As filed with the Securities and Exchange Commission on
February 6, 2009
Registration No. 333-153549
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 4
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Velocity Portfolio Group,
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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6153
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65-00008422
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(State or Other Jurisdiction
of
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(Primary Standard
Industrial
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(I.R.S. Employer
Number)
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Incorporation or
Organization)
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Classification Code Number)
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1800 Route 34 North
Building 4, Suite 404A
Wall, NJ 07719
(732) 556-9090
(Address, including
Zip Code, and Telephone Number, including Area Code, of
Registrants Principal Executive Offices)
John C. Kleinert
President and Chief Executive Officer
1800 Route 34 North
Building 4, Suite 404A
Wall, NJ 07719
(732) 556-9090
(Name, Address and
Telephone Number of Agent for Service)
Copies to:
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Douglas S. Ellenoff, Esq.
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Steven M. Skolnick, Esq.
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Sarah E. Williams, Esq.
James J. Mangan, Esq.
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Anita Chapdelaine, Esq.
Michael Lestino, Esq.
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Ellenoff Grossman & Schole LLP
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Lowenstein Sandler PC
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150 East 42nd Street, 11th Floor
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65 Livingston Avenue
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New York, New York 10017
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Roseland, New Jersey 07068-1791
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(212) 370-1300
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(973) 597-2500
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Fax:
(212) 370-7889
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Fax: (973) 597-2400
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As soon as practicable after
the effective date of this Registration Statement
(Approximate Date of
Commencement of Proposed Sale to the Public)
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box.
x
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration number of the earlier effective registration
statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
þ
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(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Proposed Maximum
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Offering Price
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Aggregate
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Amount of
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Title of Each Class of Securities to be Registered
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Amount to be Registered(1)
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per Unit(1)
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Offering Price(1)
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Registration Fee
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Units, each consisting of one share of Common Stock,
$.0001 par value, one Class A Warrant, one Class B Warrant,
and one Class C warrant(2)
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2,875,000
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$4.75
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$13,656,250
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$537
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Shares of Common Stock included as part of the Units(2)
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2,875,000
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(3)
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Class A Warrants included as part of the Units(2)
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2,875,000
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(3)
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Shares of Common Stock underlying the Class A Warrants
included in the Units(2)(4)
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2,875,000
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$4.75(4)
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$13,656,250
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$537
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Class B Warrants included as part of the Units(2)
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2,875,000
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(3)
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Shares of Common Stock underlying the Class B Warrants
included in the Units(2)(4)
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2,875,000
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$4.75(4)
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$13,656,250
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$537
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Class C Warrants included as part of the Units(2)
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2,875,000
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(3)
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Shares of Common Stock underlying the Class C Warrants
included in the Units(2)(4)
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2,875,000
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$4.75(4)
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$13,656,250
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$537
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Total
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$54,625,000
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$2,148(6)
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(1)
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Estimated solely for the purpose of
calculating the registration fee.
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(2)
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Includes 375,000 units, and
375,000 shares of common stock, 375,000 class A
warrants underlying such units, 375,000 class B warrants
underlying such units, and 375,000 class C warrants
underlying such units which may be issued on exercise of a
30-day
option granted to the underwriters to cover over-allotments, if
any.
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(3)
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No fee pursuant to Rule 457(g).
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(4)
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Calculated in accordance with
Rule 457(g)(2)
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(5)
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Pursuant to Rule 416, there
are also being registered an indeterminable number of additional
securities as may be issued to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
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(6)
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Of which $1,701.01 was previously
paid.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
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SUBJECT TO COMPLETION, DATED
FEBRUARY 6, 2009
PRELIMINARY PROSPECTUS
2,500,000 Units
We are offering 2,500,000 of our units, with each unit
consisting of one share of our common stock, one class A
warrant, one class B warrant, and one class C warrant.
Each of the class A warrants, class B warrants, and class C
warrants entitles the holder to purchase one share of our common
stock at $ ,
$ , and
$ , respectively. Our common stock
is traded on the NYSE Alternext, formerly known as the American
Stock Exchange, under the symbol PGV. We have
applied to have the units listed on the NYSE Alternext under the
symbol
.
Once the securities comprising the units begin separate trading,
the units will continue to trade under the symbol
,
and the common stock, class A warrants, class B warrants, and
class C warrants will be listed under the symbols
PGV,
,
,
and
,
respectively. The securities comprising the units will begin
separate trading five days following the earlier to occur of the
expiration of the underwriters over-allotment option, its
exercise in full, or the announcement by the underwriters of
their intention not to exercise all or any remaining portion of
the over-allotment option, subject to our issuing a press
release announcing when such separate trading will begin. We
have applied to have the units begin trading on or promptly
after the date of this prospectus, and to have the warrants
begin trading upon their separation from the units. On
February 4, 2009, the closing sale price of our common
stock as reported on the NYSE Alternext was $4.75 per share.
Investing in our securities involves risks. See Risk
Factors beginning on page 12.
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Per Unit
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Total
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Price to public
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds to us(1)
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$
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$
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(1)
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This amount represents the total proceeds to us before deducting
legal, accounting, printing and other offering expenses payable
by us, which are estimated at $800,000. The underwriting
discount is $ per unit.
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The underwriters may also purchase up to 375,000 additional
units from us at the public offering price, less the
underwriting discount, within 30 days of the date of this
prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the units against payment in
New York, New York on or
about ,
2009, subject to customary closing conditions.
Sandler
Oneill + partners, l.p.
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GunnAllen
Financial, Inc.
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Maxim Group LLC
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The date of this prospectus
is ,
2009
Table of
Contents
You should rely only upon the information contained in this
prospectus and the registration statement of which this
prospectus is a part. No dealer, salesperson or other person is
authorized to give any information or to represent anything not
contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is
an offer to sell only the securities offered hereby, but only
under circumstances and in jurisdictions where it is lawful to
do so. The information contained in this prospectus is current
only as of its date.
You should assume the information appearing in this prospectus
is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of
operations and prospects may have changed since that date. This
prospectus is based on information provided by us and other
sources that we believe are reliable. We have summarized certain
documents and other information in a manner we believe to be
accurate, but we refer you to the actual documents for a more
complete understanding of what we discuss in this prospectus. In
making an investment decision, you must rely on your own
examination of our business and the terms of the offering,
including the merits and risks involved.
We obtained statistical data, market data and other industry
data and forecasts used throughout this prospectus from market
research, publicly available information and industry
publications. While we believe that the statistical data,
industry data and forecasts and market research are reliable, we
have not independently verified the data, and we do not make any
representation as to the accuracy of the information.
In the United Kingdom, this communication is directed only at
persons who (i) have professional experience in matters
relating to investments or (ii) are persons falling within
Article 49(2)(a) to (d) (high net worth companies,
unincorporated associations, etc.) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 (all such
persons together being referred to as relevant persons). This
communication must not be acted on or relied on by persons who
are not relevant persons. Any investment or investment activity
to which this communication relates is available only to such
relevant persons and will be engaged in only with such relevant
persons.
i
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and may not contain all of the information that
is important to you. You should carefully read this entire
prospectus, including the Risk Factors and
Cautionary Statement Regarding Forward-Looking
Statements sections and our consolidated financial
statements and the related notes, and other information
appearing elsewhere in this prospectus before you decide to
invest in our units. In this prospectus, unless the context
suggests otherwise, references to the Company,
we, us and our mean Velocity
Portfolio Group, Inc., including its subsidiaries. Unless
otherwise indicated, (i) share information in this
prospectus, including our consolidated financial statements,
gives retroactive effect to a reverse stock split of all
outstanding shares of our common stock at an exchange rate of
1-for-20 effected by us on November 17, 2008 and
(ii) the information in this prospectus assumes no exercise
by the underwriters of the over-allotment option.
Our
Company
We are a portfolio management company that purchases unsecured
consumer receivables in the secondary market and seeks to
collect those receivables through an outsourced legal collection
network. Our primary business is to acquire credit-card
receivable portfolios at significant discounts to the total
amounts owed by the debtors. We use our proprietary valuation
process to calculate the purchase price so that our estimated
cash flow from such portfolios offers us an adequate return on
our investment after servicing expenses.
We generally purchase consumer receivable portfolios that
include charged-off credit card receivables, which are accounts
that have been written-off by the originators, and consumer
installment loans. When evaluating a portfolio for purchase, we
conduct an extensive quantitative and qualitative analysis of
the portfolio to appropriately price the debt and to identify
portfolios that are optimal for collection through our legal
collection network. This analysis relies upon, but is not
limited to, the use of our proprietary pricing and collection
probability model and draws upon our extensive experience in the
legal collection and debt-buying industry.
We purchase consumer receivable portfolios from creditors and
others through privately negotiated direct sales and auctions in
which sellers of consumer receivables seek bids from
pre-qualified debt purchasers. We pursue new acquisitions of
consumer receivable portfolios on an ongoing basis through our
relationships with industry participants, collection agencies,
investors, our financing sources, brokers who specialize in the
sale of consumer receivable portfolios and other sources. Our
consumer receivable portfolios are purchased through internally
generated cash flow, seller financed credit lines/leases and
traditional leverage methods. Our profitability depends upon our
ability to purchase and collect on a sufficient volume of our
consumer receivables to generate revenue that exceeds our costs.
As of September 30, 2008, we held approximately
$500 million in consumer receivables, excluding post
charge-off accrued interest. We currently service approximately
115,000 accounts and place these accounts with over 80 law firms
across the 50 states and Puerto Rico. Our portfolios have
face amounts ranging from $225,000 to approximately
$43 million with purchase prices ranging from $0.017 to
$0.25 per $1.00 of such face amounts.
Industry
Overview
The growth of the accounts receivable management industry has
been driven by a number of industry trends, including:
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increasing levels of debt;
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mounting debt and pressure on banks and financial institutions
to remove nonperforming or unattractive assets from their
balance sheets;
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increasing defaults of the underlying receivables; and
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increasing utilization of third-party providers to collect such
receivables.
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According to the U.S. Federal Reserve Board, the consumer
credit industry increased from $731.9 billion of consumer
debt obligations in 1988 to $2.6 trillion of consumer debt
obligations in June 2008, a compound annual growth rate of 6.5%.
The U.S. Treasury Department has indicated that
approximately 40% of U.S. consumer credit is provided
through securitization of credit card receivables, auto loans,
and student loans. The 2007 Kaulkin Ginsberg Company Report
projects that the consumer credit market will increase to $3.2
trillion by 2011 from $2.4 trillion in 2007. We utilize law
firms to collect our revenues, which we believe is one of the
fastest growing segments of the collections industry. According
to the 2007 Kaulkin Ginsberg Company Report, law firms
collections revenue is expected to increase 15% a year from
$1.2 billion in 2006 to $2.4 billion in 2011.
Business
Strategy
Our primary objective is to utilize our managements
experience and expertise to effectively grow our business. We
intend to do so by identifying, evaluating, pricing and
acquiring distressed consumer receivable portfolios that are
identified as optimal for collection through our legal
collection network and maximizing the return on such assets in a
cost efficient manner. Our strategy includes:
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conducting extensive internal due diligence to ensure our third
party servicers are provided with the most complete available
information about a portfolio in order to maximize collections;
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outsourcing the legal collection process to a national legal
network that is compensated on a fixed success-based commission
schedule;
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managing the legal collection and servicing of our receivable
portfolios;
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expanding geographically while maintaining the same disciplined
management of the legal collection network;
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increasing and expanding financial flexibility and leverage
through increased capital lines of credit; and
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expanding our business through the purchase of consumer
receivables from new and existing sources.
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We believe that as a result of our managements experience
and expertise and the fragmented yet growing market in which we
operate, we are well-positioned to successfully implement our
strategy.
Competitive
Strengths
We have a number of competitive advantages which we believe
differentiate us from our competitors and that have enabled us
to effectively grow our business by identifying, evaluating,
pricing and acquiring consumer receivable portfolios that are
optimal for collection through our legal collection network and
maximizing the return on such assets. We believe that our
proprietary pricing model and our focus on the legal collections
model provide us with significant advantages over competitors.
Our competitive strengths are:
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Experienced, Specialized Management Team:
Our
leadership team is comprised of executives with over
60 years of combined experience in the collections
industry. John C. Kleinert, our Chief Executive Officer, founded
our company in 1998 after spending 15 years at Goldman
Sachs. While at Goldman, Mr. Kleinert worked in several
different capacities, including running the Municipal Bond
Trading Desk and ultimately serving as a General Partner and
then as a Limited Partner. W. Peter Ragan, Jr.,
co-founder
and our President, applied his over 12 years of collections
industry experience and expertise to develop our proprietary
pricing model and to develop our legal collection platform
(including lawyer selection, software to manage our legal
network, incentive platform and legal collections network
monitoring). His father, W. Peter Ragan, Sr., co-founder
and senior advisor to us, has litigated many reported cases in
the creditors rights arena. James J. Mastriani, our Chief
Legal Officer and Chief Financial Officer since joining us in
2004, has over 10 years experience in the consumer finance
and financial services industries.
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Disciplined Proprietary Pricing Model:
We
utilize our proprietary pricing model to value portfolios which
we believe are optimal for collection through our legal
collection network and can provide
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attractive returns. This model was developed based on our
management teams extensive experience working in the
consumer receivables marketplace. The prices we pay for our
consumer receivable portfolios are dependent on many criteria
including the age of the portfolio, the type of receivable, our
analysis of the percentage of obligors who owe debt that is
collectible through legal collection means and the geographical
distribution of the portfolio. We are generally willing to pay
higher prices for portfolios that have a higher percentage of
obligors whose debt we believe is collectible through legal
collection means. Price fluctuations for portfolio purchases
from quarter-to-quarter or year-over-year are indicative of the
economy or overall mix of the types of portfolios we are
purchasing.
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Legal Collections Model:
We utilize third
party law firms, including a law firm owned by certain of our
officers and directors, to collect our receivable portfolios. We
currently service approximately 115,000 accounts and place these
accounts with over 80 law firms across the 50 states and
Puerto Rico. We actively manage our outsourced legal network
through advanced information technology systems. We believe that
our senior management team, two of whom are collections lawyers,
understands what our legal third parties need to properly
collect and service our portfolios, which provides us with a
significant competitive advantage. We generally only utilize two
lawyers in most states and are regularly solicited by
independent law firms seeking to join our network. In addition,
we believe we can direct significantly more business to the law
firms in our network.
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Scaleable, Profitable Business Model:
We are
able to keep fixed costs very low and currently have only
12 employees, of which 10 are full-time employees. As we
acquire more portfolios, the only cost that we expect would
significantly increase is the professional fees paid to the
lawyers we utilize to collect our receivables. Our management
team, information technology systems platform, purchasing model
and legal collections can all support a significantly larger
accounts receivable portfolio.
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Consumer
Receivables Purchase Program
We have purchased more than 70 portfolios from over 15 different
debt sellers since 2003. Our focus has historically been on
purchases of charged-off credit card receivables and consumer
installment loans, which receivables make up over 95% of our
portfolio. We also have purchased portfolios that contain a
minimal percentage of auto deficiency and health club
receivables. Although we have no policy limiting purchases of
other types of charged-off receivables, to date, we have not
purchased any telecom, utility, healthcare, student loan, mobile
home or retail mail order receivables. While we have no policy
limiting purchases from a single debt seller, we purchase from a
diverse set of debt sellers and our purchasing decisions are
based upon constantly changing economic and competitive
conditions as opposed to long-term relationships with particular
debt sellers.
Each potential acquisition begins with a quantitative and
qualitative analysis of the portfolio. In the initial stages of
the due diligence process, we typically review basic data on the
portfolios accounts. This data typically includes the
account number, the obligors name, address, social
security number, phone numbers, outstanding balance, date of
charge-off, last payment date and account origination. We will
not bid on portfolios to the extent that this information is not
available. We analyze this information on an account by account
basis and summarize it based on certain key metrics that enable
us to make a determination that the debt is optimally collected
through legal collection means, such as, but not limited to:
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the number of collection agencies previously attempting to
collect the receivables in the portfolio;
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state distribution of the obligors in the portfolio as different
states have different liquidation rates, which is factored into
our cash flow analysis;
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obligors last known residence;
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type of receivable;
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availability of account documentation (e.g. charge-off
statements, account statements, applications);
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the applicable states statute of limitations;
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age of the charged-off receivable (as older receivables may
liquidate at a different rate than newer receivables); and
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managements assessment of each debtors ability to
repay this debt based on an account by account analysis.
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In addition, we generally request the seller to provide answers
to a questionnaire designed to help us understand important
qualitative factors relating to the portfolio. The age of a
charged-off consumer receivables portfolio, or the time since an
account has been charged-off by the credit originator and the
number of times a portfolio has been placed with third parties
for collection purposes, is one of many factors in determining
the price at which we will offer to purchase a receivables
portfolio. As long as the charged-off receivables are
collectible through legal collection means based on the relevant
states applicable statute of limitations, we will purchase
accounts at any point in the delinquency cycle. We deploy our
capital within these delinquency stages based upon
managements assessment of the values of the available debt
portfolios based on our analysis of certain key metrics and our
proprietary pricing model.
We purchase the portfolios at a percentage discount to the
outstanding balance of the originator at the time of charge-off.
The purchase balance may include interest and other fees which
are accrued by the originator prior to charge-off. In the case
of credit cards, the interest and late fees accumulated prior to
charge- off are regarded as principal by the credit card
companies. Under the terms of our receivable purchase
agreements, as assignees of the debt, we may also purchase the
interest accumulated up to the date of sale. Subsequent to the
purchase, we may also accrue interest by accumulating simple
interest on the outstanding balance based on the terms and
conditions of the applicable cardholder agreement or the
applicable state law. We attempt to collect the purchased
balance and any interest that occurs subsequent to charge-off
subject to the relevant federal and state laws governing this
collection.
Portfolio
Purchases and Performance
As a result of our emphasis on the legal collections model, we
have historically realized significant cash collections from
pools of consumer receivables years after we purchase them. The
following table sets forth certain data related to our
portfolios.
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Initial
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Gross Cash
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Average Price
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Total #
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Outstanding
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Purchase
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Gross Cash
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Collections as
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per Dollar
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Year
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Portfolios
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Amount(1)
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Price(2)
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Collections(3)
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a % of Cost(4)
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Outstanding(5)
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2003
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5
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$
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11,497,833
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$
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2,038,950
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$
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8,611,681
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422.36
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%
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$
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0.18
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2004
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10
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$
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9,511,088
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$
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1,450,115
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$
|
3,493,431
|
|
|
|
240.91
|
%
|
|
$
|
0.15
|
|
2005
|
|
|
22
|
|
|
$
|
133,103,213
|
|
|
$
|
11,449,557
|
|
|
$
|
17,671,641
|
|
|
|
154.34
|
%
|
|
$
|
0.09
|
|
2006
|
|
|
26
|
|
|
$
|
199,042,032
|
|
|
$
|
15,367,940
|
|
|
$
|
14,984,891
|
|
|
|
97.51
|
%
|
|
$
|
0.08
|
|
2007
|
|
|
19
|
|
|
$
|
129,892,667
|
|
|
$
|
9,316,779
|
|
|
$
|
5,386,499
|
|
|
|
57.82
|
%
|
|
$
|
0.07
|
|
2008
|
|
|
7
|
|
|
$
|
15,865,914
|
|
|
$
|
956,882
|
|
|
$
|
208,155
|
|
|
|
21.75
|
%
|
|
$
|
0.06
|
|
|
|
|
(1)
|
|
Initial Outstanding Amount
represents the
original face amount purchased from sellers and has not been
reduced by any adjustments including payments and returns.
Returns are defined as purchase price refunded by
the seller due to the return of non-compliant accounts, such as
deceased and bankrupt accounts.
|
|
(2)
|
|
Purchase Price
represents the cash paid to
sellers to acquire portfolios of consumer receivables, and does
not include certain capitalized acquisition costs.
|
|
(3)
|
|
Gross Cash Collections
include gross cash
collections on portfolios of consumer receivables as of
September 30, 2008.
|
|
(4)
|
|
Gross Cash Collections as a Percentage of Cost
represents the gross cash collections on portfolios of
consumer receivables as of September 30, 2008 divided by
the Purchase Price of such portfolios in the related calendar
year.
|
|
(5)
|
|
Average Price Per Dollar Outstanding
represents the Purchase Price of portfolios of consumer
receivables divided by the Initial Outstanding Amount of such
portfolios purchased in the related calendar year.
|
4
Collections
and Operating Expenses
We outsource all of our legal collection process of our
receivables to third-party law firms based upon specific
guidelines established by us and set forth in a third party
servicing contract. Our standard form of servicing contract
provides for a payment to the law firm of a contingency fee
equal to 25% of all amounts collected and paid by the debtors.
These legal expenses are included as professional fees in our
consolidated statements of income. The following table sets
forth certain data regarding our expenses as they relate to cash
collections on our portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Cash collections
|
|
$
|
13,620,759
|
|
|
$
|
13,058,115
|
|
|
$
|
17,960,713
|
|
|
$
|
10,777,742
|
|
Portfolio purchases, at cost
|
|
|
956,882
|
|
|
|
9,060,980
|
|
|
|
9,316,779
|
|
|
|
15,367,940
|
|
Portfolio purchases, at face
|
|
|
15,865,914
|
|
|
|
127,066,158
|
|
|
|
129,892,667
|
|
|
|
199,042,032
|
|
Cumulative aggregate managed portfolios, at face
|
|
|
498,912,748
|
|
|
|
480,220,325
|
|
|
|
483,046,834
|
|
|
|
353,154,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
3,817,408
|
|
|
$
|
3,438,740
|
|
|
$
|
4,791,224
|
|
|
$
|
2,888,643
|
|
General and administrative expenses
|
|
|
1,557,351
|
|
|
|
2,156,741
|
|
|
|
2,479,608
|
|
|
|
2,205,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
5,374,759
|
|
|
$
|
5,595,481
|
|
|
$
|
7,270,832
|
|
|
$
|
5,093,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses to cash collections(1)
|
|
|
39.46
|
%
|
|
|
42.85
|
%
|
|
|
40.48
|
%
|
|
|
47.26
|
%
|
General and administrative expenses to cash collections(1)
|
|
|
11.43
|
%
|
|
|
16.52
|
%
|
|
|
13.81
|
%
|
|
|
20.46
|
%
|
|
|
|
(1)
|
|
The ratio information for the nine months ended
September 30, 2008 and September 30, 2007 has been
annualized.
|
Recent
Developments
On November 14, 2008, we amended our Certificate of
Incorporation to (a) effect a
1-for-20
reverse stock split of our then issued and outstanding shares of
common stock and (b) change our name to Velocity Portfolio
Group, Inc. The 1-for-20 reverse stock split took effect on
November 17, 2008. All references to common share numbers
contained in this prospectus, including our consolidated
financial statements, give retroactive effect to the reverse
stock split.
Corporate
Information
Our principal executive offices are located at 1800 Route 34
North, Building 4, Suite 404A, Wall, New Jersey 07719,
and our telephone number is
(732) 556-9090.
Our corporate website is www.velocitycollect.com. The
information on our website is not incorporated by reference in
this prospectus.
5
This
Offering
|
|
|
Securities offered by us
|
|
2,500,000 units, each unit consisting of:
|
|
|
|
|
|
one share of common stock;
|
|
|
|
|
|
one class B warrant; and
|
|
|
|
Common stock outstanding prior to this offering (1)
|
|
894,799 shares
|
|
|
|
Common stock outstanding after this offering (1)
|
|
3,394,799 shares
|
|
|
|
Number outstanding before this
offering
|
|
|
|
|
|
Number to be outstanding after
this
offering
|
|
|
|
|
|
class A warrants
|
|
2,500,000
|
|
|
|
class B warrants
|
|
2,500,000
|
|
|
|
class C warrants
|
|
2,500,000
|
|
|
|
Exercisability
|
|
Each warrant is exercisable for one share of common stock,
subject to adjustment as described herein.
|
|
|
|
Exercise Period
|
|
From the date of the separation of the common stock and warrants
from the units until 5:00 pm, New York City time,
on ,
2014 (the five year anniversary of this prospectus).
|
|
|
|
Redemption
|
|
We may redeem the outstanding warrants without the consent of
the underwriters or any third party:
|
|
|
|
|
|
with respect to each class, in whole and
not in part,
|
|
|
|
|
|
at a price of $0.01 per warrant,
|
|
|
|
|
|
upon not less than 20 days
prior written notice of redemption, and
|
|
|
|
|
|
if, and only if, the last sales
price of our common stock equals or exceeds, with respect to the
class A warrants, $ per share
(120% of the exercise price), with respect to the class B
warrants, $ per share (120% of the
exercise price), with respect to the class C warrants,
$ per share (120% of the exercise
price), in each case for any 20 trading days within a 30 trading
day period ending three business days before we send the notice
of redemption,
|
6
|
|
|
|
|
provided
that on the date we give notice of redemption
and during the entire period thereafter until the time we redeem
the class of warrants, we have an effective registration
statement covering the shares of common stock issuable upon
exercise of such warrants and a current prospectus relating to
them is available.
|
|
|
|
|
|
There can be no assurance, however, that the price of our common
stock will exceed the respective exercise price after we call a
class of warrants for redemption and the price may in fact
decline as a result of the limited liquidity following any such
call for redemption.
|
|
|
|
Net proceeds
|
|
The net proceeds of this offering will be approximately
$10.0 million, assuming a public offering price of $4.75
per unit (without attributing any value to the warrants
contained in the units), which is based on the last reported
sale price of our common stock on the NYSE Alternext on
February 4, 2009.
|
|
|
|
Use of proceeds
|
|
We intend to use the estimated net proceeds from this offering
primarily for the purchase of portfolios of unsecured consumer
receivables and for general corporate purposes, including
working capital.
|
|
|
|
Market for common stock
|
|
Our common stock is listed on the NYSE Alternext under the
symbol PGV.
|
|
|
|
Proposed NYSE Alternext symbols for our:
|
|
|
|
|
|
Trade commencement and separation of common stock and
warrants
|
|
The units will begin trading on or promptly after the date of
this prospectus. The securities comprising the units will trade
separately on the 5th day following the earlier to occur of:
(i) the expiration of the underwriters over-allotment
option, which is 30 days from the date of this prospectus,
(ii) the exercise of the over-allotment option in full or
(iii) the announcement by the underwriters of their
intention not to exercise all or any remaining portion of the
over-allotment option, subject to our having issued a press
release announcing when such separate trading will begin.
|
|
|
|
|
|
Following the date that the common stock and warrants are
eligible to trade separately, the units will continue to be
listed for trading, and any security holder may elect to
separate a unit and trade the common stock or warrants
separately or as a unit. Even if the component parts of the
units are separated and traded separately, the units will
continue to be listed as a separate security, and consequently,
any subsequent security holder owning common stock and each of
the class A warrants, class B warrant, and
class C warrants may elect to combine them together and
trade them as a unit. Securityholders will have the ability to
trade our securities as units until such time as at least one
class of warrants expires or is
|
7
|
|
|
|
|
redeemed or no warrants within such class are otherwise
outstanding.
|
|
|
|
Dividend policy
|
|
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain all future earnings for the
operation and expansion of our business and, therefore, we do
not anticipate declaring or paying cash dividends in the
foreseeable future.
|
|
|
|
(1)
|
|
The total number of shares of common stock that will be
outstanding prior to and after this offering is based on the
number of shares outstanding as of February 4, 2009. The
total number of outstanding shares of common stock does not
include:
|
|
|
|
|
|
(i) outstanding unexercised options or warrants exercisable
for 263,391 shares of common stock with per share exercise
prices ranging between $18.00 and $62.00;
|
|
|
|
(ii) 276,000 shares of common stock issuable upon
conversion of 1,380,000 shares of preferred stock issued in
May 2006;
|
|
|
|
|
|
(iii) 47,000 shares of common stock issuable upon
conversion of the convertible debt in the principal amount of
$2,350,000 issued in connection with a private placement
consummated in June and July 2007; and
|
|
|
|
|
|
(iv) 7,500,000 shares of common stock issuable upon
the exercise of each of the class A warrants, class B
warrants, and class C warrants underlying the Units.
|
Risk
Factors
Investing in our securities involves a high degree of risk.
You should carefully consider the information set forth in the
Risk Factors section of this prospectus beginning on
page 12.
8
Summary
Financial Data
The summary financial data for the fiscal years ended
December 31, 2007 and 2006 was derived from our financial
statements that have been audited by Weiser LLP for the fiscal
years then ended. The nine months ended September 30, 2008
and 2007 and the years ended December 31, 2007 and 2006
data were restated to reflect discontinued operations. All
common shares numbers have been restated to reflect the
1-for-20
reverse stock split. The summary financial data for the nine
months ended September 30, 2008 and 2007 was derived from
our unaudited financial data but, in the opinion of management,
reflects all adjustments necessary for a fair presentation of
the results for such periods. Historical results are not
necessarily indicative of the results to be expected in the
future. You should read the summary selected consolidated
financial data presented below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the notes to those financial statements
appearing elsewhere in this prospectus.
Consolidated
Statements of Income Data (As Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income on consumer receivables
|
|
$
|
10,942,757
|
|
|
$
|
9,901,507
|
|
|
$
|
13,863,538
|
|
|
$
|
8,431,259
|
|
Other income
|
|
|
3,334
|
|
|
|
27,176
|
|
|
|
27,847
|
|
|
|
208,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
10,946,091
|
|
|
|
9,928,683
|
|
|
|
13,891,385
|
|
|
|
8,639,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees (including fees paid to related parties of
$634,081 and $868,761 for the nine months ended
September 30, 2008 and 2007, respectively and $1,128,107
and $1,225,577 for the years ended December 31, 2007 and
2006, respectively)
|
|
|
3,817,408
|
|
|
|
3,438,740
|
|
|
|
4,791,224
|
|
|
|
2,888,643
|
|
General and administrative expenses
|
|
|
1,557,351
|
|
|
|
2,156,741
|
|
|
|
2,479,608
|
|
|
|
2,205,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,374,759
|
|
|
|
5,595,481
|
|
|
|
7,270,832
|
|
|
|
5,093,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,571,332
|
|
|
|
4,333,202
|
|
|
|
6,620,553
|
|
|
|
3,545,810
|
|
Interest expense (including interest incurred to related parties
of $28,435 and $10,500 for the nine months ended
September 30, 2008 and 2007, respectively and $14,000 and
$18,269 for the years ended December 31, 2007 and 2006,
respectively)
|
|
|
(880,064
|
)
|
|
|
(1,196,045
|
)
|
|
|
(1,623,520
|
)
|
|
|
(908,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
4,691,268
|
|
|
|
3,137,157
|
|
|
|
4,997,033
|
|
|
|
2,637,663
|
|
Provision for income taxes
|
|
|
1,888,038
|
|
|
|
1,307,720
|
|
|
|
2,090,143
|
|
|
|
1,102,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
2,803,230
|
|
|
|
1,829,437
|
|
|
|
2,906,890
|
|
|
|
1,535,025
|
|
Loss from discontinued operations (including fees paid to
related parties of $-0- and $4,531 and $6,238 and $15,667 and
interest incurred to related parties of $175,056 and $164,559
and $233,194 and $216,528 for the nine months ended
September 30, 2008 and 2007, respectively and the years
ended December 31, 2007 and 2006, respectively and net of
tax benefit of $442,430 and $195,330 and $244,808 and $130,597
for the nine months ended September 30, 2008 and 2007,
respectively and years ended December 31, 2007 and 2006,
respectively
|
|
|
(1,124,027
|
)
|
|
|
(269,288
|
)
|
|
|
(334,815
|
)
|
|
|
(216,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,679,203
|
|
|
|
1,560,149
|
|
|
|
2,572,075
|
|
|
|
1,318,690
|
|
Preferred dividends
|
|
|
(1,035,000
|
)
|
|
|
(1,035,000
|
)
|
|
|
(1,380,000
|
)
|
|
|
(851,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
644,203
|
|
|
$
|
525,149
|
|
|
$
|
1,192,075
|
|
|
$
|
467,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.02
|
|
|
$
|
0.98
|
|
|
$
|
1.86
|
|
|
$
|
0.85
|
|
Diluted
|
|
$
|
2.02
|
|
|
$
|
0.89
|
|
|
$
|
1.69
|
|
|
$
|
0.79
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.29
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.27
|
)
|
Diluted
|
|
$
|
(1.28
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.25
|
)
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
0.65
|
|
|
$
|
1.45
|
|
|
$
|
0.58
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.59
|
|
|
$
|
1.32
|
|
|
$
|
054
|
|
Average common shares basic
|
|
|
873,606
|
|
|
|
808,811
|
|
|
|
819,752
|
|
|
|
800,433
|
|
Average common shares diluted
|
|
|
876,511
|
|
|
|
893,462
|
|
|
|
903,788
|
|
|
|
863,844
|
|
9
Consolidated
Balance Sheet Data (As Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Assets
|
Cash and cash equivalents
|
|
$
|
33,992
|
|
|
$
|
162,180
|
|
|
$
|
2,444,356
|
|
Consumer receivables, net
|
|
|
46,152,417
|
|
|
|
46,971,014
|
|
|
|
38,327,926
|
|
Property and equipment, net of accumulated depreciation
|
|
|
47,347
|
|
|
|
64,420
|
|
|
|
68,619
|
|
Deferred income tax asset, net
|
|
|
83,600
|
|
|
|
98,600
|
|
|
|
205,900
|
|
Security deposits
|
|
|
30,224
|
|
|
|
30,224
|
|
|
|
30,100
|
|
Other assets (including $0, $115,146 and $0 employee loan
to a related party at September 30, 2008 and
December 31, 2007 and 2006, respectively)
|
|
|
351,035
|
|
|
|
487,071
|
|
|
|
195,198
|
|
Assets of discontinued operations
|
|
|
5,730,328
|
|
|
|
6,793,319
|
|
|
|
7,162,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
52,428,943
|
|
|
$
|
54,606,828
|
|
|
$
|
48,434,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
477,590
|
|
|
$
|
552,269
|
|
|
$
|
266,756
|
|
Estimated court and media costs
|
|
|
5,742,939
|
|
|
|
7,374,212
|
|
|
|
8,446,319
|
|
Line of credit
|
|
|
9,792,567
|
|
|
|
14,429,138
|
|
|
|
13,791,388
|
|
Notes payable
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
Notes payable to related parties
|
|
|
740,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
Convertible subordinated notes
|
|
|
2,350,000
|
|
|
|
2,350,000
|
|
|
|
|
|
Income taxes payable
|
|
|
1,605,919
|
|
|
|
820,222
|
|
|
|
600,974
|
|
Liabilities from discontinued operations (including notes
payable to related parties of $2,300,000)
|
|
|
5,490,675
|
|
|
|
4,374,441
|
|
|
|
3,556,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,599,690
|
|
|
|
30,100,282
|
|
|
|
26,862,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A 10% convertible preferred stock, $0.001 par
value, 10,000,000 shares authorized, 1,380,000 shares
issued and outstanding (liquidation preference of $13,800,000)
|
|
|
1,380
|
|
|
|
1,380
|
|
|
|
1,380
|
|
Common stock, $0.001 par value, 40,000,000 shares
authorized, 893,799, 853,341, and 806,466 shares issued and
outstanding, respectively
|
|
|
894
|
|
|
|
853
|
|
|
|
806
|
|
Additional
paid-in-capital
|
|
|
25,938,620
|
|
|
|
25,260,157
|
|
|
|
23,517,704
|
|
Accumulated deficit
|
|
|
(111,641
|
)
|
|
|
(755,844
|
)
|
|
|
(1,947,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
25,829,253
|
|
|
|
24,506,546
|
|
|
|
21,571,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
52,428,943
|
|
|
$
|
54,606,828
|
|
|
$
|
48,434,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Operating
and Other Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The
|
|
|
For The
|
|
|
|
Nine Months Ended
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Cash collections
|
|
$
|
13,620,759
|
|
|
$
|
13,058,115
|
|
|
$
|
17,960,713
|
|
|
$
|
10,777,742
|
|
Portfolio purchases, at cost
|
|
|
956,882
|
|
|
|
9,060,980
|
|
|
|
9,316,779
|
|
|
|
15,367,940
|
|
Portfolio purchases, at face
|
|
|
15,865,914
|
|
|
|
127,066,158
|
|
|
|
129,892,667
|
|
|
|
199,042,032
|
|
Cumulative aggregate managed portfolios, at face
|
|
|
498,912,748
|
|
|
|
480,220,325
|
|
|
|
483,046,834
|
|
|
|
353,154,167
|
|
Return on average assets(1)(2)
|
|
|
4.17
|
%
|
|
|
4.01
|
%
|
|
|
4.97
|
%
|
|
|
3.95
|
%
|
Return on average stockholders equity(1)(3)
|
|
|
8.89
|
%
|
|
|
9.32
|
%
|
|
|
11.56
|
%
|
|
|
8.92
|
%
|
Return from continuing operations on average assets(1)(4)
|
|
|
6.96
|
%
|
|
|
4.70
|
%
|
|
|
5.62
|
%
|
|
|
4.59
|
%
|
Return from continuing operations on average stockholders
equity(1)(5)
|
|
|
14.84
|
%
|
|
|
10.93
|
%
|
|
|
13.06
|
%
|
|
|
10.39
|
%
|
Operating expenses to cash collections(1)
|
|
|
39.46
|
%
|
|
|
42.85
|
%
|
|
|
40.48
|
%
|
|
|
47.26
|
%
|
General and administrative expenses to cash collections(1)
|
|
|
11.43
|
%
|
|
|
16.52
|
%
|
|
|
13.81
|
%
|
|
|
20.46
|
%
|
|
|
|
(1)
|
|
The ratio information for the nine months ended
September 30, 2008 and September 30, 2007 has been
annualized.
|
|
(2)
|
|
The return on average assets is computed by dividing net income
by average total assets for the period.
|
|
(3)
|
|
The return on average stockholders equity is computed by
dividing net income by average stockholders equity for the
period.
|
|
(4)
|
|
The return from continuing operations on average assets is
computed by dividing income from continuing operations by
average total assets for the period.
|
|
(5)
|
|
The return from continuing operations on average
stockholders equity is computed by dividing income from
continuing operations by average stockholders equity for
the period.
|
11
RISK
FACTORS
Investing in our securities involves a high degree of risk.
Before you invest in our securities, you should understand and
carefully consider the risks below, as well as all of the other
information contained in this prospectus and our financial
statements and the related notes included elsewhere in this
prospectus. Any of these risks could have a material adverse
effect on our business, financial condition, results of
operations and the trading price of our securities may decline,
and you may lose all or part of your investment.
If we
are unable to access external sources of financing we may not be
able to fund and grow our operations.
We depend on loans from our $22.5 million credit facility,
our cash flow from operations and other external sources,
including the proceeds from this offering, to fund and expand
our operations. Our ability to grow our business is dependent on
availability under our credit facility and our access to
additional financing and capital resources at acceptable rates.
The failure to obtain financing and capital on acceptable
financing terms as needed could limit our ability to purchase
consumer receivable portfolios and achieve our growth plans.
We have a $22.5 million credit facility with Wells Fargo,
which expires in January 2011. As of January 31, 2009, we
had approximately $14,247,000 million of credit available.
However, many financial institutions have been adversely
impacted by the current financial crisis and, as a result, have
ceased or reduced the amount of lending they have made available
to their customers. As a result, we may have insufficient credit
lines available to purchase additional receivables, unless we
successfully obtain additional credit.
We have also raised additional capital from time to time through
private placement offerings, or public offerings of equity or
debt securities, or a combination thereof. Although we have no
specific capital raising transactions currently under
negotiation other than this offering, we may determine to
undertake such transactions at any time. Such transactions could
include the sale of equity or debt at less than the market price
of our common stock at the time of such transaction. The terms
of any such capital raising transaction would be considered by
the board of directors at the time it is proposed by management.
Our ability to obtain additional financing in the future will
depend in part upon the prevailing capital market conditions, as
well as our business performance. We may be unable to arrange
additional financing on terms satisfactory to us or at all. If
additional financing is raised by the issuance of common stock
you may suffer additional dilution and if additional financing
is raised through debt financing, it may involve significant
restrictive covenants which could affect our ability to operate
our business. In addition, we may incur significant costs in
connection with any potential financing, whether or not we are
able to raise additional capital.
We may
not be able to purchase consumer receivable portfolios at
favorable prices or on sufficiently favorable terms or at
all.
Our ability to execute our business strategy depends upon the
continued availability of consumer receivable portfolios that
meet our purchasing criteria and our ability to identify and
finance the purchases of such assets. The availability of
consumer receivable portfolios at favorable prices and on terms
acceptable to us depends on a number of factors outside of our
control, including:
|
|
|
|
|
the continuation of the current growth trend in debt;
|
|
|
|
the continued volume of consumer receivable portfolios available
for sale;
|
|
|
|
competitive factors affecting potential purchasers and sellers
of consumer receivable portfolios; and
|
|
|
|
fluctuations in interest rates.
|
The market for acquiring consumer receivable portfolios is
becoming more competitive, thereby possibly diminishing our
ability to acquire such portfolios at attractive prices in
future periods. The growth in debt may also be affected by:
|
|
|
|
|
a continued slowdown in the economy;
|
|
|
|
continued reductions in consumer spending;
|
12
|
|
|
|
|
changes in the underwriting criteria by originators;
|
|
|
|
changes in laws and regulations governing lending and
bankruptcy; and
|
|
|
|
fluctuation in interest rates.
|
The continued slowing of growth in consumer spending could
result in a decrease in the availability for purchase of
consumer receivable portfolios that could affect the purchase
prices of such portfolios. Any increase in the prices we are
required to pay for such assets in turn will reduce the possible
profit, if any, we generate from such assets.
We may
not be able to recover sufficient amounts from the assets we
acquire to recover the costs associated with the purchase and
servicing of those assets and to fund our
operations.
We acquire and collect on charged-off consumer receivable
portfolios. In order to operate profitably over the long term,
we must continually purchase and collect on a sufficient volume
of receivables to generate revenue that exceeds our costs. Our
inability to realize value from our receivable portfolios in
excess of the purchase price paid for such receivables and our
expenses may compromise our ability to remain as a going
concern. The originators or interim owners of the receivables
generally have:
|
|
|
|
|
made numerous attempts to collect on these obligations, often
using both their in-house collection staff and third-party
collection agencies;
|
|
|
|
subsequently deemed these obligations as uncollectible; and
|
|
|
|
charged-off these obligations.
|
These receivable portfolios are purchased at significant
discounts to the actual amounts the obligors owe. These
receivables are difficult to collect and actual recoveries may
vary and be less than the amount expected. In addition, our
collections may worsen in a weak economic cycle, such as the
cycle we are currently experiencing in the United States. In
addition, as the unemployment rate increases, we may also
experience lower recovery rates. As a result, we may not recover
amounts in excess of our acquisition and servicing costs. Since
2003, we have purchased approximately $500 million in
original face amount of consumer receivables at a purchase price
of approximately $40.6 million. Such original outstanding
amount does not include interest and other fees which are
accrued by the originator subsequent to the time of charge-off.
We have collected approximately $50.4 million of such
consumer receivables, which includes interest accrued post
charge-off. As of September 30, 2008, we have approximately
$671 million in current face amount of consumer
receivables, which includes interest accrued post charge-off and
excludes uncollectible accounts, such as deceased and bankrupt
accounts. For the reasons set forth herein and elsewhere in this
prospectus, we cannot estimate what percentage of the current
face amount of consumer receivables we will actually collect.
Our ability to recover on our consumer receivable portfolios and
produce sufficient returns can also be negatively impacted by
the quality of the purchased receivables. In the normal course
of our portfolio acquisitions, some receivables may be included
in the portfolios that fail to conform to certain terms of the
purchase agreements and we may seek to return these receivables
to the seller for payment or replacement receivables. However,
such sellers may not be able to meet their payment obligations
to us. In addition, in order to obtain a portfolio of
receivables, we may be required to purchase certain receivables
that do not meet our general purchase criteria. Accounts that we
are unable to return to sellers or that do not meet our general
purchase criteria may yield no return. If cash flows from
operations are less than anticipated as a result of our
inability to collect sufficient amounts on our receivables, our
ability to satisfy our debt obligations, purchase new portfolios
and our future growth and profitability may be materially
adversely affected.
We are
subject to intense competition for the purchase of distressed
assets that may affect our ability to purchase distressed assets
at acceptable prices or at all.
We compete with other purchasers of consumer receivable
portfolios, with third-party collection agencies and with
financial services companies that manage their own portfolios.
We compete on the basis of reputation, industry experience and
performance. Some of our competitors have greater capital,
personnel and
13
other resources than we have. The possible entry of new
competitors, including competitors that historically have
focused on the acquisition of different asset types, and the
expected increase in competition from current market
participants, may reduce our access to consumer receivable
portfolios. Aggressive pricing by our competitors could raise
the price of such distressed assets above levels that we are
willing to pay, which could reduce the amount of such assets
suitable for us to purchase or, if purchased by us, reduce the
profits, if any, generated by such assets. If we are unable to
purchase distressed assets at favorable prices or at all, our
revenues and our ability to cover operating expenses may be
negatively impacted and our earnings could be materially reduced.
We are
dependent upon third parties, including affiliates of our
officers and directors, to service the legal collection process
of our consumer receivable portfolios.
We outsource substantially all of our receivable servicing to
over 80 law firms throughout the United States. As a
result, we are dependent upon the efforts of our third party
servicers, including the law firm of Ragan &
Ragan, P.C., to service and collect our consumer
receivables. Any failure by our third party servicers to
adequately perform collection services for us or remit such
collections to us could materially reduce our revenues and
possibly our profitability. In addition, our revenues and
profitability could be materially adversely affected if we are
not able to secure replacement servicers.
Conflicts
of interest may occur as a result of W. Peter Ragan, Sr. serving
as a director and officer of our company, and W. Peter Ragan,
Jr., serving as an officer of our company, while also being the
principals of Ragan & Ragan, P.C., our third
party servicers in the State of New Jersey.
As officers and, in the case of W. Peter Ragan, Sr., also
as a director, of our company, Messrs. Ragan and Ragan have
a fiduciary duty to our stockholders. However, their position as
the principals of the law firm Ragan &
Ragan, P.C., the primary third party servicers of our
consumer receivable portfolios in the State of New Jersey, may
compromise their ability to make decisions in the best interests
of our stockholders.
Each of Messrs. Ragan and Ragan devotes approximately 50%
of his business time to our affairs in accordance with the terms
of his respective employment agreement and the balance of his
business time to his law practice which includes the
representation of companies that may be deemed our competitors.
Accordingly, there are potential conflicts of interest inherent
in such relationship. The current agreement by and between our
wholly-owned subsidiary, Velocity Investments (VI),
and Ragan & Ragan P.C. is for one calendar year, and
automatically extends for additional periods of one calendar
year each unless terminated by us. The agreement provides for
the payment to such firm of a contingency fee equal to 25% of
all amounts collected and paid by the obligors. The shareholders
of Ragan & Ragan, P.C. are W. Peter
Ragan, Sr., our vice president and a director, and W. Peter
Ragan Jr., president of our wholly-owned subsidiary, VI. During
2007 and 2006, we paid Ragan & Ragan, P.C. an
aggregate of $1,134,345 and $1,241,244 respectively, for
services rendered in accordance with the terms of the agreements
between our subsidiaries and Ragan & Ragan, P.C.
Pursuant to an employment agreement dated January 1, 2004,
by and between W. Peter Ragan, Sr. and us,
Mr. Ragan, Sr. is entitled to an annual salary of
$100,000 in consideration for his position as our Vice President
and president of our wholly-owned subsidiaries, J. Holder, Inc.
(J. Holder) and VOM, LLC (VOM). In
addition, pursuant to an employment agreement dated
January 1, 2004, by and between W. Peter Ragan, Jr.
and us, Mr. Ragan, Jr. is entitled to an annual salary
of $100,000 per year in consideration for his position as
president of our wholly-owned subsidiary, VI.
Each of Messrs. Ragan and Ragan beneficially own
approximately 13.10% of our issued and outstanding shares of
common stock as of February 4, 2009.
The
loss of any of our executive officers may adversely affect our
operations and our ability to successfully acquire distressed
assets.
John C. Kleinert, our president and chief executive officer, W.
Peter Ragan, Sr., our vice president, W. Peter
Ragan, Jr., president of our wholly-owned subsidiary, VI,
and Mr. James J. Mastriani, our chief financial officer,
chief legal officer, treasurer and secretary, are responsible
for making substantially all
14
management decisions, including determining which distressed
assets to purchase, the purchase price and other material terms
of such acquisitions and when to sell such portfolios. Although
we have entered into employment agreements with each of such
individuals, the loss of any of their services could disrupt our
operations and adversely affect our ability to successfully
acquire consumer receivable portfolios. In addition, we have not
obtained key man life insurance on the lives of
Mr. Kleinert, Mr. Ragan, Sr.,
Mr. Ragan, Jr. and Mr. Mastriani.
We may
incur substantial indebtedness from time to time in connection
with our operations.
As of September 30, 2008, we had $17.7 million of debt
outstanding, including borrowings under our $22.5 million
credit facility and our outstanding notes, $4.4 million of
which related to discontinued operations. On October 29,
2008, we issued an additional $360,000 principal amount of debt.
We may incur substantial additional debt from time to time in
connection with our purchase of consumer receivable portfolios
which could affect our ability to obtain additional funds and
may increase our vulnerability to economic downturns. In
particular,
|
|
|
|
|
we could be required to dedicate a portion of our cash flows
from operations to pay debt service costs and, as a result, we
would have less funds available for operations, future
acquisitions of consumer receivable portfolios and other
purposes;
|
|
|
|
it may be more difficult and expensive to obtain additional
funding through financings, if available at all;
|
|
|
|
we would be more vulnerable to economic downturns and
fluctuations in interest rates, less able to withstand
competitive pressures and less flexible in reacting to changes
in our industry and general economic conditions; and
|
|
|
|
if we defaulted under our existing senior credit facility or
other outstanding indebtedness or if our lenders demanded
payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments.
|
Some
of our debt relates to discontinued operations, and we may not
be able to satisfy such debt obligations solely by liquidating
the related assets.
As of September 30, 2008, we had approximately
$4.4 million in outstanding debt related to the
discontinued operations of our wholly-owned subsidiaries, J.
Holder and VOM. Such debt consists of an outstanding balance on
a line of credit and notes, including $2.3 million
principal amount of notes held by related parties. As of
September 30, 2008, we valued the assets attributable to
the discontinued operations at $5.7 million,
$4.9 million of which is attributable to properties held
for sale. Due to the current economic crisis and real estate
market downturn, we may be forced to accept less for such assets
upon liquidation or incur additional impairment charges.
Accordingly, we may not be able to satisfy our debt obligations
related to our discontinued operations solely by liquidating the
related assets.
We
have pledged all of our assets to secure our borrowings under
our credit facility and if we default under our credit facility,
our operations would be seriously harmed.
Any indebtedness that we incur under our credit facility is
secured by a first lien upon all of our assets, including all of
our portfolios of consumer receivables acquired for liquidation.
If we default under our credit facility, those assets would be
available to our lender to satisfy our obligations. Any of these
consequences could adversely affect our ability to acquire
consumer receivable portfolios and operate our business.
The
restrictions contained in the secured financings could
negatively impact our ability to obtain financing from other
sources and to operate our business.
We and our subsidiaries have agreed to maintain certain ratios
with respect to borrowings under our credit facility against the
estimated remaining return value on Wells Fargo financed
portfolios. Our VI subsidiary agreed to maintain a minimum net
worth and subordinated debt of at least $14,000,000 for the
duration of the facility and net income of $375,000 for each
calendar quarter. We have also agreed to maintain minimum net
worth of at least $25,000,000 in stockholders equity and
subordinated debt for the duration of the facility and net
income of at least $200,000 for each calendar quarter.
Therefore, our ability to obtain financing from other sources
may be limited in the future.
15
Our credit facility contains certain restrictive covenants that
may restrict our ability to operate our business. Furthermore,
the failure to satisfy any of these covenants could:
|
|
|
|
|
cause our indebtedness to become immediately payable;
|
|
|
|
preclude us from further borrowings from these existing
sources; and
|
|
|
|
prevent us from securing alternative sources of financing
necessary to purchase consumer receivable portfolios and to
operate our business.
|
The result of such failure to satisfy these covenants would
significantly impact our ability to operate our business and
cause our credit facility to become immediately due and payable,
and give Wells Fargo the right to foreclose on our assets.
We
anticipate that we will incur significant increases in interest
expenses and dividend payments in the future.
As a result of our increased borrowings under our line of
credit, our other outstanding debt and our preferred stock, we
anticipate that we will incur significant increases in interest
expense and dividend payments. We believe such increases will be
offset over time by expected increased revenues from consumer
receivable portfolios purchased utilizing the proceeds of these
financings. However, revenues from such purchased portfolios may
not exceed the additional interest expense and dividend
payments. If the expected revenues from such purchased
portfolios do not exceed such interest expenses and dividend
payments, our results could be materially affected.
Our
collections may decrease if bankruptcy filings
increase.
During times of economic recession, the amount of defaulted
consumer receivables generally increases, which contributes to
an increase in the amount of personal bankruptcy filings. Under
certain bankruptcy filings an obligors assets are sold to
repay credit originators, but since certain of the receivables
we purchase are unsecured, we often would not be able to collect
on those receivables. We cannot assure you that our collection
experience would not decline with an increase in bankruptcy
filings. If our actual collection experience with respect to our
unsecured receivable portfolios is significantly lower than we
projected when we purchased the portfolios, our realization on
those assets may decline and our earnings could be negatively
affected.
We may
not be able to acquire consumer receivables of new asset types
or implement a new pricing structure.
We may pursue the acquisition of consumer receivable portfolios
of asset types in which we have little current experience. We
may not be able to complete any acquisitions of receivables of
these asset types and our limited experience in these asset
types may impair our ability to properly price these receivables
or collect on these receivables. This may cause us to pay too
much for these receivables, and consequently, we may not
generate a profit from these receivable portfolio acquisitions.
If we
fail to manage our growth effectively, we may not be able to
execute our business strategy.
We have experienced rapid growth over the past several years and
intend to maintain our growth. However, our growth will place
demands on our resources and we cannot be sure that we will be
able to manage our growth effectively. Future internal growth
will depend on a number of factors, including:
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the effective and timely initiation and development of
relationships with sellers of distressed assets and strategic
partners;
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our ability to efficiently collect consumer receivables; and
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the recruitment, motivation and retention of qualified personnel.
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Sustaining growth will also require the implementation of
enhancements to our operational and financial systems and will
require additional management, operational and financial
resources. We may not be able to manage our expanding operations
effectively or maintain or accelerate our growth. Any failure to
do so could adversely affect our ability to generate revenues
and control our expenses.
Our
operations could suffer from telecommunications or technology
downtime, disruption or increased costs.
Our ability to execute our business strategy depends in part on
sophisticated telecommunications and computer systems. The
temporary loss of our computer and telecommunications systems,
through casualty, operating malfunction or servicers
failure, could disrupt our operations. In addition, we must
record and process significant amounts of data quickly and
accurately to properly bid on prospective acquisitions of
consumer receivable portfolios and to access, maintain and
expand the databases we use for our collection and monitoring
activities. Any failure of our information systems and their
backup systems would interrupt our operations. We do not
maintain business interruption insurance. However, we maintain a
disaster recovery program intended to allow us to operate our
business at an offsite facility. In the event our disaster
recovery program fails to operate as expected or we do not have
adequate backup arrangements for all of our operations, we may
incur significant losses if an outage occurs.
We use
estimates for recognizing revenue on a majority of our consumer
receivable portfolio investments and our earnings would be
reduced if actual results are less than estimated.
We recognize finance income on a majority of our consumer
receivable portfolios using the interest method. We only use
this method if we can reasonably estimate the expected amount
and timing of cash to be collected on a specific portfolio based
on historic experience and other factors. Under the interest
method, we recognize finance income on the effective yield
method based on the actual cash collected during a period,
future estimated cash flows and the portfolios carrying
value prior to the application of the current quarters
cash collections. At September 30, 2008, we have
$46,152,417 in consumer receivables outstanding. The estimated
future cash flows are reevaluated quarterly. If future cash
collections on these portfolios were less than what was
estimated, we would recognize less than anticipated finance
income or possibly an expense that would reduce our earnings
during such periods. Any reduction in our earnings could
materially adversely affect our stock price. When we first
developed our cash forecasting models in 2003, limited
historical collection data was available to accurately estimate
cash collections beyond 60 months. Since developing these
models, we have continuously analyzed the historical collection
data over the life of the portfolios. While we do not yet have
six complete years of historical information on any of our
static pools, we have observed that certain receivable
portfolios purchased during, and prior to 2004, have experienced
cash collections beyond 60 months from the date of
purchase. When we believe that we have enough collection history
to forecast collections beyond 60 months, we may extend the
useful life of our static pools.
Risk
Factors Relating to Our Industry
Government
regulations may limit our ability to recover and enforce the
collection of our consumer receivables.
Federal, state and municipal laws, rules, regulations and
ordinances may limit our ability to recover and enforce our
rights with respect to the consumer receivables acquired by us.
These laws include, but are not limited to, the following
Federal statutes and related regulations and comparable statutes
in states where obligors reside
and/or
where
creditors are located:
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Fair Debt Collection Practices Act;
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Fair Credit Reporting Act;
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Gramm-Leach-Bliley Act;
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Electronic Funds Transfer Act;
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Telephone Consumer Protection Act;
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Servicemembers Civil Relief Act;
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U.S. Bankruptcy Code;
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Fair Credit Billing Act; and
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the Equal Credit Opportunity Act.
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We may be precluded from collecting consumer receivables we
purchase where the creditors or other previous owners or
servicers failed to comply with applicable law in originating or
servicing such acquired receivables. Laws relating to the
collection of consumer debt also directly apply to our business.
Our failure to comply with any laws applicable to us, including
state licensing laws, could limit our ability to recover on our
receivables and could subject us to fines and penalties, which
could reduce our earnings and result in a default under our loan
arrangements.
In addition, while some financial services companies are
eligible to receive funds from the U.S. Treasury
Departments Troubled Asset Relief Program, or TARP, we are
not. Therefore, to the extent the current economic crisis
adversely affects our ability to collect upon troubled assets,
we do not expect to receive government assistance.
Additional laws may be enacted that could impose additional
restrictions on the servicing and collection of consumer
receivables. Such new laws may adversely affect the ability to
collect on our receivables which could also adversely affect our
revenues and earnings.
Our
inability to obtain or renew required licenses or to be
qualified to do business in certain states could have a material
adverse effect upon our results of operations and financial
condition.
We currently hold a number of licenses issued under applicable
consumer credit laws. Certain of our current licenses and any
licenses that we may be required to obtain in the future may be
subject to periodic renewal provisions
and/or
other
requirements. In addition, many states require companies to be
qualified to do business in such states in order for such
companies to be able to bring lawsuits in the courts of such
states, and unqualified companies transacting business in a
state are generally barred from maintaining a lawsuit in such
states courts. If we are denied access to a states
courts, we may not be able to bring an action to enforce
collection of our receivables in that state. Our inability to
renew our licenses or take any other required action with
respect to such licenses or obtain or maintain qualifications to
do business in certain states could limit our ability to collect
on some of our receivables and otherwise have a material adverse
effect upon our results of operations and financial condition.
Because our receivables are generally originated and serviced
pursuant to a variety of federal
and/or
state
laws by a variety of entities and may involve consumers in all
50 states, the District of Columbia and Puerto Rico, it is
difficult to detect whether the original servicing entities have
at all times been in substantial compliance with applicable law.
Also, while we have no knowledge of circumstances to the
contrary, it is possible that we or our servicers have been or
will continue to be at all times in substantial compliance with
applicable law. The failure to comply with applicable law could
materially adversely affect our ability to collect our
receivables and could subject us to increased costs, fines and
penalties.
Class
action suits and other litigation in our industry could divert
our managements attention from operating our business and
increase our expenses.
Certain originators and servicers in the consumer credit
industry have been subject to class actions and other
litigation. Claims have included failure to comply with
applicable laws and regulations and improper or deceptive
origination and servicing practices. If we become a party to any
such class action suit or other litigation, our results of
operations and financial condition could be materially adversely
affected.
18
Risk
Factors Relating to Our Securities
We may
choose to redeem our outstanding warrants at a time that is
disadvantageous to our warrant holders.
We may redeem the outstanding class A warrants,
class B warrants, and class C warrants issued as a part of
our units at any time, at a price of $0.01 per warrant, upon not
less than 20 days prior written notice of redemption,
and if, and only if, the last sales price of our common
stock equals or exceeds, with respect to the class A
warrants, $ per share (120% of the
exercise price), with respect to the class B warrants,
$ per share (120% of the exercise
price), with respect to the class C warrants,
$ per share (120% of the exercise
price), in each case for any 20 trading days within a 30 trading
day period ending three business days before we send the notice
of redemption. In addition, we may not redeem the warrants
unless on the date we give notice of redemption and during the
entire period thereafter until the time we redeem the class of
warrants we have an effective registration statement covering
the shares of common stock issuable upon the exercise of such
warrants and a current prospectus relating to them is available
from the date we give notice of redemption through the date
fixed for the redemption.
Redemption of a class of warrants could force the warrant
holders: (i) to exercise the warrants and pay the exercise price
at a time when it may be disadvantageous for the holders to do
so, (ii) to sell the warrants at the then current market price
when they might otherwise wish to hold the warrants, or (iii) to
accept the nominal redemption price which, at the time the
warrants are called for redemption, is likely to be
substantially less than the market value of the warrants. We
expect most purchasers of our warrants will hold their
securities through one or more intermediaries and consequently
you are unlikely to receive notice directly from us that the
warrants are being redeemed. If you fail to receive notice of
redemption from a third party and your warrants are redeemed for
nominal value, you will not have recourse to us.
Although
we are required to use our best efforts to have an effective
registration statement covering the issuance of the shares of
common stock underlying the class A warrants, class B
warrants, and class C warrants at the time that our warrant
holders exercise their warrants, we cannot guarantee that a
registration statement will be effective, in which case our
warrant holders may not be able to exercise our warrants and
therefore the warrants could expire worthless.
Holders of our class A warrants, class B warrants, and
class C warrants will be able to exercise the warrants only
if (i) a current registration statement under the Securities Act
relating to the shares of our common stock underlying the
warrants is then effective and (ii) such shares of common stock
are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various
holders of warrants reside. Although we have undertaken in the
warrant agreement, and therefore have a contractual obligation,
to use our best efforts to maintain a current registration
statement covering the shares of common stock underlying the
warrants following completion of this offering, and we intend to
comply with our undertaking, we may not be able to do so.
Holders of warrants will not be entitled to a cash settlement
for their warrants if we fail to have an effective registration
statement or a current prospectus available relating to the
common stock issuable upon exercise of the warrants. Factors
such as an unexpected inability to remain current in our SEC
reporting obligations or other material developments concerning
our business could present difficulties in maintaining a current
registration statement. If such event occurs, holders of the
warrants will be unable to exercise their warrants and would
either have to sell their warrants in the open market or allow
them to expire unexercised. Such expiration would result in each
unit holder paying the full unit purchase price solely for the
shares of common stock underlying the unit.
An
investor will only be able to exercise a class A warrant,
class B warrant, or class C warrant if the issuance of
common stock upon such exercise has been registered or qualified
or is deemed exempt under the securities laws of the state of
residence of the holder of the warrants.
No class A warrants, class B warrants or class C
warrants will be exercisable and we will not be obligated to
issue shares of common stock unless the common stock issuable
upon such exercise has been registered or qualified or deemed to
be exempt under the securities laws of the state of residence of
the holder of the
19
warrants. At the time that the warrants become exercisable, we
expect that our securities will continue to be listed on a
national securities exchange, which would provide an exemption
from registration in every state. Accordingly, we believe
holders in every state will be able to exercise their warrants
as long as our prospectus relating to the common stock issuable
upon exercise of the warrants is current. However, we cannot
assure you of this fact. As a result, the warrants may be
deprived of any value, the market for the warrants may be
limited and the holders of warrants may not be able to exercise
their warrants if the common stock issuable upon such exercise
is not qualified or exempt from qualification in the
jurisdictions in which the holders of the warrants reside.
Our
quarterly operating results may fluctuate and may cause possible
volatility in the price of our securities or cause the price to
decline.
Because of the nature of our business, our quarterly operating
results may fluctuate, which may adversely affect the market
price of our securities. Our results may fluctuate as a result
of any of the following:
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the timing and amount of collections on our consumer receivable
portfolios;
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our inability to identify and acquire additional consumer
receivable portfolios;
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a decline in the estimated value of our consumer receivable
portfolio recoveries;
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increases in operating expenses associated with the growth of
our operations; and
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general and economic market conditions.
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In addition, the overall market for securities in recent years
generally, and in the last year particularly, has experienced
extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies and
companies operating in the financial sector. The trading price
of our securities is expected to be subject to significant
fluctuations including, but not limited to, the following:
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quarterly variations in operating results and achievement of key
business metrics;
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changes in earnings estimates by securities analysts, if any;
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any differences between reported results and securities
analysts published or unpublished expectations;
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announcements of new portfolio purchases by us or our
competitors;
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market reaction to any acquisitions, divestitures, joint
ventures or strategic investments announced by us or our
competitors;
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shares being sold pursuant to Rule 144 or upon exercise of
warrants or options or conversion of our outstanding preferred
stock and convertible notes; and
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general economic or stock market conditions unrelated to our
operating performance.
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These fluctuations, as well as general economic and market
conditions, may have a material or adverse effect on the market
price of our securities.
Because
three stockholders own a large percentage of our voting stock,
other stockholders voting power may be
limited.
As of February 4, 2009, John C. Kleinert, W. Peter
Ragan, Sr. and W. Peter Ragan, Jr., three of our
executive officers, beneficially owned or controlled
approximately 77.96% (including shares issuable upon exercise of
warrants owned by such stockholders) of our shares. Following
this offering, such stockholders will beneficially own
approximately 20.58% of our outstanding stock, assuming
2,500,000 units are sold in this offering. If those stockholders
act together, they may have the ability to influence matters
submitted to our stockholders for approval, including the
election and removal of directors and the approval of any
merger, consolidation or sale of all or substantially all of our
assets. In addition, the ownership of such three stockholders
could preclude any unsolicited acquisition of us, and
consequently, materially adversely affect the price of our
common stock. These stockholders may make decisions that are
adverse to your interests.
20
Our
organizational documents, employment and change of control
agreements and Delaware law make it more difficult for us to be
acquired without the consent and cooperation of our board of
directors and management.
Provisions of our organizational documents and Delaware law may
deter or prevent a takeover attempt, including a takeover
attempt in which the potential purchaser offers to pay a per
share price greater than the current market price of our common
stock. In addition, our employment and change of control
agreements with certain of our executive officers require lump
sum payments and the immediate vesting of unvested stock grants
and stock options upon a change of control. Under the terms of
our certificate of incorporation, our board of directors has the
authority, without further action by the stockholders, to issue
shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of such shares.
The ability to issue shares of preferred stock could tend to
discourage takeover or acquisition proposals not supported by
our current board of directors. In addition, we are subject to
Section 203 of the Delaware General Corporation Law, which
restricts business combinations with some stockholders once the
stockholder acquires 15% or more of our common stock.
Our
outstanding warrants may have an adverse effect on the market
price of common stock.
In connection with this offering, we will be issuing warrants to
purchase up to an aggregate of 7,500,000 shares of common
stock. In addition, we have agreed to issue up to an additional
1,125,000 warrants to purchase additional shares of common stock
if the underwriters
over-allotment
option is exercised in full. The sale, or even the possibility
of sale, of the shares of common stock underlying the warrants
could have an adverse effect on the market price for our
securities or on our ability to obtain future financing. If and
to the extent these warrants are exercised, you may experience
dilution to your holdings.
A
market for our securities may not develop, which would adversely
affect the liquidity and price of our securities.
Although we have applied to have our units, class A warrants,
class B warrants, and class C warrants listed on the NYSE
Alternext, as of the date of this prospectus, there is currently
no market for these securities. While our common stock
currently trades on the NYSE Alternext, there is no prior
trading history on which to base an investment decision with
respect to the units and warrants. Following this offering, the
price of our securities may vary significantly for a variety of
reasons, including our results of operations, the filing of
periodic reports with the SEC, and general market and economic
conditions. Once listed on the NYSE Alternext, an active trading
market for our units and warrants may never develop or, if
developed, it may not be sustained. You may be unable to sell
these securities unless a market can be established or sustained.
The
issuance of authorized shares of preferred stock and additional
common stock may result in dilution to existing stockholders,
adversely affect the rights of existing stockholders and depress
the price of our common stock.
We have 10,000,000 shares of authorized blank
check preferred stock, the terms of which may be fixed by
our board of directors. Our board of directors has the
authority, without stockholder approval, to create and issue one
or more series of such preferred stock and to determine the
voting, dividend and other rights of the holders of such
preferred stock. Depending on the rights, preferences and
privileges granted when the preferred stock is issued, it may
have the effect of delaying, deferring or preventing a change in
control without further action by the stockholders, may
discourage bids for our common stock at a premium over the
market price of the common stock and may adversely affect the
market price of and voting and other rights of the holders of
our common stock.
As of February 4, 2009, there were 1,380,000 shares of
preferred stock outstanding, convertible into
276,000 shares of our common stock. In addition to the
preferred stock, we are authorized to issue
40,000,000 shares of our common stock. As of
February 4, 2009, there were 894,799 shares of our
common stock issued and outstanding. However, the total number
of shares of common stock issued and outstanding
21
does not include outstanding unexercised options, warrants,
convertible preferred shares or convertible debt exercisable for
426,416 shares of common stock, which we have reserved as
of February 4, 2009. We have reserved a total of
50,000 shares of common stock under our 2004 Equity
Incentive Program. As of February 4, 2009,
12,600 shares had been issued under such plan. In addition,
assuming we sell all of the units offered hereby, we have
reserved for issuance an aggregate of 7,500,000 shares of
common stock underlying the class A warrants, class B
warrants, and class C warrants.
Under most circumstances, our board of directors has the right,
without stockholder approval, to issue authorized but unissued
and nonreserved shares of our common stock. If all of these
shares were issued, it would dilute the existing stockholders
and may depress the price of our common stock.
Any of (i) the exercise of the outstanding options and
warrants, (ii) the conversion of the preferred stock, or
(iii) the conversion by the convertible debenture holder of
such debenture into shares of our common stock will reduce the
percentage of common stock held by the public stockholders.
Further, the terms on which we could obtain additional capital
during the life of the options and warrants may be adversely
affected, and it should be expected that the holders of the
options and the warrants would exercise them at a time when we
would be able to obtain equity capital on terms more favorable
than those provided for by such options and warrants. As a
result, any issuance of additional shares of common stock may
cause our current stockholders to suffer significant dilution
and depress the price of our common stock.
Common
stock eligible for future sale may depress the price of our
common stock in the market.
As of February 4, 2009, there were 894,799 shares of
common stock held by our present stockholders, and approximately
712,386 shares may be available for public sale by means of
ordinary brokerage transactions in the open market pursuant to
Rule 144, promulgated under the Securities Act, subject to
certain limitations. 155,003 shares, 68,200 shares and
53,813 shares may be sold pursuant to current registration
statements effective on August 12, 2005, December 29,
2005 and December 18, 2007, respectively. In general,
pursuant to Rule 144, after satisfying a six month holding
period: (i) affiliated stockholder (or stockholders whose
shares are aggregated) may, under certain circumstances, sell
within any three month period a number of securities which does
not exceed the greater of 1% of the then outstanding shares of
common stock or the average weekly trading volume of the class
during the four calendar weeks prior to such sale and
(ii) non-affiliated stockholders may sell without such
limitations, provided we are current in our public reporting
obligations. Rule 144 also permits the sale of securities
by non-affiliates that have satisfied a one year holding period
without any limitation or restriction. The sale of such a large
number of shares may cause the price of our securities to
decline.
We, and each of our executive officers and directors, have
agreed, for a period of 180 days after the date of this
prospectus, not to sell, offer, agree to sell, contract to sell,
hypothecate, pledge, grant any option to sell, make any short
sale, or otherwise dispose of or hedge, directly or indirectly,
any shares of our common stock or securities convertible into,
exchangeable or exercisable for any shares of our common stock
or warrants or other rights to purchase shares of our common
stock or other similar securities without, in each case, the
prior written consent of Sandler ONeill &
Partners, L.P.
We
have never paid dividends on our common stock and do not
anticipate paying dividends on our common stock for the
foreseeable future; therefore, returns on your investment may
only be realized by the appreciation in value of our securities,
if any.
We have never paid any cash dividends on our common stock and do
not anticipate paying any cash dividends on our common stock in
the foreseeable future. We plan to retain any future earnings to
finance growth. Because of this, investors who purchase our
common stock
and/or
convert their warrants into common stock may only realize a
return on their investment if the value of our common stock
appreciates. If we determine that we will pay dividends to the
holders of our common stock, we may be unable to pay on a timely
basis.
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Our
securities may be de-listed from the NYSE Alternext if we do not
meet continued listing requirements.
In addition to our common stock which currently trades on the
NYSE Alternext, we have applied to have our units, class A
warrants, class B warrants, and class C warrants
listed upon consummation of this offering. We cannot assure you
that our units, class A warrants, class B warrants,
and class C warrants will be listed and, if listed, will
continue to be listed on the NYSE Alternext. If we do not meet
the continued listing requirements of the NYSE Alternext and our
securities are delisted by the NYSE Alternext, trading of our
securities would thereafter likely be conducted on the OTC
Bulletin Board. In such case, the market liquidity for our
securities would likely be negatively affected, which may make
it more difficult for holders of our units, common stock,
class A warrants, class B warrants, and class C
warrants to sell their securities in the open market and we
could face difficulty raising capital necessary for our
continued operations.
The NYSE Alternext requires that in the event a listed security
has been trading at a low price per share for a substantial
period of time, the issuer must effect an appropriate reverse
stock split. On November 17, 2008, we effected a
one-for-twenty reverse split of our common stock in part to
satisfy NYSE Alternext listing requirements. Nevertheless, our
securities may in the future trade at levels that do not meet
the NYSE Alternext requirements.
We
have broad discretion in the use of proceeds of this
offering.
We have not designated the anticipated net proceeds of this
offering for specific uses. Accordingly, our management will
have considerable discretion in the application of the net
proceeds of this offering and you will not have the opportunity,
as part of your investment decision, to assess whether the
proceeds are being used appropriately. See Use of
Proceeds.
23
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This prospectus includes and incorporates by reference
forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act of 1934 with respect to our
financial condition, results of operations, plans, objectives,
future performance and business, which are usually identified by
the use of words such as will, may,
anticipates, believes,
estimates, expects,
projects, plans, predicts,
continues, intends, should,
would, or similar expressions. We intend for these
forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and are
including this statement for purposes of complying with these
safe harbor provisions.
These forward-looking statements reflect our current views and
expectations about our plans, strategies and prospects, which
are based on the information currently available and on current
assumptions.
These plans, intentions or expectations may not be fully
achieved, if at all. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, and
actual results may differ materially from those discussed in the
forward-looking statements as a result of various factors,
including those factors described in the Risk
Factors section beginning on page 12 of this
prospectus. Listed below and discussed elsewhere in this
prospectus are some important risks, uncertainties and
contingencies that could cause our actual results, performances
or achievements to be materially different from the
forward-looking statements included or incorporated by reference
in this prospectus. These risks, uncertainties and contingencies
include, but are not limited to, the following:
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the availability for purchase of consumer receivable portfolios,
interests in distressed real property and tax lien certificates
that satisfy our criteria;
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competition in the industry;
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the availability of debt and equity financing;
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future acquisitions;
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availability of qualified personnel;
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international, national, regional and local economic and
political changes;
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general economic and market conditions, including the current
economic and housing crisis, could have a material effect on the
current carrying value of real properties held for sale by our
discontinued operations.
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changes in applicable state and federal laws;
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trends affecting our industry, our financial condition or
results of operations;
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the timing and amount of collections on our consumer receivable
portfolios in light of the current economic and housing
crisis; and
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increases in operating expenses associated with the growth of
our operations.
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You should read this prospectus and the documents that we
incorporate by reference in this prospectus completely and with
the understanding that our actual future results may be
materially different from what we expect. We may not update
these forward-looking statements, even though our situation may
change in the future. We qualify all of our forward-looking
statements by these cautionary statements.
24
USE OF
PROCEEDS
We estimate that the net proceeds from the sale of the units in
this offering will be approximately $10,243,750, assuming a
public offering price of $4.75 per unit (without attributing any
value to the warrants contained in the units), which is based on
the last reported sale price of our common stock on the NYSE
Alternext on February 4, 2009, after deducting the
underwriting discount and estimated offering expenses of
approximately $800,000, or approximately $11,900,313 if the
underwriters over-allotment option is exercised in full.
These amounts do not include the proceeds we would receive in
the event the class A warrants, class B warrants, and
class C warrants are exercised in full.
The net proceeds of this offering will be used primarily to
purchase portfolios of consumer receivables and for general
corporate purposes, including working capital. The amounts
actually spent for these purposes may vary significantly and
will depend on a number of factors, including our operating
costs and other factors described under Risk
Factors. Accordingly, management will retain broad
discretion as to the allocation of the net proceeds of this
offering.
Pending these uses, we intend to invest the net proceeds of this
offering in short-term, interest-bearing securities.
25
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
From May 9, 2002 through April 12, 2004, our common
stock traded on the OTC Bulletin Board under the symbol
TLOP. From April 12, 2004 through
August 8, 2007, our common stock traded on the OTC
Bulletin Board under the symbol VCYA. On
August 9, 2007, our common stock began trading on AMEX
under the symbol JVI. On October 1, 2008, as a
result of the New York Stock Exchanges acquisition of
AMEX, our stock began trading on the NYSE Alternext. On
November 17, 2008, in connection with our
1-for-20
reverse stock split, our stock began trading on the NYSE
Alternext under the symbol PGV.
The following chart sets forth the high and low per share bid
prices as quoted on the OTC Bulletin Board for each quarter
from January 1, 2006 through February 4, 2009, as
adjusted for the
1-for-20
reverse stock split. These quotations reflect prices between
dealers, do not include retail
mark-ups,
mark-downs or commissions and may not reasonably represent
actual transactions.
|
|
|
|
|
|
|
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
41.80
|
|
|
$
|
34.00
|
|
Second Quarter
|
|
|
41.00
|
|
|
|
32.00
|
|
Third Quarter
|
|
|
38.00
|
|
|
|
25.00
|
|
Fourth Quarter
|
|
|
42.00
|
|
|
|
24.00
|
|
Fiscal Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
51.40
|
|
|
|
40.00
|
|
Second Quarter
|
|
|
48.00
|
|
|
|
35.00
|
|
Third Quarter (through August 8, 2007)
|
|
|
58.40
|
|
|
|
40.00
|
|
The following chart sets forth the high and low per share sales
prices of our common stock as reported by AMEX from
August 9, 2007 through October 1, 2008, and as
reported by the NYSE Alternext from October 1, 2008 through
December 8, 2008.
|
|
|
|
|
|
|
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
Fiscal Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
Third Quarter (from August 9, 2007)
|
|
$
|
58.20
|
|
|
$
|
41.00
|
|
Fourth Quarter
|
|
|
50.00
|
|
|
|
25.00
|
|
Fiscal Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
26.00
|
|
|
|
16.00
|
|
Second Quarter
|
|
|
26.00
|
|
|
|
17.60
|
|
Third Quarter
|
|
|
24.00
|
|
|
|
8.00
|
|
Fourth Quarter
|
|
|
11.00
|
|
|
|
3.96
|
|
First Quarter (through February 4, 2009)
|
|
|
5.42
|
|
|
|
3.97
|
|
On February 4, 2009, the closing price of our common stock
as reported on the NYSE Alternext was $4.75 per share.
Holders
of Record
As of September 8, 2008, there were 755 holders of record
of our common stock, including shares held in street name. As of
February 4, 2009, there were 894,799 shares of common
stock issued and outstanding.
26
Securities
authorized for issuance under equity compensation
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
Weighted-Average Exercise
|
|
|
Remaining Available for
|
|
|
|
Number of Securities to be
|
|
|
Price of Outstanding
|
|
|
Future Issuance Under
|
|
|
|
Issued Upon Exercise of Options,
|
|
|
Options, Warrants and
|
|
|
Equity Compensation Plans
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Rights
|
|
|
Outstanding Options,
|
|
|
Equity compensation plans approved by security holders (2004
Equity Incentive Program)
|
|
|
0
|
(1)
|
|
|
|
|
|
|
37,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
0
|
(1)
|
|
|
|
|
|
|
37,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
12,600 shares of restricted stock have been issued under
the 2004 Equity Incentive Program.
|
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain all future earnings for the
operation and expansion of our business and, therefore, we do
not anticipate declaring or paying cash dividends in the
foreseeable future. The payment of dividends will be at the
discretion of our board of directors and will depend on our
results of operations, capital requirements, financial
condition, prospects, contractual arrangements, any limitations
on payment of dividends present in our current and future debt
agreements, and other factors that our board of directors may
deem relevant.
27
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2008:
|
|
|
|
|
On an actual basis after giving retroactive effect to the
1-for-20 reverse stock split; and
|
|
|
|
|
|
On an as adjusted basis after giving effect to this offering and
our receipt of the estimated net proceeds from this offering,
assuming a per unit price of $4.75 (without attributing any
value to the warrants contained in the units), the last reported
sales price of our common stock on February 4, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2008
|
|
|
|
Historical
|
|
|
As Adjusted
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
477,590
|
|
|
$
|
477,590
|
|
Estimated court and media costs
|
|
|
5,742,939
|
|
|
|
5,742,939
|
|
Lines of credit
|
|
|
9,792,567
|
|
|
|
9,792,567
|
|
Notes payable
|
|
|
400,000
|
|
|
|
400,000
|
|
Notes payable to related parties
|
|
|
740,000
|
|
|
|
740,000
|
|
Convertible subordinated notes
|
|
|
2,350,000
|
|
|
|
2,350,000
|
|
Income taxes payable
|
|
|
1,605,919
|
|
|
|
1,605,919
|
|
Liabilities from discontinued operations (including notes
payable to related parties of $2,300,000)
|
|
|
5,490,675
|
|
|
|
5,490,675
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,599,690
|
|
|
|
26,599,690
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Series A 10% convertible preferred stock, $0.001 par
value, 10,000,000 shares authorized, 1,380,000 shares
issued and outstanding (liquidation preference of $13,800,000)
|
|
|
1,380
|
|
|
|
1,380
|
|
Common stock, $0.001 par value, 40,000,000 shares
authorized, 893,799 and 3,393,799 shares issued and
outstanding, respectively
|
|
|
894
|
|
|
|
3,394
|
|
Additional
paid-in-capital
|
|
|
25,938,620
|
|
|
|
36,179,870
|
|
Accumulated deficit
|
|
|
(111,641
|
)
|
|
|
(111,641
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
25,829,253
|
|
|
|
36,073,003
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
52,428,943
|
|
|
$
|
62,672,693
|
|
|
|
|
|
|
|
|
|
|
This table should be considered in conjunction with the sections
of this prospectus captioned Use of Proceeds and
Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as the
financial statements and related notes included elsewhere in
this prospectus.
28
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our financial statements and notes thereto and
the other financial information included elsewhere in this
report. In these discussions, most percentages and dollar
amounts have been rounded to aid presentation. As a result, all
such figures are approximations.
Overview
We are a portfolio management company that purchases unsecured
consumer receivables in the secondary market and seeks to
collect those receivables through an outsourced legal collection
network. Our primary business is to acquire credit-card
receivable portfolios at significant discounts to the total
amounts owed by the debtors. We use our proprietary valuation
process to calculate the purchase price so that our estimated
cash flow from such portfolios offers us an adequate return on
our investment after servicing expenses.
We generally purchase consumer receivable portfolios that
include charged-off credit card receivables, which are accounts
that have been written-off by the originators, and consumer
installment loans. When evaluating a portfolio for purchase, we
conduct an extensive quantitative and qualitative analysis of
the portfolio to appropriately price the debt and to identify
portfolios that are optimal for collection through our legal
collection network. This analysis relies upon, but is not
limited to, the use of our proprietary pricing and collection
probability model and draws upon our extensive experience in the
legal collection and debt-buying industry.
We purchase consumer receivable portfolios from creditors and
others through privately negotiated direct sales and auctions in
which sellers of consumer receivables seek bids from
pre-qualified debt purchasers. We pursue new acquisitions of
consumer receivable portfolios on an ongoing basis through our
relationships with industry participants, collection agencies,
investors, our financing sources, brokers who specialize in the
sale of consumer receivable portfolios and other sources. Our
consumer receivable portfolios are purchased through internally
generated cash flow, seller financed credit lines/leases and
traditional leverage methods. Our profitability depends upon our
ability to purchase and collect on a sufficient volume of our
consumer receivables to generate revenue that exceeds our costs.
As of September 30, 2008, we held approximately
$500 million in consumer receivables, excluding post
charge-off accrued interest. We currently service approximately
115,000 accounts and place these accounts with over 80 law firms
across the 50 states and Puerto Rico. Our portfolios have
face amounts ranging from $225,000 to approximately
$43 million with purchase prices ranging from $0.017 to
$0.25 per $1.00 of such face amounts.
Recent
Developments
On September 29, 2008, our stockholders approved an
amendment to our Certificate of Incorporation to effect a
reverse split of our issued and outstanding common stock, par
value $0.001 per share of between a one-for-ten (1-10) and
one-for-twenty (1-20) reverse stock split in the discretion of
our board of directors, and to change our name to Velocity
Portfolio Group, Inc. On November 14, 2008, we amended our
Certificate of Incorporation to (a) effect a
1-for-20
reverse stock split of our then issued and outstanding shares of
common stock and (b) change our name to Velocity Portfolio
Group, Inc. The 1-for-20 reverse stock split took effect on
November 17, 2008.
Critical
Accounting Policies
Our discussion and analysis of financial condition and results
of operations is based upon our consolidated financial
statements which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the fair value of
consumer receivables, the fair value of properties held for sale
and the reported amounts of revenues and expenses. On an
on-going basis, we evaluate our estimates, including those
related to the recognition of revenue, future estimated cash
flows and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates. We
believe the following critical accounting policies affect the
significant judgment and estimates used in the preparation of
our consolidated financial statements.
29
Purchased
Consumer Receivable Portfolios and Revenue Recognition
We purchase portfolios of consumer receivable accounts at a
substantial discount from their face amounts, usually discounted
at 75% to 98% from face value. We record these accounts at our
acquisition cost, including the estimated cost of court filing
fees and account media. The portfolios of consumer receivables
contain accounts that have experienced deterioration of credit
quality between origination and our acquisition of the consumer
receivable portfolios. The discounted amount paid for a
portfolio of consumer receivable accounts reflects our
determination that it is probable we will be unable to collect
all amounts due according to the contractual terms of the
accounts. At acquisition, we review the consumer receivable
accounts in the portfolio to determine whether there is evidence
of deterioration of credit quality since origination and whether
it is probable that we will be unable to collect all amounts due
according to the contractual terms of the accounts. If both
conditions exist, we determine whether each such portfolio is to
be accounted for individually or whether such portfolios will be
assembled into static pools based on common risk
characteristics. We consider expected prepayments and estimate
the amount and timing of undiscounted expected principal,
interest and other cash flows for each acquired portfolio of
consumer receivable accounts and subsequently aggregated pools
of consumer receivable portfolios. We determine the excess of
the pools scheduled contractual principal and contractual
interest payments over all cash flows expected at acquisition as
an amount that should not be accreted based on our proprietary
acquisition models. The remaining amount, representing the
excess of the loans cash flows expected to be collected
over the amount paid, is accreted into income recognized on
consumer receivables over the remaining life of the loan or pool
using the interest method.
We acquire these consumer receivable portfolios at a significant
discount to the amount actually owed by the borrowers. We
acquire these portfolios after a qualitative and quantitative
analysis of the underlying receivables and calculate the
purchase price so that our estimated cash flow provides us with
a sufficient return on our acquisition costs and servicing
expenses. After purchasing a portfolio, we actively monitor its
performance and review and adjust our collection and servicing
strategies accordingly.
We account for our investment in consumer receivables using the
interest method under the guidance of American Institute of
Certified Public Accountants Statement of Position
03-3,
Accounting for Loans or Certain Securities Acquired in a
Transfer. In accordance with Statement of Position
03-03
(and
the amended Practice Bulletin 6), revenue is recognized
based on our anticipated gross cash collections and the
estimated rate of return over the useful life of the pool.
We believe that the amounts and timing of cash collections for
our purchased receivables can be reasonably estimated and,
therefore, we utilize the interest method of accounting for our
purchased consumer receivables prescribed by Statement of
Position
03-3.
Such
belief is predicated on our historical results and our knowledge
of the industry. Each static pool of receivables is
statistically modeled to determine its projected cash flows
based on historical cash collections for pools with similar risk
characteristics. Statement of Position
03-3
requires that the accrual basis of accounting be used at the
time the amount and timing of cash flows from an acquired
portfolio can be reasonably estimated and collection is probable.
Where the future cash collections of a portfolio cannot be
reasonably estimated, we use the cost recovery method as
prescribed under Statement of Position
03-3.
Under
the cost recovery method, no revenue is recognized until we have
fully collected the initial acquisition cost of the portfolio.
We have no consumer receivable portfolios that are accounted for
under the cost recovery method.
Under Statement of Position
03-3,
to the
extent that there are differences in actual performance versus
expected performance, increases in expected cash flows are
recognized prospectively through adjustment of internal rate of
return while decreases in expected cash flows are recognized as
impairment. Under both the guidance of Statement of Position
03-3
and the
amended Practice Bulletin 6, when expected cash flows are
higher than prior projections, the increase in expected cash
flows results in an increase in the internal rate of return and
therefore, the effect of the cash flow increase is recognized as
increased revenue prospectively over the remaining life of the
affected pool. However, when expected cash flows are lower than
prior projections, Statement of Position
03-3
requires that the expected decrease be recognized as an
impairment by decreasing the carrying value of the affected pool
(rather than lowering the internal rate of return) so that the
pool will amortize over its expected life using the original
internal rate of return.
30
Generally, these portfolios are expected to amortize over a five
year period based on our estimated future cash flows.
Historically, a majority of the cash we ultimately collect on a
portfolio is received during the first 48 months after
acquiring the portfolio, although additional amounts are
collected over the remaining period. The estimated future cash
flows of the portfolios are re-evaluated quarterly. When we
first developed our cash forecasting models in 2003, limited
historical collection data was available to accurately estimate
cash collections beyond 60 months. Since developing these
models, we have continuously analyzed the historical collection
data over the life of the portfolios. While we do not yet have
six complete years of historical information on any of our
static pools, we have observed that certain receivable
portfolios purchased during, and prior to 2004, have experienced
cash collections beyond 60 months from the date of
purchase. When we believe that we have enough collection history
to forecast collections beyond 60 months, we may extend the
useful life of our static pools.
The internal rate of return is estimated and periodically
recalculated based on the timing and amount of anticipated cash
flows using our proprietary collection models. A pool can become
fully amortized (zero carrying balance on the balance sheet)
while still generating cash collections. In this case, all cash
collections are recognized as revenue when received.
Additionally, we would use the cost recovery method when
collections on a particular pool of accounts cannot be
reasonably predicted. Under the cost recovery method, no revenue
is recognized until we have fully collected the cost of the
portfolio, or until such time that we consider the collections
to be probable and estimable and begin to recognize income based
on the interest method as described above. We have no consumer
receivable portfolios that are accounted for under the cost
recovery method.
We establish valuation allowances for all acquired consumer
receivable portfolios subject to Statement of Position
03-3
to
reflect only those losses incurred after acquisition (that is,
the present value of cash flows initially expected at
acquisition that are no longer expected to be collected).
Valuation allowances are established only subsequent to
acquisition of the loans. At September 30, 2008 and
December 31, 2007, we had no valuation allowance on our
consumer receivables. Prior to January 1, 2005, if
estimated future cash collections would be inadequate to
amortize the carrying balance, an impairment charge would be
taken with a corresponding write-off of the receivable balance.
Application of Statement of Position
03-3
requires the use of estimates to calculate a projected internal
rate of return for each pool. These estimates are based on
historical cash collections. If future cash collections are
materially different in amount or timing than projected cash
collections, earnings could be affected either positively or
negatively. Higher collection amounts or cash collections that
occur sooner than projected cash collections will have a
favorable impact on yield and revenues. Lower collection amounts
or cash collections that occur later than projected cash
collections will have an unfavorable impact on operations.
Consumer receivable activity for the six month periods ended
September 30, 2008 and 2007 and the years ended
December 31, 2007 and 2006 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
46,971,014
|
|
|
$
|
38,327,926
|
|
|
$
|
38,327,926
|
|
|
$
|
17,758,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and capitalized costs, net of returns
|
|
|
1,903,802
|
|
|
|
11,491,501
|
|
|
|
12,799,459
|
|
|
|
22,915,748
|
|
Amortization of capitalized costs
|
|
|
(44,397
|
)
|
|
|
(44,397
|
)
|
|
|
(59,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,859,405
|
|
|
|
11,447,104
|
|
|
|
12,740,263
|
|
|
|
22,915,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections(1)
|
|
|
(13,553,840
|
)
|
|
|
(13,058,115
|
)
|
|
|
(17,960,713
|
)
|
|
|
(10,777,742
|
)
|
Income recognized on consumer receivables(1)
|
|
|
10,875,838
|
|
|
|
9,901,507
|
|
|
|
13,863,538
|
|
|
|
8,431,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections applied to principal
|
|
|
(2,678,002
|
)
|
|
|
(3,156,608
|
)
|
|
|
(4,097,175
|
)
|
|
|
(2,346,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
46,152,417
|
|
|
$
|
46,618,422
|
|
|
$
|
46,971,014
|
|
|
$
|
38,327,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes $66,919 derived from fully amortized pools for the nine
months ended September 30, 2008.
|
31
Stock
Based Compensation
We have adopted the fair value recognition provisions of
SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123(R)), which supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. The revised statement addresses the
accounting for share-based payment transactions with employees
and other third parties, eliminates the ability to account for
share-based transactions using APB No. 25 and requires that
the compensation costs relating to such transactions be
recognized in the consolidated financial statements.
SFAS No. 123(R) requires additional disclosures
relating to the income tax and cash flow effects resulting from
share-based payments. We have adopted the modified prospective
application method of SFAS No. 123(R), effective
January 1, 2006, and the adoption of
SFAS No. 123(R) has had an immaterial impact on our
consolidated results of operations and earnings per share.
Additionally, regarding the treatment of non-employee stock
based compensation, we have followed the guidance of
EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
New
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value to be the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date and emphasizes that
fair value is a market-based measurement, not an entity-specific
measurement. It establishes a fair value hierarchy and expands
disclosures about fair value measurements in both interim and
annual periods. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. FASB Staff Position
No. FAS 157-2
(as amended) defers the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities on a
non-recurring basis to fiscal years beginning after
November 15, 2008. With the exception of nonfinancial
assets and nonfinancial liabilities, the Company adopted
SFAS 157 on January 1, 2008 which did not have an
impact on its consolidated financial position and results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS No. 159). This
statement permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that
elect the fair value option. However, the amendment to
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities
with available-for-sale and trading securities
SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. Management has not made an election to
adopt this pronouncement.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(R), Business Combinations
(SFAS 141(R)), and Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51 (SFAS 160). These new standards
significantly change the accounting for and reporting of
business combination transactions and noncontrolling interests
(previously referred to as minority interests) in consolidated
financial statements. Both standards are effective for fiscal
years beginning on or after December 15, 2008, with early
adoption prohibited. These Statements are effective for us
beginning on January 1, 2009. We are currently evaluating
the provisions of SFAS 141(R) and SFAS 160.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures About Derivative Instruments
and Hedging Activities, an amendment of FASB Statement
No. 133. This new standard enhances the disclosure
requirements related to derivative instruments and hedging
activities required by FASB Statement No. 133. This
standard is effective for fiscal years and interim periods
beginning after November 15, 2008, with early adoption
encouraged. We are currently evaluating the potential impact, if
any, of the adoption of SFAS 161 and do not believe that it
will have a significant impact on our condensed consolidated
financial position and results of operations.
32
In May 2008, the FASB issued SFAS No. 162 The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles generally accepted in the
United States. SFAS 162 is effective sixty days following
the SECs approval of PCAOB amendments to AU
Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting
Principles. We expect that the adoption of this
standard would have no impact on our condensed consolidated
financial position and results of operations.
Results
of Operations
Revenues
Comparison
of the year ended December 31, 2007 to the year ended
December 31, 2006
Revenues in the year ended December 31, 2007 were
$13,891,385 as compared to $8,639,664 in the year ended
December 31, 2006, representing a 60.79% increase. The
increase in revenues was primarily attributable to an increase
in our consumer receivables portfolio and resulting revenues
from collections on consumer receivables. After careful
consideration of trends in revenues and future opportunities for
growth, management has made the determination that the consumer
receivables business will be our sole operating focus in 2008.
Comparison
of the nine months ended September 30, 2008 and
2007
Revenues in the nine month period ended September 30, 2008
(the 2008 Period) were $10,946,091 as compared to
$9,928,683 in the same period in the prior year (the 2007
Period), representing a 10.25% increase. The increase in
revenues in the 2008 Period was primarily attributable to an
increase in acquisitions in consumer receivables portfolios and
resulting revenues from collections on consumer receivables.
Total
Operating Expenses
Comparison
of the year ended December 31, 2007 to the year ended
December 31, 2006
Total operating expenses for the year ended December 31,
2007 were $7,270,832 as compared to $5,093,854 for the year
ended December 31, 2006, representing a 42.74% increase.
The increase in total operating expenses was primarily
attributable to increased professional fees incurred as a result
of an increase in collections and a corresponding increase in
legal commission expense as a result of the expansion of
operations at our VI subsidiary. General and administrative
expenses also increased as a result of our increasing due
diligence expenses and electronic search fees for VI and an
increase in payroll expense.
Comparison
of the nine months ended September 30, 2008 and
2007
Total operating expenses for the 2008 Period were $5,374,759 as
compared to $5,595,481 during the 2007 Period, representing a
3.94% decrease. The decrease in total operating expenses for the
2008 Third Quarter and the 2008 Period was primarily
attributable to a significant decrease in general and
administrative expenses as a result of a decrease of due
diligence expenses and electronic search fees for our VI
subsidiary and a decrease in payroll expense.
Interest
Expense
Comparison
of the year ended December 31, 2007 to the year ended
December 31, 2006
Interest expense in the year ended December 31, 2007 was
$1,623,520, as compared to $908,147 in the year ended
December 31, 2006, representing a 78.77% increase. The
increase in interest expense was primarily attributable to
expansion of the senior credit facility with Wells Fargo.
Comparison
of the nine months ended September 30, 2008 and
2007
Interest expense in the 2008 Period was $880,064 as compared to
$1,196,045 in the 2007 Period, representing a 26.42% decrease.
The decrease in interest expense was primarily attributable to
declining interest rates and a reduction in amounts outstanding
on our VI subsidiarys line of credit with Wells Fargo
Foothill, Inc.
33
Net
Income
Comparison
of the year ended December 31, 2007 to the year ended
December 31, 2006
Net income for the year ended December 31, 2007 was
$2,572,075, as compared to net income of $1,318,690 for the year
ended December 31, 2006, an increase of 95.05%. The
increase in net income was primarily attributable to an increase
in interest income from consumer receivables as a result of
expansion of operations and increased collections at our VI
subsidiary during the year ended December 31, 2007. Income
from continuing operations for the year ended December 31,
2007 was $2,906,890 as compared to income from continuing
operations for the year ended December 31, 2006 of
$1,535,025, a 89.37% increase. We had a $334,815 loss from
discontinued operations in the year ended December 31, 2007
compared to a loss of $216,335 in the year ended
December 31, 2006. The increase in loss from discontinued
operations in the year ended December 31, 2007 was
primarily attributable to an impairment of approximately
$240,000 in connection with an investment property in Melbourne,
Florida owned by J. Holder.
Comparison
of the nine months ended September 30, 2008 and
2007
Net income for the 2008 Period was $1,679,203, as compared to
net income for the 2007 Period of $1,560,149, a 7.63% increase.
Net income attributable to common stockholders for the 2008
Period was $644,203 as compared to net income attributable to
common stockholders of $525,149 for the 2007 Period, a 22.67%
increase. Income from continuing operations for the 2008 Period
was $2,803,230 as compared to income from continuing operations
for the 2007 Period of $1,829,437, a 53.23% increase. We had a
$1,124,027 loss from discontinued operations in the 2008 Period
compared to a loss of $269,288 in the 2007 Period. The loss from
discontinued operations in the 2008 Period was primarily
attributable to cumulative impairments and carrying costs of
approximately $660,000 and $207,000, respectively, in connection
with an investment property in Melbourne, Florida.
Liquidity
and Capital Resources
The term liquidity refers to our ability to generate
adequate amounts of cash to fund our operations, including
portfolio purchases, operating expenses, tax payments and
dividend payments, if any. Historically, we have generated
working capital primarily from cash collections on our
portfolios of consumer receivables in excess of the cash
collections required to make principal and interest payments on
our senior credit facility, and from offerings of equity
securities and debt instruments. At September 30, 2008, we
had approximately $34,000 in cash and cash equivalents,
approximately $12,700,000 in credit available from our credit
facility and trade accounts payable of approximately $478,000.
Management believes that the cash expected to be generated from
operations, this offering, proceeds of the 14% subordinated
debt issuance and our line of credit will be sufficient to
finance operations through at least the next twelve months.
However, following this offering, we may need to raise
additional capital by way of the sale of equity securities or
debt instruments to expand our business and purchase additional
debt portfolios. If, for any reason, our available cash
otherwise proves to be insufficient to fund operations (because
of future changes in the industry, general economic conditions,
unanticipated increases in expenses, or other factors, including
acquisitions), we will be required to seek additional funding.
On December 31, 2007, our board of directors unanimously
approved managements plan to discontinue the operation of
our J. Holder and VOM subsidiaries. Management began
implementation of the plan in the first quarter of 2008. We do
not expect managements plan with respect to the disposal
of assets of the discontinued operations to have a material
effect on our liquidity. The discontinued operations have no
employees and management believes that it will require an
immaterial amount of general and administrative expense to
execute managements plan.
Net cash provided by operating activities was approximately
$2,031,000 during the nine months ended September 30, 2008,
compared to net cash provided by operating activities of
approximately $1,135,000 during the nine months ended
September 30, 2007. The increase in net cash provided by
operating activities was primarily due to increase in income
from continuing operations and income taxes offset by payment of
estimated court and media costs and a decrease in accounts
payable and accrued expense. Net cash provided
34
by investing activities was approximately $773,000 during the
nine months ended September 30, 2008, compared to net cash
used in investing activities of approximately $8,359,000 during
the nine months ended September 30, 2007. The decrease in
net cash used in investing activities was primarily due to a
decrease in acquisition of consumer receivables portfolios. Net
cash used in financing activities was approximately $3,988,000
during the nine months ended September 30, 2008, compared
to net cash provided by financing activities of approximately
$5,363,000 during the nine months ended September 30, 2007.
The decrease in net cash provided by financing activities was
primarily due to collections of consumer receivables at our
VI subsidiary paying down the principal amount outstanding
on the Wells Fargo Loan, partially offset by proceeds of the May
2008 equity offering. Net cash provided by discontinued
operations was approximately $1,055,000 during the nine months
ended September 30, 2008 as compared to net cash provided
by discontinued operations of approximately $66,000 during the
nine months ended September 30, 2007. The increase in cash
provided by discontinued operations was primarily due to a
$1,000,000 promissory note issued by J. Holder collateralized by
an investment property in Melbourne, Florida.
Net cash provided by operating activities was approximately
$2,608,000 during 2007, compared to net cash provided by
operating activities of approximately $6,880,000 in 2006. The
decrease in net cash provided by operating activities was
primarily related to estimated court and media costs offset by
an increase in net income. Net cash used in investing activities
was approximately $8,730,000 in 2007, compared to net cash used
in investing activities of $20,583,000 in 2006. The decrease in
net cash used in investing activities was primarily due to a
decrease in acquisition of consumer receivables portfolios
offset by an increase in cash collections applied to principal
on consumer receivables. Net cash provided by financing
activities was approximately $2,987,000 during 2007, compared to
net cash provided by financing activities of approximately
$19,032,000 in 2006. The decrease in net cash provided by
financing activities was primarily due to the $12,000,000
preferred stock offering in May 2006 partially offset by
proceeds from equity transactions and convertible subordinated
notes. Net cash provided by discontinued operations was
approximately $851,600 during the year ended December 31,
2007 as compared to net cash used by discontinued operations of
approximately $2,975,000 during the year ended December 31,
2006. The decrease in net cash provided by discontinued
operations was primarily due to the repayment of certain notes
payable by the J. Holder subsidiary.
On January 27, 2005, VI entered into a Loan and Security
Agreement with Wells Fargo, Inc., a California corporation, in
which Wells Fargo agreed to provide VI with a three year
$12,500,000 senior credit facility to finance the acquisition of
individual pools of unsecured consumer receivables that are
approved by Wells Fargo under specific eligibility criteria set
forth in the Loan and Security Agreement. The Loan and Security
Agreement provided for an advance rate of 60%, bore interest at
a rate of the prime rate plus 3.5%, and matured in
24 months. Our advance rate was later increased to 67% and
our interest rate was reduced to 2.5% above the prime rate.
Simultaneous with the Loan and Security Agreement, the following
agreements were also entered into with Wells Fargo, a Continuing
Guaranty, in which we unconditionally and irrevocably guaranteed
our obligations under the Loan and Security Agreement; a
Security and Pledge Agreement, in which we pledged all of our
assets to secure the credit facility, including, but not limited
to, all of our stock ownership of J. Holder and all our
membership interests in VI and VOM; and a Subordination
Agreement, in which all sums owing to us by VI as an
intercompany payable for advances or loans made or property
transferred to VI will be subordinated to the credit facility to
the extent that their sums, when added to VI membership interest
in the parent does not exceed $3,250,000. In addition, three of
our executive officers, John C. Kleinert, W. Peter
Ragan, Sr. and W. Peter Ragan, Jr., provided joint and
several limited guarantees of VIs obligations under the
Loan and Security Agreement.
On February 27, 2006, VI entered into a First Amendment to
the Loan and Security Agreement pursuant to which Wells Fargo
extended the credit facility until January 27, 2009 and
agreed to increase the advance rate under the facility to 75%
(up from 67%) of the purchase price of individual pools of
unsecured consumer receivables that are approved by the lender.
Under the First Amendment to the Loan and Security Agreement,
Wells Fargo also agreed to reduce the interest rate on the loan
to 1.5% above the prime rate and agreed to permanently increase
our credit facility up to $14,500,000. On February 23,
2007, we entered into a Third
35
Amendment to the Loan Agreement dated January 27, 2005.
Pursuant to the Amended and Restated Loan Agreement, the Lender
agreed to permanently increase our credit facility up to
$17,500,000 and extended the maturity date by six months. On
March 3, 2008 (effective February 29, 2008), the
Lender increased the amount of credit available under the Credit
Facility from $17,500,000 to $22,500,000 and extended the
maturity date until January 27, 2011. The Lender also
agreed to eliminate the requirement that certain executive
officers of VI and us provide the Lender with joint and several
limited guarantees of VIs obligations under the Original
Loan Agreement.
Use of the Credit Facility is subject to VI meeting certain
restrictive covenants under the Fourth Amendment to the Loan
Agreement including but not limited to: a restriction on
incurring additional indebtedness or liens; a change of control
of VI; a restriction on entering into transactions with
affiliates outside the course of Velocitys ordinary
business; and a restriction on making payments to us in
compliance with the Subordination Agreement. VI has agreed to
maintain at least $14,000,000 in members equity and
subordinated debt. We have also agreed to maintain at least
$25,000,000 in stockholders equity and subordinated debt
for the duration of the facility. In addition, VI and us
covenant that net income for each subsequent quarter shall not
be less than $375,000 and $200,000, respectively. We had
approximately $14,247,000 available on the credit line as of
January 31, 2009.
On November 1, 2008, our VI subsidiary entered into a Fifth
Amendment to the Loan and Security Agreement with Wells Fargo.
Pursuant to the Fifth Amendment to the Loan Agreement, the
applicable interest rate on loans to VI changed from the prime
rate plus 1.5% to the rate equal to the three-month LIBOR plus
4%. Also pursuant to the Fifth Amendment to the Loan Agreement,
the Loan Sub-Account Amortization Schedule which sets forth the
maximum principal loan amount VI may have outstanding during a
three-month period, has been extended from 36 months to
42 months. We are currently negotiating an amendment to the
Loan and Security Agreement with Wells Fargo and we anticipate
the change of control provision will be waived or amended.
On January 25, 2008, we issued a promissory note for
$1,000,000 to a financial institution. The note bears interest
at a rate of 7% per annum, payable monthly in arrears, on the
first day of each month with the original principal amount plus
accrued interest due January 23, 2009. We are currently in
the process of negotiating an extension to this note, and we
anticipate that the note will be extended. The note is
collateralized with specified real property owned by our
subsidiary, J. Holder. The Note is guaranteed by us and
personally by certain of our executive officers. J. Holder has
agreed to maintain a loan to value ratio of 33% at all times.
In May 2008, we consummated several closings of a private
placement offering to accredited investors of units comprised of
shares of common stock and warrants to purchase shares of common
stock. We sold an aggregate of 40,000 shares of our common
stock at a purchase price of $18.00 per share and
7,259 shares at a purchase price of $18.60 per share and
10,000 warrants at an exercise price of $22.50 per share and
1,815 warrants at an exercise price of $23.20 per share. The
terms of the Warrants allow the holders to receive shares
pursuant to a cashless exercise provision. The warrants contain
certain anti-dilution rights on terms specified in the warrants.
We received net proceeds of $793,650 from the placement, after
commissions of approximately $61,350. We used the net proceeds
from the offering primarily for the purchase of portfolios of
unsecured consumer receivables and for general corporate
purposes, including working capital. We retained a registered
FINRA broker dealer to act as placement agent. In addition, the
placement agent received three-year warrants to acquire
4,000 shares of our common stock at an exercise price of
$22.60 per share and three-year warrants to acquire 726
shares of our common stock at an exercise price of $23.20 per
share.
On May 30, 2008, June 10, 2008 and October 29,
2008, our VI subsidiary consummated closings of a private
placement offering of 14% subordinated notes due 2011 to
accredited investors. The notes were offered and sold pursuant
to exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. VI has issued notes in the
aggregate principal amount of $1,300,000 in the offering.
Interest is payable quarterly in arrears beginning on the last
day of the month that is four months from the date of the notes.
VI is obligated to pay the principal amount of the notes upon
the earlier of maturity or redemption. The notes are
subordinated to all of our existing debt. The notes are senior
to any future long term debt of VI. Upon an
36
event of default, VI is obligated to pay the note holder a late
charge computed at the rate of 18% per annum of the amount not
paid. Of the $1,300,000 principal amount of notes that were
issued, $900,000 in principal amount are held by related parties
to us, including a note in the amount of $160,000 payable to our
chief executive officer, John C. Kleinert, and notes in the
aggregate of $750,000 to immediate family members of John C.
Kleinert, including Robert Kleinert, a principal of Sandler
ONeill & Partners, L.P., the representative of
the underwriters of this offering. VI used the net proceeds from
the offering primarily for the purchase of portfolios of
unsecured consumer receivables and for general corporate
purposes, including working capital.
Supplementary
Information on Consumer Receivables Portfolios
The following tables show certain data related to our entire
owned portfolios. These tables describe the purchase price, cash
collections and related multiples. We utilize a long-term legal
approach to collecting our portfolios of consumer receivables.
This approach has historically caused us to realize significant
cash collections from pools of consumer receivables years after
they are initially acquired. When we acquire a new pool of
consumer receivables, our estimates typically result in a
60 month projection of cash collections.
The following table shows the changes in consumer receivables,
including amounts paid to acquire new portfolios of consumer
receivables for the nine months ended September 30, 2008
and 2007 and the years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Purchases/Collections
|
|
|
Initial
|
|
|
|
|
|
Gross Cash
|
|
|
Outstanding
|
|
Portfolios
|
|
Purchase
|
|
Collections
|
Reporting Period
|
|
Amount
|
|
Purchased
|
|
Price
|
|
per Period
|
|
|
(Dollar amounts in thousands)
|
|
Period Ended December 31, 2006
|
|
$
|
199,042
|
|
|
|
26
|
|
|
$
|
15,368
|
|
|
$
|
10,778
|
|
Period Ended December 31, 2007
|
|
$
|
129,893
|
|
|
|
19
|
|
|
$
|
9,317
|
|
|
$
|
17,961
|
|
Nine Month Period Ended September 30, 2007
|
|
$
|
127,066
|
|
|
|
18
|
|
|
$
|
9,061
|
|
|
$
|
13,058
|
|
Nine Month Period Ended September 30, 2008
|
|
$
|
15,866
|
|
|
|
7
|
|
|
$
|
957
|
|
|
$
|
13,621
|
|
Portfolio
Purchases and Performance
The following table shows the changes in consumer receivables,
including amounts paid to acquire new portfolios of consumer
receivables and the performance of such portfolios for the years
2003 through 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
|
|
|
Gross Cash
|
|
Average Price
|
|
|
|
|
Total #
|
|
Outstanding
|
|
Purchase
|
|
Gross Cash
|
|
Collections as
|
|
per Dollar
|
|
|
Year
|
|
Portfolios
|
|
Amount(1)
|
|
Price(2)
|
|
Collections(3)
|
|
a % of Cost(4)
|
|
Outstanding(5)
|
|
|
|
2003
|
|
|
5
|
|
|
$
|
11,497,833
|
|
|
$
|
2,038,950
|
|
|
$
|
8,611,681
|
|
|
|
422.36
|
%
|
|
$
|
0.18
|
|
|
|
|
|
2004
|
|
|
10
|
|
|
$
|
9,511,088
|
|
|
$
|
1,450,115
|
|
|
$
|
3,493,431
|
|
|
|
240.91
|
%
|
|
$
|
0.15
|
|
|
|
|
|
2005
|
|
|
22
|
|
|
$
|
133,103,213
|
|
|
$
|
11,449,557
|
|
|
$
|
17,671,641
|
|
|
|
154.34
|
%
|
|
$
|
0.09
|
|
|
|
|
|
2006
|
|
|
26
|
|
|
$
|
199,042,032
|
|
|
$
|
15,367,940
|
|
|
$
|
14,984,891
|
|
|
|
97.51
|
%
|
|
$
|
0.08
|
|
|
|
|
|
2007
|
|
|
19
|
|
|
$
|
129,892,667
|
|
|
$
|
9,316,779
|
|
|
$
|
5,386,499
|
|
|
|
57.82
|
%
|
|
$
|
0.07
|
|
|
|
|
|
2008
|
|
|
7
|
|
|
$
|
15,865,914
|
|
|
$
|
956,882
|
|
|
$
|
208,155
|
|
|
|
21.75
|
%
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
(1)
|
|
Initial Outstanding Amount
represents the
original face amount purchased from sellers and has not been
reduced by any adjustments including payments and returns.
Returns are defined as purchase price refunded by
the seller due to the return of non-compliant accounts, such as
deceased and bankrupt accounts.
|
|
(2)
|
|
Purchase Price
represents the cash paid to
sellers to acquire portfolios of consumer receivables, and does
not include certain capitalized acquisition costs.
|
|
(3)
|
|
Gross Cash Collections
include gross cash
collections on portfolios of consumer receivables as of
September 30, 2008.
|
|
(4)
|
|
Gross Cash Collections as a Percentage of Cost
represents the gross cash collections on portfolios of
consumer receivables as of September 30, 2008 divided by
the Purchase Price of such portfolios in the related calendar
year.
|
|
(5)
|
|
Average Price Per Dollar Outstanding
represents the Purchase Price of portfolios of consumer
receivables divided by the Initial Outstanding Amount of such
portfolios purchased in the related calendar year.
|
37
The prices we pay for our consumer receivable portfolios are
dependent on many criteria including the age of the portfolio,
the type of receivable, our analysis of the percentage of
obligors who owe debt that is collectible through legal
collection means and the geographical distribution of the
portfolio. When we pay higher prices for portfolios that may
have a higher percentage of obligors whose debt we believe is
collectible through legal collection means, we believe it is not
at the sacrifice of our expected returns. Price fluctuations for
portfolio purchases from quarter to quarter or year over year
are indicative of the economy or overall mix of the types of
portfolios we are purchasing.
During the nine months ended September 30, 2008, we
acquired seven portfolios of consumer receivables aggregating
approximately $16 million in initial outstanding amount at
a purchase price of approximately $957,000, bringing the
aggregate initial outstanding amount of consumer receivables
under management as of September 30, 2008 to approximately
$500 million, an increase of 3.52% as compared to
approximately $483 million as of September 30, 2007.
For the nine months ended September 30, 2008, we posted
gross collections of approximately $13.6 million, compared
to gross collections of $13.1 million in the nine month
period ended September 30, 2007, representing a 4.3%
increase.
During the twelve months ended December 31, 2007, we
acquired 19 portfolios of consumer receivables aggregating
approximately $130 million in initial outstanding amount at
a purchase price of approximately $9.3 million, bringing
the aggregate initial outstanding amount of consumer receivables
under management as of December 31, 2007 to approximately
$483 million, an increase of 36.8% as compared to
approximately $353 million as of December 31, 2006.
For the twelve month period ended December 31, 2007, we
posted gross collections of approximately $18.0 million,
compared to gross collections of $10.8 million in the
twelve month period ended December 31, 2006, representing a
66.7% increase.
Collections
and Operating Expenses
We outsource all of our legal collection process of our
receivables to third-party law firms based upon specific
guidelines established by us and set forth in a third party
servicing contract. Our standard form of servicing contract
provides for a payment to the law firm of a contingency fee
equal to 25% of all amounts collected and paid by the debtors.
These legal expenses are included as professional fees in our
consolidated statements of income. The following table sets
forth certain data regarding our expenses as they relate to cash
collections on our portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Cash collections
|
|
$
|
13,620,759
|
|
|
$
|
13,058,115
|
|
|
$
|
17,960,713
|
|
|
$
|
10,777,742
|
|
Portfolio purchases, at cost
|
|
|
956,882
|
|
|
|
9,060,980
|
|
|
|
9,316,779
|
|
|
|
15,367,940
|
|
Portfolio purchases, at face
|
|
|
15,865,914
|
|
|
|
127,066,158
|
|
|
|
129,892,667
|
|
|
|
199,042,032
|
|
Cumulative aggregate managed portfolios, at face
|
|
|
498,912,748
|
|
|
|
480,220,325
|
|
|
|
483,046,834
|
|
|
|
353,154,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
3,817,408
|
|
|
$
|
3,438,740
|
|
|
$
|
4,791,224
|
|
|
$
|
2,888,643
|
|
General and administrative expenses
|
|
|
1,557,351
|
|
|
|
2,156,741
|
|
|
|
2,479,608
|
|
|
|
2,205,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
5,374,759
|
|
|
$
|
5,595,481
|
|
|
$
|
7,270,832
|
|
|
$
|
5,093,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets(1)(2)
|
|
|
4.17
|
%
|
|
|
4.01
|
%
|
|
|
4.97
|
%
|
|
|
3.95
|
%
|
Return on average stockholders equity(1)(3)
|
|
|
8.89
|
%
|
|
|
9.32
|
%
|
|
|
11.56
|
%
|
|
|
8.92
|
%
|
Return from continuing operations on average assets(1)(4)
|
|
|
6.96
|
%
|
|
|
4.70
|
%
|
|
|
5.62
|
%
|
|
|
4.59
|
%
|
Return from continuing operations on average stockholders
equity(1)(5)
|
|
|
14.84
|
%
|
|
|
10.93
|
%
|
|
|
13.06
|
%
|
|
|
10.39
|
%
|
Operating expenses to cash collections(1)
|
|
|
39.46
|
%
|
|
|
42.85
|
%
|
|
|
40.48
|
%
|
|
|
47.26
|
%
|
General and administrative expenses to cash collections(1)
|
|
|
11.43
|
%
|
|
|
16.52
|
%
|
|
|
13.81
|
%
|
|
|
20.46
|
%
|
38
|
|
|
(1)
|
|
The ratio information for the nine months ended
September 30, 2008 and September 30, 2007 has been
annualized.
|
|
(2)
|
|
The return on average assets is computed by dividing net income
by average total assets for the period.
|
|
(3)
|
|
The return on average stockholders equity is computed by
dividing net income by average stockholders equity for the
period.
|
|
(4)
|
|
The return from continuing operations on average assets is
computed by dividing income from continuing operations by
average total assets for the period.
|
|
(5)
|
|
The return from continuing operations on average
stockholders equity is computed by dividing income from
continuing operations by average stockholders equity for
the period.
|
Trends
As a result of our increased borrowings under our line of
credit, our other outstanding debt and our preferred stock, we
anticipate that we will incur significant increases in interest
expense and dividend payments, offset over time, by expected
increased revenues from consumer receivable portfolios purchased
utilizing funds under such line of credit. The expected revenues
from such purchased portfolios may not exceed the additional
interest expense and dividend payments. While we are not
presently aware of any other known trends that may have a
material impact on our revenues, we are continuing to monitor
our collections to assess whether the current economic crisis
will have a long term impact on collections. We do not believe
that the recent decreases in interest rates, or the potential
increase in interest rates, has had or will have a material
adverse effect upon our business.
39
BUSINESS
We are a portfolio management company that purchases unsecured
consumer receivables in the secondary market and seeks to
collect those receivables through an outsourced legal collection
network. Our primary business is to acquire credit-card
receivable portfolios at significant discounts to the total
amounts owed by the debtors. We use our proprietary valuation
process to calculate the purchase price so that our estimated
cash flow from such portfolios offers us an adequate return on
our investment after servicing expenses.
Overview
We generally purchase consumer receivable portfolios that
include charged-off credit card receivables, which are accounts
that have been written off by the originators, and consumer
installment loans. When evaluating a portfolio for purchase, we
conduct an extensive quantitative and qualitative analysis of
the portfolio to appropriately price the debt and to identify
portfolios that are optimal for collection through our legal
collection network. This analysis relies upon, but is not
limited to, the use of our proprietary pricing and collection
probability model and draws upon our extensive experience in the
legal collection and debt-buying industry.
We purchase consumer receivable portfolios from creditors and
others through privately negotiated direct sales and auctions in
which sellers of consumer receivables seek bids from
pre-qualified debt purchasers. We pursue new acquisitions of
consumer receivable portfolios on an ongoing basis through our
relationships with industry participants, collection agencies,
investors, our financing sources, brokers who specialize in the
sale of consumer receivable portfolios and other sources. Our
consumer receivable portfolios are purchased through internally
generated cash flow, seller financed credit lines/leases and
traditional leverage methods. Our profitability depends upon our
ability to purchase and collect on a sufficient volume of our
consumer receivables to generate revenue that exceeds our costs.
As of September 30, 2008, we held approximately
$500 million in consumer receivables, excluding post
charge-off accrued interest. We currently service approximately
115,000 accounts and place these accounts with over 80 law firms
across the 50 states and Puerto Rico. Our portfolios have
face amounts ranging from $225,000 to approximately
$43 million with purchase prices ranging from $0.017 to
$0.25 per $1.00 of such face amounts.
History
We were organized in the State of Delaware in December 1986 as
Tele-Optics, Inc. We were inactive until February 3, 2004,
when we acquired STB, Inc. Since that acquisition, we have
focused on the business of acquiring, managing and servicing
distressed assets, consisting of consumer receivable portfolios,
interests in distressed real property and tax lien certificates.
Historically, the business had been carried on by our three
wholly-owned subsidiaries: Velocity Investments, LLC
(VI), which invests in non-performing consumer debt
purchased in the secondary market at a discount from face value
and then seeks to liquidate these debt portfolios through legal
collection means; J. Holder, Inc. (J. Holder),
which invested in distressed real property interests, namely
real property being sold at sheriffs foreclosure and
judgment execution sales, defaulted mortgages, partial interests
in real property and the acquisition of real property with
clouded title; and VOM, LLC (VOM), which invested in
New Jersey municipal tax liens with the focus on realization of
value through legal collection and owned real estate
opportunities presented by the current tax environment. On
December 31, 2007, our board of directors unanimously
approved managements plan to discontinue the operation of
J. Holder and VOM and to sell and dispose of the assets or
membership interests/capital stock of such subsidiaries. The
divestiture of the businesses is consistent with our strategy of
concentrating our resources on purchasing, managing, servicing
and collecting portfolios of consumer receivables.
40
Industry
Overview
The growth of the consumer receivable management industry has
been driven by a number of industry trends, including:
|
|
|
|
|
increasing levels of debt;
|
|
|
|
mounting debt and pressure on banks and financial institutions
to remove nonperforming or unattractive assets from their
balance sheets;
|
|
|
|
increasing defaults of the underlying receivables; and
|
|
|
|
increasing utilization of third-party providers to collect such
receivables.
|
The current amount of consumer debt in the United States is
unprecedented. According to the U.S. Federal Reserve Board,
the consumer credit industry increased from $731.9 billion
of consumer debt obligations in 1988 to $2.6 trillion of
consumer debt obligations in June 2008, a compound annual growth
rate of 6.5%. The U.S. Treasury Department has indicated
that approximately 40% of U.S. consumer credit is provided
through securitization of credit card receivables, auto loans,
and student loans. As of June 30, 2008, approximately 5% of
credit card loans were delinquent. As a result, many
opportunistic consumer receivable purchasers have left the
market, resulting in an increase in the availability of
receivable portfolios and a decrease in the price for such
portfolios. The 2007 Kaulkin Ginsberg Company Report projects
that the consumer credit market will increase to $3.2 trillion
by 2011 from $2.4 trillion in 2007, and that the total
collections industrys revenues are estimated to increase
11% per year from $3.7 billion in 2006 to $6.2 billion
in 2011. As a result, we believe that current market conditions
create a good opportunity for acquiring large quantities of
consumer receivable portfolios.
Most of our competitors generally rely on call-center collection
models, with legal collections historically used as a secondary
strategy. We believe that call centers are inherently
inefficient due to their fixed costs, including the need to
retain a significant number of employees and manage a high rate
of employee turnover. We utilize law firms to collect our
revenues, which we believe is one of the fastest growing
segments of the collections industry and more suitable for
collecting in the current difficult economic environment.
According to the 2007 Kaulkin Ginsberg Company Report, law
firms collections revenue is expected to increase 15% a
year from $1.2 billion in 2006 to $2.4 billion in 2011.
Business
Strategy
Our primary objective is to utilize our managements
experience and expertise to effectively grow our business. We
intend to do so by identifying, evaluating, pricing and
acquiring distressed consumer receivable portfolios that are
optimal for collection through our legal collection network and
maximizing the return on such assets in a cost efficient manner.
Our strategy includes:
|
|
|
|
|
conducting extensive internal due diligence to ensure our third
party servicers are provided with the most complete available
information on a portfolio in order to maximize collections;
|
|
|
|
outsourcing the legal collection process to a national legal
network that is compensated on a fixed success-based commission
schedule;
|
|
|
|
managing the legal collection and servicing of our receivable
portfolios;
|
|
|
|
expanding geographically while maintaining the same disciplined
management of the legal collection network;
|
|
|
|
increasing and expanding financial flexibility and leverage
through increased capital lines of credit; and
|
|
|
|
expanding our business through the purchase of consumer
receivables from new and existing sources.
|
We believe that as a result of our managements experience
and expertise and the fragmented yet growing market in which we
operate, we are well-positioned to successfully implement our
strategy.
Consumer
Receivables Purchase Program
We have purchased more than 70 portfolios from over 15 different
debt sellers since 2003. Our focus has historically been on
purchases of charged-off credit card receivables, which are
accounts that have been
41
written off by their originators, and consumer installment
loans, which receivables make up over 95% of our portfolio. We
also have purchased portfolios that have a small percentage of
auto deficiency and health club receivables. Although we have no
policy limiting purchases of other types of charged-off
receivables, to date, we have not purchased any telecom,
utility, healthcare, student loan, mobile home or retail mail
order receivables. While we have no policy limiting purchases
from a single debt seller, we purchase from a diverse set of
debt sellers and our purchasing decisions are based upon
constantly changing economic and competitive conditions as
opposed to long-term relationships with particular debt sellers.
Each potential acquisition begins with a quantitative and
qualitative analysis of the portfolio. In the initial stages of
the due diligence process, we typically review basic data on the
portfolios accounts. This data typically includes the
account number, the obligors name, address, social
security number, phone numbers, outstanding balance, date of
charge-off, last payment date and account origination. We will
not bid on portfolios to the extent that this information is not
available. We also analyze the portfolio by comparing it to
similar portfolios previously acquired by us. In addition, we
perform qualitative analyses of other matters affecting the
value of portfolios, including a review of the delinquency,
charge off, placement and recovery policies of the originator as
well as the collection authority granted by the originator to
any third party collection agencies and, if possible, by
reviewing their recovery efforts on the particular portfolio. We
analyze this information on an account by account basis and
summarize it based on certain key metrics that enable us to make
a determination that the debt is optimally collected through
legal collection means, such as, but not limited to:
|
|
|
|
|
the number of collection agencies previously attempting to
collect the receivables in the portfolio;
|
|
|
|
state distribution of the obligors in the portfolio as different
states have different liquidation rates, which is factored into
our cash flow analysis;
|
|
|
|
obligors last known residence;
|
|
|
|
type of receivable;
|
|
|
|
availability of account documentation (e.g. charge-off
statements, account statements, applications);
|
|
|
|
the applicable states statute of limitations;
|
|
|
|
age of the charged-off receivable (as older receivables may
liquidate at a different rate than newer receivables); and
|
|
|
|
managements assessment of each debtors ability to
repay this debt based on an account by account analysis.
|
In addition, we generally request the seller to provide answers
to a questionnaire designed to help us understand important
qualitative factors relating to the portfolio. The age of a
charged-off consumer receivables portfolio, or the time since an
account has been charged-off by the credit originator and the
number of times a portfolio has been placed with third parties
for collection purposes, is one of many factors in determining
the price at which we will offer to purchase a receivables
portfolio. As long as the charged-off receivables are
collectible through legal collection means based on the relevant
states applicable statute of limitations, we will purchase
accounts at any point in the delinquency cycle. We deploy our
capital within these delinquency stages based upon
managements assessment of the values of the available debt
portfolios based on our analysis of the key metrics discussed
above and our proprietary pricing model.
We purchase the portfolios at a percentage discount to the
outstanding balance of the originator at the time of charge-off.
The purchase balance may include interest and other fees which
are accrued by the originator prior to charge-off. In the case
of credit cards, the interest and late fees accumulated prior to
charge- off are regarded as principal by the credit card
companies. Under the terms of our receivable purchase
agreements, as assignees of the debt, we may also purchase the
interest accumulated up to the date of sale. Subsequent to the
purchase, we may also accrue interest by accumulating simple
interest on the outstanding balance based on the terms and
conditions of the applicable cardholder agreement or the
applicable state law. We attempt to collect the purchased
balance and any interest that occurs subsequent to charge-off
subject to the relevant federal and state laws governing this
collection.
42
Historically, we have acquired consumer receivable portfolios
with face amounts ranging from $225,000 to approximately
$43 million at purchase prices ranging from $0.017 to $0.25
per $1.00 of such face amounts. Consumer receivable activity for
the nine months ended September 30, 2008 and 2007 and years
ended December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
46,971,014
|
|
|
$
|
38,327,926
|
|
|
$
|
38,327,926
|
|
|
$
|
17,758,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and capitalized costs, net of returns
|
|
|
1,903,802
|
|
|
|
11,491,501
|
|
|
|
12,799,459
|
|
|
|
22,915,748
|
|
Amortization of capitalized costs
|
|
|
(44,397
|
)
|
|
|
(44,397
|
)
|
|
|
(59,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,859,405
|
|
|
|
11,447,104
|
|
|
|
12,740,263
|
|
|
|
22,915,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections(1)
|
|
|
(13,553,840
|
)
|
|
|
(13,058,115
|
)
|
|
|
(17,960,713
|
)
|
|
|
(10,777,742
|
)
|
Income recognized on consumer receivables(1)
|
|
|
10,875,838
|
|
|
|
9,901,507
|
|
|
|
13,863,538
|
|
|
|
8,431,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections applied to principal
|
|
|
(2,678,002
|
)
|
|
|
(3,156,608
|
)
|
|
|
(4,097,175
|
)
|
|
|
(2,346,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
46,152,417
|
|
|
$
|
46,618,422
|
|
|
$
|
46,971,014
|
|
|
$
|
38,327,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes $66,919 derived from fully amortized pools for the nine
months ended September 30, 2008.
|
We utilize our relationships with brokers, servicers and sellers
of consumer receivable portfolios to locate consumer receivable
portfolios for purchase. Our senior management is responsible
for:
|
|
|
|
|
coordinating due diligence, including in some cases
on-site
visits to the sellers office;
|
|
|
|
stratifying and analyzing the portfolio characteristics;
|
|
|
|
valuing the portfolio;
|
|
|
|
preparing bid proposals;
|
|
|
|
negotiating pricing and terms;
|
|
|
|
closing the purchase; and
|
|
|
|
coordinating the receipt of account documentation for the
acquired portfolios.
|
The seller or broker typically supplies us with either a sample
listing or the actual portfolio being sold on a compact disk, a
diskette or other form of media. We analyze each consumer
receivable portfolio to determine if it meets our purchasing
criteria. We may then prepare a bid or negotiate a purchase
price. If a purchase is completed, senior management monitors
the portfolios performance and uses this information in
determining future buying criteria and pricing.
We purchase most of our consumer receivable portfolios directly
from originators and other sellers including, from time to time,
auction type sales in which sellers of consumer receivables seek
bids from several pre-qualified debt purchasers. In order for us
to consider a potential seller as a source of receivables, a
variety of factors are considered. Sellers must demonstrate that
they have:
|
|
|
|
|
adequate internal controls to detect fraud;
|
|
|
|
the ability to provide post-sale support; and
|
|
|
|
the capacity to honor buy-back and return warranty requests.
|
Generally, our portfolio purchase agreements provide that we can
return certain accounts to the seller. In some transactions,
however, we may acquire a portfolio with limited representations
and warranties including title representations and indemnities,
few, if any, rights to return accounts to the seller. After
acquiring a
43
portfolio, we conduct a detailed analysis to determine which
accounts in the portfolio should be returned to the seller.
Although the terms of each portfolio purchase agreement differ,
examples of accounts that may be returned to the seller include:
|
|
|
|
|
debts paid prior to the cutoff date;
|
|
|
|
debts in which the obligor filed bankruptcy prior to the cutoff
date; and
|
|
|
|
debts in which the obligor was deceased prior to cutoff date.
|
We generally use third-party electronic public record searches
to determine bankrupt and deceased obligors, which allow us to
focus our resources on portfolio collections. Under a typical
portfolio purchase agreement, the seller refunds the portion of
the purchase price attributable to the returned accounts or
delivers replacement receivables to us. Occasionally, we will
acquire a well seasoned portfolio at a reduced price from a
seller that is unable to meet all of our purchasing criteria.
When we acquire such portfolios, the purchase price is
discounted beyond the typical discounts we receive on the
portfolios we purchase that meet our purchasing criteria.
Consumer
Receivables Collecting and Servicing
Our objective is to maximize our return on investment on
acquired consumer receivable portfolios. Consequently, before
acquiring a portfolio, we analyze the various assets contained
in the portfolio to determine how to best maximize collections
in a cost efficient manner. If we acquire the portfolio, we can
then promptly process the receivables that were purchased and
commence the collection process. Unlike collection agencies that
typically have only a specified period of time to recover a
receivable, as the portfolio owner, we have significantly more
flexibility in establishing payment programs and establishing
customized policies and procedures.
Once a portfolio has been acquired, we download all receivable
information provided by the seller into our account management
system and reconcile certain information with the information
provided by the seller in the purchase contract. We then conduct
additional due diligence on the portfolio to augment the
information provided by the seller and download such information
into our account management system. We send regulatory-required
notification letters to obligors of each acquired account
explaining, among other matters, our new ownership and asking
that the obligor contact us or our servicers to make payment
arrangements.
We outsource all of the legal collection process of our
receivables to third-party law firms based on specific
guidelines established by senior management and set forth in a
third-party servicing contract. Prior to January 1, 2005,
substantially all legal work was outsourced to Ragan &
Ragan, P.C., an affiliate of
W. Peter Ragan, Sr., our Vice President and one
of our directors, and W. Peter Ragan Jr., President of VI. Each
third-party law firm to whom we might outsource receivable
servicing is selected from an industry law list with an
accredited bond, has compatible information technology systems
and meets certain other specific criteria. Our standard form of
servicing contract provides for the payment to the law firm of a
contingency fee equal to 25% of all amounts collected and paid
by the debtors. Once a group of receivables is sent to a
third-party servicer, our management actively monitors and
reviews the servicers performance on an ongoing basis. Our
management receives detailed analyses, including collection
activity and portfolio performance, from our internal servicing
department to assist it in evaluating the results of the efforts
of the third-party law firm. Based on portfolio performance
guidelines, our management may move certain receivables from one
third-party
servicer to another if it anticipates that this will result in
an increase in collections. Until December 2004, all of our
receivables were from obligors in New Jersey and we employed the
law firm of Ragan & Ragan, P.C. to service those
receivables. We expect to continue to use Ragan &
Ragan, P.C. with respect to our receivables in New Jersey
until such time as either (i) our agreement with
Ragan & Ragan, P.C. terminates; or (ii) the
consumer receivable portfolios in New Jersey increase beyond the
capacity of Ragan & Ragan, P.C. Our current
agreement with respect to consumer receivables portfolios with
Ragan & Ragan P.C. is for one calendar year and
automatically extends for additional periods of one calendar
year each unless terminated by us. The agreement provides for
the payment to such firm of a contingency fee equal to 25% of
all amounts collected and paid by the obligors. The shareholders
of Ragan & Ragan, P.C. are W. Peter
44
Ragan, Sr., our Vice President and a Director, and W. Peter
Ragan Jr., President of our wholly-owned subsidiary, VI.
From time to time, we may resell certain accounts in our pool of
consumer receivables that we have deemed uncollectible in order
to generate revenue.
Competition
Our business of purchasing consumer receivables is highly
competitive and fragmented, and we expect that competition from
new and existing companies will increase. We compete with:
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other purchasers of consumer receivables; and
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other financial services companies who purchase consumer
receivables.
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Some of our competitors are larger and more established and may
have substantially greater financial, technological, personnel
and other resources than we have, including greater access to
capital markets. We believe that no individual competitor or
group of competitors has a dominant presence in the market. We
also believe our competitors that rely on call center models
have a high fixed cost model, with a significant number of
employees and a high rate of turnover. We believe some of our
competitors, particularly hedge funds, are currently reducing
the amount of consumer debt they are purchasing due to the
current financial crisis.
We compete with our competitors for consumer receivable
portfolios, based on many factors, including:
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purchase price;
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representations, warranties and indemnities requested;
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speed in making purchase decisions; and
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our reputation.
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Our competitive strategy is designed to capitalize on the
markets lack of a dominant industry player. We believe
that our managements experience and expertise in
identifying, evaluating, pricing and acquiring consumer
receivable portfolios, and managing collections coupled with our
strategic alliances with third-party servicers and our sources
of financing give us a competitive advantage. However, we may
not be able to compete successfully against current or future
competitors or that competition will not increase in the future.
We have a number of competitive advantages which we believe
differentiate us from our competitors and that have enabled us
to effectively grow our business by identifying, evaluating,
pricing and acquiring consumer receivable portfolios that are
optimal for collection through our legal collection network and
maximizing the return on such assets. We believe that our
proprietary pricing model and our focus on the legal collections
model, which has traditionally been used by our competitors as a
secondary strategy, provide us with significant advantages over
competitors. Our competitive strengths are:
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Experienced, Specialized Management Team:
Our
leadership team is comprised of executives with over
60 years of combined experience in the collections
industry. John C. Kleinert, our Chief Executive Officer, founded
our company in 1998 after spending 15 years at Goldman
Sachs. While at Goldman, Mr. Kleinert worked in several
different capacities, including running the Municipal Bond
Trading Desk and ultimately serving as a General Partner and
then Limited Partner. W. Peter Ragan, Jr., co-founder and
President, applied his over 12 years of collections
industry experience and expertise to develop our proprietary
pricing model and to develop our legal collections platform
(including lawyer selection, software to manage our legal
network, incentive platform and legal collections network
monitoring). His father, W. Peter Ragan, Sr., co-founder
and senior advisor to the company and has litigated many
reported cases in the creditors rights arena. James J.
Mastriani, our Chief Legal Officer and Chief Financial Officer
since joining us in 2004, has over 10 years experience in
the consumer finance and financial services industries.
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Disciplined Proprietary Pricing Model:
We
utilize our proprietary pricing model to value portfolios which
we believe are optimal for collection through our legal
collection network and can provide
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attractive returns. This model was developed based on our
management teams extensive experience working in the
consumer receivables marketplace. The prices we pay for our
consumer receivable portfolios are dependent on many criteria
including the age of the portfolio, the type of receivable, our
analysis of the percentage of obligors who owe debt that is
collectible through legal collection means and the geographical
distribution of the portfolio. We are generally willing to pay
higher prices for portfolios that have a higher percentage of
obligors whose debt we believe is collectible through legal
collection means. Price fluctuations for portfolio purchases
from quarter-to-quarter or year-over-year are indicative of the
economy or overall mix of the types of portfolios we are
purchasing.
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Legal Collections Model:
We utilize third
party law firms, including a law firm owned by certain of our
officers and directors, to collect our receivable portfolios. We
currently service 115,000 accounts and place these accounts with
over 80 law firms across the 50 states and Puerto Rico. We
actively manage our outsourced legal network through advanced
information technology systems. We believe that our senior
management team, two of whom are collections lawyers,
understands what our legal third parties need to properly
collect and service our portfolios, which provides us with a
significant competitive advantage. We generally only utilize two
lawyers in most states and are regularly solicited by
independent law firms seeking to join our network. In addition,
we believe we can direct significantly more business to the law
firms in our network.
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Scaleable, Profitable Business Model:
We are
able to keep fixed costs very low and currently have only
12 employees, of which 10 are full-time employees. As we
acquire more portfolios, the only cost that we expect would
significantly increase is the professional fees paid to the
lawyers we utilize to collect our receivables. Our management
team, information technology systems platform, purchasing model
and legal collections can all support a significantly larger
amount of receivables.
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Management
Information Systems
We believe that a high degree of automation is necessary to
enable us to grow and successfully compete with other financial
services companies. Accordingly, we continually upgrade our
computer software and, when necessary, our hardware to support
the servicing and recovery of consumer receivables that we
acquire. Our telecommunications and computer systems allow us to
quickly and accurately process the large amount of data
necessary to purchase and service consumer receivable
portfolios. Due to our desire to increase productivity through
automation, we periodically review our systems for possible
upgrades and enhancements. We do not maintain business
interruption insurance. However, we maintain a disaster recovery
program intended to allow us to operate our business at an
offsite facility. In the event our disaster recovery program
fails to operate as expected or we do not have adequate backup
arrangements for all of our operations, we may incur significant
losses if an outage occurs.
Government
Regulation
Federal, state and municipal statutes, rules, regulations and
ordinances establish specific guidelines and procedures which
debt purchasers must follow when collecting consumer accounts.
It is our policy to comply with the provisions of all applicable
federal laws and comparable state statutes in all of our
recovery activities, even in circumstances in which we may not
be specifically subject to these laws. Our failure to comply
with these laws could have a material adverse effect on us in
the event and to the extent that they limit our recovery
activities or subject us to fines or penalties in connection
with such activities. Federal and state consumer protection,
privacy and related laws and regulations extensively regulate
the collection of consumer debt and the relationship between
customers and credit card issuers. Significant federal laws and
regulations applicable to our business include the following:
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Fair Debt Collection Practices Act.
This act
imposes certain obligations and restrictions on collection
practices, including specific restrictions regarding
communications with consumer customers, including the time,
place and manner of the communications. This act also gives
consumers certain rights, including the right to dispute the
validity of their obligations and a right to sue third parties
who fail to comply with its provisions, including the right to
recover their attorney fees.
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Fair Credit Reporting Act.
While we believe
that we are not currently subject to this act as we do not
currently furnish trade line information to the credit reporting
agencies or use credit reports, we may decide to furnish or use
such information in the future. This act places certain
requirements on credit information providers regarding
verification of the accuracy of information provided to credit
reporting agencies and investigating consumer disputes
concerning the accuracy of such information. The Fair Credit
Reporting Act to include additional duties applicable to data
furnishers with respect to information in the consumers
credit file that the consumer identifies as resulting from
identity theft, and requires that data furnishers have
procedures in place to prevent such information from being
furnished to credit reporting agencies.
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Gramm-Leach-Bliley Act.
This act requires that
certain financial institutions, including debt purchasers,
collection agencies, develop policies to protect the privacy of
consumers private financial information and provide
notices to consumers advising them of their privacy policies.
This act also requires that if private personal information
concerning a consumer is shared with another unrelated
institution, the consumer must be given an opportunity to opt
out of having such information shared. Since we do not share
consumer information with non-related entities, except as
required by law, or except as needed to collect on the
receivables, our consumers are not entitled to any opt-out
rights under this act. This act is enforced by the Federal Trade
Commission, which has retained exclusive jurisdiction over its
enforcement, and does not afford a private cause of action to
consumers who may wish to pursue legal action against a
financial institution for violations of this act.
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Electronic Funds Transfer Act.
This act
regulates the use of the Automated Clearing House, or ACH,
system to make electronic funds transfers. All ACH transactions
must comply with the rules of the National Automated Check
Clearing House Association, or NACHA, and Uniform Commercial
Code § 3-402. This act, the NACHA regulations and the
Uniform Commercial Code give the consumer, among other things,
certain privacy rights with respect to the transactions, the
right to stop payments on a pre-approved fund transfer, and the
right to receive certain documentation of the transaction. This
act also gives consumers a right to sue institutions which cause
financial damages as a result of their failure to comply with
its provisions.
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Telephone Consumer Protection Act.
In the
process of collecting accounts, we may, in the future, use
automated predictive dialers to place calls to consumers. This
act and similar state laws place certain restrictions on
telemarketers and users of automated dialing equipment who place
telephone calls to consumers.
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Servicemembers Civil Relief Act.
The
Soldiers and Sailors Civil Relief Act of 1940 was
amended in December 2003 as the Servicemembers Civil Relief Act,
or SCRA. The SCRA gives U.S. military service personnel
relief from credit obligations they may have incurred prior to
entering military service, and may also apply in certain
circumstances to obligations and liabilities incurred by a
servicemember while serving on active duty. The SCRA prohibits
creditors from taking specified actions to collect the defaulted
accounts of servicemembers. The SCRA impacts many different
types of credit obligations, including installment contracts and
court proceedings, and tolls the statute of limitations during
the time that the servicemember is engaged in active military
service. The SCRA also places a cap on interest bearing
obligations of servicemembers to an amount not greater than 6%
per year, inclusive of all related charges and fees.
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U.S. Bankruptcy Code.
In order to prevent
any collection activity with bankrupt debtors by creditors and
collection agencies, the U.S. Bankruptcy Code provides for
an automatic stay, which prohibits certain contacts with
consumers after the filing of bankruptcy petitions.
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Additionally, there are some states statutes and regulations
comparable to the above federal laws, and specific licensing
requirements which affect our operations. State laws may also
limit credit account interest rates and the fees, as well as
limit the time frame in which judicial actions may be initiated
to enforce the collection of consumer accounts.
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Although we are not a credit originator, some of these laws
directed toward credit originators, including the Fair Credit
Billing Act and the Equal Credit Opportunity Act may
occasionally affect our operations because our receivables were
originated through credit transactions. Federal laws which
regulate credit originators require, among other things, that
credit card issuers disclose to consumers the interest rates,
fees, grace periods and balance calculation methods associated
with their credit card accounts. Consumers are entitled under
current laws to have payments and credits applied to their
accounts promptly, to receive prescribed notices and to require
billing errors to be resolved promptly. Some laws prohibit
discriminatory practices in connection with the extension of
credit. Federal statutes further provide that, in some cases,
consumers cannot be held liable for, or their liability is
limited with respect to, charges to the credit card account that
were a result of an unauthorized use of the credit card. These
laws, among others, may give consumers a legal cause of action
against us, or may limit our ability to recover amounts owing
with respect to the receivables, whether or not we committed any
wrongful act or omission in connection with the account. If the
credit originator fails to comply with applicable statutes,
rules and regulations, it could create claims and rights for
consumers that could reduce or eliminate their obligations to
repay the account and have a possible material adverse effect on
us. Accordingly, while we seek to contractually obtain
indemnification from creditor originators and others against
losses caused by the failure to comply with applicable statutes,
rules and regulations relating to the receivables before they
are sold to us, we may not be able to do so.
The U.S. Congress and several states have enacted
legislation concerning identity theft. Additional consumer
protection and privacy protection laws may be enacted that would
impose additional requirements on the enforcement of and
recovery on consumer credit card or installment accounts. Any
new laws, rules or regulations that may be adopted, as well as
existing consumer protection and privacy protection laws, may
adversely affect our ability to recover the receivables. In
addition, our failure to comply with these requirements could
adversely affect our ability to enforce the receivables.
If some of the receivables were established as a result of
identity theft or unauthorized use of a credit card and,
accordingly, we could not recover the amount of such defaulted
consumer receivables. As a purchaser of defaulted consumer
receivables, we may acquire receivables subject to legitimate
defenses on the part of the consumer. Our account purchase
contracts allow us to return to the debt owners certain
defaulted consumer receivables that may not be collectible, due
to these and other circumstances. Upon return, the debt owners
are required to replace the receivables with similar receivables
or repurchase the receivables. These provisions limit to some
extent our losses on such accounts.
We currently hold a number of licenses issued under applicable
credit laws. Certain of our current licenses and any licenses
that we may be required to obtain in the future may be subject
to periodic renewal provisions
and/or
other
requirements. Our inability to renew licenses or to take any
other required action with respect to such licenses could have a
material adverse effect upon our results of operation and
financial condition.
Employees
As of December 31, 2008, we had a total of twelve
employees, of which ten are full time employees. Most of our
collection activities are outsourced and managed by corporate
officers. Each of our employees has signed a standard employee
agreement, containing confidentiality and change of control
provisions. None of our employees is covered by a collective
bargaining agreement. We consider our relationship with our
employees to be good.
Description
of Properties
Both our executive/corporate offices at 48 Franklin Turnpike,
3rd Floor, Ramsey, NJ 07746 and our business office at 1800
Route 34 North, Building 4, Suite 404A, Wall, NJ, 07719 are
located in leased space. The business office is approximately
2,450 square feet, is subject to a five year lease from an
unrelated third party (expiring on July 1, 2012) and
has an annual lease payment of $43,488. We also maintain office
space of approximately 500 square feet, which is subject to
a renewable two year lease (expiring on January 1,
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2010) from an unrelated third party and has an annual lease
payment of $8,400. We believe our property is adequate for our
current needs.
Legal
Proceedings
In the ordinary course of our business we are involved in
numerous legal proceedings, usually as the plaintiff. We
regularly initiate collection lawsuits against consumers using
our network of third party law firms. Also, consumers may
occasionally initiate litigation against us in which they allege
that we have violated a Federal or state law in the process of
collecting on their account. We do not believe that these
ordinary course matters are material to our business and
financial condition.
As of the date of this filing, there are presently no material
pending legal proceedings to which we or any of our subsidiaries
is a part or to which any of its property is the subject and, to
the best of its knowledge, no such actions against us are
contemplated or threatened.
49
EXECUTIVE
OFFICERS AND DIRECTORS
Each of our executive officers and directors, his age, position
with us and the year of his initial election or appointment are
identified in the table below. All directors hold office until
the next annual meeting of stockholders or until their
respective successors are elected and qualified.
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Year Became
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An Executive
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Officer or
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Name
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Age
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Director
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Positions
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John C. Kleinert
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2004
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President, Chief Executive Officer and Director(1)
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James J. Mastriani
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2004
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Chief Financial Officer, Chief Legal Officer, Treasurer and
Secretary
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W. Peter Ragan, Sr.
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2004
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Vice President and Director
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W. Peter Ragan, Jr.
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2004
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President of VI, our wholly-owned subsidiary
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Steven Marcus
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2005
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Independent Director(1)(2)
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Dr. Michael Kelly
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2005
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Independent Director(1)
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David Granatell
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2005
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Independent Director(1)(2)
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(1)
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Member of our Compensation Committee
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(2)
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Member of our Audit Committee and Nominating Committee
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There are no material proceedings known to us to which any of
our directors, officers or affiliates, or any owner of record or
beneficially of more than 5% of any class of our voting
securities, or any affiliate of such persons is a party adverse
to us or has a material interest adverse to our interests. None
of our directors received any additional compensation for his
services as a director.
The following brief biographies contain information about our
directors and our executive officers. The information includes
each persons principal occupation and business experience
for at least the past five years. This information has been
furnished to us by the individuals named. Except for the
relationship of Mr. Ragan, Sr. and
Mr. Ragan, Jr., who are father and son, there are no
family relationships known to us between the directors and
executive officers. We do not know of any legal proceedings that
are material to the evaluation of the ability or integrity of
any of the directors or executive officers.
John C. Kleinert
earned a Bachelor of Science
degree in Chemical Engineering from Princeton University in
1981. In 1982, Mr. Kleinert was hired by Goldman Sachs in
New York and from
1982-1990,
he traded various municipal products and was appointed head of
the Municipal Trading Desk in 1991. In 1994, Mr. Kleinert
was elected a general partner of the firm and served in that
capacity until the end of 1997 when he retired and became a
limited partner. Since retiring from Goldman Sachs and prior to
his full-time employment by us as president and chief executive
officer, Mr. Kleinert pursued several business ventures,
including managing a trading operation, JCK Investments, which
invested in equities, bonds, commodities and options. He is also
a co-founder or our company.
James J. Mastriani
earned a Bachelor of Arts
degree in 1992 from Georgetown University and earned his juris
doctorate from the Seton Hall University School of Law in 1997.
After graduating from law school, Mr. Mastriani was
in-house counsel for SBC Warburg Dillon Read Inc., providing
legal advice and transactional support to the broker-dealer
subsidiary of Swiss Bank Corporation. From 1998 to 2004,
Mr. Mastriani practiced at the New York office of
international law firm Skadden, Arps, Slate, Meagher and Flom
LLP, where he was responsible for providing legal and regulatory
advice to clients in the financial services and consumer finance
industries.
W. Peter Ragan, Sr.
received a Bachelor of
Science in Marketing from LaSalle University in 1968 and earned
his law degree from the Seton Hall University School of Law in
1974. Since his graduation he has practiced primarily in the
area of creditors rights. Mr. Ragan practiced with
the firm of Schaefer and Crawford
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in Ocean Township, New Jersey, from 1974 to 1979 where he
specialized in municipal law and creditors rights. From
1979 through May of 1998, Mr. Ragan was a principal of
Blankenhorn & Ragan, P.C., and its predecessor
partnership. In May of 1998, the law firm of Ragan &
Ragan, P.C. was created where Mr. Ragan is presently
senior partner and continues with his focus upon creditors
rights. Mr. Ragan has been a member of the New Jersey State
Bar since 1974 and is also admitted to practice before the
United States District Court for the District of New Jersey,
United States Third Circuit Court of Appeals and the United
States Supreme Court. Mr. Ragan is also a co-founder of our
company.
W. Peter Ragan, Jr.
earned a Bachelor of
Science in Management and Marketing from Manhattan College 1992
and graduated, cum laude, from the Seton Hall University School
of Law in May of 1996. In 2001, Mr. Ragan received a
Masters Degree in Business Administration from Monmouth
University. After Mr. Ragans graduation from Seton
Hall he was employed by the law firm of Blankenhorn &
Ragan, PC as a litigation associate. He has handled cases
involving creditors rights, collection and bankruptcy
litigation practice. In May of 1998, Mr. Ragan became a
partner in the law firm of Ragan & Ragan, P.C.
and now manages Ragan & Ragan, P.C.s volume
collection practice. Mr. Ragan is a member of the New York
and New Jersey State Bars and is also admitted to practice
before the United States District of New Jersey, the United
States District Court for the Southern District of New York, and
the United States Third Circuit Court of Appeals. Mr. Ragan
is also a co-founder of our company.
Steven Marcus
joined our board of directors in
September 2005. Mr. Marcus is the founder and President of
Rainbow Capital, LLC, a private equity firm that sponsors
private equity transactions of mature middle market companies.
He founded the firm in 2001. From 1999 through 2001,
Mr. Marcus was a private equity investor, sourcing and
evaluating investment opportunities in primarily internet
start-ups.
For the previous 14 years, Mr. Marcus worked in the
high yield bond market for Donaldson, Lufkin &
Jenrette, Smith Barney, Inc. and PaineWebber, Inc.
Mr. Marcus has an M.B.A. in finance from the University of
Duke and a B.S. in accounting from Syracuse University.
Mr. Marcus is the Chairman of our Audit Committee and a
member of our Nominating Committee and our Compensation
Committee.
Dr. Michael Kelly
joined our board of directors in
September 2005. Mr. Kelly has been a Director of the Insal,
Scott Kelly Institute of Orthopedic and Sports Medicine in New
York, New York since 1991. In 2004, Dr. Kelly was named
Chairman of the Department of Orthopedic Surgery at Hackensack
University Medical Center. He is also Vice President of the
U.S. Knee Society, an attending orthopedic surgeon at Lenox
Hill Hospital in New York, New York and has served as team
physician for the New Jersey Nets franchise of the National
Basketball Association for the last five years. Mr. Kelly
is a member of our Audit Committee, our Nominating Committee and
our Compensation Committee.
David Granatell
joined our board of directors in
September 2005. Mr. Granatell is an Executive Director of
the privately-owned Elmwood Park, NJ based Grant Industries,
Inc., a specialty manufacturer of textile chemicals and personal
care raw materials, with locations in Mexico, Romania, England,
China and Korea. Mr. Granatell has worked for Grant
Industries since graduating from Rutgers University in 1979 and
became a Partner in 1982. Mr. Granatell is a member of our
Audit Committee, our Nominating Committee and our Compensation
Committee.
Director
Independence
We believe that Steven Marcus, Dr. Michael Kelly and David
Granatell qualify as independent directors in accordance with
the standards set by NYSE Alternext and also as defined in
Section 301 of the
Sarbanes-Oxley
Act of 2002 and Rule 10A(3)(b)(1) of the Securities
Exchange Act, as amended. Accordingly, as required by the NYSE
Alternext, our board of directors is comprised of a majority of
independent directors.
Board
Committees
The board of directors has established three standing
committees: (1) the Audit Committee (2) the
Compensation Committee and (3) the Nominating Committee.
Each committee operates under a charter that has been approved
by the board of directors. Copies of the Charters of the Audit
Committee, Compensation Committee and Nominating Committee are
posted on our website at www.velocitycollect.com.
Messrs. Marcus,
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Kelly and Granatell are the members of each of such committees.
Mr. Marcus serves as the Chair of each of such committees.
Audit
Committee
Our board of directors established an Audit Committee in
September 2005, comprised of Steven Marcus, Dr. Michael
Kelly and David Granatell, all of whom are independent directors
as defined in Section 301 of the Sarbanes-Oxley Act of 2002
and Rule 10A(3)(b)(1) of the Securities Exchange Act, as
amended. Mr. Marcus serves as chairman of the committee.
Our board of directors has determined that Mr. Marcus is an
audit committee financial expert as defined in
Item 407(d)(5)(ii) of
Regulation S-K.
The Audit Committee oversees our corporate accounting, financial
reporting practices and the audits of financial statements. For
this purpose, the Audit Committee performs several functions.
The Audit Committee evaluates the independence and performance
of, and assesses the qualifications of and engages, our
independent registered public accountants. The Audit Committee
approves the plan and fees for the annual audit, review of
quarterly reports, tax and other audit-related services, and
approves in advance any non-audit service to be provided by the
independent registered public accountants. The Audit Committee
monitors the rotation of partners of the independent registered
public accountants on our engagement team as required by law.
The Audit Committee reviews the financial statements to be
included in our Annual Report on
Form 10-K
and reviews with management and the independent registered
public accountants the results of the annual audit and our
quarterly financial statements. In addition, the Audit Committee
oversees all aspects our systems of internal accounting control
and corporate governance functions on behalf of the board of
directors. The Audit Committee provides oversight assistance in
connection with legal and ethical compliance programs
established by management and the board of directors, including
Sarbanes-Oxley implementation, and makes recommendations to the
board of directors regarding corporate governance issues and
policy decisions.
Nominating
Committee
The board of directors has a Nominating Committee, comprised of
Steven Marcus, Dr. Michael Kelly and David Granatell.
Mr. Marcus serves as the chairman of the committee. The
Nominating Committee is charged with the responsibility of
reviewing our corporate governance policies and with proposing
potential director nominees to the board of directors for
consideration. The Nominating Committee has a charter. All
members of the Nominating Committee are independent directors as
defined by the rules of the NYSE Alternext. The Nominating
Committee will consider director nominees recommended by
security holders. To recommend a nominee, please write to the
Nominating Committee
c/o the
Company Attn: James J. Mastriani. There are no minimum
qualifications for consideration for nomination to be one of our
directors. The nominating committee will assess all director
nominees using the same criteria. All of the current nominees to
serve as directors on our board of directors have previously
served in such capacity. During 2007, we did not pay any fees to
any third parties to assist in the identification of nominees.
During 2007, we did not receive any director nominee suggestions
from stockholders.
Compensation
Committee
Our board of directors also has a Compensation Committee, which,
either alone or in conjunction with the full board, as the case
may be, reviews or recommends the compensation arrangements for
our management and employees. The Compensation Committee has a
charter and is comprised of three members: John C. Kleinert,
Steven Marcus and David Granatell.
Compensation
Committee Interlocks and Insider Participation
None of the members of the Compensation Committee had any
relationships with us or any other entity that require
disclosure under the proxy rules and regulations promulgated by
the SEC.
There are no other board of directors committees at this time.
52
Code of
Ethics
On January 20, 2006, our board of directors adopted a code
of ethics that applies to our principal executive and financial
officers. A copy of the Code of Ethics is attached as an exhibit
to our Annual Report on
Form 10-K
for the year ended December 31, 2005. Additionally, a copy
of our Code of Ethics is available on our website,
www.velocitycollect.com
. We intend to file any
amendments, changes or waivers to the code of ethics as required
by SEC rules.
Executive
Compensation
Summary
Compensation Table
The following table sets forth all annualized compensation paid
to our named executive officers for the years ended
December 31, 2007 and 2006. Individuals we refer to as our
named executive officers include our Chief Executive
Officer and our most highly compensated executive officers whose
salary and bonus for services rendered in all capacities
exceeded $100,000 during the year ended December 31, 2007.
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Stock
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Name and Principal Position
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Year
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Salary ($)
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Bonus ($)
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Awards ($)
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Total ($)
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John C. Kleinert
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2007
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225,000
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70,000
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295,000
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Chief Executive Officer
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2006
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215,000
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25,000
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240,000
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James J. Mastriani
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2007
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200,000
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65,000
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110,000
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(1)
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375,000
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Chief Financial Officer and
Chief Legal Officer
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2006
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175,000
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60,000
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200,000
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(1)
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435,000
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W. Peter Ragan, Jr.
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2007
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100,000
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25,000
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125,000
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President, Velocity Investments
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2006
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60,000
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40,000
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100,000
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W. Peter Ragan Sr.
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2007
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100,000
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10,000
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110,000
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Vice President
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2006
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100,000
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12,500
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112,500
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(1)
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On August 26, 2006, the board of directors approved a grant
to Mr. Mastriani for 10,000 restricted shares of our common
stock. Of those shares, 6,250 shares were unvested as of
December 31, 2006. As of September 30, 2007, all of
such shares have vested. The $110,000 sum reflects the value of
the 3,750 restricted shares that have vested as of
December 31, 2007. The $200,000 sum reflects the value of
the 6,250 restricted shares that have vested as of
December 31, 2006. The value of the grants of restricted
stock was based on the market price of our common stock on the
date of grant. See Note 10 Stock Based
Compensation, to our audited financial statements for the fiscal
year ended December 31, 2007. On March 14, 2008,
Mr. Mastriani returned 6,800 of these shares for
cancellation and retirement to offset a $115,146 withholding tax
payment made by us on his behalf on December 28, 2007.
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Narrative
Disclosure to Summary Compensation Table
On January 1, 2006, we extended our employment contract
with our President, John C. Kleinert, for a period of four years
commencing from January 1, 2004 and renewable annually
subject to the terms and conditions of the contract, at an
annual salary of $215,000, which was increased to $225,000 for
the year ended December 31, 2007. Mr. Kleinert devotes
all of his business time to our affairs in accordance with the
terms of his employment contract.
On September 8, 2004, we entered into an employment
contract with James J. Mastriani in which we agreed to employ
Mr. Mastriani as our Chief Financial Officer and our Chief
Legal Officer for a period of three years ending
September 1, 2007 at an annual base salary of not less than
$150,000, with annual increases and annual bonuses determined at
the discretion of our board of directors and calculated in same
manner as other executives. In 2006, we agreed to grant
Mr. Mastriani equity securities pursuant to our 2004 Equity
Incentive Program. During 2006, Mr. Mastriani received a
stock award for 10,000 restricted shares of common stock, all of
which have vested to date. Mr. Mastriani devotes all of his
business time to our affairs as provided under his employment
contract. On December 28, 2007, we paid $115,146 in
withholding taxes in connection
53
with the vesting of 8,750 shares of restricted stock
granted to James J. Mastriani. As of March 14, 2008,
Mr. Mastriani has returned 6,800 of such shares for
cancellation and retirement in order to offset such payment.
On January 1, 2006, we extended our employment contract
with W. Peter Ragan, Jr. in which we agreed to employ
Mr. Ragan, Jr. as President of our wholly owned
subsidiary VI, for a period of four years, commencing from
January 1, 2004 and renewable annually subject to the terms
and conditions of the contract, at an annual salary of $100,000.
Mr. Ragan, Jr. devotes approximately 50% of his
business time to the affairs of VI in accordance with the terms
of his employment contract.
Change in
Control Arrangements and Severance Arrangements
We have agreed that in the event of a change in ownership of
more than 25% of our outstanding stock, Messrs. Kleinert,
Ragan, Sr. and Ragan, Jr. shall have the option,
within 180 days of such change in ownership, to choose to
terminate their employment and receive two years of severance
pay in one lump sum. In addition, those employees are entitled
to receive two years of severance pay in one lump sum if their
employment is terminated without cause. Such severance amounts
would entitle Messrs. Kleinert, Ragan, Sr. and
Ragan, Jr. to payments of $450,000, $200,000 and $200,000,
respectively, based on their respective salaries for the 2007
fiscal year and assuming such change in control occurred during
the 2007 fiscal year. There are no other conditions or
obligations applicable to the receipt of payments.
Messrs. Kleinert and Ragan, Jr. have agreed to waive
any rights that may be triggered under their respective change
in control arrangements as a result of this offering.
Outstanding
Equity Awards
There were no outstanding equity awards held by our named
executive officers as of December 31, 2007.
Outstanding
Equity Awards Narrative Disclosure
Incentive Program. On August 26, 2006, the board of
directors approved a grant to Mr. Mastriani for 10,000
restricted shares of common stock of which, 6,250 shares
vested during 2006, and the remaining 3,750 shares have
vested as of September 30, 2007. On December 28, 2007,
we paid $115,146 in withholding taxes in connection with the
vesting of 8,750 shares of restricted stock granted to
James J. Mastriani. As of March 14, 2008,
Mr. Mastriani has returned 6,800 of such shares for
cancellation and retirement in order to offset such payment.
Our board of directors presently consists of two of our
executive officers and three independent directors. We are not
currently providing any compensation to our two executive
officers for serving on the board of directors.
Compensation Pursuant to Plans. In March 2004, we approved our
2004 Equity Incentive Program. The program provides for the
grant of incentive stock options, nonqualified stock options,
restricted stock grants, including, but not limited to,
unrestricted stock grants, as approved by the board of directors
or a committee of the board. Incentive stock options granted
under the program are intended to qualify as incentive stock
options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended. Nonqualified stock
options granted under the program are intended not to qualify as
incentive stock options under the Internal Revenue Code.
The total number of shares of our common stock that may be
issued under the program upon the exercise of all options
granted under the program or the satisfaction by all recipients
of all conditions necessary for the receipt of restricted stock
awards
and/or
unrestricted stock awards may not exceed 50,000, of which
25,000 shares shall be available for issuance under
incentive stock options and 25,000 shares shall be
available for issuance under nonqualified stock options,
restricted stock awards
and/or
unrestricted stock awards. A total of 11,600 shares have
been issued under the program.
54
Director
Compensation
The following table sets forth the compensation paid to our
directors for the year ended December 31, 2007:
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Total Fees Earned or
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Name
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Paid in Cash ($)
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Steven Marcus
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$
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2,000
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David Granatell
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$
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2,000
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Dr. Michael Kelly
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$
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2,000
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Narrative
to Director Compensation
Fees earned or paid in cash represent a per day meeting fee of
$1,000 for attendance at the August 2, 2007 and
December 5, 2007 board of directors meetings. No
compensation is paid to our officers who are directors and
attend board meetings. We expect to implement a director
incentive plan in 2009. No compensation is paid to our directors
with respect to their attendance to committee meetings.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below, no transactions have occurred since
the beginning of our last two fiscal years or are proposed with
respect to which a director, executive officer, security holder
owning of record or beneficially more than 5% of any class of
our securities or any member of the immediate families of the
foregoing persons had or will have a direct or indirect material
interest:
We engage Ragan & Ragan, P.C. to pursue legal
collection of our receivable portfolios, interests in distressed
real property and tax lien certificates.
Messrs. Ragan, Sr. and Ragan, Jr. are the sole
members of Ragan & Ragan, P.C. In May 2007, the
fee arrangements between our subsidiaries and Ragan &
Ragan, P.C. were approved by unanimous written consent of
the board of directors other than Mr. Ragan, Sr. who
abstained. During years 2007 and 2006, our subsidiary, VI, paid
Ragan & Ragan, P.C. an aggregate of $1,128,107
and $1,225,577, respectively; our subsidiary, J. Holder,
paid Ragan & Ragan, P.C. an aggregate of $6,000
and $10,139, respectively; and our subsidiary, VOM, paid
Ragan & Ragan, P.C. an aggregate of $238 and
$5,528, respectively. During the nine months ended
September 30, 2008 and 2007, we paid Ragan and
Ragan, P.C. an aggregate of $634,081 and $873,484,
respectively. By virtue of their positions as sole members of
Ragan & Ragan, P.C., Messrs. Ragan and Ragan
retain the net proceeds paid by us to Ragan &
Ragan, P.C.
We received a note receivable in the amount of $205,000 in
partial payment of the $455,000 purchase price from an officer
and related party, John C. Kleinert, for the assignment of
membership interests in Ridgedale Avenue Commons, LLC, and
Morris Avenue Commons, LLC, previously owned by J. Holder, Inc.
As of December 31, 2007, the note has a balance of
$100,000, along with interest at the rate of 12% which shall
accrue only on and after December 26, 2007, by means of one
lump sum payment of principal and accrued interest on
August 25, 2008. As of March 14, 2008,
Mr. Kleinert made a $100,000 lump sum payment to us and the
promissory note was retired. We waived $2,630 in accrued
interest on the prepayment.
On June 2, 2005, J. Holder acquired a residential
property in Melbourne, Florida. Acquisition financing of
$3,350,000 was provided by a group of investors that receive 10%
per annum and 2% of the loaned amount along with a pro rata
share of 20% of the net profit realized by J. Holder upon
the sale of the property. Of the $3,350,000 in financing on this
property, $1,400,000 was provided by Dr. Kelly and
Mr. Granatell, who subsequently became members of our board
of directors. Additionally, Mr. Robert Kleinert and
Ms. Yoke, related parties of our President and CEO,
provided $900,000 of this financing in connection with the
acquisition. Interest on these related party notes with respect
to this property accrued in the amounts of $175,056 and $164,559
for the nine months ended September 30, 2008 and 2007 and
$242,273 and $216,528 as of the years ended December 31,
2007 and 2006.
55
On December 28, 2007, we paid $115,146 in withholding taxes
in connection with the vesting of 8,750 shares of
restricted stock granted to James J. Mastriani. As of
March 14, 2008, Mr. Mastriani has returned 6,800 of
these shares for cancellation and retirement in order to offset
this payment.
On May 30, 2008 and October 29, 2008, we executed
promissory notes in favor of Robert Kleinert, the brother of
John C. Kleinert, our chief executive officer, with a principal
amount of $500,000 and $200,000, respectively. The notes each
bear interest at a rate of 14% per annum and mature on
May 30, 2011 and October 29, 2011, respectively. The
notes grant the holder a subordinated lien upon all of the
assets of our VI subsidiary. Mr. Robert Kleinert is a
principal of Sandler ONeill & Partners, L.P.,
the representative of the underwriters in this offering. Sandler
ONeill & Partners, L.P. will receive proceeds in
an amount equal to the underwriting discount listing in the
section entitled Underwriting for each share of
common stock underwritten by it, plus reimbursement of a portion
of the expenses of the offering up to $200,000. In addition,
Robert Kleinert and other principals of Sandler ONeill
& Partners, L.P. own an aggregate of approximately 1.3% of
our outstanding common stock as of February 4, 2009 and
warrants to purchase 6,200 shares of our common stock at an
exercise price of $50.00 per share.
On October 29, 2008, our VI subsidiary executed a
promissory note in favor of John C. Kleinert, our chief
executive officer, with a principal amount of $160,000. The note
grants the holder a subordinated lien upon all of the assets of
our VI subsidiary.
It is our policy, with respect to insider transactions, that all
transactions between us, our officers, directors and principal
stockholders and our affiliates be on terms no less favorable to
us than could be obtained from an unrelated third parties in
arms-length transactions, and that all such transactions shall
be approved by a majority of the disinterested members of the
board of directors. We believe that the transactions described
above comply with such policy.
Except for the relationship of W. Peter Ragan, Sr. and W.
Peter Ragan, Jr. who are father and son, none of our
officers or directors are related.
56
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information available to us, as
of February 4, 2009 with respect to the beneficial
ownership of the outstanding shares of our common stock, and as
adjusted to reflect the sale of the common stock in this
offering, by (i) any holder of more than five percent (5%)
of our outstanding shares of common stock; (ii) our
officers and directors; and (iii) our officers and
directors as a group:
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Amount and
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Nature of
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Percentage of
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Percentage of
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Name and Address of
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Beneficial
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Class Prior to
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Class Subsequent to
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Beneficial Owner(1)
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Ownership
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Offering
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Offering(5)
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John C. Kleinert(2)(3)
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464,766
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51.82
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%
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13.68
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%
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James J. Mastriani(2)
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3,200
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*
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*
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W. Peter Ragan, Sr.(2)
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117,183
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13.10
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%
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3.45
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%
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W. Peter Ragan, Jr.(2)(4)
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117,246
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13.10
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%
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3.45
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%
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Steven Marcus(2)
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0
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|
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*
|
|
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*
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Dr. Michael Kelly(2)
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17,221
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1.92
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%
|
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*
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David Granatell(2)
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56,250
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6.29
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%
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1.66
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%
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All directors and executive officers as a group
(seven individuals)(3)(4)
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775,866
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86.51
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%
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22.85
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%
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*
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Less than one percent.
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(1)
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The amounts and percentages of common stock beneficially owned
are reported on the basis of regulations of the SEC governing
the determination of beneficial ownership of securities. Under
the rules of the SEC, a person is deemed to be a beneficial
owner of a security if that person has or shares voting power,
which includes the power to vote or to direct the voting of such
security, or investment power, which includes the power to
dispose of or to direct the disposition of such security at any
time within 60 days of December 8, 2008. Unless
otherwise indicated below, each beneficial owner named in this
table has sole voting and sole investment power with respect to
all shares beneficially owned.
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(2)
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The business address is 1800 Route 34 North, Building 4,
Suite 404A, Wall, NJ, 07719.
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(3)
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Includes 2,000 shares of common stock which are convertible
from the 10,000 shares of Series A Preferred Stock
that Mr. Kleinert owns.
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(4)
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Includes 63 shares of common stock which are convertible
from the 315 shares of Series A Preferred Stock that
Mr. Ragan Jr. owns.
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(5)
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Assumes the full amount of units offered hereby are sold (but
excludes the shares of common stock issuable upon the exercise
of the class A warrants, class B warrants and class C warrants).
|
DESCRIPTION
OF SECURITIES
Our authorized capital stock consists of 40,000,000 shares
of common stock, $0.001 par value, and
10,000,000 shares of preferred stock, $0.001 par
value. No other classes of capital stock are authorized. As of
February 4, 2009, we had 894,799 shares of common
stock and 1,380,000 shares of our Series A Preferred
Stock outstanding. No other preferred stock has been issued.
After this offering, but prior to the exercise of any of the
class A warrants, class B warrants, or class C warrants, we will
have 3,394,799 shares of common stock outstanding, assuming
the entire offering is sold. If the over-allotment option is
exercised in full, but prior to the exercise of any of the class
A warrants, class B warrants, or class C warrants, we will have
3,769,799 shares outstanding.
The following is a summary of the rights of our capital stock as
provided in our Certificate of Incorporation and Bylaws, as they
will be in effect upon the closing of this offering. For more
detailed information, please see our Certificate of
Incorporation and Bylaws, which have been filed as exhibits to
the registration statement of which this prospectus is a part.
57
Units
Each unit consists of one share of common stock, one
class A warrant, one class B warrant, and one
class C warrant. Each class A warrant, class B
warrant, and class C warrant entitles the holder to
purchase one share of common stock at a price of
$ , $
and $ , respectively. The units
will begin trading on or promptly after the date of this
prospectus. The common stock and warrants comprising the units
will trade separately on the 5th day following the earlier
to occur of: (i) the expiration of the underwriters
over-allotment option, (ii) the exercise of the
over-allotment option in full, or (iii) the announcement by
the underwriters of their intention not to exercise all or any
remaining portion of the over-allotment option, subject to our
having issued a press release announcing when such separate
trading will begin.
Following the date that the common stock and warrants are
eligible to trade separately, the units will continue to be
listed for trading, and any security holder may elect to
separate a unit and trade the common stock or warrants
separately or as a unit. Even if the component parts of the
units are separated and traded separately, the units will
continue to be listed as a separate security, and consequently,
any subsequent securityholder owning common stock and each of
the class A warrants, class B warrants and
class C warrants may elect to combine them together and
trade them as a unit. Securityholders will have the ability to
trade our securities as units until such time as at least one
class of warrants expires or is redeemed or no warrants within
such class are otherwise outstanding.
Common
Stock
Holders of common stock are entitled to one vote per share on
matters acted upon at any stockholders meeting, including
the election of directors, and to dividends when, as and if
declared by the board of directors out of funds legally
available for the payment of dividends. There is no cumulative
voting and the common stock is not redeemable. In the event of
any liquidation, dissolution or winding up of our business, each
holder of common stock is entitled to share ratably in all of
our assets remaining after the payment of liabilities and
liquidation preferences of our holders of preferred stock.
Holders of common stock have no preemptive or conversion rights
and are not subject to further calls or assessments by us. All
shares of common stock now outstanding, and all shares to be
outstanding upon the completion of this offering, are and will
be fully paid and nonassessable.
Dividend
Policy on Common Stock
We have not declared or paid any dividends on our common stock.
We do not intend to declare or pay any dividends on our common
stock in the foreseeable future, but rather to retain any
earnings to finance the growth of our business. 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 condition, contractual and legal restrictions and
other factors the board of directors deems relevant.
Series A
Preferred Stock
The Series A Preferred Stock, has no stated maturity and is
not subject to any sinking fund or mandatory redemption. The
Series A Preferred Stock has a liquidation preference of
$10.00 per share, plus any accumulated but unpaid dividends.
Dividends on the Series A Preferred Stock are cumulative
from the date of original issue and are payable monthly in
arrears on the last day of each month, at the annual rate of 10%
of the $10.00 liquidation preference per share, equivalent to a
fixed annual amount of $1.00 per share. Dividends on the
Series A Preferred accrue regardless of whether we have
earnings, whether there are funds legally available for the
payment of such dividends or whether such dividends are
declared. Unpaid dividends accumulate and earn additional
dividends at 10%, compounded monthly. Holders of our
Series A Preferred Stock do not have voting rights except
in limited circumstances.
Each of the Series A Preferred shares is convertible into
0.2 shares of our common stock at the option of the holder;
provided, however, if after May 18, 2009 (a) the price
of our common stock exceeds the conversion price of the
Series A Preferred Stock by more than 35%, and (b) our
common stock is traded on a national securities exchange, we may
terminate the conversion right. We have the right to redeem the
Series A
58
Preferred Stock, subject to certain conditions; however, the
Series A Preferred Stock is not redeemable prior to
May 18, 2009.
14%
Notes
As of February 4, 2009, our VI subsidiary has outstanding
notes in the aggregate principal amount of $1,300,000. Interest
is payable quarterly in arrears beginning on the last day of the
month that is four months from the date of the notes. VI will
pay the principal amount of the notes upon the earlier of
maturity or redemption. The notes are subordinated to all of our
existing debt but will be senior to any future long
term debt of VI. Upon an event of default, VI will pay the
note holder a late charge computed at the rate of 18% per annum
of the amount not paid.
Warrants
and Options
As of February 4, 2009 and prior to the consummation of
this offering, warrants to purchase 103,416 shares of our
common stock and 100,000 shares of our Series A
Preferred Stock were issued and outstanding. Our warrants are
exercisable for shares of our common stock or Series A
Preferred Stock at the exercise price stated thereon. In all
cases the exercise price of our warrants shall be adjusted for
stock splits, reorganization, mergers, and the like. One of our
warrants to purchase 43,056 shares of our common stock
contains full-ratchet anti-dilution protection. In
addition, we may redeem certain of our warrants if the price of
our common stock exceeds a certain level for a specified period
of time. Certain of our warrants contain a net share
settlement feature.
The following table summarizes information on all common share
purchase options and warrants issued by us for the nine months
and years ended September 30, 2008 and December 31,
2007 and 2006, including common share equivalents relating to
convertible debenture share warrants.
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September 30,
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December 31,
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December 31,
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|
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2008
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2007
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|
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2006
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|
|
|
Shares
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|
|
Price
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|
Shares
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|
|
Price
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|
|
Shares
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|
|
Price
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|
Outstanding at the beginning of the year
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229,521
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|
$
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25.80
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|
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218,833
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$
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29.40
|
|
|
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216,333
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|
|
$
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29.00
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|
Granted during period
|
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|
58,870
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|
|
|
43.60
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|
|
|
10,688
|
|
|
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50.00
|
|
|
|
2,500
|
|
|
|
62.00
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Exercised during period
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Terminated, replaced or expired during the period
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(25,000
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)
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Outstanding at the end of the period
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263,391
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$
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28.40
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|
|
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229,521
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|
|
$
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29.80
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|
|
|
218,833
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|
|
$
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29.40
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Exercisable at the end of the period
|
|
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263,391
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|
$
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28.40
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|
|
|
229,521
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|
|
$
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29.80
|
|
|
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218,833
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|
$
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29.40
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The number and weighted average exercise prices of all common
shares and common share equivalents issuable and stock purchase
options and warrants outstanding as of September 30, 2008
is as follows:
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Remaining
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Weighted
|
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Number
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Average
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Range of Exercise Prices
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Outstanding
|
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Exercise Price
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$0 - 40
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218,845
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|
$
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21.14
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$40 - 80
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44,546
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50.00
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|
As a result of certain anti-dilution provisions, warrants to
purchase 12,500 shares of our common stock at an exercise
price of $62.00 per share that were issued in connection with an
October 2005 convertible debt financing were exchanged for
43,056 warrants at a reset exercise price of $18.00 per share.
The warrants expire in April 2011. On February 4, 2009, the
closing price of our common stock on the NYSE Alternext was
$4.75. If we were to issue additional common stock in this
offering at an offering price of $4.75 per share, the
43,056 warrants could be exchanged for 163,160 warrants,
exercisable at the offering price.
59
Class A,
Class B, and Class C warrants
Each of the class A warrants, class B warrants, and
class C warrants offered hereby entitles the registered
holder to purchase one share of our common stock at a price of
$ ,
$ , and
$ per share, respectively, subject
to adjustment as discussed below. They will become exercisable
on the date of the separation of the common stock and warrants
from the units.
The warrants will expire five years from the date of this
prospectus at 5:00 pm, New York City time or earlier upon
redemption.
The warrants will trade separately from the common stock on the
5th day following the earlier to occur of: (i) the
expiration of the underwriters over-allotment option,
(ii) the exercise of the over-allotment option in full, or
(iii) the announcement by the underwriters of their
intention not to exercise all or any remaining portion of the
over-allotment option, subject to our having issued a press
release announcing when such separate trading will begin.
We may redeem the classes of outstanding warrants without the
consent of the underwriters or any third party:
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in whole and not in part, with respect to each class,
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at a price of $0.01 per warrant at any time after the warrants
become exercisable,
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upon not less than 20 days prior written notice of
redemption, and
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if, and only if, the last sales price of our common stock equals
or exceeds, with respect to the class A warrants,
$ per share (120% of the exercise
price), with respect to the class B warrants,
$ per share (120% of the exercise
price), with respect to the class C warrants,
$ per share (120% of the exercise
price), in each case for any 20 trading days within a 30 trading
day period ending three business days before we send the notice
of redemption,
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provided
that on the date we give notice of redemption
and during the entire period thereafter until the time we redeem
the warrants, we have an effective registration statement
covering the shares of common stock issuable upon exercise of
the warrants and a current prospectus relating to them is
available.
The class A warrants, class B warrants and
class C warrants will be issued in registered form under a
warrant agreement between Continental Stock Transfer and
Trust Company, as warrant agent, and us. The material
provisions of the warrants are set forth herein and a copy of
the warrant agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part.
The exercise price and number of shares of common stock issuable
upon exercise of the warrants may be adjusted in certain
circumstances, including in the event of a stock dividend,
extraordinary 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
or official bank 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
we have a registration statement under the Securities Act in
effect covering the shares of common stock issuable upon the
exercise of the warrants, 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 use our best efforts to
60
maintain an effective registration statement and a current
prospectus relating to the common stock issuable upon exercise
of the warrants until the expiration of the warrants. If we are
unable to maintain the effectiveness of such registration
statement until the expiration of the warrants, and therefore
are unable to deliver registered shares of common stock, the
warrants may become worthless. Such expiration would result in
each holder paying the full unit purchase price solely for the
shares of common stock underlying the unit. Additionally, 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. In no event will the registered
holders of a warrant be entitled to receive a net-cash
settlement, stock, or other consideration in lieu of physical
settlement in shares of our common stock.
No fractional shares of common stock 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.
The exercise price of the classes of warrants has been
arbitrarily established by us and the underwriters after giving
consideration to numerous factors, including but not limited to,
the pricing of units in this offering. No particular weighting
was given to any one aspect of the factors considered. We have
not performed any method of valuation of the warrants.
Anti-Takeover
Law
We are subject to Section 203 of the Delaware General
Corporation Law, which restricts certain transactions and
business combinations between a corporation and an
interested stockholder (as defined in
Section 203) owning 15% or more of the
corporations outstanding voting stock, for a period of
three years from the date the stockholder becomes an interested
stockholder. Subject to certain exceptions, unless the
transaction is approved by the board of directors and the
holders of at least two-thirds of our outstanding voting stock
(excluding shares held by the interested stockholder),
Section 203 prohibits significant business transactions
such as a merger with, disposition of assets to, or receipt of
disproportionate financial benefits by the interested
stockholder, or any other transaction that would increase the
interested stockholders proportionate ownership of any
class or series of the corporations stock. The statutory
ban does not apply if, upon consummation of the transaction in
which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by
persons who are both directors and officers or by certain
employee stock plans).
Transfer
Agent, Registrar and Warrant Agent
Continental Stock Transfer & Trust Co. is the
transfer agent, registrar and warrant agent for our common
stock, Series A Preferred Stock, units, class A
warrants, class B warrants, and class C warrants.
61
SHARES
ELIGIBLE FOR FUTURE SALE
As of September 8, 2008, there were 755 holders of record
of our common stock, including shares held in street name. As of
February 4, 2009, there were 894,799 shares of our
common stock outstanding. Of these shares, approximately
149,700 shares of common stock are freely tradable without
restriction. 745,099 shares are restricted securities under
Rule 144 of the Securities Act, in that they were issued in
private transactions not involving a public offering. 155,003,
68,200 and 53,813 shares may be sold pursuant to current
registration statements, respectively. All but approximately
634,408 of those shares are currently eligible for sale under
Rule 144.
The 745,099 shares of restricted stock may not be sold in
the absence of registration under the Securities Act unless an
exemption from registration is available, including the
exemption from registration afforded by Rule 144.
The 2,500,000 shares of common stock (2,875,000 shares
of common stock if the underwriters over-allotment option
is exercised in full) underlying the units issued in this
offering will be freely tradable except by any of our
affiliates as defined in Rule 144 under the
Securities Act.
Additionally, after this offering, an aggregate of 2,500,000 of
each of our outstanding class A warrants, class B
warrants, and class C warrants (2,875,000 if the
underwriters over-allotment option is exercised in full)
will be exercisable into shares of our common stock.
Rule 144
In general, under Rule 144, an affiliate who has
beneficially owned restricted shares of our common stock for at
least six months, as well as any affiliate who owns shares
acquired in the public market, is entitled to sell in any
three-month period a number of shares that does not exceed the
greater of:
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1% of the number of shares of our common stock then outstanding,
or approximately 79,000 shares immediately after this
offering, assuming no exercise by the underwriters of their
option to purchase additional shares; and
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the average weekly trading volume of the common stock on all
national securities exchanges during the four calendar weeks
preceding the sale.
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These sales may commence beginning 90 days after the date
of this prospectus, subject to continued availability of current
public information about us and to the
lock-up
agreements described below. They also are subject to certain
manner of sale and notice requirements of Rule 144.
A person who is not one of our affiliates, and who is not deemed
to have been one of our affiliates at any time during the three
months preceding a sale, may sell shares according to the
following conditions:
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If the person has beneficially owned the shares for at least six
months, including the holding period of any prior owner other
than an affiliate, the shares may be sold subject to continued
availability of current public information about us.
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|
If the person has beneficially owned the shares for at least one
year, including the holding period of any prior owner other than
an affiliate, the shares may be sold without any Rule 144
limitations.
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Listing
of securities
Our common stock currently trades on the NYSE Alternext under
the symbol PGV. We have applied to have our units,
class A warrants, class B warrants and class C
warrants listed on the NYSE Alternext under the symbols
,
,
and
,
respectively. We anticipate that our units will be listed on the
NYSE Alternext on or promptly after the effective date of the
registration statement. Following the date the common stock and
warrants are eligible to trade separately, we anticipate that
the common stock, class A warrants, class B warrants
and class C warrants will be listed separately and as a
unit on the NYSE Alternext until such time as at least one class
of warrants expires or is redeemed or no warrants within such
class are otherwise outstanding.
62
UNDERWRITING
We and the underwriters named below have entered into an
underwriting agreement with respect to the units being offered.
Subject to the terms and conditions contained in the
underwriting agreement, each underwriter has agreed to purchase
from us the respective number of units set forth opposite its
name below. The underwriters obligations are several,
which means that each underwriter is required to purchase a
specific number of units, but it is not responsible for the
commitment of any other underwriter to purchase units. Sandler
ONeill & Partners, L.P. is acting as the
representative of the underwriters.
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Name
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|
Number of Units
|
|
|
Sandler ONeill & Partners, L.P.
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GunnAllen Financial, Inc.
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|
|
Maxim Group LLC
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|
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|
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Total
|
|
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2,500,000
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|
|
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The underwriters are committed to purchase and pay for all such
units if any are purchased.
We have granted to the underwriters an option, exercisable no
later than 30 days after the date of this prospectus, to
purchase up to 375,000 additional units at the public offering
price, less the underwriting discount set forth on the cover
page of this prospectus. The underwriters may exercise this
option only to cover over-allotments, if any, made in connection
with this offering. To the extent the option is exercised and
the conditions of the underwriting agreement are satisfied, we
will be obligated to sell to the underwriters, and the
underwriters will be obligated to purchase, these additional
units in proportion to their respective initial purchase amounts.
The underwriters propose to offer the units directly to the
public at the offering price set forth on the cover page of this
prospectus and to certain securities dealers at the public
offering price less a concession not in excess of
$ per unit. The underwriters may
allow, and these dealers may re-allow, a concession not in
excess of $ per unit on sales to
other dealers. After the public offering of units, the
underwriters may change the offering price and other selling
terms.
The following table shows the per unit and total underwriting
discount that we will pay to the underwriters and the proceeds
we will receive before expenses. These amounts are shown
assuming both no exercise and full exercise of the
underwriters over-allotment option to purchase additional
units.
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|
|
|
|
|
|
|
|
|
Total Without
|
|
|
Total With
|
|
|
|
Per Unit
|
|
|
Over-Allotment
|
|
|
Over-Allotment
|
|
|
Price to public
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds to us, before expenses
|
|
|
|
|
|
|
|
|
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We have engaged Sandler ONeill & Partners, L.P.,
the 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
FINRA and the rules and regulations of the SEC, we have agreed
to pay the representative for bona fide services rendered a
commission equal to 2.0% of the exercise price for each warrant
exercised more than one year after the consummation of this
offering if the exercise was solicited by the representative. In
addition to soliciting, either orally or in writing, the
exercise of the warrants, the representatives 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:
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the market price of the underlying shares of common stock is
lower than the exercise price;
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the holder of the warrants has not confirmed in writing that the
representative solicited the exercise;
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the warrants are held in a discretionary account;
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63
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the warrants are exercised in an unsolicited transaction; or
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the arrangement to pay the commission is not disclosed in the
prospectus provided to warrant holders at the time of exercise.
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We estimate that the total expenses of the offering, excluding
the underwriting discount, will be approximately $800,000 and
are payable by us. We have agreed to reimburse the underwriters
for their actual out-of-pocket expenses incurred in connection
with the offering, including certain fees and disbursements of
underwriters counsel, up to $200,000.
The units are being offered by the several underwriters, subject
to prior sale, when, as and if issued to and accepted by them,
subject to approval of certain legal matters by counsel for the
underwriters and other conditions specified in the underwriting
agreement. The underwriters reserve the right to withdraw,
cancel or modify this offer and to reject orders in whole or in
part.
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their
discretion based on their assessment of the state of the
financial markets. The obligations of the underwriters may also
be terminated upon the occurrence of the events specified in the
underwriting agreement. The underwriting agreement provides that
the underwriters are obligated to purchase all the units in this
offering if any are purchased, other than those units covered by
the over-allotment option described above.
Lock-up
Agreement.
We, and each of our executive officers
and directors, have agreed, for a period of 180 days after
the date of this prospectus, not to sell, offer, agree to sell,
contract to sell, hypothecate, pledge, grant any option to sell,
make any short sale, or otherwise dispose of or hedge, directly
or indirectly, any shares of our common stock or securities
convertible into, exchangeable or exercisable for any shares of
our common stock or warrants or other rights to purchase shares
of our common stock or other similar securities without, in each
case, the prior written consent of Sandler
ONeill & Partners, L.P. These restrictions are
expressly agreed to preclude us, and our executive officers and
directors, from engaging in any hedging or other transaction or
arrangement that is designed to, or which reasonably could be
expected to, lead to or result in a sale, disposition or
transfer, in whole or in part, of any of the economic
consequences of ownership of our common stock, whether such
transaction would be settled by delivery of common stock or
other securities, in cash or otherwise. The
180-day
restricted period will be automatically extended if
(1) during the last 17 days of the
180-day
restricted period we issue an earnings release or material news
or a material event relating to us occurs or (2) prior to
the expiration of the
180-day
restricted period, we announce that we will release earnings
results or become aware that material news or a material event
relating to us will occur during the
16-day-period
beginning on the last day of the
180-day
restricted period, in which case the restrictions described
above will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
Indemnity.
We have agreed to indemnify the
underwriters, and persons who control the underwriters, against
certain liabilities, including liabilities under the Securities
Act of 1933, and to contribute to payments that the underwriters
may be required to make in respect of these liabilities.
Stabilization.
In connection with this
offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering
transactions and penalty bids.
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Stabilizing transactions permit bids to purchase securities so
long as the stabilizing bids do not exceed a specified maximum,
and are engaged in for the purpose of preventing or retarding a
decline in the market price of the securities while the offering
is in progress.
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Over-allotment transactions involve sales by the underwriters of
securities in excess of the number of securities the
underwriters are obligated to purchase. This creates a syndicate
short position which may be either a covered short position or a
naked short position. In a covered short position, the number of
securities over-allotted by the underwriters is not greater than
the number of securities that they may purchase in the
over-allotment option. In a naked short position, the number of
securities involved is greater than the number of securities in
the over-allotment option. The underwriters may close out any
short position by exercising their over-allotment option
and/or
purchasing securities in the open market.
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64
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Syndicate covering transactions involve purchases of securities
in the open market after the distribution has been completed in
order to cover syndicate short positions. In determining the
source of securities to close out the short position, the
underwriters will consider, among other things, the price of
securities available for purchase in the open market as compared
with the price at which they may purchase securities through
exercise of the over-allotment option. If the underwriters sell
more securities than could be covered by exercise of the
over-allotment option and, therefore, have a naked short
position, the position can be closed out only by buying
securities in the open market. A naked short position is more
likely to be created if the underwriters are concerned that
after pricing there could be downward pressure on the price of
the securities in the open market that could adversely affect
investors who purchase in the offering.
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Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the security originally
sold by that syndicate member is purchased in stabilizing or
syndicate covering transactions to cover syndicate short
positions.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our securities or preventing or retarding a
decline in the market price of our securities. As a result, the
price of our securities in the open market may be higher than it
would otherwise be in the absence of these transactions. Neither
we nor the underwriters make any representation or prediction as
to the effect that the transactions described above may have on
the price of our securities. These transactions may be effected
on the NYSE Alternext, in the over-the-counter market or
otherwise and, if commenced, may be discontinued at any time.
Passive Market Making.
In connection with this
offering, the underwriters and selected dealers, if any, who are
qualified market makers on the NYSE Alternext, may engage in
passive market making transactions in our securities on the NYSE
Alternext in accordance with Rule 103 of Regulation M
under the Securities Act of 1933. Rule 103 permits passive
market making activity by the participants in our unit offering.
Passive market making may occur before the pricing of our
offering, or before the commencement of offers or sales of our
units. Each passive market maker must comply with applicable
volume and price limitations and must be identified as a passive
market maker. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid
for the security. If all independent bids are lowered below the
bid of the passive market maker, however, the bid must then be
lowered when purchase limits are exceeded. Net purchases by a
passive market maker on each day are limited to a specified
percentage of the passive market makers average daily
trading volume in the unit during a specified period and must be
discontinued when that limit is reached. The underwriters and
other dealers are not required to engage in passive market
making and may end passive market making activities at any time.
Robert Kleinert, a principal of Sandler ONeill &
Partners, L.P., and John C. Kleinert, our chief executive
officer, are brothers. On May 30, 2008 and October 29,
2008, we issued to Robert Kleinert promissory notes in the
principal amounts of $500,000 and $200,000, which each bear
interest at a rate of 14% per annum and mature on May 30,
2011 and October 29, 2011, respectively. In addition,
Robert Kleinert and other principals of Sandler
ONeill & Partners, L.P. own an aggregate of
approximately 1.3% of our outstanding common stock and warrants
to purchase 6,200 shares of our common stock at an exercise
price of $50.00 per share.
In connection with this offering, the underwriters may
distribute prospectuses electronically. No forms of prospectus
other than printed prospectuses and electronically distributed
prospectuses that are printable in Adobe.PDF format will be used
in connection with this offering.
Certain of the underwriters and selling group members may have
and may in the future, from time to time, engage in transactions
with and perform services for us or our affiliates in the
ordinary course of their business for which they will receive
fees and commissions.
United
Kingdom
Each underwriter has severally represented and agreed that:
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it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of
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65
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Section 21 of the Financial Services and Markets Act 2000,
or FSMA) in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of the FSMA does not apply
to us; and
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it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to
our common stock in, from or otherwise involving the United
Kingdom.
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LEGAL
MATTERS
The validity of the securities offered hereby will be passed
upon for us by Ellenoff Grossman & Schole LLP, New
York, New York. The statements in this prospectus under
Risk Factors Governmental regulations may
limit our ability to recover and enforce the collection of our
receivables and Our Business
Governmental Regulation will be passed upon by Barron,
Newburger, Sinsley & Wier, PLLC. Certain legal matters
regarding the offering will be passed upon for the underwriters
by Lowenstein Sandler PC.
EXPERTS
Our consolidated annual financial statements appearing in this
prospectus and the registration statement on
Form S-1
have been audited by Weiser 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
Securities Exchange Act of 1934, as amended, 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
from this prospectus certain information included in the
registration statement. You may read and copy the registration
statement at the SECs 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 SECs 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.
66
INDEX TO
FINANCIAL STATEMENTS
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and
Subsidiaries)
|
|
|
|
|
Page
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
F-1
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Velocity Portfolio Group, Inc.
We have audited the accompanying consolidated balance sheets of
Velocity Portfolio Group, Inc. (formerly Velocity Asset
Management, Inc.) and subsidiaries as of December 31, 2007
and 2006 and the related consolidated statements of income,
changes in stockholders equity, and cash flows for the
years then ended. These financial statements are the
responsibility of the Companys 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 Velocity Portfolio Group,
Inc. and subsidiaries as of December 31, 2007 and 2006, and
the consolidated results of their operations and cash flows for
the years then ended in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of presenting the
change in consumer receivables in the consolidated statements of
cash flows.
New York, NY
March 17, 2008, except for the effects of discontinued
operations discussed in Note 5 as to which the date is
September 17, 2008, and the reverse stock split discussed
in Note 1 as to which the date is November 17, 2008
F-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
33,992
|
|
|
$
|
162,180
|
|
|
$
|
2,444,356
|
|
Consumer receivables, net
|
|
|
46,152,417
|
|
|
|
46,971,014
|
|
|
|
38,327,926
|
|
Property and equipment, net of accumulated depreciation
|
|
|
47,347
|
|
|
|
64,420
|
|
|
|
68,619
|
|
Deferred income tax asset, net
|
|
|
83,600
|
|
|
|
98,600
|
|
|
|
205,900
|
|
Security deposits
|
|
|
30,224
|
|
|
|
30,224
|
|
|
|
30,100
|
|
Other assets (including $0, $115,146 and $0 employee loan
to a related party at September 30, 2008 and
December 31, 2007 and 2006, respectively)
|
|
|
351,035
|
|
|
|
487,071
|
|
|
|
195,198
|
|
Assets of discontinued operations
|
|
|
5,730,328
|
|
|
|
6,793,319
|
|
|
|
7,162,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
52,428,943
|
|
|
$
|
54,606,828
|
|
|
$
|
48,434,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
LIABILITIES
|
Accounts payable and accrued expenses
|
|
$
|
477,590
|
|
|
$
|
552,269
|
|
|
$
|
266,756
|
|
Estimated court and media costs
|
|
|
5,742,939
|
|
|
|
7,374,212
|
|
|
|
8,446,319
|
|
Line of credit
|
|
|
9,792,567
|
|
|
|
14,429,138
|
|
|
|
13,791,388
|
|
Notes payable
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
Notes payable to related parties
|
|
|
740,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
Convertible subordinated notes
|
|
|
2,350,000
|
|
|
|
2,350,000
|
|
|
|
|
|
Income taxes payable
|
|
|
1,605,919
|
|
|
|
820,222
|
|
|
|
600,974
|
|
Liabilities from discontinued operations (including notes
payable to related parties of $2,300,000)
|
|
|
5,490,675
|
|
|
|
4,374,441
|
|
|
|
3,556,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,599,690
|
|
|
|
30,100,282
|
|
|
|
26,862,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A 10% convertible preferred stock, $0.001 par
value, 10,000,000 shares authorized, 1,380,000 shares
issued and outstanding (liquidation preference of $13,800,000)
|
|
|
1,380
|
|
|
|
1,380
|
|
|
|
1,380
|
|
Common stock, $0.001 par value, 40,000,000 shares
authorized, 893,799, 853,341 and 806,466 shares issued and
outstanding, respectively
|
|
|
894
|
|
|
|
853
|
|
|
|
806
|
|
Additional
paid-in-capital
|
|
|
25,938,620
|
|
|
|
25,260,157
|
|
|
|
23,517,704
|
|
Accumulated deficit
|
|
|
(111,641
|
)
|
|
|
(755,844
|
)
|
|
|
(1,947,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
25,829,253
|
|
|
|
24,506,546
|
|
|
|
21,571,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
52,428,943
|
|
|
$
|
54,606,828
|
|
|
$
|
48,434,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
For the Years
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income on consumer receivables
|
|
$
|
10,942,757
|
|
|
$
|
9,901,507
|
|
|
$
|
13,863,538
|
|
|
$
|
8,431,259
|
|
Other income
|
|
|
3,334
|
|
|
|
27,176
|
|
|
|
27,847
|
|
|
|
208,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
10,946,091
|
|
|
|
9,928,683
|
|
|
|
13,891,385
|
|
|
|
8,639,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees (including fees paid to related parties of
$634,081 and $868,761 for the nine months ended
September 30, 2008 and 2007, respectively and $1,128,107
and $1,225,577 for the years ended December 31, 2007 and
2006, respectively)
|
|
|
3,817,408
|
|
|
|
3,438,740
|
|
|
|
4,791,224
|
|
|
|
2,888,643
|
|
General and administrative expenses
|
|
|
1,557,351
|
|
|
|
2,156,741
|
|
|
|
2,479,608
|
|
|
|
2,205,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,374,759
|
|
|
|
5,595,481
|
|
|
|
7,270,832
|
|
|
|
5,093,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,571,332
|
|
|
|
4,333,202
|
|
|
|
6,620,553
|
|
|
|
3,545,810
|
|
Interest expense (including interest incurred to related parties
of $28,435 and $10,500 for the nine months ended
September 30, 2008 and 2007, respectively and $14,000 and
$18,269 for the years ended December 31, 2007 and 2006,
respectively)
|
|
|
(880,064
|
)
|
|
|
(1,196,045
|
)
|
|
|
(1,623,520
|
)
|
|
|
(908,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
4,691,268
|
|
|
|
3,137,157
|
|
|
|
4,997,033
|
|
|
|
2,637,663
|
|
Provision for income taxes
|
|
|
1,888,038
|
|
|
|
1,307,720
|
|
|
|
2,090,143
|
|
|
|
1,102,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
2,803,230
|
|
|
|
1,829,437
|
|
|
|
2,906,890
|
|
|
|
1,535,025
|
|
Loss from discontinued operations (including fees paid and
interest incurred to related parties of $-0- and $4,723 and
$6,238 and $15,667 and $175,056 and $164,559 and $233,194 and
$216,528 for the nine months ended September 30, 2008 and
2007, respectively and the years ended December 31, 2007
and 2006, respectively and net of tax benefit of $442,430 and
$195,330 and $244,808 and $130,597 for the nine months ended
September 30, 2008 and 2007, respectively and years ended
December 31, 2007 and 2006, respectively
|
|
|
(1,124,027
|
)
|
|
|
(269,288
|
)
|
|
|
(334,815
|
)
|
|
|
(216,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,679,203
|
|
|
|
1,560,149
|
|
|
|
2,572,075
|
|
|
|
1,318,690
|
|
Preferred dividends
|
|
|
(1,035,000
|
)
|
|
|
(1,035,000
|
)
|
|
|
(1,380,000
|
)
|
|
|
(851,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
644,203
|
|
|
$
|
525,149
|
|
|
$
|
1,192,075
|
|
|
$
|
467,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.02
|
|
|
$
|
0.98
|
|
|
$
|
1.86
|
|
|
$
|
0.85
|
|
Diluted
|
|
$
|
2.02
|
|
|
$
|
0.89
|
|
|
$
|
1.69
|
|
|
$
|
0.79
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.29
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.27
|
)
|
Diluted
|
|
$
|
(1.28
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.25
|
)
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
0.65
|
|
|
$
|
1.45
|
|
|
$
|
0.58
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.59
|
|
|
$
|
1.32
|
|
|
$
|
0.54
|
|
Average common shares basic
|
|
|
873,606
|
|
|
|
808,811
|
|
|
|
819,752
|
|
|
|
800,433
|
|
Average common shares diluted
|
|
|
876,511
|
|
|
|
893,462
|
|
|
|
903,788
|
|
|
|
863,844
|
|
See accompanying notes to the consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
BALANCES, December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
798,616
|
|
|
$
|
798
|
|
|
$
|
10,853,825
|
|
|
$
|
(2,415,604
|
)
|
|
$
|
8,439,019
|
|
Preferred stock offering of 1,200,000 shares of
Series A convertible preferred stock
|
|
|
1,200,000
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
11,998,800
|
|
|
|
|
|
|
|
12,000,000
|
|
Preferred stock sale to underwriter in conjunction with
preferred stock offering of 180,000 shares of Series A
convertible preferred stock
|
|
|
180,000
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
1,799,820
|
|
|
|
|
|
|
|
1,800,000
|
|
Commissions and expenses related to preferred stock offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,404,000
|
)
|
|
|
|
|
|
|
(1,404,000
|
)
|
Sale of warrants pursuant to preferred stock offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
120
|
|
Dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(851,005
|
)
|
|
|
(851,005
|
)
|
Issuance of warrants pursuant to secured debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,347
|
|
|
|
|
|
|
|
12,347
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,850
|
|
|
|
8
|
|
|
|
256,792
|
|
|
|
|
|
|
|
256,800
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,318,690
|
|
|
|
1,318,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, December 31, 2006
|
|
|
1,380,000
|
|
|
|
1,380
|
|
|
|
806,466
|
|
|
|
806
|
|
|
|
23,517,704
|
|
|
|
(1,947,919
|
)
|
|
|
21,571,971
|
|
Dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,380,000
|
)
|
|
|
(1,380,000
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,750
|
|
|
|
4
|
|
|
|
109,996
|
|
|
|
|
|
|
|
110,000
|
|
Private placement offering of 33,750 shares of common stock
and warrants to purchase 8,250 shares of common stock (net
of issuance costs of $60,000)
|
|
|
|
|
|
|
|
|
|
|
33,750
|
|
|
|
34
|
|
|
|
1,289,966
|
|
|
|
|
|
|
|
1,290,000
|
|
Private placement offering of 9,375 shares of common stock
and warrants to purchase 2,438 shares of common stock (net
of issuance costs of $32,500)
|
|
|
|
|
|
|
|
|
|
|
9,375
|
|
|
|
9
|
|
|
|
342,491
|
|
|
|
|
|
|
|
342,500
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,572,075
|
|
|
|
2,572,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, December 31, 2007
|
|
|
1,380,000
|
|
|
|
1,380
|
|
|
|
853,341
|
|
|
|
853
|
|
|
|
25,260,157
|
|
|
|
(755,844
|
)
|
|
|
24,506,546
|
|
Dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,035,000
|
)
|
|
|
(1,035,000
|
)
|
Retirement of common stock
|
|
|
|
|
|
|
|
|
|
|
(6,800
|
)
|
|
|
(7
|
)
|
|
|
(115,139
|
)
|
|
|
|
|
|
|
(115,146
|
)
|
Private placement offering of 47,258 shares of common stock
and warrants to purchase 11,815 shares of common stock (net
of issuance costs of $61,350)
|
|
|
|
|
|
|
|
|
|
|
47,258
|
|
|
|
48
|
|
|
|
793,602
|
|
|
|
|
|
|
|
793,650
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,679,203
|
|
|
|
1,679,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, September 30, 2008 (Unaudited)
|
|
|
1,380,000
|
|
|
$
|
1,380
|
|
|
|
893,799
|
|
|
$
|
894
|
|
|
$
|
25,938,620
|
|
|
$
|
(111,641
|
)
|
|
$
|
25,829,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
For the Years
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,679,203
|
|
|
$
|
1,560,149
|
|
|
$
|
2,572,075
|
|
|
$
|
1,318,690
|
|
Loss from discontinued operations
|
|
|
1,124,027
|
|
|
|
269,288
|
|
|
|
334,815
|
|
|
|
216,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
2,803,230
|
|
|
|
1,829,437
|
|
|
|
2,906,890
|
|
|
|
1,535,025
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
|
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
256,800
|
|
Depreciation and amortization
|
|
|
120,861
|
|
|
|
140,281
|
|
|
|
190,556
|
|
|
|
44,865
|
|
Deferred income tax
|
|
|
15,000
|
|
|
|
86,800
|
|
|
|
107,300
|
|
|
|
(96,100
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security deposit
|
|
|
|
|
|
|
(124
|
)
|
|
|
(124
|
)
|
|
|
(3,600
|
)
|
Other assets
|
|
|
12,622
|
|
|
|
(43,835
|
)
|
|
|
(138,968
|
)
|
|
|
(71,941
|
)
|
Accounts payable and accrued expenses
|
|
|
(74,681
|
)
|
|
|
256,925
|
|
|
|
285,513
|
|
|
|
119,126
|
|
Estimated court and media costs
|
|
|
(1,631,273
|
)
|
|
|
(1,136,414
|
)
|
|
|
(1,072,107
|
)
|
|
|
4,646,673
|
|
Income taxes payable
|
|
|
785,697
|
|
|
|
(108,069
|
)
|
|
|
219,248
|
|
|
|
449,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,031,456
|
|
|
|
1,135,001
|
|
|
|
2,608,308
|
|
|
|
6,880,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(1,122
|
)
|
|
|
(24,242
|
)
|
|
|
(27,309
|
)
|
|
|
(13,915
|
)
|
Acquisition of consumer receivables
|
|
|
(1,903,802
|
)
|
|
|
(11,491,502
|
)
|
|
|
(12,799,459
|
)
|
|
|
(22,915,748
|
)
|
Collections applied to principal on consumer receivables
|
|
|
2,678,002
|
|
|
|
3,156,608
|
|
|
|
4,097,175
|
|
|
|
2,346,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
773,078
|
|
|
|
(8,359,136
|
)
|
|
|
(8,729,593
|
)
|
|
|
(20,583,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayments) borrowings under lines of credit, net
|
|
|
(4,686,571
|
)
|
|
|
2,982,113
|
|
|
|
609,493
|
|
|
|
7,696,926
|
|
Proceeds of notes payable
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
(210,000
|
)
|
Proceeds of note payable from a related party
|
|
|
540,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from private placement
|
|
|
793,650
|
|
|
|
1,290,000
|
|
|
|
1,632,500
|
|
|
|
13,800,120
|
|
Commissions and related expenses paid on stock offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,404,000
|
)
|
Net proceeds from convertible subordinated notes
|
|
|
|
|
|
|
2,125,500
|
|
|
|
2,125,500
|
|
|
|
|
|
Payment of preferred dividends
|
|
|
(1,035,000
|
)
|
|
|
(1,035,000
|
)
|
|
|
(1,380,000
|
)
|
|
|
(851,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(3,987,921
|
)
|
|
|
5,362,613
|
|
|
|
2,987,493
|
|
|
|
19,032,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM DISCONTINUED OPERATIONS, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
58,207
|
|
|
|
(581,002
|
)
|
|
|
244,975
|
|
|
|
294,826
|
|
Investing activities
|
|
|
100,000
|
|
|
|
(229,486
|
)
|
|
|
55,641
|
|
|
|
|
|
Financing activities
|
|
|
896,992
|
|
|
|
876,000
|
|
|
|
551,000
|
|
|
|
(3,270,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) discontinued operations
|
|
|
1,055,199
|
|
|
|
65,512
|
|
|
|
851,616
|
|
|
|
(2,975,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(128,188
|
)
|
|
|
(1,796,010
|
)
|
|
|
(2,282,176
|
)
|
|
|
2,353,732
|
|
Cash and cash equivalents, beginning of period
|
|
|
162,180
|
|
|
|
2,444,356
|
|
|
|
2,444,356
|
|
|
|
90,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
33,992
|
|
|
$
|
648,346
|
|
|
$
|
162,180
|
|
|
$
|
2,444,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest continuing operations
|
|
$
|
912,107
|
|
|
$
|
1,180,777
|
|
|
$
|
1,636,437
|
|
|
$
|
1,018,573
|
|
Cash paid for income taxes continuing operations
|
|
$
|
785,711
|
|
|
$
|
1,170,714
|
|
|
$
|
1,333,958
|
|
|
$
|
680,836
|
|
Non-cash item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of common stock in satisfaction of employee receivable
|
|
$
|
115,146
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes to the consolidated financial statements.
F-6
|
|
NOTE 1
|
ORGANIZATION
AND BUSINESS
|
Nature
of Operations
On February 3, 2004, Velocity Portfolio Group, Inc.
(formerly known as Velocity Asset Management, Inc.), (the
Company), through its wholly-owned subsidiary TLOP
Acquisition Company, L.L.C. (TLOP), entered into a
reverse acquisition (the Reverse Merger) with STB,
Inc. and its subsidiaries. On February 3, 2004, STB, Inc.
became a wholly-owned subsidiary of TLOP. As a result of the
Reverse Merger, the Company operates all of its current business
activities through its wholly-owned subsidiary TLOP.
The Company was incorporated in the state of Delaware on
December 31, 1986. In 1987, the Company issued shares of
its common stock pursuant to a public offering. The Company was
engaged in the manufacture of optical products until 1991 when
all assets and operations were sold.
Effective April 8, 2004, the Company changed its name from
Tele-Optics, Inc. to Velocity Asset Management, Inc. and then on
November 14, 2008 to Velocity Portfolio Group, Inc. The
entities that are included in these consolidated financial
statements are as follows:
TLOP Acquisition Company, L.L.C. was incorporated in New Jersey
as a limited liability company. TLOP is a wholly-owned
subsidiary of the Company and pursuant to the Reverse Merger
owns 100% of STB, Inc.
STB, INC. (STB) was incorporated in New Jersey in
2003. Its primary purpose was to act as a holding company for
three subsidiaries, namely, J. Holder, Inc., VOM, LLC and
Velocity Investments, LLC.
J. Holder, Inc. (J. Holder) was formed in 1998
to invest in, and maximize the return on real property being
sold at sheriffs foreclosure sales and judgment execution
sales, defaulted mortgages, partial interests in real property
and the acquisition of real property with clouded title.
VOM, L.L.C. (VOM) was formed in 2002 to invest in
and maximize the return on New Jersey municipal tax liens. VOM
focuses on maximization of profit through legal collections and
owned real estate opportunities presented by the current tax
lien environment.
Velocity Investments, L.L.C. (Velocity) was
established in 2002 to invest in, and maximize the return on,
consumer debt purchased in the secondary market. Velocity
purchases consumer receivable portfolios at a discount and then
liquidates these portfolios through legal collection means.
On September 29, 2008, our stockholders approved an
amendment to our Certificate of Incorporation to effect a
reverse stock split of our issued and outstanding common stock,
par value $0.001 per share of between
one-for-ten
(1-10) and
one-for-twenty
(1-20) reverse stock split in the discretion of our board of
directors. On September 29, 2008, our stockholders also
approved an amendment to our Certificate of Incorporation to
change the name of the company from Velocity Asset Management,
Inc. to Velocity Portfolio Group, Inc.
On November 14, 2008, the Company amended its Certificate
of Incorporation to (a) effect a 1 for 20 reverse stock
split of the Companys then issued and outstanding shares
of common stock and (b) change the name of the Company to
Velocity Portfolio Group, Inc. The 1-for-20 reverse stock split
took effect on November 17, 2008. All references to share
numbers or earnings or loss per share contained in the
consolidated financial statements to which these notes relate
give retroactive effect to the reverse split.
After careful consideration of trends in revenues and future
opportunities for growth, management has made the determination
that the consumer receivables business will be the sole
operating focus of the Company in fiscal 2008. As a result, the
Company is currently considering all strategic alternatives for
J.
F-7
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
Holder and VOM, including, but not limited to, the sale of some
or all of each entitys assets, partnering or other
collaboration agreements, or a merger, spin-off or other
strategic transaction. On December 31, 2007, the board of
directors of the Company unanimously approved managements
plan to discontinue the operations of the Companys J.
Holder and VOM subsidiaries and to sell and dispose of the
assets or membership
interests/capital
stock of such subsidiaries. Accordingly, these operations have
been presented as discontinued operations.
The Company has one continuing industry segment the
acquisition, management, collection and servicing of consumer
receivables.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The consolidated financial statements of the Company are
prepared in accordance with accounting principles generally
accepted in the United States of America. All significant
intercompany payables, receivables, revenues and expenses have
been eliminated in consolidation.
Unaudited
Interim Financial Statements
The accompanying balance sheet as of September 30, 2008,
the statements of income, changes in stockholders equity
and cash flows for the nine months ended September 30, 2008
and 2007 are unaudited. In the opinion of management, such
information includes all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of this
interim information when read in connection with the audited
financial statements and notes hereto. Results for the nine
months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2008.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Concentrations
of Credit Risk
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and
cash equivalents and consumer receivables. The Company places
its cash and cash equivalents principally with one financial
institution. At times, cash balances may be in excess of the
amounts insured by the Federal Deposit Insurance Corporation. As
of September 30, 2008 and December 31, 2007, the
Company had cash deposits in excess of federally-insured amounts
totaling $0 and $21,558. Management considers the risk of loss
to be minimal.
Properties
Held for Sale
Properties held for sale consists of real property purchased by
the Company for resale and are carried at the lower of cost or
market value. This includes the cost to purchase the property
and repairs or other costs required to present the property
ready for resale. The Company recognizes income and related
expenses from the sale of real property at the date the sale
closes. These properties are maintained by the Companys
subsidiary, J. Holder, and are reflected as a part of
discontinued operations.
F-8
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
Tax
Certificates Held and Accrued Interest Receivable
The Company records its New Jersey municipal tax liens at cost
plus accrued interest. Interest income is recognized using the
effective interest method (interest method). These
assets are maintained by the Companys subsidiary, VOM and
are reflected as a part of discontinued operations.
Consumer
Receivables
The Company purchases consumer receivable portfolios at a
substantial discount from their face amount due to a
deterioration of credit quality between the time of origination
and the Companys acquisition of the portfolios. Income is
recognized using either the interest method or cost recovery
method. Upon acquisition, the Company reviews each consumer
receivable portfolio to determine whether each such portfolio is
to be accounted for individually or whether such portfolio will
be assembled into static pools of consumer receivable portfolios
based on common risk characteristics. Once the static portfolio
pools are created, management estimates the future anticipated
cash flows for each pool. If management can reasonably estimate
the expected timing and amount of future cash flows, the
interest method is applied. However, if the expected future cash
flows cannot be reasonably estimated, the Company uses the cost
recovery method.
The Company accounts for its investment in consumer receivable
portfolios using the interest method under the guidance of
American Institute of Certified Public Accountants Statement of
Position (SOP)
03-3,
Accounting for Loans or Certain Securities Acquired in a
Transfer.
SOP 03-3
addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an
investors initial investment in loans or debt if those
differences are attributable, at least in part, to credit
quality. Increases in expected cash flows are recognized
prospectively through adjustment of the internal rate of return
(IRR) while decreases in expected cash flows are
recognized as impairments.
Under the guidance of
SOP 03-3,
when expected cash flows are higher than prior projections, the
increase in expected cash flows results in an increase in the
IRR and therefore, the effect of the cash flow increase is
recognized as increased revenue prospectively over the remaining
life of the affected pool. However, when expected cash flows are
lower than prior projections,
SOP 03-3
requires that the expected decrease be recognized as an
impairment by decreasing the carrying value of the affected pool
(rather than lowering the IRR) so that the pool will amortize
over its expected life using the original IRR. A pool can become
fully amortized (zero carrying balance on the balance sheet)
while still generating cash collections. In this case, all cash
collections are recognized as revenue when received.
Under the cost recovery method, no revenue is recognized until
the Company has fully collected the cost of the portfolio, or
until such time that the Company considers the collections to be
probable and estimable and begins to recognize income based on
the interest method as described above. The Company currently
has no consumer receivable portfolios accounted for under the
cost recovery method.
The Company estimates and capitalizes certain fees paid and to
be paid to third parties related to the direct acquisition and
collection of a portfolio of accounts. These fees are added to
the cost of the individual portfolio and amortized over the life
of the portfolio using the interest method. An offsetting
liability is included as Estimated court and media
costs on the balance sheet.
The Company establishes valuation allowances for all acquired
loans subject to
SOP 03-3
to reflect only those losses incurred after acquisition (that
is, the present value of cash flows initially expected at
acquisition that are no longer expected to be collected).
Valuation allowances are established only subsequent to
acquisition of the loans, if necessary. At September 30,
2008 and December 31, 2007 and 2006, the Company had no
valuation allowances on its consumer receivables.
F-9
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
Property
and Equipment
Property and equipment, including improvements that
significantly add to the productive capacity or extend useful
life, are recorded at cost, while maintenance and repairs are
expensed currently. Property and equipment are depreciated over
their estimated useful lives using the straight-line method of
depreciation. Software and computer equipment are depreciated
over three to five years. Furniture and fixtures are depreciated
over five years. Office equipment is depreciated over five to
seven years. Leasehold improvements are depreciated over the
lesser of the estimated useful life or the remaining life of the
lease, which ranges from three to ten years. When property is
sold or retired, the cost and related accumulated depreciation
are removed from the balance sheet and any gain or loss is
included in the consolidated statement of income.
Income
Taxes
The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109). SFAS 109 requires recognition
of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
The Company records a valuation allowance against any portion of
the deferred income tax asset when it believes, based upon the
weight of available evidence, it is more likely than not that
some portion of the deferred asset will not be realized.
Stock
Based Compensation
The Company follows the provisions of SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS No. 123R), which addresses the
accounting for share-based payment transactions with employees
and other third parties and requires that the compensation costs
relating to such transactions be recognized in the consolidated
financial statements. SFAS No. 123R requires
additional disclosures relating to the income tax and cash flow
effects resulting from share-based payments. Additionally,
regarding the treatment of non-employee stock based
compensation, the Company follows the guidance of the Emerging
Issues Task Force
96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling,
Goods or Services.
Change
in Presentation and Reclassifications
Certain reclassifications, which have no effect on net income,
have been made to the prior period financial statements to
conform to the current presentation. The operations of J. Holder
and VOM have been reclassified as discontinued operations for
all periods presented.
Acquisitions of and collections applied to principal of consumer
receivables were previously reflected at net as adjustments to
reconcile net income to net cash provided by operating
activities. To conform with industry practices and to provide a
more meaningful presentation, these items are reflected as cash
flows from investing activities at gross. This change had no
effect on net income or retained earnings.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial
F-10
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
With respect to income recognition under the interest method,
significant estimates have been made by management with respect
to the collectability of future cash flows of portfolios. The
Company takes into consideration the relative credit quality of
the underlying receivables constituting the portfolio acquired,
the strategy implemented to maximize collections thereof as well
as other factors to estimate the anticipated cash flows. Actual
results could differ from these estimates making it reasonably
possible that a change in these estimates could occur within one
year. On a quarterly basis, management reviews the estimate of
future cash collections, and whether it is reasonably possible
that its assessment of collectability may change based on actual
results and other factors, including the current economic crisis.
Properties held for sale as discontinued operations are carried
at fair value. The Company utilizes the appraisals of third
party experts in determining fair value; however, the current
economic and housing crisis may have a material impact on the
fair value of the property.
Fair
Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, requires that the Company disclose
estimated fair values for its financial instruments. The fair
value of consumer receivables, tax certificates held, accounts
payable, accrued expenses, borrowings and other assets are
considered to approximate their carrying amount because they are
(i) short term in nature
and/or
(ii) carry interest rates which are comparable to market
based rates.
Recently
Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value to be the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date and emphasizes that
fair value is a market-based measurement, not an entity-specific
measurement. It establishes a fair value hierarchy and expands
disclosures about fair value measurements in both interim and
annual periods. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. FASB Staff Position
No. FAS 157-2
(as amended) defers the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities on a
non-recurring basis to fiscal years beginning after
November 15, 2008. With the exception of nonfinancial
assets and nonfinancial liabilities, the Company adopted
SFAS 157 on January 1, 2008 which did not have an
impact on its consolidated financial position and results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS No. 159). This
statement permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that
elect the fair value option. However, the amendment to
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities
with
available-for-sale
and trading securities SFAS No. 159 is effective as of
the beginning of an entitys first fiscal year that begins
after November 15, 2007. Management has not made an
election to adopt this pronouncement.
In December 2007, FASB issued Statement of Financial Accounting
Standards No. 141(R),
Business Combinations
(SFAS 141(R)), and Statement of Financial
Accounting Standards No. 160,
Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB
No. 51
(SFAS No. 160). These new
standards significantly change the accounting for and reporting
of business combination transactions and
F-11
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
noncontrolling interests (previously referred to as minority
interests) in consolidated financial statements. Both standards
are effective for fiscal years beginning on or after
December 15, 2008, with early adoption prohibited. These
Statements are effective for the Company beginning on
January 1, 2009. The Company is currently evaluating the
provisions of SFAS 141(R) and SFAS 160.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161,
Disclosures About Derivative
Instruments and Hedging Activities, an amendment of FASB
Statement No. 133
. This new standard enhances the
disclosure requirements related to derivative instruments and
hedging activities required by
FASB Statement
No. 133
. This standard is effective for fiscal years
and interim periods beginning after November 15, 2008, with
early adoption encouraged. The Company is currently evaluating
the potential impact, if any, of the adoption of SFAS 161
and does not believe that it will have a significant impact on
its consolidated financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162 The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles generally accepted in the
United States. SFAS 162 is effective sixty days following
the SECs approval of PCAOB amendments to AU
Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
The Company expects that the adoption of this standard would
have no impact on its consolidated financial position and
results of operations.
NOTE 3 CONSUMER
RECEIVABLES
Consumer receivable activity for the nine months ended
September 30, 2008 and 2007 and the years ended
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
46,971,014
|
|
|
$
|
38,327,926
|
|
|
$
|
38,327,926
|
|
|
$
|
17,758,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and capitalized costs, net of returns
|
|
|
1,903,802
|
|
|
|
11,491,501
|
|
|
|
12,799,459
|
|
|
|
22,915,748
|
|
Amortization of capitalized costs
|
|
|
(44,397
|
)
|
|
|
(44,397
|
)
|
|
|
(59,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,859,405
|
|
|
|
11,447,104
|
|
|
|
12,740,263
|
|
|
|
22,915,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections(1)
|
|
|
(13,553,840
|
)
|
|
|
(13,058,115
|
)
|
|
|
(17,960,713
|
)
|
|
|
(10,777,742
|
)
|
Income recognized on consumer receivables(1)
|
|
|
10,875,838
|
|
|
|
9,901,507
|
|
|
|
13,863,538
|
|
|
|
8,431,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections applied to principal
|
|
|
(2,678,002
|
)
|
|
|
(3,156,608
|
)
|
|
|
(4,097,175
|
)
|
|
|
(2,346,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
46,152,417
|
|
|
$
|
46,618,422
|
|
|
$
|
46,971,014
|
|
|
$
|
38,327,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes $66,919 derived from fully amortized pools for the nine
months ended September 30, 2008.
|
F-12
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
As of September 30, 2008, based upon managements
current estimate of projected future collections, principal
reductions will be as follows:
|
|
|
|
|
|
|
September 30,
|
|
|
2009
|
|
$
|
11,339,926
|
|
2010
|
|
|
12,578,402
|
|
2011
|
|
|
15,413,249
|
|
2012
|
|
|
6,086,986
|
|
2013
|
|
|
733,854
|
|
|
|
|
|
|
|
|
$
|
46,152,417
|
|
|
|
|
|
|
As of December 31, 2007, based upon managements
current estimate of projected future collections, principal
reductions will be as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
$
|
9,543,836
|
|
2009
|
|
|
11,534,414
|
|
2010
|
|
|
14,443,248
|
|
2011
|
|
|
8,382,696
|
|
2012
|
|
|
3,048,566
|
|
Thereafter
|
|
|
18,254
|
|
|
|
|
|
|
|
|
$
|
46,971,014
|
|
|
|
|
|
|
The accretable yield represents the amount of income the Company
can expect to generate over the remaining lives of its existing
portfolios based on estimated cash flows as of the nine months
ended September 30, 2008 and 2007 and the years ended
December 31, 2007 and 2006. Changes in the accretable yield
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
31,442,803
|
|
|
$
|
29,643,803
|
|
|
$
|
29,643,803
|
|
|
$
|
15,618,641
|
|
Income recognized on consumer receivables(1)
|
|
|
(10,875,838
|
)
|
|
|
(9,901,507
|
)
|
|
|
(13,863,538
|
)
|
|
|
(8,431,259
|
)
|
Additions
|
|
|
551,926
|
|
|
|
15,214,460
|
|
|
|
15,662,538
|
|
|
|
22,456,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
21,118,891
|
|
|
$
|
34,956,756
|
|
|
$
|
31,442,803
|
|
|
$
|
29,643,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
|
|
NOTE 4
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Office Equipment
|
|
$
|
110,896
|
|
|
$
|
111,444
|
|
|
$
|
103,889
|
|
Furniture and Fixtures
|
|
|
29,833
|
|
|
|
28,163
|
|
|
|
12,587
|
|
Leasehold Improvements
|
|
|
20,274
|
|
|
|
20,273
|
|
|
|
16,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,003
|
|
|
|
159,880
|
|
|
|
132,571
|
|
Less: Accumulated Depreciation and amortization
|
|
|
(113,656
|
)
|
|
|
(95,460
|
)
|
|
|
(63,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,347
|
|
|
$
|
64,420
|
|
|
$
|
68,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the nine months and
years ended September 30, 2008 and December 31, 2007
and 2006 was $18,196, $31,508 and $32,518, respectively.
|
|
NOTE 5
|
DISCONTINUED
OPERATIONS
|
On December 31, 2007, the Board of Directors voted to
discontinue operations of its wholly-owned subsidiaries J.
Holder and VOM. The operations of J. Holder will cease upon the
liquidation of all real properties, assignments and judgments.
The Company is currently liquidating all of VOMs tax
certificates and is accepting proposals for the sale of VOM. The
Company expects the liquidation or sale to be completed within
the next twelve months.
The divestiture of the businesses is consistent with the
Companys strategy of concentrating resources in the core
product area of consumer receivables.
Revenues and net loss for the discontinued operations were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
387,902
|
|
|
$
|
810,437
|
|
|
$
|
1,475,662
|
|
|
$
|
1,644,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
$
|
(1,566,457
|
)
|
|
$
|
(464,618
|
)
|
|
$
|
(579,623
|
)
|
|
$
|
(346,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
Assets and liabilities of the discontinued businesses were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Notes receivable
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
$
|
|
|
Notes receivable from related party
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
Deposits on properties
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
240,000
|
|
Properties held for sale
|
|
|
4,868,052
|
|
|
|
5,962,739
|
|
|
|
6,314,346
|
|
Tax certificates held and accrued interest receivable, net
|
|
|
253,353
|
|
|
|
325,339
|
|
|
|
472,071
|
|
Deferred income tax asset, net
|
|
|
572,000
|
|
|
|
325,000
|
|
|
|
101,000
|
|
Other assets
|
|
|
1,923
|
|
|
|
45,241
|
|
|
|
34,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,730,328
|
|
|
$
|
6,793,319
|
|
|
$
|
7,162,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,092,683
|
|
|
$
|
873,441
|
|
|
$
|
606,751
|
|
Line of credit
|
|
|
212,992
|
|
|
|
316,000
|
|
|
|
|
|
Notes payable
|
|
|
1,885,000
|
|
|
|
885,000
|
|
|
|
650,000
|
|
Notes payable to related parties
|
|
|
2,300,000
|
|
|
|
2,300,000
|
|
|
|
2,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
5,490,675
|
|
|
$
|
4,374,441
|
|
|
$
|
3,556,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 27, 2005 (the Closing Date),
Velocity entered into a Loan and Security Agreement (the
Loan Agreement) with Wells Fargo, Inc., a California
corporation (the Lender), pursuant to which the
Lender agreed to provide Velocity with a $12,500,000 credit
facility to finance the acquisition of individual pools of
unsecured consumer receivables that are approved by the Lender
under specific eligibility criteria set forth in the Loan
Agreement.
On the Closing Date, the following agreements were also entered
into with the Lender: a Continuing Guaranty, under which the
Company provides a secure guaranty of Velocitys
obligations under the Loan Agreement; a Security and Pledge
Agreement, by and among the Company and the Lender, under which
the Company pledged all of the Companys assets to secure
the credit facility; and a Subordination Agreement, by and among
the Company and the Lender. In addition, three of our executive
officers provided joint and several limited guarantees of
Velocity Investments obligations under the Loan and
Security Agreement.
Use of the senior credit facility is subject to Velocity
complying with certain restrictive covenants under the Loan and
Security Agreement, including but not limited to: a restriction
on incurring additional indebtedness or liens; a change of
control; a restriction on entering into transactions with
affiliates outside the course of Velocity Investments ordinary
business; and a restriction on making payments to Velocity
Portfolio Group, Inc. In addition, Velocity has agreed to
maintain certain ratios with respect to outstanding advances on
the credit facility against the estimated remaining return value
on Wells Fargo financed portfolios, and Velocity has agreed to
maintain at least $6,000,000 in members equity and
subordinated debt. The Company has also agreed to maintain at
least $21,000,000 in stockholders equity and subordinated
debt for the duration of the facility.
Pursuant to the Loan Agreement, the Lender agreed to advance to
Velocity up to $12,500,000 to be used to finance up to 60% of
the purchase price of individual pools of unsecured consumer
receivables that are approved by the Lender under specific
eligibility criteria set forth in the Loan Agreement. The
interest rate on
F-15
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
the loan was 3.50% above the prime rate of Wells Fargo Bank,
N.A. Amounts borrowed under the credit facility had been due and
payable ratably over a twenty-four month period.
In February 2006, Velocity entered into a First Amendment to the
Loan Agreement with the Lender which amended the Loan Agreement
dated January 27, 2005. As of December 31, 2007, based
upon the minimum equity requirements, Velocity must maintain
approximately $8.7 million of its $14.7 million in
equity. In February 2008, the minimum requirement was increased
to $14.0 million including any subordinated debt (see
below). Pursuant to the Amended and Restated Loan Agreement, the
Lender extended the credit facility until January 27, 2009
and increased the advance rate under the credit facility to
67.5% of the purchase price of individual pools of unsecured
consumer receivables that are approved by the Lender. The
interest rate on the loan was reduced from 3.50% above the prime
rate of Wells Fargo Bank, N.A. to 2.50% above such prime rate.
In addition, repayment terms under the credit facility were
extended to thirty months.
In May 2006, as a result of the Series A
10% Convertible Preferred Stock Offering (the
offering), the Lender agreed to reduce the interest
rate on Velocitys credit facility from 2.50% to 1.50%
above the prime rate of Wells Fargo Bank, N.A. immediately and
increase the advance rate on the credit facility to 75.0%
effective June 1, 2006.
In December 2006, Velocity entered into a Second Amendment to
the Loan Agreement with the Lender which amended the Loan
Agreement dated January 27, 2005. Pursuant to the Amended
and Restated Loan Agreement, the Lender agreed to temporarily
increase the credit facility up to $14,500,000 until
March 8, 2007.
On February 23, 2007, Velocity entered into a Third
Amendment to the Loan Agreement with the Lender, dated
January 27, 2005. Pursuant to the Loan Agreement, as
amended and restated, the Lender agreed to permanently increase
the credit facility up to $17,500,000 which matures on
January 27, 2009. In addition, Velocity agreed to maintain
certain ratios with respect to outstanding advances on the
credit facility against the estimated remaining return value on
the Lenders financed portfolios, and to maintain at least
$6,500,000 in members equity plus 50% of Velocitys
net income for each calendar quarter that ends on or after
September 30, 2007. The Company has also agreed to maintain
at least $21,000,000 in stockholders equity plus 50% of
the net income of the Company for each calendar quarter that
ends on or after June 30, 2007.
In February 2008, Velocity entered into a Fourth Amendment to
the Loan and Security Agreement (the Fourth Amendment to
the Loan Agreement) with the Lender pursuant to amend the
Loan and Security Agreement dated January 27, 2005 (the
Original Loan Agreement). Pursuant to the Fourth
Amendment to the Loan Agreement, the Lender increased the amount
of credit available under the credit facility from $17,500,000
to $22,500,000 and extended the maturity date until
January 27, 2011. The Lender has agreed to eliminate the
requirement that certain executive officers of the Company
provide the Lender with joint and several limited guarantees of
Velocitys obligations under the Original Loan Agreement.
Use of the credit facility is subject to certain restrictive
covenants under the Fourth Amendment to the Loan Agreement
including but not limited to: a restriction on incurring
additional indebtedness or liens; a change of control of
Velocity; and a restriction on entering into transactions with
affiliates outside the course of Velocitys ordinary
business. Velocity has agreed to maintain at least $14,000,000
in members equity and subordinated debt. The Company has
also agreed to maintain at least $25,000,000 in
stockholders equity and subordinated debt for the duration
of the facility. In addition, Velocity and the Company have
agreed that net income for each subsequent quarter shall not be
less than $375,000 and $200,000, respectively.
As of September 30, 2008 and December 31, 2007 and
2006, the Company had $9,792,567, $14,429,138 and $13,791,388
outstanding on the credit facility, respectively. The rate of
interest at September 30, 2008 was 6.50%.
F-16
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
On June 14, 2007, the Company entered into an agreement for
a revolving credit line for $800,000 with Northern State Bank.
Interest on the outstanding principal balance is equal to the
banks prime rate plus one-half percent per annum. Any sums
loaned under the line may be repaid at any time, without premium
or penalty, and reborrowed from time to time, until July 1,
2008. Payments of interest only are due on the 1st day of
each and every month until July 1, 2008, on which date the
entire balance or principal, interest and fees then unpaid was
due and payable. The credit line is secured by various mortgages
of real property held by the Companys subsidiary, J.
Holder. The Company had $212,992 and $316,000 outstanding on the
credit line as of September 30, 2008 and December 31,
2007, respectively, which is reported in net liabilities of
discontinued operations. On July 1, 2008, the Company
extended the maturity date of the line until January 1,
2009 and reduced the maximum principal amount of the line to
$212,992.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
On June 2, 2005, J. Holder. acquired a residential property
in Melbourne, Florida (the Melbourne Property).
Acquisition financing of $3,350,000 was provided by a group of
investors (Investors Group) that receive 10% per
annum and 2% of the loaned amount along with a pro rata share of
20% of the net profit realized by J. Holder upon the sale of the
property. Of the $3,350,000 in financing, $2,300,000 was
obtained from related parties See NOTE
9 RELATED PARTY TRANSACTIONS
|
|
$
|
2,950,000
|
|
|
$
|
2,950,000
|
|
|
$
|
2,950,000
|
|
On April 15, 2005, the Company issued three promissory
notes in the principal amounts of $100,000, $150,000 and
$100,000 to accredited investors which are related parties in a
private placement. The notes with interest at 7% per annum were
payable in quarterly installments commencing September 30,
2005. On May 14, 2006, the $150,000 promissory note was
redeemed at the Companys option. As of December 31,
2006, the remaining notes in the aggregate amount of $200,000
were held by a related party to the president/CEO. These notes
were extended through April 15, 2009.
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
On April 25, 2007, the Company issued two promissory notes
of $35,000 and $200,000 to investors in a private placement. The
notes bear interest at 10% per annum plus 15% of the net profit
related to the sale of specified real property owned by the
Companys subsidiary, J. Holder. All amounts owed are due
no later than April 25, 2008 and may be redeemed at any
time before the due date. This was extended through
April 25, 2009.
|
|
|
235,000
|
|
|
|
235,000
|
|
|
|
|
|
F-17
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
On January 25, 2008, the Company issued a promissory note
for $1,000,000 with a financial institution. The note bears
interest at a rate of 7% per annum, payable monthly in arrears,
on the first day of each month with the original principal
amount plus accrued interest due January 23, 2009. The note
is collateralized by specified real property owned by the
Companys subsidiary, J. Holder. The note is guaranteed by
the Company and personally by certain executive officers of the
Company. J. Holder has agreed to maintain a loan to value ratio
of 33% at all times. This is reported in net liabilities of
discontinued operations.
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
On May 30, 2008 and June 10, 2008, Velocity
consummated the closings of its private placement offering of
14% Subordinated Notes (the Notes) due 2011
(the Offering) to accredited investors
(Investors). The Notes were offered and sold
pursuant to exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended (the Securities
Act). Velocity issued the Notes in the aggregate principal
amount of $940,000. Interest is payable quarterly in arrears
beginning on the last day of the month that is four months from
the date of the Notes. Velocity will pay the principal amount of
the Notes upon the earlier of maturity or redemption. The Notes
will be subordinated in liquidation preference and in right of
payment to all of the Companys existing debt. The Notes
will be senior in right of payment and in liquidation preference
to any future long term debt of the Company. Upon an
event of default, Velocity will pay the Note holder a late
charge computed at the rate of 18% per annum of the amount not
paid. $540,000 of the Notes are being held by a related party of
the Company.
|
|
|
940,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,325,000
|
|
|
|
3,385,000
|
|
|
|
3,150,000
|
|
Notes payable included in discontinued operations
|
|
|
4,185,000
|
|
|
|
3,185,000
|
|
|
|
2,950,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable included in continuing operations
|
|
$
|
1,140,000
|
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8
|
CONVERTIBLE
SECURED DEBENTURES AND NOTES
|
On October 27, 2005, the Company issued a 10% Secured
Convertible Debenture, due April 27, 2007, in the aggregate
principal amount of $1.8 million (the
Debenture) and a warrant to purchase
10,000 shares of the Companys common stock at an
exercise price of $62.00 per share which expires in October 2008.
The Debenture was convertible at $80.00 per share. The Debenture
bore interest at 10% per annum, payable monthly on the first day
of each calendar month, beginning on November 1, 2005.
Interest was payable in cash or, at the Companys option,
in shares of common stock provided that certain conditions were
satisfied. The holder of the Debenture was granted (i) a
security interest in the assets of the Company, and (ii) a
pledge of the Companys ownership of its subsidiaries,
which is subject to existing liens, existing indebtedness,
permitted liens and permitted indebtedness. Additionally, the
subsidiaries guaranteed the obligations of the Company under the
Debenture. The Debenture was also guaranteed personally by John
C.
F-18
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
Kleinert, the Companys President and Chief Executive
Officer, W. Peter Ragan, Sr., the Companys Vice
President and W. Peter Ragan, Jr., President of Velocity.
On April 1, 2006, the holder extended the initial payment
due date of the Debenture to June 1, 2006, and in
consideration thereof, the Company issued an additional warrant
to purchase 2,500 shares of the Companys common stock
at an exercise price of $62.00 per share which expires in April
2009. On May 19, 2006, the Company used $1,823,000 of the
proceeds from its preferred stock offering to repay the interest
and principal under the Debenture.
On June 29, 2007 and July 27, 2007, the Company closed
on its private placement offering of 10% Convertible
Subordinated Notes (the Notes) due 2017 (the
Offering) to accredited investors
(Investors). The Notes were offered and sold
pursuant to exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended (the Securities
Act). The Notes were sold by the Company through an NASD
member firm which served as placement agent. In connection with
the Offering, the Company issued the Notes and also entered into
a Subscription Agreement with each of the Note holders.
Pursuant to the Offering, the Company issued Notes in the
aggregate principal amount of $2,350,000. Interest on the notes
is payable monthly in arrears commencing September 30,
2007. The Notes are subordinated in liquidation preference and
in right of payment to all of the Companys existing debt.
The Notes are senior in right of payment and in liquidation
preference to any future long-term debt of the Company. To the
extent the Company were to complete a subsequent financing with
the placement agent on or before March 29, 2008
(Subsequent Financing), the Notes will automatically
convert into the underlying securities (either convertible debt
or preferred stock) sold in the Subsequent Financing. To the
extent the new issue in the Subsequent Financing contains an
interest rate less than 10% per annum; the exchange ratio of the
Notes will automatically adjust to maintain a 10.0% yield. To
the extent the Company does not complete a Subsequent Financing;
the Notes may be converted, at the option of the holder, into
shares of the Companys common stock at a price of $50.00
per share, subject to certain adjustments.
The Company used the net proceeds from the Offering primarily
for the purchase of portfolios of consumer receivables and for
general corporate purposes.
For its services in connection with the Offering, the placement
agent received a fee of 7% of the principal amount of the Notes
sold. In addition, the Company paid an unaccountable expense
allowance of 1% of the principal amount of the Notes sold. As a
result, after other Offering expenses of approximately $41,500,
the Company received net proceeds of approximately $2,125,500.
Total costs of $224,500 related to this offering have been
capitalized and are being amortized over the life of the notes.
|
|
NOTE 9
|
RELATED
PARTY TRANSACTIONS
|
In 2007, the Company received a note receivable in the amount of
$205,000 in partial payment of the $455,000 purchase price from
an officer and related party, John C. Kleinert for the
assignment of membership interests in Ridgedale Avenue Commons,
LLC, and Morris Avenue Commons, LLC, previously owned by J.
Holder, Inc. As of December 31, 2007, the note has a
balance of $100,000, along with interest at the rate of 12%
which shall accrue only on and after December 26, 2007, and
is payable by means of one lump sum payment of principal and
accrued interest on August 25, 2008. As of March 14,
2008, Mr. Kleinert made a $100,000 lump sum payment to the
Company and the promissory note was retired. The Company waived
$2,630 in accrued interest on the prepayment.
On December 28, 2007, the Company paid $115,146 in
withholding taxes in connection with the vesting of
8,750 shares of restricted stock granted to James J.
Mastriani. As of March 14, 2008, Mr. Mastriani has
returned 6,800 of such shares for cancellation and retirement to
offset this payment.
F-19
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
Of the $3,350,000 in acquisition financing on the Melbourne
Property, $1,400,000 was provided by Dr. Kelly and
Mr. Granatell, who subsequently became members of the
Companys Board of Directors. Additionally, Mr. Robert
Kleinert and Ms. Yoke, related parties of the President and
CEO of the Company, provided $900,000 of this financing in
connection with the acquisition. The $2,300,000 is reported in
net liabilities of discontinued operations. Interest on these
related party notes with respect to the Melbourne Property
accrued in the amounts of $123,278 and $116,103 for the nine
months ended September 30, 2008 and 2007 and $242,273 and
$216,528 as of the years ended December 31, 2007 and 2006
which is included in accounts payable and accrued expenses of
the discontinued operations. Interest paid to other related
parties as referenced in NOTE 7 totaled $28,435 and $10,500
for the nine months ended September 30, 2008 and 2007 and
$14,000 and $18,269 and years ended December 31, 2007 and
2006.
Total interest to related parties for the nine months ended
September 30, 2008 and 2007 and the years ended
December 31, 2007 and 2006 was $203,491 and $175,059 and
$247,194 and $216,528, respectively. Of the total interest to
related parties for the nine months ended September 30,
2008 and 2007 and the years ended December 31, 2007 and
2006, $175,056 and $164,559 and $233,194 and $216,528,
respectively, are included in the results of operations of
discontinued operations.
The Company engages Ragan & Ragan, PC, an entity owned
by Messrs. Ragan & Ragan, to pursue legal
collection of its receivable portfolios with respect to obligors
and properties located in the State of New Jersey. The fee
arrangements between the Companys subsidiaries Velocity,
J. Holder and VOM and Ragan & Ragan, P.C., each
dated as of January 1, 2005, have been reviewed and
approved by all the members of a committee appointed by the
board of directors other than Mr. Ragan, Sr. who
abstained. In May 2007, the fee arrangements were approved by
Unanimous Written Consent of the board of directors other than
Mr. Ragan, Sr. who abstained.
Ragan and Ragan, P.C. routinely advances court costs
associated with their servicing of consumer receivable
portfolios, which are subsequently reimbursed by the Company.
These costs are included in the estimated court and media costs
in the consolidated balance sheets.
Legal fees paid to Ragan & Ragan, P.C., by the
Companys subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Velocity Investments, LLC
|
|
$
|
634,081
|
|
|
$
|
868,761
|
|
|
$
|
1,128,107
|
|
|
$
|
1,225,577
|
|
J. Holder, Inc.
|
|
|
|
|
|
|
4,500
|
|
|
|
6,000
|
|
|
|
10,139
|
|
VOM, LLC
|
|
|
|
|
|
|
223
|
|
|
|
238
|
|
|
|
5,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
634,081
|
|
|
$
|
873,484
|
|
|
$
|
1,134,345
|
|
|
$
|
1,241,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10
|
STOCK
BASED COMPENSATION
|
Stock
Based Consideration to Employees
The 2004 Equity Incentive Program of the Company, (the
Employee Plan) authorizes the issuance of up to
50,000 shares of common stock in connection with the grant
of options or issuance of restricted stock awards. To the extent
that the Company derives a tax benefit from options exercised by
employees, if any, such benefit will be credited to additional
paid-in capital when realized on our income tax return. There
were no tax benefits realized by the Company. No options have
been granted to date.
F-20
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
The Company did not make any awards under the Employee Plan
during the year ended December 31, 2007. During the year
ended December 31, 2006, the Company issued restricted
stock awards. The following summarizes shares of common stock
under the Employee Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
Expenses Recorded
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Date of Grant
|
|
December 31,
|
|
|
December 31,
|
|
Employee
|
|
Granted
|
|
|
Vested
|
|
|
Market Value
|
|
2007
|
|
|
2006
|
|
|
James J. Mastriani
|
|
|
10,000
|
|
|
|
10,000
|
|
|
31.00
|
|
$
|
110,000
|
|
|
$
|
200,000
|
|
Craig Buckley
|
|
|
1,250
|
|
|
|
1,250
|
|
|
30.00 to 38.00
|
|
|
|
|
|
|
44,300
|
|
Adam Atkinson
|
|
|
150
|
|
|
|
150
|
|
|
30.00 to 38.00
|
|
|
|
|
|
|
5,300
|
|
Lisa Cullen
|
|
|
150
|
|
|
|
150
|
|
|
30.00 to 38.00
|
|
|
|
|
|
|
5,300
|
|
Kristina Vingara
|
|
|
50
|
|
|
|
50
|
|
|
38.00
|
|
|
|
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,000
|
|
|
$
|
256,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock based compensation expense of $110,000 pertained to
3,750 shares of common stock which vested to James J.
Mastriani in 2007. For the year ended December 31, 2007,
there was no tax benefits realized related to stock based
compensation issued to employees in 2006.
|
|
NOTE 11
|
COMMON
STOCK OFFERING
|
On September 26, 2007, the Company consummated a closing of
its private placement offering (the Offering) of
shares of common stock (the Shares) and warrants to
purchase shares of common stock (the Warrants,
together with the Shares, the Securities) to
accredited investors (Investors). The Securities
were offered and sold pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act). In connection with the
Offering, the Company also entered into a Securities Purchase
Agreement and a Registration Rights Agreement with the investors
in the Offering. The Company sold an aggregate of
33,750 shares at a purchase price of $40.00 per share and
delivered Warrants to purchase an aggregate of 8,250 shares.
On October 11, 2007, the Company closed on its second
offering of shares of common stock and warrants to purchase
shares of common stock to accredited investors under the same
terms described above. Together with the first closing, the
Company sold an aggregate of 43,125 shares at a purchase
price of $40.00 per share and delivered Warrants to purchase an
aggregate of 8,625 shares of the Companys common
stock. Net proceeds from the financing were used for working
capital purposes including the purchase of distressed consumer
receivable portfolios.
The Company received net proceeds of $1,632,500 from these
placements, after offering expenses of approximately $10,000 and
commissions of approximately $82,500. In addition, the placement
agent received 2 year warrants to acquire 2,063 shares
of the Companys common stock.
The Warrants entitle the holders to purchase shares of the
Companys common stock (the Warrant Shares) for
a period of three years commencing on April 4, 2008 at an
exercise price of $50.00 per share. The Warrants contain certain
anti-dilution rights. In addition, the Investors are entitled to
additional shares of common stock if, during the six month
period after the Initial Closing, the Company sells or issues
additional shares of Common Stock, or securities (debt
and/or
equity) convertible into common stock, with a purchase, exercise
or conversion price of less than $40.00.
Pursuant to the Registration Rights Agreement, the Company
agreed to file a registration statement providing for the resale
of the Shares and the Warrant Shares. The Company agreed to file
the registration statement within 45 days of the initial
closing and to use its best efforts to cause the registration
statement to
F-21
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
become effective within 90 or 120 days, The Company met its
obligations under the registration rights arrangement and
therefore, the carrying amount of the liability representing the
Companys registration rights obligations was $0. The
registration statement for the Offering was filed on
November 9, 2007 and declared effective on
November 21, 2007.
On May 6, 2008, the Company consummated an initial closing
of its private placement offering of units comprised of shares
of common stock and warrants to purchase shares of common stock
to accredited investors. The Company sold an aggregate of
40,000 shares at a purchase price of $18.00 per share with
three year warrants to purchase an aggregate of
10,000 shares of the Companys common stock at an
exercise price of $22.50 per share.
On May 19, 2008, the Company consummated its second and
final closing of its private placement offering of Units
comprised of shares of common stock and warrants to purchase
shares of common stock to accredited investors. Together with
the first closing, the Company sold an aggregate of
47,258 shares, 40,000 of which were at a purchase price of
$18.00 per share and 7,258 of which were at a purchase price of
$18.60 per share and delivered three-year warrants to purchase
an aggregate of 11,815 shares of the Companys common
stock. The Company used the net proceeds from the offering
primarily for the purchase of portfolios of unsecured consumer
receivables and for general corporate purposes, including
working capital.
The warrants entitle the holders to purchase shares of the
Companys common stock reserved for issuance thereunder for
a period of three years from the date of issuance. 10,000 of the
warrants have an exercise price of $22.50 per share and 1,815 of
the warrants have an exercise price of $23.20 per share, or the
holders may receive shares pursuant to a net settled stock
appreciation right provision. The warrants contain certain
anti-dilution rights on terms specified in the Warrants.
The Company received net proceeds of $793,650 from the
placement, after commissions of approximately $61,350. The
Company retained a registered FINRA broker dealer to act as
placement agent. In addition, the placement agent receives
three-year warrants to acquire 4,000 shares of the
Companys common stock at an exercise price of $22.60 per
share and three-year warrants to acquire 726 shares of the
Companys common stock at an exercise price of $23.20 per
share.
|
|
NOTE 12
|
PREFERRED
STOCK OFFERING
|
On May 18, 2006, the Company sold 1,200,000 shares of
Series A 10% Convertible Preferred Stock
(Preferred Stock) at $10 per share resulting in
gross proceeds of $12,000,000. The underwriters were granted an
over allotment option to purchase up to an additional
180,000 shares of Preferred Stock. The underwriters were
also issued a warrant to purchase 120,000 shares of
Preferred Stock at $10 per share. On May 31, 2006, the
underwriters exercised their overallotment option to purchase
180,000 shares of the Preferred Stock. The shares of
Series A Convertible Preferred Stock are listed on the
American Stock Exchange under the symbol JVI.PR.
Each share of Preferred Stock is convertible into one-fifth of
one share of the Companys Common Stock. If after
May 18, 2009, the Companys common stock exceeds the
conversion price of the Preferred Stock by more than 35% and is
traded on a national exchange, the Company may terminate the
conversion right. If the Company issues a conversion
cancellation notice, the Company will have the right to redeem
the stock after May 18, 2008 for cash, at the
Companys option, at $10 per share, plus accrued and unpaid
dividends to the redemption date.
|
|
NOTE 13
|
OUTSTANDING
WARRANTS AND OPTIONS
|
At December 31, 2006, the Company had outstanding warrants
and options to purchase 218,833 shares of its common stock
at prices ranging from $20.80 to $62.00 per share. The first
warrants (159,975 shares of
F-22
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
common stock) expire in February 2009. The second warrants for
33,858 shares of common stock were granted pursuant to a
private offering as compensation for services rendered and
expire on September 30, 2009. A third warrant for
10,000 shares of common stock was granted in connection
with the October 2005 convertible debt financing and expires on
October 10, 2010. On May 19, 2006, the Company entered
into an amendment to the Securities Purchase Agreement,
effective April 1, 2006, for the October 2005 convertible
debt financing, pursuant to which it extended the initial
payment due date of its outstanding convertible secured
debenture and issued to the holder an additional warrant to
purchase 2,500 shares of the Companys common stock at
an exercise price of $62.00 per share which expires on
April 1, 2011. In May 2008, under the full ratchet
anti-dilution provision of the 12,500 in outstanding warrants
exercisable at $62.00 a share, such warrants were exchanged for
43,056 warrants at a reset strike price of $18.00 per share.
At December 31, 2007, the Company had issued three year
warrants to purchase an aggregate of 8,625 shares of the
Companys common stock at $50.00 and 2,063 of two year
warrants of the Companys common stock at $50.00 in
conjunction with the private offering discussed in
NOTE 11 COMMON STOCK OFFERING.
At December 31, 2007, the Company had an option outstanding
to an independent consultant (issued in 2005) in exchange
for services rendered for 12,500 shares of common stock at
an exercise price per share of $50.00 which expired on
September 1, 2008.
The following table summarizes information on all common share
purchase options and warrants issued by the Company for the nine
months and years ended September 30, 2008 and
December 31, 2007 and 2006, respectively, including common
share equivalents relating to convertible debenture share
warrants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
Outstanding at the beginning of the period
|
|
|
229,521
|
|
|
$
|
29.80
|
|
|
|
218,833
|
|
|
$
|
29.40
|
|
|
|
216,333
|
|
|
$
|
29.00
|
|
Granted during period
|
|
|
58,870
|
|
|
|
43.60
|
|
|
|
10,688
|
|
|
|
50.00
|
|
|
|
2,500
|
|
|
|
62.00
|
|
Exercised during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminated, replaced or expired during the period
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the period
|
|
|
263,391
|
|
|
$
|
28.40
|
|
|
|
229,521
|
|
|
$
|
29.80
|
|
|
|
218,833
|
|
|
$
|
29.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the period
|
|
|
263,391
|
|
|
$
|
28.40
|
|
|
|
229,521
|
|
|
$
|
29.80
|
|
|
|
218,833
|
|
|
$
|
29.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number and weighted average exercise prices of all common
shares and common share equivalents issuable and stock purchase
options and warrants outstanding as of September 30, 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
$0 - 40
|
|
|
218,845
|
|
|
$
|
21.14
|
|
$40 - 80
|
|
|
44,546
|
|
|
|
50.00
|
|
The number and weighted average exercise prices of all common
shares and common share equivalents issuable and stock purchase
options and warrants outstanding as of December 31, 2007 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
$0 - 40
|
|
|
159,975
|
|
|
$
|
20.80
|
|
$40 - 80
|
|
|
69,546
|
|
|
|
54.00
|
|
F-23
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
|
|
NOTE 14
|
EARNINGS
PER SHARE
|
Basic earnings per share are computed using the weighted average
number of shares outstanding during each period. Diluted
earnings per share are computed using the weighted average
number of shares outstanding during each period, plus the
dilutive effects of potential convertible securities related to
preferred stock, convertible notes, options and warrants.
Outstanding options and warrants to non-employees convertible
into 263,391 and 67,108 and 69,546 and 58,858 shares of
common stock; convertible preferred stock, convertible into
276,000 shares of common stock; and convertible notes,
convertible into 47,000 and 15,659 and 23,365 and
10,423 shares for the nine months ended September 30,
2008 and 2007 and the years ended December 31, 2007 and
2006, respectively, were not included in the dilutive per share
calculations because their effect would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2,803,230
|
|
|
$
|
1,829,437
|
|
|
$
|
2,906,890
|
|
|
$
|
1,535,025
|
|
Preferred stock dividends
|
|
|
(1,035,000
|
)
|
|
|
(1,035,000
|
)
|
|
|
(1,380,000
|
)
|
|
|
(851,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common
stockholders
|
|
|
1,768,230
|
|
|
|
794,437
|
|
|
|
1,526,890
|
|
|
|
684,020
|
|
Discontinued operations, net of tax
|
|
|
(1,124,027
|
)
|
|
|
(269,288
|
)
|
|
|
(334,815
|
)
|
|
|
(216,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders Basic
and Diluted
|
|
$
|
644,203
|
|
|
$
|
525,149
|
|
|
$
|
1,192,075
|
|
|
$
|
467,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common stock outstanding Basic
|
|
|
873,606
|
|
|
|
808,810
|
|
|
|
819,752
|
|
|
|
800,433
|
|
Effect of dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,905
|
|
|
|
84,652
|
|
|
|
84,036
|
|
|
|
63,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares Diluted
|
|
|
876,511
|
|
|
|
893,462
|
|
|
|
903,788
|
|
|
|
863,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
The provision for corporate income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations before discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,407,947
|
|
|
$
|
878,418
|
|
|
$
|
1,417,070
|
|
|
$
|
841,245
|
|
State
|
|
|
465,091
|
|
|
|
342,502
|
|
|
|
565,773
|
|
|
|
357,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,873,038
|
|
|
|
1,220,920
|
|
|
|
1,982,843
|
|
|
|
1,199,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(197,766
|
)
|
|
|
(56,866
|
)
|
|
|
(26,382
|
)
|
|
|
(76,173
|
)
|
State
|
|
|
2,336
|
|
|
|
2,536
|
|
|
|
5,574
|
|
|
|
8,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,430
|
)
|
|
|
(54,330
|
)
|
|
|
(20,808
|
)
|
|
|
(67,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
1,677,608
|
|
|
|
1,166,590
|
|
|
|
1,962,035
|
|
|
|
1,131,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations before discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
14,100
|
|
|
|
70,500
|
|
|
|
87,300
|
|
|
|
(73,000
|
)
|
State
|
|
|
900
|
|
|
|
16,300
|
|
|
|
20,000
|
|
|
|
(23,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
86,800
|
|
|
|
107,300
|
|
|
|
(96,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(335,500
|
)
|
|
|
(99,500
|
)
|
|
|
(168,500
|
)
|
|
|
(30,000
|
)
|
State
|
|
|
88,500
|
|
|
|
(41,500
|
)
|
|
|
(55,500
|
)
|
|
|
(32,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(247,000
|
)
|
|
|
(141,000
|
)
|
|
|
(224,000
|
)
|
|
|
(62,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax (benefit) expense
|
|
|
(232,000
|
)
|
|
|
(54,200
|
)
|
|
|
(116,700
|
)
|
|
|
(159,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current and deferred tax expense
|
|
$
|
1,445,608
|
|
|
$
|
1,112,390
|
|
|
$
|
1,845,335
|
|
|
$
|
972,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
The tax effect of temporary differences that make up the
significant components of the deferred tax assets and liability
for financial reporting purposes for the nine months and year
ended September 30, 2008 and December 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
For the
|
|
|
For the
|
|
|
|
Months Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations before discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
89,600
|
|
|
$
|
102,100
|
|
|
$
|
129,000
|
|
Accrued interest
|
|
|
7,700
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
|
|
|
|
16,800
|
|
|
|
110,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,300
|
|
|
|
118,900
|
|
|
|
239,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
111,800
|
|
|
|
54,000
|
|
|
|
47,100
|
|
Accrued interest
|
|
|
90,800
|
|
|
|
61,200
|
|
|
|
30,000
|
|
Impairment of property held for sale
|
|
|
382,200
|
|
|
|
96,000
|
|
|
|
|
|
Section 263(a)
|
|
|
241,400
|
|
|
|
128,200
|
|
|
|
38,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
826,200
|
|
|
|
339,400
|
|
|
|
115,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
923,500
|
|
|
|
458,300
|
|
|
|
355,200
|
|
Deferred tax liability continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(13,700
|
)
|
|
|
(20,300
|
)
|
|
|
(23,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
|
909,800
|
|
|
|
438,000
|
|
|
|
332,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance continuing operations
|
|
|
|
|
|
|
|
|
|
|
(10,400
|
)
|
Valuation allowance discontinued operations
|
|
|
(254,300
|
)
|
|
|
(14,400
|
)
|
|
|
(14,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total valuation allowance
|
|
|
(254,300
|
)
|
|
|
(14,400
|
)
|
|
|
(25,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
655,500
|
|
|
$
|
423,600
|
|
|
$
|
306,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Velocity Portfolio Group, Inc. generated net operating losses
prior to its acquisition of STB. As a result of the reverse
acquisition, the ownership change of Velocity Asset Management,
Inc. as of February 3, 2004 limits and reduces the future
utilization of the Companys net operating loss
carryforwards. These pre-reverse acquisition net operating loss
carryforwards will be limited and reduced based upon the
applicable Federal and New Jersey rules.
The total valuation allowance increased $239,000 in the nine
months ended September 30, 2008 and decreased $10,800 in
the year ended December 31, 2007.
At September 30, 2008, the Company had unused net operating
loss carryforwards of approximately $342,000 for Federal
purposes and $904,000 for New Jersey purposes. These net
operating losses may provide future income tax benefits of
approximately $102,000 which will expire between the years 2008
and 2023. At December 31, 2007, the Company had unused net
operating loss carryforwards of approximately $380,500 for
Federal purposes and $284,000 for New Jersey purposes. Those net
operating losses may provide future income tax benefits of
approximately $156,100 which will expire between the years 2008
and 2023. The ability to utilize such losses is dependent upon
the Companys ability to generate taxable income as well as
the annual limit per the Internal Revenue Code Section 382
versus the expiration dates of the losses. Because some of the
losses are due to expire prior to fully utilizing the
carryforwards, a valuation reserve has been established equal to
the amount expected to expire unused.
F-26
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
The Company adopted FIN 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 effective January 1,
2007. FIN 48 contains a two-step approach to recognizing
and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109, Accounting for
Income Taxes. The first step is to evaluate the tax
position for recognition by determining if the weight of
available evidence indicates that it is more likely than not
that the position will be sustained on audit, including
resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount
that is more than 50% likely of being realized upon ultimate
settlement.
As a result of the implementation of FIN 48, no adjustments
have been deemed necessary to retained earnings for prior
periods due to immateriality; therefore, the liability for
income taxes associated with uncertain tax positions at
January 1, 2007 was $0. This liability was increased during
2007 by approximately $29,000 (including penalties and interest)
for State income taxes. Therefore, the liability for income
taxes associated with uncertain tax positions at
December 31, 2007 is approximately $29,000. During the nine
months ended September 30, 2008, this liability increased
by approximately $6,500 for state income taxes. The Company has
determined that there is no material impact on the effective tax
rate with respect to any uncertain tax positions. In addition,
the Company has also determined that there are no material
uncertain tax positions in the net deferred tax asset account as
of September 30, 2008 and December 31, 2007 with
respect to the implementation of FIN 48.
During the nine months ended September 30, 2008, the
Company accrued potential penalties and interest of
approximately $700. The penalties and interest are recorded as
part of the provision for income taxes.
The Company files Federal and State income tax returns in
jurisdictions with varying statutes of limitations. The 2004,
2006 and 2007 tax years remain subject to examination by Federal
taxing authorities and the 2004 through 2007 tax years generally
remain subject to examination by State tax authorities. In 2007,
the U.S. Internal Revenue Service audited the 2005
U.S. Federal tax return. This audit has been closed. There
was no material effect on the Companys financial position.
A reconciliation of the provision for income taxes attributable
to income on continuing operations computed at the Federal
statutory rate to the reported provision for income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Tax provision at Federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State income taxes net of Federal benefit
|
|
|
5.00
|
%
|
|
|
5.94
|
%
|
|
|
5.94
|
%
|
|
|
5.94
|
%
|
Non-deductible expenses
|
|
|
6.76
|
%
|
|
|
2.53
|
%
|
|
|
2.68
|
%
|
|
|
7.04
|
%
|
Other (permanent differences, overaccrual, etc.)
|
|
|
0.50
|
%
|
|
|
(0.85
|
)%
|
|
|
(0.85
|
)%
|
|
|
(4.55
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
46.26
|
%
|
|
|
41.62
|
%
|
|
|
41.77
|
%
|
|
|
42.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 2, 2007, the Company signed a lease with respect to
its new business office located at 1800 Route 34, Wall, New
Jersey 07719. The lease covers 2,450 square feet of office
space and commenced on July 1, 2007 with an initial term of
five years (the Term).
The Company has two options to extend the Term for a period of
five years each. The total annual lease payment is $43,488,
payable in equal monthly installments on or before the first of
each month.
F-27
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
The future minimum lease payments for each of the twelve month
periods ended September 30, 2008 are as follows:
|
|
|
|
|
|
|
September 30,
|
|
|
2009
|
|
$
|
43,488
|
|
2010
|
|
|
43,488
|
|
2011
|
|
|
43,488
|
|
2012
|
|
|
32,616
|
|
|
|
|
|
|
|
|
$
|
163,080
|
|
|
|
|
|
|
The future minimum lease payments for each of the twelve month
periods ended December 31, 2007 are as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
$
|
43,488
|
|
2009
|
|
|
43,488
|
|
2010
|
|
|
43,488
|
|
2011
|
|
|
43,488
|
|
2012
|
|
|
21,744
|
|
|
|
|
|
|
|
|
$
|
195,696
|
|
|
|
|
|
|
Rent expense for the nine months ended September 30, 2008
and 2007 was $46,912 and $41,957 and $56,198 and $21,328 for the
years ended December 31, 2007 and 2006, respectively.
The Company has entered into employment agreements with several
officers with terms expiring through December 31, 2009. The
Companys gross commitments related to these agreements
amounted to $1,080,000.
|
|
NOTE 17
|
SUBSEQUENT
EVENTS
|
On October 29, 2008, Velocity consummated a final closing
of a private placement offering of 14% Subordinated Notes
due 2011 (the Notes) to accredited investors.
Velocity issued new Notes in the aggregate principal amount of
$360,000. The Notes were offered and sold pursuant to exemption
from registration under Section 4(2) of the Securities Act
of 1933, as amended.
Together with the May 2008 and June 2008 private placements,
Velocity has issued Notes in the aggregate principal amount of
$1,300,000 in the offering. Interest shall be payable quarterly
in arrears beginning on the last day of the month that is four
months from the date of the Notes. Velocity will pay the
principal amount of the Notes upon the earlier of maturity or
redemption. The Notes will be subordinated in liquidation
preference and in right of payment to all of the Companys
existing debt. The Notes will be senior in right of payment and
in liquidation preference to any future long term
debt of the Company. Upon an event of default, Velocity will pay
the Note holder a late charge computed at the rate of 18% per
annum of the amount not paid. Of the $1,300,000 in Notes that
were issued, $900,000 are held by related parties to Velocity,
including a Note in the amount of $150,000 to our CEO, John C.
Kleinert, and Notes in the aggregate of $750,000 to immediate
family members of John C. Kleinert. Velocity intends to use the
net proceeds from the offering primarily for the purchase of
portfolios of unsecured consumer receivables and for general
corporate purposes, including working capital.
On November 1, 2008, Velocity entered into a Fifth
Amendment to the Loan and Security Agreement (the Fifth
Amendment to the Loan Agreement) with the Lender. Pursuant
to the Fifth Amendment to the Loan Agreement, the applicable
interest rate on loans to Velocity changed from the prime rate
plus 1.5% to
F-28
VELOCITY
PORTFOLIO GROUP, INC. AND SUBSIDIARIES
(Formerly Velocity Asset Management, Inc. and Subsidiaries)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited for the information related to September 30,
2008 and 2007)
the rate equal to the three-month LIBOR plus 4%. Also pursuant
to the Fifth Amendment to the Loan Agreement, the Loan
Sub-Account Amortization Schedule which sets forth the maximum
principal loan amount Velocity may have outstanding during a
three-month period, has been extended from 36 months to
42 months.
F-29
2,500,000 Units
PROSPECTUS
Sandler
Oneill + partners, l.p.
GunnAllen
Financial, Inc.
Maxim
Group LLC
,
2009
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 pursuant to this registration statement. We
will pay all of these amounts. All amounts except the SEC
registration fee are estimated.
|
|
|
|
|
SEC registration fee
|
|
$
|
2,148
|
|
FINRA filing fee
|
|
|
5,964
|
|
Accounting fees and expenses
|
|
|
225,000
|
|
Legal fees and expenses
|
|
|
250,000
|
|
NYSE Alternext Listing Fee
|
|
|
60,000
|
|
Printing fees, transfer agent fees and expenses
|
|
|
50,000
|
|
Underwriter fees and expenses
|
|
|
200,000
|
|
Miscellaneous
|
|
|
6,888
|
|
|
|
|
|
|
Total
|
|
$
|
800,000
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Our certificate of incorporation provides that all our
directors, officers, employees and agents shall be entitled to
be indemnified by us to the fullest extent permitted under the
Delaware General Corporation Law, provided that they acted in
good faith and that they reasonably believed their conduct or
action was in, or not opposed to, the best interest of our
company.
Our bylaws provide for indemnification of our officers,
directors and others who become a party to an action on our
behalf by us to the fullest extent not prohibited under the
Delaware General Corporation Law. Further, we maintain officer
and director liability insurance.
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
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. If a claim for indemnification against
such liabilities (other than the payment 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 our counsel the matter has been settled by
controlling precedent, submit to the 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.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
On July 27, 2007, we consummated the final closing of our
private placement offering of 10.0% convertible subordinated
notes in the aggregate principal amount of $2,350,000, due 2017
to accredited investors. The notes were sold by us through
Anderson & Strudwick, which served as placement agent.
The notes are subordinated in liquidation preference and in
right of payment to all of our then-existing debt and senior in
right of payment and in liquidation preference to any of our
future long term debt.
On September 26, 2007, we consummated an initial closing of
a private placement offering of shares of common stock and
warrants to purchase shares of common stock to accredited
investors. On October 11, 2007, we consummated the second
and final closing of this offering. We sold an aggregate of
43,125 shares at a purchase price of $40.00 per share and
delivered warrants to purchase an aggregate of 8,625 shares
of our common stock. We received aggregate net proceeds of
$1,632,500 from the placement, after payment of offering
expenses of approximately $10,000 and commissions of
approximately $82,500. We retained Anderson &
Strudwick to act as placement agent. In addition, the placement
agent is entitled to receive 2 year warrants to acquire
2,063 shares of the Companys common stock.
On May 6, 2008, we consummated an initial closing of a
private placement offering of Units comprised of shares of
common stock and warrants to purchase shares of common stock to
accredited investors. On
II-1
May 19, 2008, we consummated our second and final closing
of the private placement offering. We sold an aggregate of
47,258 Shares, 40,000 of which were at a purchase price of
$18.00 per share and 7,258 of which were at a purchase
price of $18.60 per Share and delivered three-year warrants to
purchase an aggregate of 11,815 shares of our common stock.
The Warrants entitle the holders to purchase shares of our
common stock reserved for issuance thereunder for a period of
three years from the date of issuance. 10,000 of the warrants
have an exercise price of $22.6 per share and 1,815 of the
warrants have an exercise price of $23.20 per share, or the
holders may receive shares pursuant to a net settled stock
appreciation right provision.
We received net proceeds of $793,650 from the placement, after
payment of offering expenses of approximately $61,350 and
commissions of approximately $50,400. In addition,
Anderson & Strudwick received three-year warrants to
acquire 4,000 shares of our common stock at an exercise
price of $22.60 per share and three-year warrants to
acquire 726 shares of our common stock at an exercise price
of $23.20 per share.
Net proceeds from the sales of securities discussed in this
Item 15 were used primarily for working capital purposes
including, but not limited to, the purchase of distressed
consumer receivable portfolios. All of the offers and sales
referred to above were in private offerings to accredited
investors (as such term is defined in Regulation D) in
reliance upon the exemption provided by Section 4(2) of the
Securities Act and Regulation D promulgated under such act
by the Commission. Each of the purchasers was furnished with
information about us and had the opportunity to verify such
information. Additionally, we obtained a representation from
each purchaser of such purchasers intent to acquire the
securities for the purpose of investment only, and not with a
view toward the subsequent distribution thereof. The securities
bear appropriate legends and we have issued stop transfer
instructions to our transfer agent.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
See the Exhibit Index immediately following the signature
page hereof.
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.
The undersigned registrant hereby undertakes that:
|
|
|
|
|
For purposes of determining any liability under the Securities
Act of 1933, to treat 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 497(h) under the Securities Act of 1933
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, to treat 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-2
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant has only caused authorized this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Wall, State of New
Jersey, on the 6th day of February, 2009.
VELOCITY PORTFOLIO GROUP, INC.
John C. Kleinert
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Person
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ John
C. Kleinert
John
C. Kleinert
|
|
Chief Executive Officer, President,
Chairman of the Board and Director (Principal Executive Officer)
|
|
February 6, 2009
|
|
|
|
|
|
*
W.
Peter Ragan Sr.
|
|
Vice President, Director
|
|
February 6, 2009
|
|
|
|
|
|
*
Steven
Marcus
|
|
Director
|
|
February 6, 2009
|
|
|
|
|
|
*
Dr. Michael
Kelly
|
|
Director
|
|
February 6, 2009
|
|
|
|
|
|
*
David
Granatell
|
|
Director
|
|
February 6, 2009
|
|
|
|
|
|
/s/ James
J. Mastriani
James
J. Mastriani
|
|
Chief Financial Officer, Chief Legal
Officer, Secretary, Treasurer
(Principal Accounting Officer)
|
|
February 6, 2009
|
By:
/s/ John
C. Kleinert
Attorney-in-Fact
II-3
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
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1
|
.1+
|
|
Form of Underwriting Agreement
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|
3
|
.1(A)
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|
Certificate of Incorporation
|
|
3
|
.2 (X)
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|
Amendment to Certificate of Incorporation
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|
3
|
.3(N)
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|
Amended and Restated By-laws
|
|
3
|
.4(BB)
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|
Amendment to Certificate of Incorporation
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|
4
|
.1(C)
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|
Specimen Common Stock certificate
|
|
4
|
.2(S)
|
|
Loan and Security Agreement, dated as of January 27, 2005,
by and between Velocity Investments, LLC and Wells Fargo Inc.
|
|
4
|
.3(S)
|
|
General Continuing Guaranty, dated January 27, 2005,
executed by Registrant in favor of Wells Fargo Inc.
|
|
4
|
.4(S)
|
|
Security and Pledge Agreement, dated as of January 27,
2005, by and between Registrant and Wells Fargo Inc.
|
|
4
|
.5(S)
|
|
Subordination Agreement, dated as of January 27, 2005, by
and between Registrant and Wells Fargo Inc.
|
|
4
|
.6(T)
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|
Form of promissory note issued on April 15, 2007
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|
4
|
.8(K)
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|
Common Stock Purchase Warrant
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|
4
|
.9(U)
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|
Warrant to Purchase 100,000 Shares of Series A
Convertible Preferred Stock
|
|
4
|
.10(U)
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|
Specimen Series A Convertible Preferred Stock Certificate
|
|
4
|
.11(V)
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|
Common Stock Purchase Warrant
|
|
4
|
.13(W)
|
|
Form of Common Stock Warrant
|
|
4
|
.14(B)
|
|
2004 Equity Incentive Program
|
|
4
|
.15(Z)
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|
Fourth Amendment to Loan and Security Agreement, dated as of
February 29, 2008, by and between Velocity Investments, LLC
and Wells Fargo Foothill, LLC
|
|
4
|
.16(AA)
|
|
Fifth Amendment to Loan and Security Agreement, dated as of
November 1, 2008, by and between Velocity Investments, LLC
and Wells Fargo Foothill, LLC
|
|
4
|
.17+
|
|
Specimen Unit Certificate
|
|
4
|
.18+
|
|
Specimen Class A Warrant Certificate
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|
4
|
.19+
|
|
Specimen Class B Warrant Certificate
|
|
4
|
.20+
|
|
Specimen Class C Warrant Certificate
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|
4
|
.21+
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|
Form of Warrant Agreement between Continental Stock Transfer and
Trust Company and the Registrant.
|
|
5
|
.1
|
|
Opinion of Ellenoff Grossman & Schole LLP
|
|
10
|
.1(F)
|
|
Employment Contract, dated as of September 8, 2004, by and
between Registrant and James J. Mastriani
|
|
10
|
.2(G)
|
|
Independent Consulting Agreement, dated December 16, 2004,
between Registrant and The Del Mar Consulting Group, Inc.
|
|
10
|
.3(G)
|
|
Non-qualified Stock Option Agreement, dated December 16,
2004, Between Registrant and The Del Mar Consulting Group, Inc.
|
|
10
|
.4(H)
|
|
Employment Agreement, dated as of January 1, 2004, between
John C. Kleinert and STB, Inc. (n/k/a Velocity Portfolio Group,
Inc.)
|
|
10
|
.5(H)
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|
Addendum, dated September 1, 2004, to Employment Agreement,
dated as of January 1, 2004, between John C. Kleinert and
Registrant
|
|
10
|
.6(H)
|
|
Employment Agreement, dated as of January 1, 2004, between
John C. Kleinert and J. Holder, Inc.
|
|
10
|
.7(H)
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|
Addendum, dated September 1, 2004, to Employment Agreement,
dated As of January 1, 2004, between John C. Kleinert and
J. Holder, Inc.
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|
|
|
|
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Exhibit
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|
|
Number
|
|
Description
|
|
|
10
|
.8(H)
|
|
Employment Agreement, dated as of January 1, 2004, between
Velocity Investments, LLC and W. Peter Ragan, Jr.
|
|
10
|
.9(H)
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|
Addendum, dated September 1, 2004, to Employment Agreement,
dated As of January 1, 2004, between W. Peter Ragan, Jr.
and Velocity Investments, LLC
|
|
10
|
.10(H)
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|
Employment Agreement, dated as of January 1, 2004, between
VOM, LLC and W. Peter Ragan, Sr.
|
|
10
|
.11(H)
|
|
Addendum, dated September 1, 2004, to Employment Agreement,
dated As of January 1, 2004, between W. Peter Ragan, Sr.
and VOM, LLC
|
|
10
|
.12(H)
|
|
Retainer Agreement, dated as of January 1, 2005, between
Ragan & Ragan, P.C. and Velocity Investments, LLC
|
|
10
|
.13(H)
|
|
Retainer Agreement, dated as of January 1, 2005, between
Ragan & Ragan, P.C. and VOM, LLC
|
|
10
|
.14(H)
|
|
Retainer Agreement, dated as of January 1, 2005, between
Ragan & Ragan, P.C. and J. Holder, Inc.
|
|
10
|
.15(Y)
|
|
Addendum, dated January 1, 2006, to Employment Agreement,
dated as of January 1, 2004, between John C. Kleinert and
Registrant
|
|
10
|
.16(Y)
|
|
Addendum, dated January 1, 2006, to Employment Agreement,
dated As of January 1, 2004, between W. Peter Ragan, Jr.
and Velocity Investments, LLC
|
|
10
|
.17(Y)
|
|
Addendum, dated January 1, 2006, to Employment Agreement,
dated As of January 1, 2004, between W. Peter Ragan, Sr.
and VOM, LLC
|
|
10
|
.18(H)
|
|
Form of Legal Collection Agreement
|
|
10
|
.19(I)
|
|
Real Estate Joint Venture Agreement dated June 2, 2005
|
|
10
|
.20(K)
|
|
Securities Purchase Agreement dated October 27, 2005
|
|
10
|
.21(K)
|
|
Registration Rights Agreement dated October 27, 2005
|
|
10
|
.22(K)
|
|
Security Agreement dated October 27, 2005
|
|
10
|
.23(K)
|
|
Subsidiary Guarantee dated October 27, 2005
|
|
10
|
.24(L)
|
|
Form of Director Indemnification Agreement
|
|
10
|
.25(M)
|
|
First Amendment to Loan and Security Agreement by and between
Wells Fargo Inc. and Velocity Investments, L.L.C. dated as of
February 27, 2006
|
|
10
|
.26(O)
|
|
Amendment Agreement
|
|
10
|
.27(P)
|
|
Second Amendment to Loan and Security Agreement, dated
December 8, 2006
|
|
10
|
.28(P)
|
|
Third Amendment to Loan and Security Agreement, dated
February 23, 2007
|
|
10
|
.29(Q)
|
|
Agreement of Lease, dated May 2, 2007
|
|
10
|
.30(R)
|
|
Registration Rights Agreement, dated September 26, 2007
|
|
10
|
.31(BB)
|
|
Form of Lock-up Agreement
|
|
21
|
.1(D)
|
|
Subsidiaries of the registrant
|
|
23
|
.1
|
|
Consent of Weiser LLP
|
|
23
|
.2
|
|
Consent of Ellenoff Grossman & Schole LLP (contained
in Exhibit 5.1)
|
|
24
|
.1
|
|
Powers of Attorney (contained on
page II-4)
|
|
|
|
+
|
|
To be filed by amendment
|
|
|
|
A.
|
|
Incorporated by reference to Registrants Registration
Statement on
Form S-18
(File No. 33.13609A) filed with the Securities and Exchange
Commission
|
|
B.
|
|
Incorporated by reference to Registrants Definitive
Information Statement filed with the Securities and Exchange
Commission on March 19, 2004.
|
|
C.
|
|
Previously filed with Registrants Annual Report on
Form 10-KSB
for the year ended December 31, 2004.
|
|
D.
|
|
Filed as part of Amendment No. 1 to the Registration
Statement on
Form SB-2,
File
No. 333-130234,
filed with the Securities Exchange Commission on
December 29, 2005.
|
|
E.
|
|
Incorporated by reference to Schedule 13D filed by Lomond
International, Inc. with the Securities and Exchange Commission
on March 10, 2004.
|
|
|
|
F.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
September 14, 2004.
|
|
G.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
January 5, 2005.
|
|
H.
|
|
Filed as part of Amendment No. 1 to the Registration
Statement on
Form SB-2,
File
No. 333-122062,
filed with the Securities Exchange Commission on March 16,
2005.
|
|
I.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
June 22, 2005
|
|
J.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
September 7, 2005.
|
|
K.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 31, 2005
|
|
L.
|
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-QSB/A
for the quarter ended September 30, 2005 filed with the
Securities and Exchange Commission on December 2, 2005
|
|
M.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
February 28, 2006.
|
|
N.
|
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-QSB
for the quarter ended September 30, 2005 filed with the
Securities and Exchange Commission on November 15, 2005.
|
|
O.
|
|
Incorporated by reference to Registrants Current Report on
Form 10-QSB
filed with the Securities and Exchange Commission on
May 22, 2006.
|
|
P.
|
|
Incorporated by reference to Registrants Annual Report on
Form 10-KSB
filed with the Securities and Exchange Commission on
April 5, 2007
|
|
Q.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on May 8,
2007.
|
|
R.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
September 27, 2007.
|
|
S.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
February 2, 2005.
|
|
T.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
April 19, 2005.
|
|
U.
|
|
Incorporated by reference to Registrants Current Report on
Form SB-2/A
filed with the Securities and Exchange Commission on
April 18, 2006
|
|
V.
|
|
Incorporated by reference to Registrants Current Report on
Form 10-QSB
filed with the Securities and Exchange Commission on
May 22, 2006.
|
|
W.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
September 27, 2007.
|
|
X.
|
|
Incorporated by reference to Amendment No. 3 to
Registrants Registration Statement on
Form SB-2
(File No. 333130056)
|
|
Y.
|
|
Incorporated by reference to Registrants 2005 Annual
Report on
Form 10-KSB
filed with the Securities and Exchange Commission on
March 31, 2006.
|
|
Z.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K filed with the Securities Exchange Commission on
March 3, 2008.
|
|
|
|
AA.
|
|
Incorporated by reference to Registrants Current Report on
Form 8-K filed with the Securities Exchange Commission on
November 4, 2008.
|
|
BB.
|
|
Filed as part of Amendment No. 1 to Form S-1, File No.
333-153549, filed with the Securities and Exchange Commission on
November 19, 2008.
|