduced by a valuation allowance when, in the opinion of
+ management, it is more likely than not that some portion or all
+ of the deferred tax assets will not be realized. Tax rate
+ changes are reflected in income during the period such changes
+ are enacted. Changes in ownership may limit the amount of net
+ operating loss carryforwards that can be utilized in the future
+ to offset taxable income.
+
+ 
+
+ F-14
+
+ 
+
+ Net loss per
+ share
+
+ 
+
+ Net loss attributable to common stockholders per share is
+ calculated in accordance with SFAS No. 128,
+ Earnings per Share, and Staff Accounting Bulletin
+ ( SAB ) No. 98. Basic earnings per share
+ ( EPS ) is calculated by dividing the net income or
+ loss attributable to common stockholders by the weighted average
+ number of common shares outstanding, reduced by the weighted
+ average unvested common shares subject to repurchase.
+
+ 
+
+ Diluted EPS is computed by dividing the net income or loss
+ attributable to common stockholders by the weighted average
+ number of other potential common stock outstanding for the
+ period. Other potential common stock include Series A and B
+ Preferred Stock, stock options and warrants but only to the
+ extent that their inclusion is dilutive. The Company incurred a
+ net loss in all periods presented, causing inclusion of any
+ potentially dilutive securities to have an anti-dilutive affect,
+ resulting in dilutive loss per share attributable to common
+ stockholders and basic loss per share attributable to common
+ stockholders being equivalent. The Company did not have any
+ common shares issued for nominal consideration as defined under
+ the terms of SAB No. 98, which would be included in
+ EPS calculations.
+
+ 
+
+ 
+
+ F-15
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ Year ended
+ December 31,
+
+ 
+
+ 
+
+ 2003
+
+ 
+
+ 2004
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ Historical:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Numerator:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ $
+
+ (2,970,821
+
+ )
+
+ 
+
+ $
+
+ (9,474,286
+
+ )
+
+ 
+
+ $
+
+ (23,884,301
+
+ )
+
+ Beneficial conversion
+ feature deemed dividend to preferred stockholders
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (33,486,623
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss attributable to common
+ stockholders
+ 
+
+ 
+
+ $
+
+ (2,970,821
+
+ )
+
+ 
+
+ $
+
+ (9,474,286
+
+ )
+
+ 
+
+ $
+
+ (57,370,924
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Denominator:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Weighted average common shares
+ outstanding
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 
+
+ 30,346
+
+ 
+
+ Weighted average unvested
+ common shares subject to repurchase
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (13,344
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Denominator for basic and diluted
+ net loss per share
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 
+
+ 3,020
+
+ 
+
+ 
+
+ 
+
+ 17,002
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic and diluted net loss per
+ share attributable to common stockholders
+ 
+
+ 
+
+ $
+
+ (983.72
+
+ )
+
+ 
+
+ $
+
+ (3,137.18
+
+ )
+
+ 
+
+ $
+
+ (3,374.33
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Historical outstanding
+ anti-dilutive securities not included in diluted net loss per
+ share calculation:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Series A and B Preferred
+ Stock(1)
+ 
+
+ 
+
+ 
+
+ 3,021,368
+
+ 
+
+ 
+
+ 
+
+ 7,565,703
+
+ 
+
+ 
+
+ 
+
+ 15,794,632
+
+ 
+
+ Options to purchase common stock
+ 
+
+ 
+
+ 
+
+ 236,204
+
+ 
+
+ 
+
+ 
+
+ 314,961
+
+ 
+
+ 
+
+ 
+
+ 1,532,540
+
+ 
+
+ Warrants to purchase common stock
+ 
+
+ 
+
+ 
+
+ 13,626
+
+ 
+
+ 
+
+ 
+
+ 50,335
+
+ 
+
+ 
+
+ 
+
+ 50,335
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 3,271,198
+
+ 
+
+ 
+
+ 
+
+ 7,930,999
+
+ 
+
+ 
+
+ 
+
+ 17,377,507
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (1) Common stock equivalents assuming conversion.
+
+ 
+
+ The unaudited pro forma shares used to compute basic and diluted
+ net loss per share is the weighted average shares of common
+ stock outstanding, reduced by the weighted average unvested
+ common shares subject to repurchase, and includes the assumed
+ conversion of the Series A and B Preferred Stock into
+ shares of common stock as of January 1, 2005 or the actual
+ date of issuance if later.
+
+ F-16
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Year ended 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Pro forma
+ (unaudited):
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Numerator:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Pro forma net loss attributable to
+ common stockholders
+ 
+
+ 
+
+ $
+
+ (57,370,924
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Denominator:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Weighted average common shares
+ outstanding
+ 
+
+ 
+
+ 
+
+ 17,002
+
+ 
+
+ Pro forma adjustments to reflect
+ assumed weighted average effect on conversion of preferred stock
+ 
+
+ 
+
+ 
+
+ 8,948,015
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Pro forma shares used to compute
+ basic and diluted net loss per share
+ 
+
+ 
+
+ 
+
+ 8,965,017
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic and diluted pro forma net
+ loss per share applicable to common stockholders
+ 
+
+ 
+
+ $
+
+ (6.40
+
+ )
+
+ 
+
+ 
+
+ 
+
+ Certain risks and
+ uncertainties
+
+ 
+
+ The Company s product candidates under development require
+ approval from the Food and Drug Administration (FDA) or other
+ international regulatory agencies prior to commercial sales.
+ There can be no assurance the products will receive the
+ necessary clearance. If the Company is denied clearance or
+ clearance is delayed, it may have a material adverse impact on
+ the Company.
+
+ 
+
+ The Company s products are concentrated in
+ rapidly-changing, highly-competitive markets, which are
+ characterized by rapid technological advances, changes in
+ customer requirements and evolving regulatory requirements and
+ industry standards. Any failure by the Company to anticipate or
+ to respond adequately to technological developments in its
+ industry, changes in customer requirements or changes in
+ regulatory requirements or industry standards, or any
+ significant delays in the development or introduction of
+ products or services, could have a material adverse effect on
+ the Company s business, operating results and future cash
+ flows.
+
+ 
+
+ The Company depends on single source suppliers for critical raw
+ materials for manufacturing, as well as other components
+ required for the administration of its product candidates. The
+ loss of these suppliers could delay the clinical trials or
+ prevent or delay commercialization of the product candidates.
+
+ 
+
+ Segment
+ information
+
+ 
+
+ Management has determined that the Company operates in one
+ business segment which is the development and commercialization
+ of pharmaceutical products.
+
+ 
+
+ Use of
+ estimates
+
+ 
+
+ The preparation of financial statements in conformity with
+ accounting principles generally accepted in the United States of
+ America requires management to make estimates that affect the
+ reported amounts of assets and liabilities at the date of the
+ financial statements, disclosure of contingent assets and
+ liabilities, and the reported amounts of revenue and expenses
+ during the reporting period. Actual results could differ from
+ those estimates.
+
+ 
+
+ F-17
+
+ 
+
+ Recent accounting
+ pronouncements
+
+ 
+
+ In December 2004, the FASB issued SFAS No. 123R,
+ Share-Based Payment, a revision of
+ SFAS No. 123, Accounting for Stock-based
+ Compensation. SFAS 123R requires companies to recognize
+ expense associated with share-based compensation arrangements,
+ including employee stock options, using a fair value-based
+ option pricing model, and eliminates the alternative to use
+ APB 25 s intrinsic method of accounting for
+ share-based payments. In accordance with the new pronouncement,
+ the Company plans to begin recognizing the expense associated
+ with its share-based payments, as determined using a
+ fair-value-based method, in its statements of operations
+ beginning on January 1, 2006. Adoption of the expense
+ provisions of SFAS 123R are expected to have a material
+ impact on the Company s results of operations and net loss
+ per share. The standard generally allows two alternative
+ transition methods in the year of adoption modified
+ prospective application and retroactive application with
+ restatement of prior financial statements to include the same
+ amounts that were previously included in the pro forma
+ disclosures. On January 1, 2006 the Company adopted
+ SFAS 123R using the modified prospective method of
+ implementation and adopted the accelerated vesting method.
+ According to the modified prospective method the previously
+ issued financial statements will not be adjusted and the
+ deferred compensation balances recorded within the
+ shareholders equity will be eliminated as of
+ January 1, 2006 against the additional paid-in capital
+ account. On January 1, 2006, there was approximately
+ $19.7 million in unamortized compensation expense under the
+ fair value method that will be recognized in the future over the
+ remaining service periods through 2009.
+
+ 
+
+ In order to provide implementation guidance related to
+ SFAS 123R, the Securities and Exchange Commission
+ ( SEC ) issued Staff Accounting Bulletin
+ ( SAB ) No. 107, Share-Based Payment in
+ March 2005. SAB 107 provides guidance on numerous issues
+ such as valuation methods (including assumptions such as
+ expected volatility and expected term), the classification of
+ compensation expense, capitalization of compensation cost
+ related to share-based payment arrangements, the accounting for
+ income tax effects of share-based payment arrangements upon
+ adoption of SFAS 123R, and disclosures in MD A
+ subsequent to adoption of SFAS 123R.
+
+ 
+
+ SFAS No. 154, Accounting Changes and Error
+ Corrections a Replacement of APB Opinion No. 20 and
+ FASB Statement No. 3 was issued by the FASB in May
+ 2005. This Statement replaces APB Opinion No. 20,
+ Accounting Changes, and FASB Statement No. 3,
+ Reporting Accounting Changes in Interim Financial
+ Statements, and changes the requirements for the accounting
+ for and reporting of a change in accounting principle.
+ SFAS No. 154 applies to all voluntary changes in
+ accounting principle and requires retrospective application to
+ prior periods financial statements of changes in
+ accounting principle, unless it is impracticable to determine
+ either the period-specific effects or the cumulative effect of
+ the change. This Statement also requires that a change in
+ depreciation, amortization, or depletion method for long-lived,
+ non-financial assets be accounted for as a change in accounting
+ estimate affected by a change in accounting principle. This
+ statement is effective for accounting changes and corrections of
+ errors made in fiscal years beginning after December 15,
+ 2005. SFAS No. 154 is not expected to have a material
+ effect on the Company s consolidated financial statements.
+
+ 
+
+ In November 2005, the FASB Staff issued FASB Staff Position
+ ( FSP )
+ FAS 115-1,
+ The Meaning of
+ Other-Than-Temporary
+ Impairment and Its Application to Certain Investments. FSP
+ FAS 115-1
+
+ 
+
+ F-18
+
+ 
+
+ addresses the determination as to when an investment is
+ considered impaired, whether that impairment is other than
+ temporary, and the measurement of an impairment loss. This FSP
+ also includes accounting considerations subsequent to the
+ recognition of an
+ other-than-temporary
+ impairment and requires certain disclosures about unrealized
+ losses that have not been recognized as
+ other-than-temporary
+ impairments. The guidance in this FSP amends FASB Statements
+ No. 115, Accounting for Certain Investments in Debt and
+ Equity Securities, and No. 124, Accounting for
+ Certain Investments Held by
+ Not-for-Profit
+ Organizations, and APB Opinion No. 18, The Equity
+ Method of Accounting for Investments in Common Stock. The
+ guidance in this FSP shall be applied to reporting periods
+ beginning after December 15, 2005. Earlier application is
+ permitted. FSP
+ FAS 115-1
+ is not expected to have a material effect on the Company s
+ consolidated financial statements.
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 3. 
+
+ 
+ Property and
+ equipment
+
+ 
+
+ Property and equipment at cost:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2004
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Computer equipment
+ 
+
+ 
+
+ $
+
+ 698,405
+
+ 
+
+ 
+
+ $
+
+ 739,001
+
+ 
+
+ Laboratory equipment
+ 
+
+ 
+
+ 
+
+ 681,455
+
+ 
+
+ 
+
+ 
+
+ 730,232
+
+ 
+
+ Furniture and fixtures
+ 
+
+ 
+
+ 
+
+ 29,309
+
+ 
+
+ 
+
+ 
+
+ 101,556
+
+ 
+
+ Leasehold improvements
+ 
+
+ 
+
+ 
+
+ 304,972
+
+ 
+
+ 
+
+ 
+
+ 302,228
+
+ 
+
+ Construction in progress
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 120,851
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 1,714,141
+
+ 
+
+ 
+
+ 
+
+ 1,993,868
+
+ 
+
+ Less accumulated depreciation
+ and amortization
+ 
+
+ 
+
+ 
+
+ (462,274
+
+ )
+
+ 
+
+ 
+
+ (883,292
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 1,251,867
+
+ 
+
+ 
+
+ $
+
+ 1,110,576
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Depreciation and amortization expense for the period from
+ March 13, 2003 (inception) to December 31, 2003 and
+ years ended December 31, 2004 and 2005 was $79,891,
+ $376,709 and $423,828, respectively.
+
+ 
+
+ 
+ 
+
+ 
+ 4. 
+
+ 
+ Accrued
+ expenses
+
+ 
+
+ Accrued expenses consist of the following:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 2004
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Bonus accrual
+ 
+
+ 
+
+ $
+
+ 284,143
+
+ 
+
+ 
+
+ $
+
+ 530,311
+
+ 
+
+ Accrued professional fees
+ 
+
+ 
+
+ 
+
+ 192,977
+
+ 
+
+ 
+
+ 
+
+ 71,000
+
+ 
+
+ Accrued research and development
+ expenses
+ 
+
+ 
+
+ 
+
+ 172,730
+
+ 
+
+ 
+
+ 
+
+ 1,862,288
+
+ 
+
+ Employee benefits
+ 
+
+ 
+
+ 
+
+ 33,680
+
+ 
+
+ 
+
+ 
+
+ 46,063
+
+ 
+
+ Other accrued expenses
+ 
+
+ 
+
+ 
+
+ 5,898
+
+ 
+
+ 
+
+ 
+
+ 18,429
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total accrued expenses
+ 
+
+ 
+
+ $
+
+ 689,428
+
+ 
+
+ 
+
+ $
+
+ 2,528,091
+
+ 
+
+ 
+
+ 
+
+ 
+
+ F-19
+
+ 
+
+ 
+ 
+
+ 
+ 5. 
+
+ 
+ Line of credit
+ facility
+
+ 
+
+ In 2003, the Company entered into a $515,147 line of credit
+ facility to finance the purchase of specified equipment based on
+ lender-approved schedules. The interest rate was fixed at
+ 9.3% per annum. The Company has granted a security interest
+ in the assets purchased under the credit line. During 2003, the
+ full line of credit amount was drawn down. During 2004 and 2005,
+ the Company had no draw downs under the line of credit. During
+ 2004 and 2005, the Company repaid $156,446 and $172,617 on the
+ line of credit, respectively. The total indebtedness relating to
+ this line of credit was $316,416 and $142,461 as of
+ December 31, 2004 and 2005, respectively.
+
+ 
+
+ Interest expense for the line of credit facility for the period
+ from March 13, 2003 (inception) to December 31, 2003
+ and the years ended December 31, 2004 and 2005 was $3,971,
+ $41,668, and $21,887, respectively.
+
+ 
+
+ The following is a schedule of remaining principal payments
+ under borrowings as of December 31, 2005:
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 2006
+ 
+
+ 
+
+ $
+
+ 146,944
+
+ 
+
+ Less: Portion representing interest
+ 
+
+ 
+
+ 
+
+ 4,483
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Current portion
+ 
+
+ 
+
+ $
+
+ 142,461
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 6. 
+
+ 
+ Commitments
+
+ 
+
+ Lease
+ agreements
+
+ 
+
+ In 2003, the Company entered into a five-year non-cancelable
+ operating lease agreement for office and laboratory space. The
+ lease expires in June 2008. The lease contains an option to
+ renew for an additional five years on the same terms and
+ conditions. The lease contains a 3% annual escalation.
+
+ 
+
+ In August 2005, the Company entered into a ten-year, six-month
+ non-cancelable operating lease agreement for office and
+ laboratory space at a new office complex, which is renewable for
+ an additional five-year period at the end of the original term.
+ The lease expires in June 2016. The Company will take possession
+ of the lease space during 2006. The lease includes a rent
+ abatement and scheduled base rent increases over the term of the
+ lease. The total amount of the base rent payments and rent
+ abatement will be charged to expense on a straight-line method
+ over the term of the lease. In conjunction with a letter of
+ credit, the Company collateralized the operating lease with a
+ restricted cash deposit in the amount of $430,230 in September
+ 2005, which is recorded as non-current restricted cash at
+ December 31, 2005.
+
+ 
+
+ In 2004, the Company entered into a capital lease obligation at
+ an interest rate of 7.5%. The lease obligation was payable in
+ monthly installments of $3,312 through April 2006. The Company
+ capitalized the equipment in accordance with Statement of
+ Financial Accounting Standard No. 13, Accounting for
+ Leases (SFAS 13). SFAS 13 requires the
+ capitalization of leases meeting certain criteria, with the
+ related asset being recorded in property and equipment and an
+ offsetting amount recorded as a liability. During 2005, the
+ Company repaid the capital lease obligation in full.
+
+ 
+
+ F-20
+
+ 
+
+ The following is a schedule of future minimum lease payments for
+ non-cancelable operating leases as of December 31, 2005:
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 2006
+ 
+
+ 
+
+ $
+
+ 503,064
+
+ 
+
+ 2007
+ 
+
+ 
+
+ 
+
+ 642,347
+
+ 
+
+ 2008
+ 
+
+ 
+
+ 
+
+ 536,404
+
+ 
+
+ 2009
+ 
+
+ 
+
+ 
+
+ 427,260
+
+ 
+
+ 2010
+ 
+
+ 
+
+ 
+
+ 440,182
+
+ 
+
+ Thereafter
+ 
+
+ 
+
+ 
+
+ 2,669,569
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 5,218,826
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total rent expense for the period from March 13, 2003
+ (inception) through December 31, 2003 and the years ended
+ December 31, 2004 and 2005 was $143,174, $315,241 and
+ 299,234, respectively.
+
+ 
+
+ License and
+ clinical agreements
+
+ 
+
+ License
+ agreements
+
+ 
+
+ In June 2004, the Company acquired exclusive rights to develop
+ and commercialize iloperidone through a sublicense agreement
+ with Novartis AG ( Novartis ). In consideration for
+ this license, the Company paid Novartis an initial license fee
+ of $500,000, which was immediately expensed to research and
+ development expenses on the Consolidated Statements of
+ Operations for the year ended December 31, 2004. The
+ Company is obligated to make future milestone payments to
+ Novartis of less than $100 million in the aggregate (the
+ majority of which are tied to sales milestones), as well as
+ royalty payments to Novartis which, as a percentage of net
+ sales, is in the mid-twenties. The Company s rights with
+ respect to these patents and to commercialize iloperidone may
+ terminate in whole or in part if the Company breaches its
+ royalty obligations, covenants in the sublicense regarding our
+ financial condition or certain restrictions in the sublicense
+ regarding other development activities.
+
+ 
+
+ In February 2004, the Company entered into a license agreement
+ with Bristol-Myers Squibb (BMS) under which the Company received
+ an exclusive worldwide license under certain patents and patent
+ applications to develop and commercialize VEC-162. In partial
+ consideration for the license, the Company paid BMS an initial
+ license fee of $500,000, which was immediately expensed in
+ research and development expenses on the Consolidated Statements
+ of Operations for the year ended December 31, 2004. The
+ Company is obligated to make future milestone payments to BMS of
+ less than $40 million in the aggregate (the majority of
+ which are tied to sales milestones) as well as royalty payments
+ based on the net sales of VEC-162 at a rate which, as a
+ percentage of net sales, is in the low teens. The Company is
+ also obligated under this agreement to pay BMS a royalty on
+ certain payments (excluding royalties) that the Company receives
+ from a third party in connection with any sublicensing
+ arrangement, at a rate in the mid-twenties. Either party may
+ terminate the agreement under certain circumstances.
+
+ 
+
+ In June 2004, the Company entered into a license agreement with
+ Novartis under which the Company received an exclusive worldwide
+ license to develop and commercialize VSF-173. In consideration
+ for the license, the Company paid Novartis an initial license
+ fee of $500,000,
+
+ 
+
+ F-21
+
+ 
+
+ which was immediately expensed in research and development
+ expenses on the Consolidated Statements of Operations for the
+ year ended December 31, 2004. The Company is also obligated
+ to make future milestone payments to Novartis of less than
+ $50 million in the aggregate (the majority of which are
+ tied to sales milestones) and royalty payments which, as a
+ percentage of net sales, is in the low to mid teens. Either
+ party may terminate the agreement under certain circumstances,
+ including a material breach of the agreement by the other.
+
+ 
+
+ Clinical
+ agreements
+
+ 
+
+ During 2004 and 2005, the Company entered into agreements with
+ clinical organizations to provide services relating to
+ iloperidone and VEC-162 under fee service arrangements. The
+ Company incurred a total of $915,631 and $6,305,044 in charges
+ under these arrangements during the years ended
+ December 31, 2004 and 2005, respectively. $3,003,843 of
+ these charges during the year ended December 31, 2005 were
+ incurred under agreements that have expired; the other
+ $3,301,201 in charges were incurred for clinical services
+ rendered in connection with the Company s current
+ Phase III trial for Iloperidone and
+ VEC-162.
+
+ 
+
+ The Company s current agreements for clinical services may
+ be terminated on no more than 60 days notice without
+ incurring additional charges (other than charges for work
+ completed but not paid for through the effective date of
+ termination and other costs incurred by the Company s
+ contractors in closing out work in progress as of the effective
+ date of termination). Assuming that the Company s upcoming
+ Phase III trials for iloperidone and VEC-162 are completed
+ in accordance with our expectations, the Company will incur
+ estimated additional charges of approximately $20.9 million
+ and $9.9 million from such contractual obligations during
+ the years ended December 31, 2006 and 2007, respectively.
+
+ 
+
+ 
+ 
+
+ 
+ 7. 
+
+ 
+ Related party
+ transactions
+
+ 
+
+ From time to time, the Company reimbursed Care Capital, LLC
+ ( Care ), an affiliate of the majority shareholder of
+ the Company, for certain expenses paid by Care on behalf of the
+ Company. The Company reimbursed Care for approximately $299,000
+ and $54,000 for the period from March 13, 2003 (inception)
+ through December 31, 2003 and the year ended
+ December 31, 2004, respectively.
+
+ 
+
+ The Company also used the services of a Care employee and
+ reimbursed Care for such personnel services related to occupancy
+ and salary expenses incurred on behalf of the Company.
+ Reimbursements related to such expenses were approximately
+ $34,000 and approximately $49,000 for the period from
+ March 13, 2003 (inception) through December 31, 2003
+ and the year ended December 31, 2004, respectively.
+
+ 
+
+ There were no related party transactions during 2005.
+
+ 
+
+ 
+ 
+
+ 
+ 8. 
+
+ 
+ Preferred and
+ common stock
+
+ 
+
+ Reverse stock
+ split
+
+ 
+
+ In March 2006, the board of directors approved a
+ one-for-3.309755
+ reverse stock split of the Company s common stock to be
+ effected upon the effectiveness of the Company s initial
+ public offering. All historical common stock and per share
+ common stock information has been changed to reflect this
+ reverse stock split. Preferred stock information has not been
+ changed
+
+ 
+
+ F-22
+
+ 
+
+ except to reflect the
+ 3.309755-to-one
+ conversion ratio in effect after giving effect to this reverse
+ stock split.
+
+ 
+
+ Series A
+ Preferred Stock and Class A Common Stock
+
+ 
+
+ In March 2003, the Company closed a private placement of its
+ securities and raised approximately $10.0 million. The
+ Company sold 100 shares of newly issued Class A Common
+ Stock at a per share price of $40.00 and 10,000,000 shares
+ of newly-issued Series A Preferred Stock at a per share
+ price of $1.00 a share.
+
+ 
+
+ The 100 shares of Class A Common Stock converted into
+ 10,000 shares of common stock in September 2004
+ (3,020 shares of common stock after giving effect to the
+ reverse stock split discussed in this Note 8). No
+ Series A Common Stock is currently authorized or
+ outstanding. All share information in the financial statements
+ has been retroactively adjusted to reflect the effect of the
+ conversion as if it had occurred at the beginning of the
+ earliest period presented.
+
+ 
+
+ Series B
+ Preferred Stock
+
+ 
+
+ In September 2004, the Company closed a private placement of
+ 15,040,654 shares of Series B Preferred Stock for
+ approximately $18.5 million.
+
+ 
+
+ In September 2005, the Company closed an additional private
+ placement of 15,040,654 shares of Series B Preferred
+ Stock for approximately $18.5 million.
+
+ 
+
+ In December 2005, the Company closed an additional private
+ placement of 12,195,129 shares of Series B Preferred
+ Stock for approximately $15.0 million.
+
+ 
+
+ Voting
+ rights
+
+ 
+
+ The holders of preferred stock shall vote together with the
+ holders of the outstanding shares of common stock, and not as a
+ separate class or series, on an
+ as-converted-to-common-stock
+ basis. So long as at least 10,528,457 shares of
+ Series B Preferred Stock remain outstanding, the holders of
+ the outstanding shares of Series B Preferred Stock, voting
+ together as a class and to the exclusion of all other classes of
+ capital stock of the Company, shall be entitled to elect three
+ (3) members of the board of directors (the
+ Series B Preferred Directors ). So long as at
+ least 3,500,000 shares of Series A Preferred Stock
+ remain outstanding, the holders of the outstanding shares of
+ Series A Preferred Stock, voting together as a class and to
+ the exclusion of all other classes of capital stock of the
+ Company, shall be entitled to elect three (3) members of
+ the board of directors (the Series A Preferred
+ Directors and, together with the Series B Preferred
+ Directors, the Preferred Directors ). Any remaining
+ directors shall be appointed upon the mutual agreement of a
+ majority of the Series A Preferred Directors and the
+ Series B Preferred Directors (the General
+ Directors ), provided that one of the General Directors
+ shall be the chief executive officer of the Company.
+
+ 
+
+ Dividends
+
+ 
+
+ The holder of each then outstanding share of Series A
+ Preferred Stock and the holder of each then outstanding share of
+ Series B Preferred Stock shall be entitled to receive
+ dividends payable out of funds legally available therefor when,
+ as and if declared by the board of directors of the Company.
+ Such dividends shall be payable on parity with the holders of
+ the common stock and
+
+ 
+
+ F-23
+
+ 
+
+ any such dividend shall be distributed ratably among the holders
+ of the common stock and the holders of the preferred stock as if
+ all such shares of preferred stock were to convert into common
+ stock. The right to such dividends shall not be cumulative, and
+ no right shall accrue to holders of preferred stock. Dividends,
+ if paid, or if declared and set apart for payment, must be paid,
+ or declared and set apart for payment, on all outstanding shares
+ of the preferred stock contemporaneously.
+
+ 
+
+ Liquidation
+ preference
+
+ 
+
+ In the event of any voluntary or involuntary dissolution,
+ liquidation or winding up of the affairs of the Company (a
+ Liquidation Event ), after payment or provision for
+ payment of the debts and other liabilities of the Company, the
+ holders of each share of Series A Preferred Stock and each
+ share of Series B Preferred Stock shall be entitled to
+ receive, on a pari passu basis out of the assets of the Company,
+ an amount equal to the liquidation preference. The liquidation
+ preference per share of Series A Preferred Stock as of any
+ particular date (the Series A Liquidation
+ Preference ) shall be the greater of the Original
+ Series A Purchase Price or the amount per share of
+ Series A Preferred Stock that the holder of the number of
+ shares of common stock issuable upon conversion thereof would
+ receive upon any such Liquidation Event. The liquidation
+ preference per share of Series B Preferred Stock as of any
+ particular date (the Series B Liquidation
+ Preference and, together with the Series A
+ Liquidation Preference, the Liquidation Preference )
+ shall be the greater of the Original Series B Purchase
+ Price or the amount per share of Series B Preferred Stock
+ that the holder of the number of shares of common stock issuable
+ upon conversion thereof would receive upon any such Liquidation
+ Event.
+
+ 
+
+ If upon any Liquidation Event the assets of the Company
+ distributable among the holders of the Series A Preferred
+ Stock and the Series B Preferred Stock shall be
+ insufficient to permit the payment to them of the full
+ preferential amounts to which they are entitled, then the entire
+ assets of the Company to be distributed shall be distributed
+ ratably among the holders of the Series A Preferred Stock
+ and the Series B Preferred Stock, in proportion to the sum
+ of their respective per share liquidation preferences, until
+ payment in full of such amount per share.
+
+ 
+
+ Conversion
+
+ 
+
+ Each share of the preferred stock shall be convertible, at the
+ option of the holder, at any time after the date of the issuance
+ of such share, into that number of the fully paid and
+ nonassessable shares of common stock determined in accordance
+ with the following provisions:
+
+ 
+
+ 
+ 
+
+ (a) 
+ 
+ Each share of Series A Preferred Stock shall be convertible
+ into the number of shares of common stock which results from
+ dividing the Series A Conversion Price (as defined herein)
+ per share in effect at the time into the Original Series A
+ Purchase Price; and
+
+ 
+
+ 
+ 
+
+ (b) 
+ 
+ Each share of Series B Preferred Stock shall be convertible
+ into the number of shares of common stock which results from
+ dividing the Series B Conversion Price (as defined herein)
+ per share in effect at the time into the Original Series B
+ Purchase Price.
+
+ 
+
+ The conversion price per share for the Series A Preferred
+ Stock is currently approximately $3.31, such that shares of
+ Series A Preferred Stock convert to shares of common stock
+ at a
+ 3.309755-to-one
+ ratio after giving effect to the reverse stock split described
+ in Note 8 to these financial
+
+ 
+
+ F-24
+
+ 
+
+ statements. The conversion price per share for the Series B
+ Preferred Stock is currently approximately $4.07, such that
+ shares of Series B Preferred Stock convert to shares of
+ common stock at a
+ 3.309755-to-one
+ ratio after giving effect to the reverse stock split described
+ in Note 8 to these financial statements. The conversion
+ price per share of both the Series A Preferred Stock and
+ the Series B Preferred Stock shall be subject to equitable
+ adjustment in the event of a stock split, stock combination,
+ reclassification, reorganization, recapitalization or similar
+ event, and shall also be subject to adjustment in the event that
+ the Company issues shares of common stock (or securities
+ convertible into or exercisable for common stock) at a price per
+ share below the applicable conversion price then in effect
+ (excluding shares issued or issuable to employees, officers,
+ directors or consultants pursuant to agreements duly approved by
+ the Company s board of directors, pursuant to exercises of
+ warrants, options or other convertible securities outstanding as
+ of September 2004, or pursuant to certain lease financings).
+
+ 
+
+ Automatic
+ conversion
+
+ 
+
+ Each share of preferred stock then outstanding shall be
+ automatically converted into the number of fully paid and
+ nonassessable shares of common stock determined in accordance
+ with the conversion features listed above upon the earlier of:
+
+ 
+
+ 
+ 
+
+ (a) 
+ 
+ The close of business of the day immediately preceding the
+ closing of the sale of its common stock in connection with a
+ Qualified Public Offering (as defined in the Company s
+ Second Amended and Restated Certificate of
+ Incorporation); or
+
+ 
+
+ 
+ 
+
+ (b) 
+ 
+ The consent of the holders of at least a majority of the
+ outstanding shares of preferred stock voting or consenting
+ together as a single class and to the exclusion of all other
+ classes of capital stock of the Company.
+
+ 
+
+ Special mandatory
+ conversion
+
+ 
+
+ In connection with the additional sale of Series B
+ Preferred Stock in September 2005, if any holder of shares of
+ Series B Preferred Stock fails to purchase all shares of
+ Series B Preferred Stock required to be purchased by such
+ holder at any additional closing (as defined), all of such
+ holder s Series B Preferred Stock shall automatically
+ and without further action on the part of such holder be
+ converted into such number of shares of common stock into which
+ such shares of Series B Preferred Stock are then
+ convertible. Upon conversion, the shares of Series B
+ Preferred Stock converted shall be canceled and not subject to
+ reissuance.
+
+ 
+
+ 
+ 
+
+ 
+ 9. 
+
+ 
+ Beneficial
+ conversion feature Series B Preferred Stock
+
+ 
+
+ In September 2005, the Company completed the sale of an
+ additional 15,040,654 shares of Series B Preferred
+ Stock for proceeds of approximately $18.5 million. After
+ evaluating the fair value of the Company s common stock
+ obtainable upon conversion by the stockholders, the Company
+ determined that the issuance of the Series B Preferred
+ Stock sold in September 2005 resulted in a beneficial conversion
+ feature calculated in accordance with EITF Issue
+ No. 98-5,
+ Accounting for Convertible Securities with Beneficial
+ Conversion Features or Contingently Adjustable Conversion
+ Ratios,
+ ( EITF 98-5 )
+ as interpreted by EITF Issue
+ No. 00-27,
+ Application of Issue
+ No. 98-5
+ to Certain Convertible Instruments, ( EITF
+ 00-27 )
+ of approximately $18.5 million which was fully accreted in
+ September 2005 and is recorded as a deemed dividend to preferred
+ stockholders for the year ended December 31, 2005.
+
+ 
+
+ F-25
+
+ 
+
+ In December 2005, the Company closed an additional private
+ placement of 12,195,129 shares of Series B Preferred
+ Stock for proceeds of approximately $15.0 million. The
+ Company evaluated the fair value of the Company s common
+ stock obtainable upon conversion by the stockholders using
+ EITF 98-5
+ and EITF
+ 00-27 and
+ determined that the issuance of the Series B Preferred
+ Stock sold in December 2005 resulted in a beneficial conversion
+ feature of approximately $15.0 million that was fully
+ accreted in December 2005 and recorded as a deemed dividend to
+ preferred stockholders for the year ended December 31, 2005.
+
+ 
+
+ 
+ 
+
+ 
+ 10. 
+
+ 
+ Equity benefit
+ plans
+
+ 
+
+ In March 2003, the Company adopted the Vanda Pharmaceuticals
+ Inc. Management Equity Plan ( Stock Option Plan ), a
+ non-qualified stock option plan. The Company has reserved
+ 1,781,509 shares of common stock to accommodate the
+ exercise of options granted under the Stock Option Plan. As of
+ December 31, 2005, there were remaining 153,044 shares
+ reserved for issuance under the Stock Option Plan. The Company
+ has issued options to purchase common stock to various employees
+ which expire 10 years from the date of grant. The options
+ become 100% vested on the fourth anniversary of the date of
+ grant.
+
+ 
+
+ Management equity
+ plan
+
+ 
+
+ The Company has historically granted stock options at exercise
+ prices that equaled the fair value of its common stock at the
+ date of grant as estimated by its board of directors. Since
+ there has not been a public market for the Company s common
+ stock, the board of directors determined the fair value of its
+ common stock by considering a number of objective and subjective
+ factors, including the pricing of convertible preferred stock,
+ the preferences and rights of the Company s preferred stock
+ over the common stock, important operational events, the risk
+ and non-liquid nature of the common stock, and underlying market
+ conditions. The Company has not historically obtained
+ contemporaneous valuations by an unrelated valuation specialist
+ because, at the time of the issuances of stock options, the
+ Company believed its estimates of the fair value of its common
+ stock to be reasonable based on the foregoing factors.
+
+ 
+
+ In connection with this proposed initial public offering, the
+ Company retrospectively assessed the fair value of its common
+ stock. In reassessing the fair value, the Company considered the
+ factors used in its historical determinations of fair value, the
+ likelihood of a liquidity event such as an initial public
+ offering, and feedback received from investment banks relating
+ to an initial public offering upon beginning such discussions in
+ November 2005. In reassessing the fair value of the common
+ stock, the Company determined that an increase in the estimated
+ fair value of the underlying common stock for options granted
+ after December 2003 was appropriate. As allowed by
+ SFAS No. 123, Accounting for Stock Based
+ Compensation, the Company accounts for its stock options
+ granted to employees and directors under APB 25,
+ Accounting for Stock Issued to Employees. Accordingly,
+ deferred stock compensation is recognized to the extent that the
+ price of the underlying common stock, as determined in the
+ retrospective fair value analysis, exceeds the exercise price of
+ the stock options at the date of grant. Deferred stock
+ compensation is amortized over the vesting period of the related
+ options which is generally four years.
+
+ 
+
+ For the year ended December 31, 2004, the Company granted
+ 97,398 stock options to employees with a weighted average
+ intrinsic value of $2.81 per share, resulting in deferred
+ stock
+
+ 
+
+ F-26
+
+ 
+
+ compensation of $281,130. For the year ended December 31,
+ 2005, the Company granted 1,318,753 stock options to employees
+ with a weighted average intrinsic value of $14.36 per
+ share, resulting in deferred stock compensation of $18,788,385.
+ Compensation expense relating to stock options with the common
+ stock fair value greater than the exercise price granted to
+ employees was $23,196 and $1,276,021 for the years ended
+ December 31, 2004 and 2005, respectively. Of the $23,196 of
+ compensation expense recognized during the year ended
+ December 31, 2004, $2,086 was included in research and
+ development and $21,110 was included in general and
+ administrative. Of the $1,276,021 of compensation expense
+ recognized during the year ended December 31, 2005,
+ $152,971 was included in research and development and $1,123,050
+ was included in general and administrative expense.
+
+ 
+
+ In August 2004, the Company approved a modification to an
+ employee s stock option awards at time of employment
+ termination. The modification was to accelerate a portion of the
+ unvested stock options so the shares could be immediately
+ exercisable. According to FASB Interpretation No. 44,
+ Accounting for Certain Transactions Involving Stock
+ Compensation (FIN 44), the result of such a
+ modification is to remeasure the stock options that were
+ modified. The remeasurement of the stock options resulted in an
+ immediate charge of $14,937, which was included in general and
+ administrative expense for the year ended December 31, 2004.
+
+ 
+
+ In February 2005, the board of directors approved a modification
+ to all outstanding granted stock option awards, repricing the
+ options from its original exercise price of $1.32 to $0.33.
+ According to FIN 44, the result of such a modification is
+ to account for the modified stock option awards as variable from
+ the date of the modification to the date the awards are
+ exercised, forfeited, or cancelled. For each of the quarters
+ ended during the year ended December 31, 2005, the Company
+ remeasured approximately 335,000 outstanding stock options,
+ resulting in a deferred stock compensation of $1,702,625 at
+ December 31, 2005. Compensation expense relating to the
+ remeasurement of modified stock options was $3,826,157 for the
+ year ended December 31, 2005, which includes $3,119,676 of
+ immediate stock compensation charges for vested shares at the
+ time of remeasurement. Of the $3,826,157 of compensation expense
+ recognized during the year ended December 31, 2005,
+ $635,906 was included in research and development and $3,190,251
+ was included in general and administrative expense.
+
+ 
+
+ F-27
+
+ 
+
+ A summary of stock option activity is as follows with the
+ repricing the options from its original exercise price of $1.32
+ to $0.33 reflected for all option activity:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Weighted
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ average
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ exercise
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Number of
+
+ 
+
+ 
+
+ 
+
+ price at
+
+ 
+
+ 
+
+ 
+
+ 
+
+ shares
+
+ 
+
+ 
+
+ grant
+ date
+
+ 
+
+ 
+
+ 
+
+ March 13, 2003 (inception)
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ Granted
+ 
+
+ 
+
+ 
+
+ 236,204
+
+ 
+
+ 
+
+ $
+
+ 0.33
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Outstanding at December 31,
+ 2003
+ 
+
+ 
+
+ 
+
+ 236,204
+
+ 
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ Granted
+ 
+
+ 
+
+ 
+
+ 97,398
+
+ 
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ Cancelled or expired
+ 
+
+ 
+
+ 
+
+ (18,641
+
+ )
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Outstanding at December 31,
+ 2004
+ 
+
+ 
+
+ 
+
+ 314,961
+
+ 
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ Granted
+ 
+
+ 
+
+ 
+
+ 1,318,753
+
+ 
+
+ 
+
+ 
+
+ 1.52
+
+ 
+
+ Cancelled or expired
+ 
+
+ 
+
+ 
+
+ (5,249
+
+ )
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ Exercised
+ 
+
+ 
+
+ 
+
+ (95,925
+
+ )
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Outstanding at December 31,
+ 2005
+ 
+
+ 
+
+ 
+
+ 1,532,540
+
+ 
+
+ 
+
+ 
+
+ 1.39
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Exercisable at December 31,
+ 2005
+ 
+
+ 
+
+ 
+
+ 132,413
+
+ 
+
+ 
+
+ 
+
+ 0.33
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The following table summarizes information about stock options
+ outstanding and exercisable at December 31, 2005:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Options
+ outstanding
+
+ 
+
+ 
+
+ Options
+ exercisable
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Weighted-
+
+ 
+
+ 
+
+ 
+
+ Weighted-
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Weighted-
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ average
+
+ 
+
+ 
+
+ 
+
+ average
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ average
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Number of
+
+ 
+
+ 
+
+ 
+
+ exercise
+
+ 
+
+ 
+
+ 
+
+ remaining
+
+ 
+
+ 
+
+ 
+
+ Number of
+
+ 
+
+ 
+
+ 
+
+ exercise
+
+ 
+
+ 
+
+ 
+
+ 
+
+ underlying
+
+ 
+
+ 
+
+ 
+
+ price per
+
+ 
+
+ 
+
+ 
+
+ contractual
+
+ 
+
+ 
+
+ 
+
+ underlying
+
+ 
+
+ 
+
+ 
+
+ price per
+
+ 
+
+ 
+
+ Exercise
+ price
+
+ 
+
+ shares
+
+ 
+
+ 
+
+ share
+
+ 
+
+ 
+
+ life
+ (years)
+
+ 
+
+ 
+
+ shares
+
+ 
+
+ 
+
+ share
+
+ 
+
+ 
+
+ 
+
+ $0.33
+ 
+
+ 
+
+ 
+
+ 1,090,606
+
+ 
+
+ 
+
+ $
+
+ 0.33
+
+ 
+
+ 
+
+ 
+
+ 9.2
+
+ 
+
+ 
+
+ 
+
+ 132,413
+
+ 
+
+ 
+
+ $
+
+ 0.33
+
+ 
+
+ $0.83
+ 
+
+ 
+
+ 
+
+ 83,087
+
+ 
+
+ 
+
+ 
+
+ 0.83
+
+ 
+
+ 
+
+ 
+
+ 9.9
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $4.73
+ 
+
+ 
+
+ 
+
+ 358,847
+
+ 
+
+ 
+
+ 
+
+ 4.73
+
+ 
+
+ 
+
+ 
+
+ 10.0
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 1,532,540
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 132,413
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Restricted
+ stock
+
+ 
+
+ Certain of the Company s employees have entered into the
+ Company s standard form of stock restriction agreement as a
+ condition to their exercise of options to acquire common stock
+ pursuant to the Plan. Shares exercised prior to vesting are
+ subject to forfeiture in accordance with the vesting schedule of
+ the granted stock options. During 2005, certain of the
+ Company s employees exercised unvested stock options,
+ awarded under the Company s Stock Incentive Plan, to
+ acquire a total of 57,882 shares of restricted common
+ stock. At December 31, 2005, 55,375 shares of
+ restricted common stock remain unvested pursuant to awards.
+
+ 
+
+ F-28
+
+ 
+
+ 11. Stock
+ warrants
+
+ 
+
+ In 2003, in connection with entering into the line of credit
+ facility to finance the purchase of equipment, the Company
+ granted to the lender a freely exercisable warrant to purchase
+ 13,626 shares of the Company s common stock (the
+ Lender Warrant Shares ) at an exercise price of
+ $1.32 per share. The Lender Warrant Shares were valued
+ using the Black-Scholes option pricing model at $0.93 per
+ share and the aggregate value was $12,628, which was recorded as
+ general and administrative for the period from March 13,
+ 2003 through December 31, 2003.
+
+ 
+
+ In February 2004, the Company issued warrants to a consultant to
+ purchase 36,709 shares of the Company s common stock
+ (the Consultant Warrant Shares ) at an exercise price
+ of $1.32 per share. The Consultant Warrant Shares were
+ valued using the Black-Scholes option pricing model at
+ $0.76 per Consultant Warrant Share and the aggregate value
+ was $27,945, which was recorded as general and administrative
+ for the year ended December 31, 2004.
+
+ 
+
+ The Company used the following assumptions to calculate the
+ individual warrant shares through the Black-Scholes option
+ pricing model:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Lender
+
+ 
+
+ Consultant
+
+ 
+
+ Expected dividend yield
+ 
+
+ 
+
+ 
+
+ 0%
+
+ 
+
+ 
+
+ 0%
+
+ Expected volatility
+ 
+
+ 
+
+ 
+
+ 67%
+
+ 
+
+ 
+
+ 67%
+
+ Expected term (years)
+ 
+
+ 
+
+ 
+
+ 8
+
+ 
+
+ 
+
+ 5
+
+ Risk-free interest rate
+ 
+
+ 
+
+ 
+
+ 3.65%
+
+ 
+
+ 
+
+ 3.08%
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+
+ 
+ 12. 
+
+ 
+ Income
+ taxes
+
+ 
+
+ The tax provision is as follows:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ December 31,
+ 2003
+
+ 
+
+ 2004
+
+ 
+
+ 2005
+
+ 
+
+ Current federal tax expense
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ Current state tax expense
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Current foreign expense
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 4,949
+
+ 
+
+ 
+
+ 
+
+ 7,649
+
+ 
+
+ Deferred tax expense
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total tax expense
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 4,949
+
+ 
+
+ 
+
+ $
+
+ 7,649
+
+ 
+
+ 
+
+ 
+
+ 
+
+ F-29
+
+ 
+
+ Deferred tax assets consist of the following:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 2004
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ Deferred tax asset
+ (liability)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net operating loss carryforwards
+ 
+
+ 
+
+ $
+
+ 3,863,758
+
+ 
+
+ 
+
+ $
+
+ 8,340,222
+
+ 
+
+ Start-up
+ costs
+ 
+
+ 
+
+ 
+
+ 869,656
+
+ 
+
+ 
+
+ 
+
+ 3,717,820
+
+ 
+
+ Stock-based compensation
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 1,683,454
+
+ 
+
+ Research and development credit
+ 
+
+ 
+
+ 
+
+ 365,134
+
+ 
+
+ 
+
+ 
+
+ 769,019
+
+ 
+
+ Depreciation and amortization
+ 
+
+ 
+
+ 
+
+ (52,549
+
+ )
+
+ 
+
+ 
+
+ (57,340
+
+ )
+
+ Amortization of warrants
+ 
+
+ 
+
+ 
+
+ 26,878
+
+ 
+
+ 
+
+ 
+
+ 12,156
+
+ 
+
+ Accrued and deferred expenses
+ 
+
+ 
+
+ 
+
+ 74,870
+
+ 
+
+ 
+
+ 
+
+ 19,359
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net deferred tax assets
+ 
+
+ 
+
+ 
+
+ 5,147,747
+
+ 
+
+ 
+
+ 
+
+ 14,484,690
+
+ 
+
+ Deferred tax asset valuation
+ allowance
+ 
+
+ 
+
+ 
+
+ (5,147,747
+
+ )
+
+ 
+
+ 
+
+ (14,484,690
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Based on the Company s limited operating history and
+ management s expectation of future profitability,
+ management believes that the Company s deferred tax assets
+ do not meet the more likely than not criteria under
+ SFAS No. 109. Accordingly, a valuation allowance for
+ the entire deferred tax asset amount has been recorded.
+
+ 
+
+ The effective tax rate differs from the U.S. federal
+ statutory tax rate of 34% due to the following:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 2004
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ Federal tax at statutory rate
+ 
+
+ 
+
+ 
+
+ 34.0%
+
+ 
+
+ 
+
+ 
+
+ 34.0%
+
+ 
+
+ State taxes
+ 
+
+ 
+
+ 
+
+ 4.6%
+
+ 
+
+ 
+
+ 
+
+ 4.5%
+
+ 
+
+ Change in valuation allowance
+ 
+
+ 
+
+ 
+
+ (42.5%
+
+ )
+
+ 
+
+ 
+
+ (39.1%
+
+ )
+
+ Research and development credit
+ 
+
+ 
+
+ 
+
+ 4.0%
+
+ 
+
+ 
+
+ 
+
+ 1.7%
+
+ 
+
+ Meals, entertainment and other
+ non-deductable items
+ 
+
+ 
+
+ 
+
+ (0.1%
+
+ )
+
+ 
+
+ 
+
+ (1.1%
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Effective tax rate
+ 
+
+ 
+
+ 
+
+ 0.0%
+
+ 
+
+ 
+
+ 
+
+ 0.0%
+
+ 
+
+ 
+
+ 
+
+ 
+
+ At December 31, 2004 and 2005, the Company had
+ U.S. federal and state net operating loss carryforwards of
+ approximately $10.0 million and $21.6 million,
+ respectively available to reduce future taxable income, which
+ will begin to expire in 2023. At December 31, 2004 and
+ 2005, the Company had approximately $0.4 million and
+ $0.8 million of research and development credit,
+ respectively which will begin to expire in 2023.
+
+ 
+
+ Under the Tax Reform Act of 1986, the amounts of and benefits
+ from the operating loss carryforwards may be impaired in certain
+ circumstances. Events which cause limitations in the amount of
+ net operating losses that the Company may utilize in any one
+ year include, but are not limited to, a cumulative ownership
+ change of more than 50%, as defined, over a three year period.
+
+ 
+
+ F-30
+
+ 
+
+ 
+ 
+
+ 
+ 13. 
+
+ 
+ Employee benefit
+ plan
+
+ 
+
+ The Company has a defined contribution plan (the Plan) under the
+ Internal Revenue Code Section 401(k). This plan covers
+ substantially all employees who meet minimum age and service
+ requirements and allows participants to defer a portion of their
+ annual compensation on a pre-tax basis. Currently, the Company
+ matches 50 percent up to the first six percent of employee
+ contributions. All matching contributions have been paid by the
+ Company. The employer match vests over a 4 year period. The
+ total employer match for the period from March 13, 2003
+ (inception) through December 31, 2003 and for the years
+ ended December 31, 2004 and 2005 was $12,731, $42,206 and
+ $55,503, respectively.
+
+ 
+
+ 
+ 
+
+ 
+ 14. 
+
+ 
+ Subsequent
+ event
+
+ 
+
+ When the Company took possession of the new lease space in
+ January 2006, the Company vacated the current office and
+ laboratory space. According to SFAS 146 Accounting for
+ Costs Associated with Exit or Disposal Activities, a
+ liability for costs that will continue to be incurred under a
+ contract for its remaining term without economic benefit to the
+ Company shall be recognized and measured when the Company ceases
+ using the right conveyed by the lease agreement, reduced by
+ estimated sublease rentals that could be reasonably obtained.
+ The Company incurred a charge of approximately $260,000 at the
+ time the Company moved from the current location to the new
+ office complex in January 2006.
+
+ 
+
+ F-31
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage
+ company)
+
+ Condensed Consolidated Balance
+ Sheets (Unaudited)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ December 31,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2006
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 
+
+ Assets
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Current assets:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash and cash equivalents
+ 
+
+ 
+
+ $
+
+ 31,899,979
+
+ 
+
+ 
+
+ $
+
+ 21,012,815
+
+ 
+
+ Short-term investments
+ 
+
+ 
+
+ 
+
+ 11,096,506
+
+ 
+
+ 
+
+ 
+
+ 10,141,189
+
+ 
+
+ Prepaid expenses and other current
+ assets
+ 
+
+ 
+
+ 
+
+ 1,827,513
+
+ 
+
+ 
+
+ 
+
+ 2,217,960
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total current assets
+ 
+
+ 
+
+ 
+
+ 44,823,998
+
+ 
+
+ 
+
+ 
+
+ 33,371,964
+
+ 
+
+ Property and equipment, net
+ 
+
+ 
+
+ 
+
+ 1,848,270
+
+ 
+
+ 
+
+ 
+
+ 1,110,576
+
+ 
+
+ Deposits
+ 
+
+ 
+
+ 
+
+ 180,000
+
+ 
+
+ 
+
+ 
+
+ 840,000
+
+ 
+
+ Restricted cash
+ 
+
+ 
+
+ 
+
+ 430,230
+
+ 
+
+ 
+
+ 
+
+ 430,230
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total assets
+ 
+
+ 
+
+ $
+
+ 47,282,498
+
+ 
+
+ 
+
+ $
+
+ 35,752,770
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Liabilities and
+ stockholders equity
+
+ Current liabilities:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accounts payable
+ 
+
+ 
+
+ $
+
+ 2,112,395
+
+ 
+
+ 
+
+ $
+
+ 2,254,897
+
+ 
+
+ Accrued expenses
+ 
+
+ 
+
+ 
+
+ 7,839,431
+
+ 
+
+ 
+
+ 
+
+ 2,528,091
+
+ 
+
+ Current portion of long-term debt
+ 
+
+ 
+
+ 
+
+ 374
+
+ 
+
+ 
+
+ 
+
+ 142,461
+
+ 
+
+ Deferred grant revenue
+ 
+
+ 
+
+ 
+
+ 136,251
+
+ 
+
+ 
+
+ 
+
+ 129,950
+
+ 
+
+ Deferred rent
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 8,131
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total current liabilities
+ 
+
+ 
+
+ 
+
+ 10,088,451
+
+ 
+
+ 
+
+ 
+
+ 5,063,530
+
+ 
+
+ Deferred rent and other long-term
+ liabilities
+ 
+
+ 
+
+ 
+
+ 242,415
+
+ 
+
+ 
+
+ 
+
+ 24,433
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total liabilities
+ 
+
+ 
+
+ 
+
+ 10,330,866
+
+ 
+
+ 
+
+ 
+
+ 5,087,963
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Commitments and contingencies
+ (Note 10)
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Stockholders equity
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Common stock, $0.001 par
+ value, 150,000,000 and 70,000,000 shares authorized as of
+ September 30, 2006 and December 31, 2005,
+ respectively; and 21,907,188 and 98,945 shares issued and
+ outstanding as of September 30, 2006 and December 31,
+ 2005, respectively
+ 
+
+ 
+
+ 
+
+ 21,907
+
+ 
+
+ 
+
+ 
+
+ 99
+
+ 
+
+ Series A and Series B
+ convertible preferred stock
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 61,795,187
+
+ 
+
+ Additional paid-in capital
+ 
+
+ 
+
+ 
+
+ 124,893,956
+
+ 
+
+ 
+
+ 
+
+ 23,982,981
+
+ 
+
+ Deferred stock-based compensation
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (18,766,443
+
+ )
+
+ Accumulated other comprehensive
+ loss
+ 
+
+ 
+
+ 
+
+ (15,130
+
+ )
+
+ 
+
+ 
+
+ (17,609
+
+ )
+
+ Deficit accumulated during the
+ development stage
+ 
+
+ 
+
+ 
+
+ (87,949,101
+
+ )
+
+ 
+
+ 
+
+ (36,329,408
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total stockholders equity
+ 
+
+ 
+
+ 
+
+ 36,951,632
+
+ 
+
+ 
+
+ 
+
+ 30,664,807
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total liabilities and
+ stockholders equity
+ 
+
+ 
+
+ $
+
+ 47,282,498
+
+ 
+
+ 
+
+ $
+
+ 35,752,770
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes are an
+ integral part of these condensed consolidated financial
+ statements.
+
+ 
+
+ F-32
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage
+ company)
+
+ Condensed Consolidated
+ Statements of Operations (Unaudited)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Three months
+ ended
+
+ 
+
+ 
+
+ Nine months
+ ended
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2006
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 2006
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 2006
+
+ 
+
+ 
+
+ 
+
+ Revenues from services
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 81,545
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Operating expenses:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Research and development
+ 
+
+ 
+
+ 
+
+ 9,542,385
+
+ 
+
+ 
+
+ 
+
+ 4,092,240
+
+ 
+
+ 
+
+ 
+
+ 44,130,788
+
+ 
+
+ 
+
+ 
+
+ 11,641,565
+
+ 
+
+ 
+
+ 
+
+ 70,474,919
+
+ 
+
+ General and administrative
+ 
+
+ 
+
+ 
+
+ 3,264,849
+
+ 
+
+ 
+
+ 
+
+ 1,664,902
+
+ 
+
+ 
+
+ 
+
+ 9,170,439
+
+ 
+
+ 
+
+ 
+
+ 5,587,147
+
+ 
+
+ 
+
+ 
+
+ 19,738,530
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total operating expenses
+ 
+
+ 
+
+ 
+
+ 12,807,234
+
+ 
+
+ 
+
+ 
+
+ 5,757,142
+
+ 
+
+ 
+
+ 
+
+ 53,301,227
+
+ 
+
+ 
+
+ 
+
+ 17,228,712
+
+ 
+
+ 
+
+ 
+
+ 90,213,449
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Loss from operations
+ 
+
+ 
+
+ 
+
+ (12,807,234
+
+ )
+
+ 
+
+ 
+
+ (5,757,142
+
+ )
+
+ 
+
+ 
+
+ (53,301,227
+
+ )
+
+ 
+
+ 
+
+ (17,228,712
+
+ )
+
+ 
+
+ 
+
+ (90,131,904
+
+ )
+
+ Other income (expense):
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Interest income
+ 
+
+ 
+
+ 
+
+ 683,469
+
+ 
+
+ 
+
+ 
+
+ 57,259
+
+ 
+
+ 
+
+ 
+
+ 1,686,363
+
+ 
+
+ 
+
+ 
+
+ 208,763
+
+ 
+
+ 
+
+ 
+
+ 2,275,280
+
+ 
+
+ Interest expense
+ 
+
+ 
+
+ 
+
+ (396
+
+ )
+
+ 
+
+ 
+
+ (5,005
+
+ )
+
+ 
+
+ 
+
+ (4,829
+
+ )
+
+ 
+
+ 
+
+ (20,568
+
+ )
+
+ 
+
+ 
+
+ (80,481
+
+ )
+
+ Other income
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 93
+
+ 
+
+ 
+
+ 
+
+ 602
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Total other income
+ 
+
+ 
+
+ 
+
+ 683,073
+
+ 
+
+ 
+
+ 
+
+ 52,254
+
+ 
+
+ 
+
+ 
+
+ 1,681,534
+
+ 
+
+ 
+
+ 
+
+ 188,288
+
+ 
+
+ 
+
+ 
+
+ 2,195,401
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Loss before tax provision
+ 
+
+ 
+
+ 
+
+ (12,124,161
+
+ )
+
+ 
+
+ 
+
+ (5,704,888
+
+ )
+
+ 
+
+ 
+
+ (51,619,693
+
+ )
+
+ 
+
+ 
+
+ (17,040,424
+
+ )
+
+ 
+
+ 
+
+ (87,936,503
+
+ )
+
+ Income tax provision
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 12,598
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ 
+
+ (12,124,161
+
+ )
+
+ 
+
+ 
+
+ (5,704,888
+
+ )
+
+ 
+
+ 
+
+ (51,619,693
+
+ )
+
+ 
+
+ 
+
+ (17,040,424
+
+ )
+
+ 
+
+ 
+
+ (87,949,101
+
+ )
+
+ Beneficial conversion
+ feature deemed dividend to preferred stockholders
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (18,500,005
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (18,500,005
+
+ )
+
+ 
+
+ 
+
+ (33,486,623
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss attributable to common
+ stockholders
+ 
+
+ 
+
+ $
+
+ (12,124,161
+
+ )
+
+ 
+
+ $
+
+ (24,204,893
+
+ )
+
+ 
+
+ $
+
+ (51,619,693
+
+ )
+
+ 
+
+ $
+
+ (35,540,429
+
+ )
+
+ 
+
+ $
+
+ (121,435,724
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Basic and diluted net loss per
+ share attributable to common stockholders
+ 
+
+ 
+
+ $
+
+ (0.55
+
+ )
+
+ 
+
+ $
+
+ (1,308.87
+
+ )
+
+ 
+
+ $
+
+ (3.72
+
+ )
+
+ 
+
+ $
+
+ (3,094.51
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shares used in calculation of basic
+ and diluted net loss per share attributable to common
+ stockholders
+ 
+
+ 
+
+ 
+
+ 21,871,542
+
+ 
+
+ 
+
+ 
+
+ 18,493
+
+ 
+
+ 
+
+ 
+
+ 13,862,613
+
+ 
+
+ 
+
+ 
+
+ 11,485
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes are an
+ integral part of these condensed consolidated financial
+ statements.
+
+ 
+
+ F-33
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Condensed
+ Consolidated Statement of Changes in Stockholders Equity
+ (Unaudited)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Deficit
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Series A and
+ B
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Accumulated
+
+ 
+
+ 
+
+ accumulated
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ convertible
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Additional
+
+ 
+
+ 
+
+ Deferred
+
+ 
+
+ 
+
+ other
+
+ 
+
+ 
+
+ during the
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ preferred
+ stock
+
+ 
+
+ Common
+ stock
+
+ 
+
+ paid-in
+
+ 
+
+ 
+
+ stock-based
+
+ 
+
+ 
+
+ comprehensive
+
+ 
+
+ 
+
+ development
+
+ 
+
+ 
+
+ Comprehensive
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ Shares
+
+ 
+
+ Par
+ value
+
+ 
+
+ capital
+
+ 
+
+ compensation
+
+ 
+
+ loss
+
+ 
+
+ stage
+
+ 
+
+ loss
+
+ 
+
+ Total
+
+ 
+
+ 
+
+ Balances at December 31,
+ 2005
+
+ 
+
+ 
+
+ 52,276,437
+
+ 
+
+ 
+
+ $
+
+ 61,795,187
+
+ 
+
+ 
+
+ 
+
+ 98,945
+
+ 
+
+ $
+
+ 99
+
+ 
+
+ $
+
+ 23,982,981
+
+ 
+
+ 
+
+ $
+
+ (18,766,443
+
+ )
+
+ 
+
+ $
+
+ (17,609
+
+ )
+
+ 
+
+ $
+
+ (36,329,408
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 30,664,807
+
+ 
+
+ Elimination of deferred stock-based
+ compensation due to adoption of SFAS 123(R)
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (18,766,443
+
+ )
+
+ 
+
+ 
+
+ 18,766,443
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Exercise of stock options
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 887
+
+ 
+
+ 
+
+ 1
+
+ 
+
+ 
+
+ 293
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 294
+
+ 
+
+ Initial public offering of common
+ stock, net of issuance costs
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 5,964,188
+
+ 
+
+ 
+
+ 5,964
+
+ 
+
+ 
+
+ 53,323,987
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 53,329,951
+
+ 
+
+ Conversion of preferred stock upon
+ initial public offering
+ 
+
+ 
+
+ 
+
+ (52,276,437
+
+ )
+
+ 
+
+ 
+
+ (61,795,187
+
+ )
+
+ 
+
+ 
+
+ 15,794,632
+
+ 
+
+ 
+
+ 15,795
+
+ 
+
+ 
+
+ 61,779,392
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Exercise of warrants
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 48,536
+
+ 
+
+ 
+
+ 48
+
+ 
+
+ 
+
+ 48,544
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 48,592
+
+ 
+
+ Employee stock-based compensation
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 4,488,909
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 4,488,909
+
+ 
+
+ Non-employee stock-based
+ compensation
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 36,293
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 36,293
+
+ 
+
+ Comprehensive loss:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (51,619,693
+
+ )
+
+ 
+
+ $
+
+ (51,619,693
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cumulative translation adjustment
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 3,645
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 3,645
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net unrealized losses on short-term
+ investments
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (1,166
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (1,166
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Comprehensive loss
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ (51,617,214
+
+ )
+
+ 
+
+ 
+
+ (51,617,214
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Balances at September 30,
+ 2006
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 21,907,188
+
+ 
+
+ $
+
+ 21,907
+
+ 
+
+ $
+
+ 124,893,956
+
+ 
+
+ 
+
+ $
+
+ 
+
+ 
+
+ 
+
+ $
+
+ (15,130
+
+ )
+
+ 
+
+ $
+
+ (87,949,101
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ $
+
+ 36,951,632
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes are an
+ integral part of these condensed consolidated financial
+ statements.
+
+ 
+
+ F-34
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Condensed
+ Consolidated Statements of Cash Flows (Unaudited)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Period from
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ March 13,
+ 2003
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Nine months
+ ended
+
+ 
+
+ 
+
+ (inception) to
+
+ 
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ September 30,
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 2006
+
+ 
+
+ 
+
+ 2005
+
+ 
+
+ 
+
+ 2006
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash flows from operating
+ activities
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net loss
+ 
+
+ 
+
+ $
+
+ (51,619,693
+
+ )
+
+ 
+
+ $
+
+ (17,040,424
+
+ )
+
+ 
+
+ $
+
+ (87,949,101
+
+ )
+
+ Adjustments to reconcile net loss
+ to net cash used in operating activities:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Depreciation and amortization
+ 
+
+ 
+
+ 
+
+ 415,197
+
+ 
+
+ 
+
+ 
+
+ 316,435
+
+ 
+
+ 
+
+ 
+
+ 1,295,480
+
+ 
+
+ Employee and non-employee
+ stock-based compensation
+ 
+
+ 
+
+ 
+
+ 4,525,202
+
+ 
+
+ 
+
+ 
+
+ 4,090,301
+
+ 
+
+ 
+
+ 
+
+ 9,706,086
+
+ 
+
+ Loss on disposal of assets
+ 
+
+ 
+
+ 
+
+ 29,528
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 29,528
+
+ 
+
+ Accretion of discount on investments
+ 
+
+ 
+
+ 
+
+ (301,293
+
+ )
+
+ 
+
+ 
+
+ (15,800
+
+ )
+
+ 
+
+ 
+
+ (343,629
+
+ )
+
+ Changes in assets and liabilities:
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Prepaid expenses and other current
+ assets
+ 
+
+ 
+
+ 
+
+ 391,559
+
+ 
+
+ 
+
+ 
+
+ (335,615
+
+ )
+
+ 
+
+ 
+
+ (1,826,980
+
+ )
+
+ Deposits
+ 
+
+ 
+
+ 
+
+ 660,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (180,000
+
+ )
+
+ Accounts payable
+ 
+
+ 
+
+ 
+
+ (143,303
+
+ )
+
+ 
+
+ 
+
+ (134,948
+
+ )
+
+ 
+
+ 
+
+ 2,027,896
+
+ 
+
+ Accrued expenses
+ 
+
+ 
+
+ 
+
+ 5,329,690
+
+ 
+
+ 
+
+ 
+
+ 1,179,697
+
+ 
+
+ 
+
+ 
+
+ 7,726,200
+
+ 
+
+ Deferred grant revenue
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 127,866
+
+ 
+
+ 
+
+ 
+
+ 130,603
+
+ 
+
+ Other liabilities
+ 
+
+ 
+
+ 
+
+ 209,851
+
+ 
+
+ 
+
+ 
+
+ (370
+
+ )
+
+ 
+
+ 
+
+ 242,415
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash used in operating
+ activities
+ 
+
+ 
+
+ 
+
+ (40,503,262
+
+ )
+
+ 
+
+ 
+
+ (11,812,858
+
+ )
+
+ 
+
+ 
+
+ (69,141,502
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash flows from investing
+ activities
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Purchases of property and equipment
+ 
+
+ 
+
+ 
+
+ (1,187,295
+
+ )
+
+ 
+
+ 
+
+ (96,341
+
+ )
+
+ 
+
+ 
+
+ (2,872,784
+
+ )
+
+ Purchases of short-term investments
+ 
+
+ 
+
+ 
+
+ (101,313,078
+
+ )
+
+ 
+
+ 
+
+ (1,734,200
+
+ )
+
+ 
+
+ 
+
+ (113,159,254
+
+ )
+
+ Sales of short-term investments
+ 
+
+ 
+
+ 
+
+ 82,137,888
+
+ 
+
+ 
+
+ 
+
+ 1,750,000
+
+ 
+
+ 
+
+ 
+
+ 82,137,888
+
+ 
+
+ Maturities of short-term investments
+ 
+
+ 
+
+ 
+
+ 18,520,000
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 20,270,000
+
+ 
+
+ Investment in restricted cash
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ (430,230
+
+ )
+
+ 
+
+ 
+
+ (430,230
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash used in investing
+ activities
+ 
+
+ 
+
+ 
+
+ (1,842,485
+
+ )
+
+ 
+
+ 
+
+ (510,771
+
+ )
+
+ 
+
+ 
+
+ (14,054,380
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash flows from financing
+ activities
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Proceeds from borrowings on credit
+ facility
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 515,147
+
+ 
+
+ Principal payments on obligations
+ under capital lease
+ 
+
+ 
+
+ 
+
+ (1,071
+
+ )
+
+ 
+
+ 
+
+ (51,246
+
+ )
+
+ 
+
+ 
+
+ (94,097
+
+ )
+
+ Principal payments on credit
+ facility
+ 
+
+ 
+
+ 
+
+ (141,074
+
+ )
+
+ 
+
+ 
+
+ (127,858
+
+ )
+
+ 
+
+ 
+
+ (515,147
+
+ )
+
+ Proceeds from issuance of preferred
+ stock, net of issuance costs
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 18,500,005
+
+ 
+
+ 
+
+ 
+
+ 61,795,187
+
+ 
+
+ Proceeds from exercise of stock
+ options and warrants
+ 
+
+ 
+
+ 
+
+ 48,886
+
+ 
+
+ 
+
+ 
+
+ 14,076
+
+ 
+
+ 
+
+ 
+
+ 80,640
+
+ 
+
+ Proceeds from issuance of common
+ stock, net of issuance costs
+ 
+
+ 
+
+ 
+
+ 53,329,951
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 53,333,950
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net cash provided by financing
+ activities
+ 
+
+ 
+
+ 
+
+ 53,236,692
+
+ 
+
+ 
+
+ 
+
+ 18,334,977
+
+ 
+
+ 
+
+ 
+
+ 115,115,680
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Effect of foreign currency
+ translation
+ 
+
+ 
+
+ 
+
+ (3,781
+
+ )
+
+ 
+
+ 
+
+ (6,198
+
+ )
+
+ 
+
+ 
+
+ (19,819
+
+ )
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Net increase in cash and cash
+ equivalents
+ 
+
+ 
+
+ 
+
+ 10,887,164
+
+ 
+
+ 
+
+ 
+
+ 6,005,150
+
+ 
+
+ 
+
+ 
+
+ 31,899,979
+
+ 
+
+ Cash and cash
+ equivalents
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Beginning of period
+ 
+
+ 
+
+ 
+
+ 21,012,815
+
+ 
+
+ 
+
+ 
+
+ 16,259,770
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ End of period
+ 
+
+ 
+
+ $
+
+ 31,899,979
+
+ 
+
+ 
+
+ $
+
+ 22,264,920
+
+ 
+
+ 
+
+ $
+
+ 31,899,979
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The accompanying notes are an
+ integral part of these condensed consolidated financial
+ statements.
+
+ 
+
+ F-35
+
+ 
+
+ 
+
+ Vanda
+ Pharmaceuticals Inc.
+
+ (A development stage company)
+
+ Notes
+ to condensed consolidated financial statements
+ (unaudited)
+
+ 
+
+ 
+ 
+
+ 
+ 1. 
+
+ 
+ Basis of
+ presentation
+
+ 
+
+ The accompanying unaudited condensed consolidated financial
+ statements of Vanda Pharmaceuticals Inc. have been prepared in
+ accordance with generally accepted accounting principles and the
+ rules and regulations of the Securities and Exchange Commission,
+ or SEC, for interim financial information. Accordingly, they do
+ not include all the information and footnotes required by
+ generally accepted accounting principles for complete financial
+ statements and should be read in conjunction with the
+ Company s consolidated financial statements for the year
+ ended December 31, 2005 included in the Company s
+ Registration Statement on
+ Form S-1,
+ as amended (Registration
+ No. 333-130759),
+ which was declared effective by the SEC on April 12, 2006.
+ The financial information as of September 30, 2006 and for
+ the periods of the three and nine months ended
+ September 30, 2006 and September 30, 2005 and for the
+ period from March 13, 2003 (inception) to
+ September 30, 2006, is unaudited, but in the opinion of
+ management all adjustments, consisting only of normal recurring
+ accruals, considered necessary for a fair statement of the
+ results of these interim periods have been included. The results
+ of the Company s operations for any interim period are not
+ necessarily indicative of the results that may be expected for
+ any other interim period or for a full fiscal year.
+
+ 
+
+ The condensed consolidated financial statements include the
+ accounts of the Company and its wholly-owned Singapore
+ subsidiary. All inter-company balances and transactions have
+ been eliminated.
+
+ 
+
+ 
+ 
+
+ 
+ 2. 
+
+ 
+ Initial public
+ offering and reverse stock split
+
+ 
+
+ On April 18, 2006, the Company consummated its initial
+ public offering, consisting of 5,750,000 shares of common
+ stock. On April 21, 2006 the underwriters exercised an
+ over-allotment option to purchase additional 214,188 shares
+ of the Company s common stock. Including the over-allotment
+ shares,
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/XIN_xinyuan_legal_matters.txt b/parsed_sections/legal_matters/2007/XIN_xinyuan_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1067648830f1b50a9f648612e13beaf84ee4d829
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/XIN_xinyuan_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters in connection with this offering will be passed upon for us by Baker & McKenzie LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP. The validity of the common shares represented by the ADSs offered in this offering will be passed upon for us by Maples and Calder. Legal matters as to Chinese law will be passed upon for us by TransAsia Lawyers and for the underwriters by King & Wood. Baker & McKenzie LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law and TransAsia Lawyers with respect to matters governed by Chinese law.
\ No newline at end of file
diff --git a/parsed_sections/legal_matters/2007/YDKG_yueda_legal_matters.txt b/parsed_sections/legal_matters/2007/YDKG_yueda_legal_matters.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4fb3c2c761a198073af13381dffbe67c34233fbf
--- /dev/null
+++ b/parsed_sections/legal_matters/2007/YDKG_yueda_legal_matters.txt
@@ -0,0 +1 @@
+LEGAL MATTERS The validity of the ADSs and certain other legal matters as to the United States federal and New York law in connection with this offering will be passed upon for us by Latham & Watkins LLP. Certain legal matters as to the United States federal and New York law in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell. The validity of the ordinary shares represented by the ADSs offered in this offering and certain other legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. Legal matters as to PRC law will be passed upon for us by Commerce & Finance Law Offices and for the underwriters by Fangda Partners. Latham & Watkins LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law and Commerce & Finance Law Offices with respect to matters governed by PRC law. Davis Polk & Wardwell may rely upon Fangda Partners with respect to matters governed by PRC law.
\ No newline at end of file