Note 7. Convertible Preferred Stock

The Company is authorized to issue up to 5,000,000 shares of preferred stock from time to time with such rights and privileges as the Board of Directors may determine. The Company has issued the following shares of preferred stock:

Series C Exchangeable Preferred Stock

On June 27, 2005, the Company issued 1,000,000 shares of its $0.01 par value Series C 8% Cumulative, Compounding Exchangeable Preferred Stock (the “Series C Preferred Stock”).  The Series C Preferred Stock was exchangeable for 4,782,609 shares of common stock and warrants to acquire 6,287,045 shares of common stock at an exercise price of $2.30 per share at anytime at the discretion of the preferred stockholder.

On June 30, 2011, the Company amended the terms of the Series C Preferred Stock to:

The amended certificate of designation also designated 2,800,000 shares of the total 5,000,000 authorized shares of the Company’s preferred stock as Series C Preferred Stock. Previously, only 1,000,000 shares of the Company’s authorized preferred stock was designated as Series C Preferred Stock.

An additional 588,163 shares of Series C Preferred Stock were issued to Mykonos for payment of all dividends and associated compounded interest through June 30, 2011. Accordingly, as of June 30, 2011 the Company had issued and outstanding 1,588,163 shares of Series C Preferred Stock and no accrued dividends.

The above amendments result in the classification of the Series C Preferred Stock as Stockholders' Equity in the Company's Consolidated Balance Sheet at December 31, 2011. Prior to the amendment the Series C Preferred Stock did not qualify for classification as Stockholders’ Equity and was recorded as a liability. In addition, subsequent to June 30, 2011, as a result of the amendments, the periodic accretion noted below, which was increasing the carrying amount of the Series C Preferred Stock, is no longer required. The Company is also not expected to incur interest expense on future accrued but unpaid dividends since the dividends will be paid through the issuance of additional shares of Series C Preferred Stock.

The following paragraphs outline the original terms of the Series C Preferred Stock which were in effect through June 30, 2011.

If, after June 27, 2010, the closing price of the common stock exceeds $20.00 per share for at least 120 consecutive trading days, the Company can require the conversion of the Series C Preferred Stock into common stock in accordance with the above exchange provisions.

The Series C Preferred Stock is redeemable on the tenth anniversary of the original issue date. The redemption price per share of the Series C Preferred Stock will equal the per share original issue price ($11.00 per share) plus an amount equal to all accrued but unpaid dividends thereon (and any interest payable thereon).  The interest method will be utilized to accrete the carrying amount of the Series C Preferred Stock over the ten year period to the earliest redemption date so that the carrying amount will equal the redemption amount at the earliest possible redemption date.  Due to the accumulated deficit position of the Company, the periodic accretion will be charged to Additional Paid-In Capital. Prior to the amended designation through June 30, 2011, the Company had accrued Series C Preferred Stock dividends totaling $6,469,790 and accretion to redemption value of the Series C Preferred Stock totaling $1,148,739.

Upon any liquidation of the Company, no distribution can be made to the holders of shares of common stock or other stock ranking junior to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock have received an amount per share equal to the per share original issue price plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, multiplied by a factor of 105%.

Except as otherwise required by law, the holders of shares of Series C Preferred Stock vote together with the holders of shares of the common stock of the Company on all matters submitted to the stockholders of the Company and not as a separate class, and each share of Series C Preferred Stock entitles the holder thereof to 11 votes or the equivalent amount of voting power thereof as determined by the Board of Directors. In addition, until such time that less than 500,000 shares of Series C Preferred Stock are outstanding, the Series C Preferred Stockholders have the ability to appoint a majority of the Company’s directors.

As of December 31, 2011 the Company had accrued $704,523 in Series C Preferred Stock dividends, all of which was accrued since the terms were amended June 30, 2011.

Series D 8% Cumulative, Compounding Exchangeable Preferred Stock

On June 30, 2011, the Company filed a Certificate of Designation, Preferences and Rights of Preferred Stock Designated Series D 8% Cumulative, Compounding Exchangeable Preferred Stock (“Series D Preferred Stock”) with the Secretary of State of the State of Delaware. The Series D Certificate of Designation designates 2,200,000 shares of the Company’s 5,000,000 authorized shares of preferred stock as Series D Preferred Stock.

Also on June 30, 2011, the Company issued 1,331,814 shares of its $0.01 par value Series D Preferred Stock to Crestpark as follows:

Each share of the Series D Preferred Stock is exchangeable for 18.644068 shares of common stock or a total of 24,830,431 shares of common stock if all shares of the Series D Preferred Stock were converted.

With the exception of the conversion rate into common stock and the fact that dividends and interest are payable in Series D Preferred Stock, the terms of the Series D Preferred Stock are identical in all respects to those of the Series C Preferred Stock, as amended on June 30, 2011. Accordingly, the Company's Series D Preferred Stock is classified as Stockholders' Equity in the Company's Consolidated Balance Sheets.

The Series D Preferred Stock ranks on parity with the Series C Preferred Stock, but will rank senior to all other series of preferred stock and to the common stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up

As of December 31, 2011 the Company had accrued $590,781 in Series D Preferred Stock dividends, all of which was accrued since the terms were amended June 30, 2011.

As the holder of all issued and outstanding shares of Series D Preferred Stock, Crestpark, an affiliate of Mykonos, shares the right to appoint a majority of the Company’s Board of Directors with Mykonos the holder of all issued and outstanding shares of the Company’s Series C Preferred Stock.