UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
SCHEDULE 14A
(Rule
14a-101)
INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
(Amendment
No. )
Filed by
the Registrant x
Filed by
a Party other than the Registrant ¨
Check the
appropriate box:
o Preliminary
Proxy Statement
¨ Confidential,
for Use of the Commission Only (as permitted by Rule14a-6(e)(2))
x Definitive
Proxy Statement
¨ Definitive
Additional Materials
¨ Soliciting
Material Under Rule 14a-12
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Secure
Alliance Holdings Corporation
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(Name
of Registrant as Specified in Its Charter)
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(Name
of Persons(s) Filing Proxy Statement, if Other Than the
Registrant)
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Payment
of Filing Fee (Check the appropriate box):
¨ No
fee required.
o Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title
of each class of securities to which transaction applies: Common Stock,
par value $.01 per share, of Secure Alliance Holdings Corporation
(2) Aggregate
number of securities to which transaction applies: 38,899,018 shares of
common stock
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(3)
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
The filing fee was determined by
multiplying 38,899,018 shares of common stock to be transferred under the
Merger Agreement by $0.65, the market price of each share as of February
29, 2008, divided by 50 and further divided by
100.
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(4) Proposed
maximum aggregate value of transaction: $25,284,361
(5) Total
fee paid: $5,056.98
x Fee
paid previously with preliminary materials:
¨ Check
box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount
previously paid:
(2) Form,
Schedule or Registration Statement No.:
(3) Filing
Party:
(4) Date
Filed:
Secure
Alliance Holdings Corporation
5700
Northwest Central Dr, Ste 350
Houston,
Texas 77092
April
23, 2008
To our
stockholders:
You are
cordially invited to attend a special meeting of stockholders of Secure Alliance
Holdings Corporation to be held at Courtyard
by Marriott Salt Lake City / Sandy, 10701 South Holiday Park Drive, Sandy, Utah
84070, on Thursday, May 29, 2008 at 1:00 p.m., local time. At
this meeting, we intend to seek stockholder approval of the
following:
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1.
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The
Agreement and Plan of Merger dated as of December 6, 2007 by and among
Sequoia Media Group, LC, Secure Alliance Holdings Corporation and SMG
Utah, LC, as amended by that certain Amendment No. 1 dated as of March 31,
2008 (collectively, the “Merger
Agreement”);
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2.
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An
amendment to our certificate of incorporation to effect a 1-for-2 reverse
stock split of our common stock, par value $.01 per share, such that
holders of our common stock will receive one share for each two shares
they own;
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3.
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An
amendment to our certificate of incorporation to increase the number of
authorized shares of our common stock from 100,000,000 to 250,000,000 and
to authorize a class of preferred stock consisting of 50,000,000 shares of
$.01 par value preferred stock;
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4.
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An
amendment to our certificate of incorporation to change our name from
“Secure Alliance Holdings Corporation” to “aVinci Media
Corporation”;
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5.
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Our
2008 Stock Incentive Plan;
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6.
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To
approve adjournments of the special meeting if deemed necessary to
facilitate the approval of the above proposals, including to permit the
solicitation of additional proxies if there are not sufficient votes at
the time of the special meeting, to establish a quorum or to approve the
above proposals; and
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7.
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To
transact such other business as may properly be brought before the special
meeting or any adjournment or postponement
thereof.
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Our
board of directors has unanimously approved all of the proposals described in
the proxy statement and is recommending that stockholders also approve
them.
Please
review in detail the attached proxy statement for a more complete statement
regarding the proposal to approve the Merger Agreement (proposal 1 in the proxy
statement), including a description of the Merger Agreement, the background of
the decision to enter into the Merger Agreement and the reasons that our board
of directors decided to recommend that you approve the Merger
Agreement.
Your vote
is very important to us, regardless of the number of shares you
own. Whether or not you plan to attend the special meeting, please
vote as soon as possible to make sure your shares are represented at the
meeting.
On behalf
of our board of directors, I thank you for your support and urge you to vote
“FOR” each of the proposals described in the proxy statement.
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By
Order of the Board of Directors,
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| /s/ Stephen P. Griggs | |
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Stephen
P. Griggs
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President
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Houston,
Texas, April 23, 2008
The
notice and proxy statement are first being mailed to our stockholders on or
about April 23, 2008.
Secure
Alliance Holding Corporation
5700
Northwest Central Dr, Ste 350
Houston,
Texas 77092
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD ON MAY 29, 2008
To our
stockholders:
A special
meeting of stockholders of Secure Alliance Holdings Corporation, a Delaware
corporation (the “Company” or “Secure Alliance”) will be held at Courtyard
by Marriott Salt Lake City / Sandy, 10701 South Holiday Park Drive, Sandy, Utah
84070, on Thursday, May 29, 2008 at 1:00 p.m., local time (the
“Special Meeting”). At this meeting you will be asked:
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1.
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To
consider and to vote on a proposal to approve the Agreement and Plan of
Merger dated as of December 6, 2007, by and among Sequoia Media Group, LC,
a Utah limited liability company (“Sequoia”), Secure Alliance and SMG
Utah, LC, a Utah limited liability company and wholly owned subsidiary of
Secure Alliance (“Merger Sub”), as amended by that certain Amendment No. 1
dated as of March 31, 2008 (collectively, the “Merger Agreement”), each of
which are attached as Annex A to the proxy statement, pursuant to which
Merger Sub will merge with and into Sequoia with Sequoia becoming the
surviving entity and our wholly owned subsidiary (the
“Merger”);
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2.
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To
consider and to vote on a proposal to file a certificate of amendment to
our certificate of incorporation (the “Certificate of Incorporation”) to
effect a 1-for-2 reverse stock split (the “Reverse Stock Split”) of our
common stock, par value $.01 per share (the “Common Stock”), such that
holders of our Common Stock will receive one share for each two shares
they own (the “Reverse Stock-Split
Proposal”);
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3.
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To
consider and to vote on a proposal to file a certificate of amendment to
our Certificate of Incorporation to increase the number of authorized
shares of our Common Stock from 100,000,000 to 250,000,000 and to
authorize a class of preferred stock consisting of 50,000,000 shares of
$.01 par value preferred stock (the “Capitalization
Proposal”);
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4.
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To
consider and to vote on a proposal to file a certificate of amendment to
our Certificate of Incorporation to change our name (the “Name Change”)
from “Secure Alliance Holdings Corporation” to “aVinci Media Corporation”
(the “Name Change Proposal” and, together with the Reverse Stock Split
Proposal and the Capitalization Proposal, the “Related
Proposals”);
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5.
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To
approve our 2008 Stock Incentive Plan (the “2008
Plan”);
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6.
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To
approve adjournments of the Special Meeting if deemed necessary to
facilitate the approval of the above proposals, including to permit the
solicitation of additional proxies if there are not sufficient votes at
the time of the Special Meeting, to establish a quorum or to approve the
above proposals; and
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7.
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To
transact such other business as may properly be brought before the Special
Meeting or any adjournment or postponement
thereof.
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Our
board of directors has unanimously approved, and recommends that an affirmative
vote be cast in favor of, each of the proposals listed on the proxy card and
described in the enclosed proxy statement.
Only
holders of record of our Common Stock at the close of business on April 16, 2008
(the “Record Date”), will be entitled to notice of and to vote at the Special
Meeting or any adjournment thereof.
You are
urged to review carefully the information contained in the enclosed proxy
statement prior to deciding how to vote your shares at the Special
Meeting.
Because
of the significance of the Merger, your participation in the Special Meeting, in
person or by proxy, is especially important. We hope you will be able
to attend the Special Meeting.
Whether
or not you plan to attend the Special Meeting, please complete, sign, date, and
return the enclosed proxy card promptly.
If you
attend the Special Meeting, you may revoke your proxy and vote in person if you
wish, even if you have previously returned your proxy card. Simply
attending the Special Meeting, however, will not revoke your proxy; you must
vote at the Special Meeting. If you do not attend the Special
Meeting, you may still revoke your proxy at any time prior to the Special
Meeting by providing a later dated proxy or by providing written notice of your
revocation to our Secretary. Your prompt cooperation will be greatly
appreciated.
The
notice and proxy statement are first being mailed to stockholders on or about
April 23, 2008.
Please
follow the voting instructions on the enclosed proxy card to vote either by
mail, telephone or electronically by the Internet.
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By
Order of the Board of Directors,
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| /s/ Stephen P. Griggs | |
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Stephen
P. Griggs
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President
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Houston,
Texas
April 23,
2008
Table of Contents
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Table
of Contents
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(continued)
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Page
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88
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Table
of Contents
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(continued)
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Annexes
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Annex
A – Merger Agreement and Amendment No. 1 to the Merger
Agreement
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Annex
B – Opinion of Ladenburg
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Annex
C – Form of Amendment to the Certificate of Incorporation
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Annex
D – 2008 Stock Incentive Plan
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SUMMARY TERM SHEET
The
following summary highlights selected information from this proxy statement and
may not contain all of the information that may be important to
you. Accordingly, we encourage you to read carefully this entire
proxy statement, its annexes and the documents referred to in this proxy
statement. Each item in this summary includes a page reference
directing you to a more complete description of that item. In this
proxy statement, the terms “Secure Alliance,” “Company,” “we,” “our,” “ours,”
and “us” refer to Secure Alliance Holdings Corporation, a Delaware corporation,
and its subsidiaries, and the term “Sequoia” refers to Sequoia Media Group, LC,
a Utah limited liability company.
The
Special Meeting (Page 18)
Purpose
of the Special Meeting (Page 18)
The
purpose of the Special Meeting is to vote upon the approval of the Merger
Agreement, the Related Proposals and the 2008 Plan, and such other business as
may properly be brought before the Special Meeting and any adjournment or
postponement thereof.
Record
Date and Quorum (Page 18)
You are
entitled to vote at the Special Meeting if you owned shares of Common Stock at
the close of business on April 16, 2008, the Record Date. You will
have one vote for each share of Common Stock that you owned on the Record
Date. As of the Record Date, there were 19,484,032
shares of Common Stock outstanding and entitled to be voted.
A quorum
of the holders of the outstanding shares of Common Stock must be present for the
Special Meeting to be held. A quorum is present if the holders of a
majority of the outstanding shares of Common Stock entitled to vote are present
at the meeting, either in person or represented by proxy. Abstentions
and broker non-votes are counted as present for the purpose of determining
whether a quorum is present. A broker non-vote occurs on an item when
a broker is not permitted to vote on that item without instructions from the
beneficial owner of the shares and no instructions are given.
Required
Vote (Page 18)
For us to
consummate the transactions contemplated by the Merger Agreement, including the
Related Proposals, stockholders holding at least a majority of our Common Stock
outstanding at the close of business on the Record Date must vote “FOR” the
approval and adoption of the Merger Agreement and each of the Related
Proposals. All of our stockholders are entitled to one vote per
share. A failure to vote your shares, an abstention, or a broker
non-vote, will have the same effect as a vote against approval of the Merger
Agreement and against the Related Proposals. Approval of the 2008
Plan and the proposal to adjourn the Special Meeting, if necessary or
appropriate, requires the favorable vote of a majority of the votes cast at the
Special Meeting, in person or by proxy, even if less than a quorum is
present.
Proxies;
Revocation (Pages 19)
Any
registered stockholder (meaning a stockholder that holds stock in its own name)
entitled to vote may submit a proxy by telephone or the Internet (by following
the instructions included on your proxy card) or by returning the enclosed proxy
card by mail, or may vote in person by appearing at the Special
Meeting. If you elect to submit your proxy by telephone or via the
Internet, you will need to provide a personal identification number set forth on
the enclosed proxy card upon which you will be provided the option to vote
“for,” “against” or “abstain” with respect to each of the
proposals. All valid proxies received prior to the Special Meeting
will be voted. All shares represented by a proxy will be voted, and
where a stockholder specifies by means of the proxy a choice with respect to any
matter to be acted upon, the shares will be voted in accordance with the
specification so made. If no choice is indicated on the proxy, the
shares will be voted “FOR” the Merger Agreement, “FOR” the Related Proposals,
“FOR” the 2008 Plan and as the proxy holders may determine in their discretion
with respect to any other matters that properly come before the Special
Meeting.
If your
shares are held in “street name” by your broker, you should instruct your broker
on how to vote your shares using the instructions provided by your
broker. If you do not provide your broker with instructions, your
shares will not be voted and that will have the same effect as a vote against
the Merger and the Related Proposals.
Any
registered stockholder who executes and returns a proxy card (or submits a proxy
via telephone or the Internet) may revoke the proxy at any time before it is
voted in any one of the following ways:
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filing
with or transmitting to our Secretary at our principal executive offices,
at or before the Special Meeting, an instrument or transmission of
revocation that is dated a later date than the
proxy;
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sending
a later-dated proxy relating to the same shares to our Secretary at our
principal executive offices, at or before the Special
Meeting;
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submitting
a later-dated proxy by the Internet or by telephone, at or before the
Special Meeting; or
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attending
the Special Meeting and voting in person by
ballot.
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Simply
attending the Special Meeting will not constitute revocation of a
proxy. If you have instructed your broker to vote your shares, the
above-described options for revoking your proxy do not apply and instead you
must follow the directions provided by your broker to change your
instructions.
The
Parties (Pages 21 and 59-60)
Secure
Alliance Holdings Corporation
We are a
Delaware corporation which, through our wholly owned subsidiaries, developed,
manufactured, sold and supported automated teller machine (“ATM”) products and
electronic cash security systems, consisting of Timed Access Cash Controller
(“TACC”) products and Sentinel products (together, the “Cash Security”
products).
We
completed the sale of our ATM business on January 3, 2006 and the sale of our
Cash Security business on October 2, 2006. On October 2, 2006, we
became a shell public company with approximately $12.9 million in cash, cash
equivalents and marketable securities held-to-maturity.
Before
the sale of our Cash Security and ATM businesses, we were primarily engaged in
the development, manufacturing, sale and support of ATM products and the Cash
Security products, which were designed for the management of cash within various
specialty retail markets.
Following
the sale of our Cash Security and ATM businesses, we have had substantially no
operations.
Sequoia
Media Group, LC
Sequoia
is a Utah limited liability company organized on March 28, 2003 under the name
Life Dimensions, LC. In 2003, Sequoia changed its name from Life
Dimensions, LC to Sequoia Media Group, LC. Sequoia’s operations are
currently governed by a Board of Managers made up of five managers, three of
whom are the original founders and two of whom were appointed as part of a
private equity investment. Substantially all of its business is
conducted out of its Draper, Utah office. Sequoia also has an office
in Bentonville, Arkansas to help service Wal-Mart Stores, Inc., (“Wal-Mart”),
which is one of its large retail customers.
Sequoia
has developed and deployed a software technology that employs “Automated
Multimedia Object Models,” its patent pending way of turning consumer captured
images, video, and audio into complete digital files in the form of full-motion
movies, DVD’s, photo books, posters and streaming media
files. Sequoia filed its first provisional patent in early 2004 for
patent protection on various aspects of its technology with a full filing
occurring in early 2005, and Sequoia has filed several patents since that time
as part of its intellectual property strategy. Sequoia’s technology
carries the brand names of “aVinci” and “aVinci Experience.”
Since
inception, Sequoia has continued to develop and refine its technology to be able
to provide higher quality products through a variety of distribution models
including in-store kiosks, point of scan kits, and online
downloads. Sequoia’s business strategy has been to avoid providing
traditional multimedia tools and services that focus on providing software for
users to purchase and learn how to use so that they can build their own
products, and instead provide a product solution that provides users with
professionally created templates to be able to automatically create personalized
products by simply adding end customer images.
Sequoia
currently makes software technology that it packages in various forms available
to mass retailers, specialty retailers, Internet portals and web sites that
allow end consumers to use an automated process to create products such as DVD
productions, photo books, posters, calendars, and other print media products
from consumer photographs, digital pictures, video, and other
media. Sequoia’s customers are retailers and other vendors and not
end consumers. Sequoia enables its customers to sell its products to
the end consumer who remain customers of its vendor and do not become its
customers directly. Sequoia currently delivers its technology to end
consumers through (i) third party photo kiosks at mass and specialty retail
outlets, (ii) point of scan shrink wrapped software at mass and specialty retail
outlets, (iii) simple software downloads through third party Internet sites,
(iv) simple software downloads though its own managed Internet site to which
third party Internet sites are linked, and (v) on its own managed web servers on
the world wide web to which third party Internet sites are linked.
The
Merger (Page 88-89)
The
proposed Merger will result in (i) the merger of Merger Sub with and into
Sequoia, with Sequoia becoming the surviving entity and our wholly owned
subsidiary, pursuant to the Merger Agreement, as amended, and (ii) each Sequoia
membership interest automatically converting into the right to receive
0.87096285 shares of our Common Stock after giving effect to the Reverse Stock
Split (the “Merger Consideration”). Accordingly, as a result of the
Merger, each member of Sequoia prior to the Merger will have their Sequoia
membership interests converted into shares of Secure Alliance and will be
stockholders of Secure Alliance after the Merger. The total value of the Merger
Consideration is approximately $46.0 to 48.0 million. Immediately
following the Merger, the members of Sequoia, in the aggregate, will own
approximately 80% or an aggregate of approximately 38,899,018 post-split shares
of our Common Stock. Our stockholders as of the Record Date will own
the remaining approximately 20% of Common Stock in the combined
company. As a result of the Merger, the combined company will consist
of Secure Alliance’s assets, which are primarily cash and cash equivalents, as
well as all of Sequoia’s assets, business and operations. For more
information on the business operations of Sequoia, see “The Transactions –
Information Related to Sequoia” and “The Transactions – Sequoia’s Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
On March
31, 2008, we amended the Merger Agreement to, among other things, (i) effect a
1-for-2 reverse stock split instead of a 1-for-3 reverse stock split, (ii)
provide that, immediately prior to the effectiveness of the Merger, we will
declare and pay to our stockholders existing as of the Record Date, a cash
dividend equal to approximately $2.0 million (the “Dividend”) instead of
distributing to stockholders common stock of a newly formed company with certain
enumerated assets that were to be transferred to it by the Company, (iii)
amend the amount of the proposed Merger Consideration to be provided under the
Merger Agreement, such that each issued and outstanding Sequoia equity interest
will automatically be converted into the right to receive 0.87096285 shares of
our Common Stock instead of the right to receive 0.5806419 shares of our Common
Stock, which adjustment was made to account for the change from a 1-for-3
reverse stock split to a 1-for-2 reverse stock split, and
(iv) remove the closing condition that we have not less than $9.8 million in net
cash or cash equivalents. The Merger Agreement was
amended to provide for a 1-for-2 reverse stock split instead of a 1-for-3
reverse stock split primarily to ensure sufficient shares were available in the
public float to help avoid large pricing fluctuations. The Merger
Consideration was adjusted as a result of the change from a 1-for-3 reverse
stock split to a 1-for-2 reverse stock split to provide for no change to the
respective equity ownership levels following the Merger. The
distribution to stockholders in the form of the Dividend was reduced slightly
from the distribution originally contemplated in exchange for the removal of the
closing condition that we will have not less than $9.8 million in net cash or
cash equivalents. Upon payment of the Dividend, our stockholders will
receive approximately $.103 per share of common stock owned.
Reasons
for the Merger (Page 25)
Our board
of directors (the “Board”) approved the Merger and Related Proposals based on a
number of factors, including among other things:
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we
have been a shell public company since October 2006 with substantially no
operations or employees and Sequoia can provide an experienced management
team and operating business;
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at
the time the Merger Agreement was signed, the Board received no other firm
merger proposals or strategic alternatives to improve the Company’s
financial position;
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the
Board received a fairness opinion from Ladenburg Thalmann & Co. Inc.
(“Ladenburg”) which stated that based upon and subject to the
considerations and assumptions set forth in such opinion, the Merger
Consideration given to members of Sequoia is fair, from a financial point
of view, to our stockholders;
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the
Company has the ability to engage in discussion and negotiations with
third parties that make unsolicited superior proposals;
and
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a
merger with Sequoia may improve stockholder
value.
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In
addition, the Company weighed certain risks inherent with a merger transaction,
including those described under “Risk Factors” beginning on page
28. Based on these factors, the Board determined that the Merger was
in the best interests of our stockholders.
Effects
of the Merger (Page 41)
Immediately
following the Merger, the members of Sequoia will own on a nondiluted basis, in
the aggregate, 38,899,018 post-split shares of our Common Stock and our current
stockholders will own approximately 20% of the Company’s outstanding Common
Stock on a nondiluted basis. Although this represents substantial
dilution of the percentage ownership interest of current stockholders, we will
receive the benefit of Sequoia’s operations as consideration in the Merger,
since we have had substantially no operations since October 2006. We
believe Sequoia has an equity value in the range of $40.2 million to $62.8
million, which upon consummation of the Merger will increase the value of Secure
Alliance significantly. Following the Merger, we will have a total of
48,619,680 shares of Common Stock outstanding. In addition, in
connection with the Merger, stockholders of Secure Alliance, prior to the
effective date of the Merger, will receive the Dividend.
If the
Merger Agreement is not approved and the Merger is not completed, our business
may be adversely affected. The market price of our Common Stock may
decline to the extent that the current market price reflects a market assumption
that the Merger and the Related Proposals will be completed and many costs
related to the Merger and the Related Proposals, such as legal, accounting,
financial advisor and financial printing fees, have to be paid regardless of
whether the Merger is completed.
Interests
of our Directors and Executive Officers in the Merger (Page 41)
Our
directors and executive officers may have interests in the Merger that are
different from, or in addition to, yours, including options to purchase 950,000
shares of Common Stock held by each of Jerrell G. Clay and Stephen P. Griggs,
that, pursuant to the terms of the 1997 Long Term Incentive Plan will become
fully vested upon the consummation of the Merger.
Opinion
of Ladenburg (Page 41 and Annex B)
Ladenburg has delivered
its opinion to our Board that, as of the date of its opinion and based upon and
subject to the factors and assumptions set forth therein, the Merger
Consideration is fair, from a financial point of view, to our unaffiliated
stockholders. The Ladenburg opinion was based on a reverse stock
split of 1-for-3 and the Merger Consideration of 0.5806419 shares of our Common
Stock. Subsequently,
we amended the Merger Agreement to provide for, among other things, a Reverse
Stock Split of 1-for-2 with a corresponding change to the Merger Consideration
and the distribution of a cash Dividend instead of distributing stock of a newly
formed subsidiary with certain enumerated assets that were to be contributed to
it by the Company. Ladenburg has not reviewed the amendment to the Merger
Agreement. Although our Board believes the amendment to the Merger Agreement
does not materially impact Ladenburg’s fairness opinion, there can be no
assurance that Ladenburg’s opinion is still accurate.
The
opinion of Ladenburg is addressed to the Board for their benefit and use and was
rendered in connection with its consideration of the Merger and does not
constitute a recommendation to any of our stockholders as to how to vote in
connection with the Merger and Related Proposals. The opinion of
Ladenburg does not address our underlying business decision to pursue the
Merger, the relative merits of the Merger as compared to any alternative
business strategies that might exist for us, the financing of the Merger or the
effects of any other transaction in which the Company might
engage. The full text of the written opinion of Ladenburg, dated
November 29, 2007, which sets forth the procedures followed, limitations on the
review undertaken, matters considered and assumptions made in connection with
such opinion, is attached as Annex B to this proxy statement. We
recommend that you read the opinion carefully in its entirety.
Indemnification
and Insurance (Page 51)
The
Merger Agreement provides that all rights to indemnification or exculpation
existing in favor of the employees, agents, directors (including two former
directors) or officers of the Company and our subsidiaries in effect on the date
of the Merger Agreement, will continue in full force and effect for a period of
six years after the Merger. Additionally, we will purchase a single
payment, run-off policy or policies of directors’ and officers’ liability
insurance covering such parties for a period of six years after the
Merger. We will also indemnify and hold harmless such parties in
respect of acts or omissions occurring at or prior to the closing of the
Merger.
Loan
Agreement with Sequoia (Page 51)
Pursuant
to a Loan and Security Agreement (“Loan Agreement”) dated as of December 6, 2007
by and between the Company and Sequoia, we have agreed to extend (and have
extended) $2.5 million in secured financing to Sequoia. Under the
terms of the Loan Agreement, Sequoia has agreed to pay interest on the loan at a
rate per annum equal to 10%. Interest on the loan is payable on
December 31, 2008, the scheduled maturity date. In addition, if the
loan obligations have not been paid in full on or prior to the scheduled
maturity date, a monthly fee equal to 10% of the outstanding loan obligations is
payable to us by Sequoia on the last day of each calendar month for which the
loan obligations remain outstanding.
We
entered into the Loan Agreement to provide Sequoia with additional capital for
working capital purposes and to provide Sequoia with additional liquidity until
the Merger. If the Merger is not approved, the Loan Agreement
provides for Sequoia to repay the loan as set forth above, on the terms and
conditions set forth in the Loan Agreement.
Material
United States Federal Income Tax Consequences (Page 52)
We do not
expect that the proposals will result in any federal income tax consequences to
our stockholders. However, to the extent we declare and pay the Dividend, a
portion of the distribution may be taxable as “qualified dividend income”,
generally taxable at a federal rate of 15%, to the extent paid out of a
stockholder’s pro rata share of our current or accumulated earnings and
profits. Any portion of the distribution in excess of each holder’s
pro rata share of our earnings and profits will be treated first as a tax-free
return of capital to the extent of each stockholder’s tax basis in his, her or
its shares of our Common Stock, with any remaining portion treated as capital
gain. Non-United States holders of our Common Stock generally will be subject to
withholding on the gross amount of the distribution at a rate of 30% or such
lower rate as may be permitted by an applicable income tax treaty. Because
individual tax circumstances of stockholders vary, stockholders should consult
their own tax advisors regarding the tax consequences to them of the
distribution.
Regulatory
Approvals (Page 52)
We are
unaware of any material federal, state or foreign regulatory requirements or
approvals required for the execution of the Merger Agreement or completion of
the Merger.
Exclusivity;
No Solicitation of Transactions (Page 91)
The
Merger Agreement restricts our ability to solicit or engage in discussions or
negotiations with third parties regarding specified transactions involving the
Company. Notwithstanding these restrictions, under certain limited
circumstances required for our Board to comply with its fiduciary duties, our
Board may respond to an unsolicited written bona fide proposal for an
alternative transaction, change its recommendation in support of the Merger or
terminate the Merger Agreement and enter into an agreement with respect to a
superior proposal after paying a termination fee specified in the Merger
Agreement.
Conditions
to Merger (Page 94)
The
Merger Agreement is subject to customary closing conditions including, among
other things, (i) the approval of the Merger Agreement and Related Proposals by
our stockholders as set forth in this proxy statement, (ii) the sufficiency of
shares of our capital stock authorized to complete the Merger, and (iii) the
accuracy of each party’s representations and warranties.
The
approval of the 2008 Plan is not a condition to the consummation of the Merger,
but is being proposed in connection with the Merger and will not be presented at
the meeting for a vote if the Related Proposals that are conditions to the
Merger are not approved or waived (where practical). If the Reverse
Stock Split Proposal or the Capitalization Proposal is not approved, we cannot
effect the Merger or the other transactions contemplated by the Merger Agreement
because we will not have sufficient shares to issue to Sequoia to consummate the
Merger. Accordingly, although each of Sequoia and us have the contractual right
to waive these conditions, as a practical matter they may not both be waived. If
the Name Change Proposal is not approved, absent a waiver by Sequoia and us, we
cannot effect the Merger or the other transactions contemplated by the Merger
Agreement.
Termination
Fee (Page 91)
Should
the Merger Agreement be terminated before consummation by the Company in
connection with the Company’s acceptance of a superior proposal, the Company has
agreed to pay Sequoia a termination fee of $1,000,000 in cash under certain
circumstances.
No
Right of Appraisal (Page 118)
You will
not experience any change in your rights as a stockholder as a result of the
Merger or Related Proposals. None of Delaware law, our Certificate of
Incorporation or our bylaws provides for appraisal or other similar rights for
dissenting stockholders in connection with the Merger or the Related
Proposals. Accordingly, you will have no right to dissent and obtain
payment for your shares.
Board
Composition and Management following the Merger (Page 52)
Upon
completion of the Merger, Jerrell G. Clay, our Chief Executive Officer, and
Stephen P. Griggs, our President, Chief Operating Officer, Principal Financial
Officer and Secretary, will resign from the Company, but will remain directors
on our Board. Following the merger, we expect our directors and
executive officers to be as follows: Chett B. Paulsen, as President, Chief
Executive Officer and director, Richard B. Paulsen, as Vice President, Chief
Technology Officer and director, Edward B. Paulsen, as Secretary/Treasurer,
Chief Operating Officer and director, Terry Dickson, as Vice President of
Marketing and Business Development and Tod M. Turley and John E. Tyson as
directors.
Reverse
Stock Split Proposal (Page 100)
On or
prior to the closing date of the Merger and subject to the approval of our
stockholders, we will amend and restate our Certificate of Incorporation in
order to effect the 1-for-2 Reverse Stock Split. The Reverse Stock
Split is a condition to the consummation of the Merger to ensure a sufficient
number of shares are available for issuance to Sequoia. The Reverse
Stock Split will also have the effect of reducing the number of shares of Common
Stock issued and outstanding, which may correspondingly increase the price per
share of our Common Stock. If the Merger is not consummated, this
proposal to amend our Certificate of Incorporation will not take
effect. The form of amendment for the Reverse Stock Split Proposal is
attached to this proxy statement as Annex C.
Capitalization
Proposal (Page 102)
On or
prior to the closing date of the Merger and subject to approval of our
stockholders, we will amend and restate our Certificate of Incorporation in
order to increase the authorized share capital of the Company to 250,000,000
shares of Common Stock and 50,000,000 shares of preferred stock, par value $.01
per share. The Capitalization Proposal is a condition to the
consummation of the Merger and is necessary because the Company’s current
authorized share capitalization is insufficient to issue the number of shares
necessary to complete the Merger. Increasing the authorized share
capital of the Company should provide us with the shares necessary to complete
the Merger and to address any future needs. If the Merger is not
consummated, this proposal to amend our Certificate of Incorporation will not
take effect. The form of amendment for the Capitalization Proposal is
attached to this proxy statement as Annex C.
Name
Change Proposal (Page 104)
Upon the
consummation of the Merger and subject to approval of our stockholders, we will
amend and restate our Certificate of Incorporation in order to change our name
from “Secure Alliance Holdings Corporation” to “aVinci Media
Corporation”. If the Merger is not consummated, this proposal to
amend our Certificate of Incorporation will not take effect. The form
of amendment for the Name Change is attached to this proxy statement as Annex
C.
2008
Plan Proposal (Page 105)
The 2008
Plan will take effect upon the consummation of the Merger, subject to approval
of our stockholders. If the Merger is not consummated, the 2008 Plan
will not take effect. The 2008 Plan is attached to this proxy
statement as Annex D.
Recommendation
of our Board (Page 99)
Our Board
has:
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·
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determined
that the Merger Agreement and Merger are advisable and fair to and in the
best interests of the Company and its unaffiliated
stockholders;
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·
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approved
and adopted the Merger Agreement, the Related Proposals and the 2008 Plan;
and
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·
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recommended
that our stockholders vote “FOR” the approval and adoption of the Merger
Agreement and “FOR” the approval and adoption of each of the Related
Proposals and “FOR” the approval and adoption of the 2008
Plan.
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In
considering the recommendation of the Board with respect to the Merger, you
should be aware that some of our directors and executive officers may have
interests in the Merger that are different from, or in addition to, the
interests of our stockholders generally. For the factors considered
by our Board in reaching its decision to approve and adopt the Merger Agreement,
see “The Transactions-- Reasons for the Merger.”
In
addition, the Merger Agreement has been approved by Sequoia’s Board of Managers
and a majority of the members of Sequoia.
QUESTIONS AND ANSWERS ABOUT THE MERGER
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Q.
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Why
are our stockholders receiving these
materials?
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A.
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Our
Board is sending these proxy materials to provide our stockholders with
information about the Merger, the Merger Agreement, the Related Proposals
and the 2008 Plan, so that you may determine how to vote your shares in
connection with the Special
Meeting.
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Q.
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When
and where is the Special Meeting?
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A.
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The
special meeting will be held on Thursday, May 29, 2008 at Courtyard by
Marriott Salt Lake City / Sandy, located at 10701 South Holiday Park
Drive, Sandy, Utah 84070, at 1:00 p.m., local
time.
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Q.
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Who
is soliciting my proxy?
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A.
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This
proxy is being solicited by the
Board.
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Q.
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Who
is paying for the solicitation of
proxies?
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A.
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We
will bear the cost of solicitation of proxies by us. In
addition to soliciting stockholders by mail, our directors, officers and
employees, without additional remuneration, may solicit proxies in person
or by telephone or other means of electronic communication. We
will not pay these individuals for their solicitation activities but will
reimburse them for their reasonable out-of-pocket
expenses. Brokers and other custodians, nominees and
fiduciaries will be requested to forward proxy-soliciting material to the
owners of stock held in their names, and we will reimburse such brokers
and other custodians, nominees and fiduciaries for their reasonable
out-of-pocket costs. Solicitation by our directors, officers
and employees may also be made of some stockholders in person or by mail,
telephone or other means of electronic communication following the
original solicitation.
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Q.
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What
will be voted on at the Special
Meeting?
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A.
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You
are being asked to approve the following
proposals:
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the
Merger Agreement;
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a
certificate of amendment to our Certificate of Incorporation to effect the
1-for-2 Reverse Stock Split;
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a
certificate of amendment to our Certificate of Incorporation to increase
the number of authorized shares of our Common Stock from 100,000,000 to
250,000,000 and to authorize a class of preferred stock consisting of
50,000,000 shares of $.01 par value preferred
stock;
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a
certificate of amendment to our Certificate of Incorporation to change our
name from “Secure Alliance Holdings Corporation” to “aVinci Media
Corporation”;
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the
2008 Plan; and
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adjournments
of the Special Meeting if deemed necessary to facilitate the approval of
the above proposals, including to permit the solicitation of additional
proxies if there are not sufficient votes at the time of the Special
Meeting to establish a quorum or to approve the above
proposals.
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The
Related Proposals and 2008 Plan, if approved, will take effect only if the
Merger is consummated.
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Q.
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Why
does the Merger Agreement provide for the amendment of our Certificate of
Incorporation?
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A.
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The
Merger Agreement provides for the amendment of our Certificate of
Incorporation to effect the Reverse Stock Split, the Capitalization
Proposal and the Name Change. Specifically, we will need to
amend our Certificate of Incorporation to effect the Reverse Stock Split
to ensure a sufficient number of shares are available for issuance to
Sequoia upon consummation of the Merger. The Reverse Stock
Split will also have the effect of reducing the number of shares of Common
Stock issued and outstanding, which may correspondingly increase the price
per share of our Common Stock. We will also need to amend our
Certificate of Incorporation to effect the Capitalization Proposal because
we will be issuing an additional 38,899,018 shares of Common Stock upon
the consummation of the Merger. We currently have 78,461,176
shares of Common Stock available for issuance. The increase in
the number of authorized shares, in addition to the creation of a class of
preferred stock, will ensure that sufficient shares are available to be
issued in connection with the Merger and that an adequate number of shares
will be available for future
business.
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The
amendments to our Certificate of Incorporation will take effect only if the
Merger is consummated.
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Q.
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What
will I receive in the Merger?
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A.
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In
connection with the Merger, prior to the effective date of the Merger, we
will declare and pay the Dividend. Upon payment of the
Dividend, our stockholders will receive approximately $.103 per share of
common stock owned. Following the Merger, our stockholders will
remain stockholders of the combined company, although their ownership
interests will be substantially diluted by the shares issued related to
the Merger. However, as a result of the Merger, the combined
company will consist of Secure Alliance’s assets, which are primarily cash
and cash equivalents, as well as all of Sequoia’s assets, business and
operations.
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Q.
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How
does the Board recommend that I vote on the
proposals?
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A.
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Our
Board unanimously recommends that you vote “FOR” all of the proposals
submitted.
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Q.
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What
vote is required to approve the
proposals?
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A.
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For
us to consummate the transactions contemplated by the Merger Agreement,
including the Related Proposals, stockholders holding at least a majority
of Common Stock outstanding at the close of business on the Record Date
must vote “FOR” the approval and adoption of the Merger Agreement and each
of the Related Proposals. The 2008 Plan requires the favorable
vote of a majority of the votes cast at the Special Meeting, in person or
by proxy, even if less than a
quorum.
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Q.
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Who
may attend the special meeting?
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A.
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All
of our stockholders who owned shares on April 16, 2008, the Record Date
for the Special Meeting, may
attend.
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Q.
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Who
may vote at the special meeting?
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A.
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Only
holders of record of our Common Stock as of the close of business on the
Record Date, may vote at the Special Meeting. As of the Record
Date, we had 19,484,032
outstanding shares of our Common Stock entitled to
vote.
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Q.
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If
I hold my shares in “street name” through my broker, will my broker vote
my shares for me?
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A.
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Your
broker will vote your shares only if you provide instructions on how to
vote. If you do not provide your broker with instructions on
how to vote, your broker's non-votes will have the same effect as votes
AGAINST approval of the Merger Agreement and the Related Proposals and
will have no effect on the vote regarding the 2008 Plan. A broker non-vote
occurs on an item when a broker is not permitted to vote on that item
without instructions from the beneficial owner of the shares and no
instructions are given. To avoid a broker non-vote with respect
to your shares, you should follow the directions provided by your broker
regarding how to instruct your broker to vote your
shares.
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Q.
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What
constitutes a quorum at the Special
Meeting?
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A.
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A
quorum is present if the holders of a majority of the outstanding shares
of Common Stock entitled to vote are present at the meeting, either in
person or represented by proxy. Abstentions and broker
non-votes are counted as present for the purpose of determining whether a
quorum is present.
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Q.
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What
happens if I withhold my vote or abstain from
voting?
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A.
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If you withhold a vote or
abstain from voting on the proposal for the adoption of the Merger
Agreement and the approval of the Related Proposals, it will have the same
effect as a vote “AGAINST” the proposals. Approval of
the 2008 Plan and the proposal to adjourn the Special Meeting, if
necessary or appropriate, requires the favorable vote of a majority of the
votes cast at the Special Meeting, in person or by proxy, even if less
than a quorum, and, therefore, withholding a vote or abstaining from
voting will have no effect on the proposals to approve the 2008 Plan or to
adjourn the Special Meeting.
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Q.
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What
do I need to do now?
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A.
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After
you read and consider the information in this proxy statement, return your
signed proxy card in the enclosed return envelope or vote by telephone or
the Internet by following the instructions included on your proxy card as
soon as possible, so that your shares may be represented at the Special
Meeting. You should return your proxy card or vote by telephone
or the Internet whether or not you plan to attend the
meeting. If you do attend the meeting, you may revoke your
proxy at any time before it is voted and vote in person if you
wish.
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Q.
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How
do I vote?
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A.
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You
may vote either by casting your vote in person at the meeting, or by
marking, signing and dating each proxy card you receive and returning it
in the prepaid envelope, by telephone, or electronically through the
Internet by following the instructions included on your proxy
card.
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The
telephone and Internet voting procedures are designed to authenticate
votes cast by use of a personal identification number. The procedures,
which are designed to comply with Delaware law, allow stockholders to
appoint a proxy to vote their shares and to confirm that their
instructions have been properly
recorded.
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If
you hold your shares in “street name” through a broker or other nominee,
you may be able to vote by telephone or electronically through the
Internet in accordance with the voting instructions provided by that
institution.
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Q.
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What
do I do if I want to change my vote after I return my proxy card, or after
I vote by telephone or
electronically?
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A.
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You
can change your vote at any time before your proxy is voted at the Special
Meeting. You can do this in one of four ways. First,
you can send a written notice stating that you would like to revoke your
proxy. Second, you can complete and submit a new proxy card at
a later date. If you choose either of these methods, you must
submit your notice of revocation or your new proxy card to us so that it
is received before the Special Meeting. Third, you can vote
again by telephone or the Internet. Finally, you can attend the
Special Meeting and vote in person. Simply attending the
Special Meeting, however, will not revoke your proxy. If you
have instructed a broker to vote your shares, you must follow directions
received from your broker to change your
vote.
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Q.
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If
the proposals are approved and completed, what do I do with my stock
certificate upon the completion of the Reverse Stock
Split?
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A.
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Nothing
now. As soon as practicable after the filing of the amendment
to our Certificate of Incorporation effecting the Reverse Stock Split,
stockholders will be notified and provided the opportunity (but shall not
be obligated) to surrender their certificates to an exchange agent in
exchange for certificates representing post-split Common
Stock. Stockholders will not receive certificates for shares of
post-split Common Stock unless and until the certificates representing
their shares of pre-split Common Stock are surrendered and they provide
such evidence of ownership of such shares as we or the exchange agent may
require. Stockholders should not forward their certificates to
the exchange agent until they have received notice from us that the
Reverse Stock Split has become effective. Beginning on the
Reverse Stock Split effective date, each certificate representing shares
of our pre-split Common Stock will be deemed for all purposes to evidence
ownership of the appropriate number of shares of post-split Common
Stock.
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Q.
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Will
the Merger or the consummation of the Related Proposals be taxable to
me?
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A.
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No. We
do not expect that the Merger or consummation of the Related Proposals
will result in any federal income tax consequences. However, to
the extent we declare and pay the Dividend, a portion of the distribution
may be taxable as “qualified dividend income”, generally taxable at a
federal rate of 15%, to the extent paid out of a stockholder’s pro rata
share of our current or accumulated earnings and profits. Any
portion of the distribution in excess of each holder’s pro rata share of
our earnings and profits will be treated first as a tax-free return of
capital to the extent of each stockholder’s tax basis in his, her or its
shares of our Common Stock, with any remaining portion treated as capital
gain. Non-United States holders of our Common Stock generally will be
subject to withholding on the gross amount of the distribution at a rate
of 30% or such lower rate as may be permitted by an applicable income tax
treaty. Because individual tax circumstances of stockholders vary,
stockholders should consult their own tax advisors regarding the tax
consequences to them of the
distribution.
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Q.
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Who
can I contact with questions?
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A.
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If
you have questions about the Special Meeting or the transactions after
reading this proxy statement, you should contact our proxy solicitor,
Mackenzie Partners, Inc. at 105 Madison Avenue, 14th Floor, New York, New
York 10016, or call collect at (212) 929-5500 or toll free at (800)
322-2885.
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GENERAL INFORMATION ABOUT THE SPECIAL MEETING
Place and Time. The
meeting will be held at Courtyard
by Marriott Salt Lake City / Sandy, 10701 South Holiday Park Drive, Sandy, Utah
84070 on Thursday, May 29, 2008 at 1:00 p.m., local time.
Record Date and
Voting. Our Board fixed the close of business on April 16,
2008, as the Record Date for the determination of holders of our outstanding
shares entitled to notice of and to vote on all matters presented at the Special
Meeting. Such stockholders will be entitled to one vote for each
share held on each matter submitted to a vote at the Special
Meeting. As of the Record Date, there were 19,484,032
shares of Common Stock, issued and outstanding, each of which is entitled
to one vote on each matter to be voted upon. You may vote in person
or by proxy.
Purpose of the Special
Meeting. The purpose of the Special Meeting is to vote upon
the (i) approval of the Merger Agreement; (ii) approval of the Related
Proposals, (iii) approval of the 2008 Plan, (iv) adjournment of the Special
Meeting, if necessary, including to permit the solicitation of additional
proxies if there are not sufficient votes at the time of the Special Meeting to
approve the Merger Agreement, the Related Proposals and the 2008 Plan; and (v)
such other business as may properly be brought before the Special Meeting and
any adjournment or postponement thereof.
Quorum. The
required quorum for the transaction of business at the Special Meeting is a
majority of the votes eligible to be cast by holders of shares of Common Stock
issued and outstanding on the Record Date. Shares that are voted
“FOR,” “AGAINST” a proposal or marked “ABSTAIN” are treated as being present at
the Special Meeting for purposes of establishing a quorum and are also treated
as shares entitled to vote at the Special Meeting with respect to such
proposal.
Abstentions and Broker
Non-Votes. Broker “non-votes” and the shares of Common Stock
as to which a stockholder abstains are included for purposes of determining
whether a quorum of shares of Common Stock is present at a meeting. A
broker “non-vote” occurs when a nominee holding shares of Common Stock for the
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to that item and has not
received instructions from the beneficial owner. Since the Merger
Agreement and Related Proposals require the approval of the holders of a
majority of our shares outstanding, both broker “non-votes” and abstentions
would have the same effect as votes against such proposals. With
respect to the proposals to adopt the 2008 Plan and approve the adjournment of
the Special Meeting if deemed necessary, neither broker “non-votes” nor
abstentions are included in the tabulation of the voting results and, therefore,
they do not have the effect of votes against such proposals.
Voting of
Proxies. Our Board is asking for your proxy. Giving
the Board your proxy means you authorize it to vote your shares at the Special
Meeting in the manner you direct. After carefully reading and
considering the information contained in this proxy statement, you should either
complete, date and sign the enclosed proxy card and mail the proxy card in the
enclosed return envelope as soon as possible or promptly submit your proxy by
telephone or over the Internet following the instructions on the proxy card so
that your shares of Common Stock are represented at the Special Meeting, even if
you plan to attend the Special Meeting in person. The telephone and
Internet voting procedures are designed to authenticate votes cast by use of a
personal identification number. The procedures, which are designed to comply
with Delaware law, allow stockholders to appoint a proxy to vote their shares
and to confirm that their instructions have been properly recorded. If you hold
your shares in “street name” through a broker or other nominee, you may be able
to vote by telephone or electronically through the Internet in accordance with
the voting instructions provided by that institution.
All valid
proxies received prior to the Special Meeting will be voted. All
shares represented by a proxy will be voted, and where a stockholder specifies
by means of the proxy a choice with respect to any matter to be acted upon, the
shares will be voted in accordance with the specification so made. If
no choice is indicated on the proxy, the shares will be voted “FOR” the Merger
Agreement, “FOR” the Related Proposals, “FOR” the 2008 Plan and as the proxy
holders may determine in their discretion with respect to any other matters that
properly come before the Special Meeting. A stockholder giving a
proxy has the power to revoke his or her proxy, at any time prior to the time it
is voted, by delivering to our Secretary a written instrument that revokes the
proxy or a validly executed proxy with a later date, or by attending the Special
Meeting and voting in person. The form of proxy accompanying this
proxy statement confers discretionary authority upon the named proxy holders
with respect to amendments or variations to the matters identified in the
accompanying Notice of Special Meeting and with respect to any other matters
that may properly come before the Special Meeting. As of the date of
this proxy statement, management knows of no such amendment or variation or of
any matters expected to come before the Special Meeting that are not referred to
in the accompanying Notice of Special Meeting.
Attendance at the Special
Meeting. Only holders of Common Stock, their proxy holders and
guests we may invite may attend the Special Meeting. If you wish to
attend the Special Meeting in person but you hold your shares through someone
else, such as a stockbroker, you must bring proof of your ownership and
identification with a photo at the Special Meeting. For example, you
could bring an account statement showing that you beneficially owned shares of
Common Stock as of the Record Date as acceptable proof of
ownership.
Accounting
Information. Representatives of our independent registered
public accountants, Hein & Associates LLP, are expected to be present at the
Special Meeting to answer appropriate questions. They will also have
the opportunity to make a statement if they desire to do so.
Costs of
Solicitation. We will bear the cost of printing and mailing
proxy materials, including the reasonable expenses of brokerage firms and others
for forwarding the proxy materials to beneficial owners of Common
Stock. In addition to solicitation by mail, solicitation may be made
by certain of our directors, officers and employees, or firms specializing in
solicitation; and may be made in person or by telephone or
telegraph. No additional compensation will be paid to any of our
directors, officers or employees for such solicitation. We have
retained Mackenzie Partners, Inc., 105 Madison Avenue, 14th Floor, New York, New
York 10016, as proxy solicitor, for a fee of $7,500
plus out-of-pocket expenses.
Stockholder Nominations and
Proposals. The Company’s By-Laws require stockholders to
provide advance notice prior to bringing business before an annual meeting or to
nominate a candidate for director at the meeting. In order for a
stockholder to properly bring business or propose a director at the 2009 annual
meeting of stockholders, the stockholder must give written notice to the
Company. To be timely, a stockholder’s notice must be received by the
Company not less than 45 days prior to the anniversary of the mailing of the
prior years’ annual meeting of stockholders proxy. These procedures
apply to any matter that a stockholder wishes to raise at the 2009 annual
meeting of stockholders, other than those raised pursuant to 17 C.F.R.
§240.14a-8 of the Rules and Regulations of the SEC.
THE
TRANSACTIONS
This
section of the proxy statement describes certain aspects of the Merger, the
Merger Agreement and the Related Proposals. While we believe that the
description covers the material terms of the Merger and the transactions
contemplated thereby, this summary may not contain all of the information that
may be important to you. You should read carefully this entire
document and the other documents referred to in this proxy statement, including
the Merger Agreement, for a more complete understanding of the Merger and the
transactions contemplated thereby. Unless otherwise defined in this
section, all capitalized terms used in this section have the meanings ascribed
to them in the section titled “Summary.”
Background
of the Merger
We are a
Delaware corporation which, through our wholly owned subsidiaries, developed,
manufactured, sold and supported ATM products and electronic cash security
systems, consisting of TACC products and Sentinel products.
We
completed the sale of our ATM business on January 3, 2006 and the sale of our
Cash Security business on October 2, 2006. On October 2, 2006, we
became a shell public company with approximately $12.9 million in cash, cash
equivalents and marketable securities held-to-maturity.
Before
the sale of our Cash Security and ATM businesses, we were primarily engaged in
the development, manufacturing, sale and support of ATM products and the Cash
Security products, which were designed for the management of cash within various
specialty retail markets.
On
September 25, 2006, the holders of a majority of shares of our outstanding stock
approved a proposal that we amend our Certificate of Incorporation and change
our name from “Tidel Technologies, Inc.” to “Secure Alliance Holdings
Corporation.” In addition, our subsidiaries effected the following
name changes at or about the same time: Tidel Engineering, L.P. changed its name
to Secure Alliance, L.P., Tidel Cash Systems, Inc. changed its name to Secure
Alliance Cash Systems, Inc. and Tidel Services, Inc. changed its name to Secure
Alliance Services, Inc.
Following
the sale of our Cash Security and ATM businesses, we have had substantially no
operations.
In March
2007, one of our stockholders and an investor of Sequoia contacted Jerrell G.
Clay, our Chief Executive Officer, and Stephen P. Griggs, our President, Chief
Operating Officer, Principal Financial Officer and Secretary, regarding a
potential business combination or other strategic transaction with
Sequoia.
During
the first few weeks of March 2007, our management received certain business and
financial information about Sequoia, including an investment overview and
presentation from one of Sequoia’s outside directors, Tod M.
Turley. Mr. Turley also provided an overview of Amerivon Holdings
LLC, a private equity group that is a significant investor in Sequoia (“Amerivon
Holdings”).
On March
16, 2007, our management team met in Sugarland, Texas with Sequoia’s other
outside director, John E. Tyson, to discuss Sequoia’s business prospects and to
learn more about Amerivon Holdings.
Over the
next few weeks, Mr. Turley provided our management with additional information
regarding Sequoia’s business operations, management and capitalization, as well
as updated financial statements of Sequoia. Mr. Turley also proposed
a reverse merger as the potential structure for a business combination between
Sequoia and our Company.
On April
9 and April 10, 2007, Messrs. Griggs and Clay met with Sequoia’s management and
full Board of Managers in Sequoia’s offices in Draper, Utah. At the
meeting, Sequoia introduced its technology and discussed its business plan going
forward. The parties discussed the contracts signed by Sequoia,
including a contract with Fujicolor to deploy Sequoia’s technology for making
DVDs in domestic Wal-Mart stores. Messrs. Griggs and Clay then
presented details of Secure Alliance’s cash position to Sequoia’s Board of
Managers. At the end of the meeting, we agreed to conduct preliminary
due diligence discussions regarding Sequoia’s business, prospects and potential
benefits of a combination of the two companies.
Following
this meeting, Sequoia retained the law firm of Cohne, Rappaport & Segal,
P.C., Salt Lake City, Utah, or CRS, to advise it in respect of a possible
strategic transaction.
On April
18, 2007, we requested our legal counsel, Olshan Grundman Frome Rosenzweig &
Wolosky LLP, New York, New York, or Olshan, to advise us in respect of a
possible strategic transaction. We also requested Olshan to consider
possible structures for a business combination with Sequoia.
On May 2,
2007, we received from Edward “Ted” B. Paulsen, the Secretary/Treasurer and
Chief Operating Officer of Sequoia, an outline of the general terms of a
business combination. In the proposal, Sequoia presented a potential
pre-merger valuation of $60-$65 million for Sequoia.
On May 4,
2007, our management team discussed Sequoia’s proposal with representatives from
Olshan. Mr. Griggs also contacted Edward Paulsen to discuss the
valuation. At this time, Sequoia informed us that they had engaged Tanner LC to
begin work on an audit for 2006 in anticipation of needing audited financial
information for a potential transaction.
On May
13, 2007, Edward Paulsen sent our management a revised pre-merger valuation of
$55 million for Sequoia and assumed we would have $13-$15 million in cash
available for a transaction.
Over the
next week, our management continued to review information sent by Sequoia
regarding its pre-merger valuation and had several teleconferences with
Sequoia’s management.
On May
21, 2007, our management informed Olshan that it had reached a deal with Sequoia
and that CRS would begin drafting the legal documents. At this time
we also began our full due diligence review of Sequoia, which continued over the
next few months.
On June
7, 2007, Messrs. Griggs and Clay met with Sequoia’s full Board of Managers and
management at Sequoia’s offices in Utah. Sequoia provided a business
update, which included the anticipated timing for the Wal-Mart launch in July
2007. Additional due diligence documents were also
exchanged.
On July
31, 2007, an initial draft of an exchange agreement, prepared by CRS, was
delivered to the Company.
On August
2, 2007, Messrs. Griggs and Clay met again with Sequoia’s full Board of Managers
and management at Sequoia’s offices in Utah to discuss the timing of the
transaction and to finalize business terms. Sequoia explained that it
would have to wait for its financial statements to be prepared, but was
committed to moving things forward as quickly as possible. We also
discussed engaging Ladenburg to provide a third-party valuation of the
transaction.
Over the
next few weeks, our Board reviewed the draft exchange agreement and discussed
its terms with Olshan. We, through our counsel, responded to
Sequoia’s draft of the exchange agreement in September 2007 and proposed that
the exchange agreement be structured in the form of a merger
agreement. The Board negotiated the addition of enhanced
representations and warranties and the ability to terminate the agreement if a
superior proposal was received by the Company, in which case a $1,000,000
termination fee would be payable to Sequoia in the event we consummated a
superior proposal. The Board devoted substantial time to determining
the structure of the Merger.
On
September 13, 2007, we engaged Ladenburg to prepare a fairness opinion regarding
the proposed Merger Consideration.
During
the third quarter, Sequoia learned that its full functionality would not be made
available in Wal-Mart before 2008 because of problems with its kiosk
partner.
On
October 17, 2007, Mr. Griggs participated in a teleconference with Chett B.
Paulsen, John Tyson and Edward Paulsen to discuss the Wal-Mart
situation. During this call, Sequoia provided new projections and the
parties discussed resetting the valuation for the Merger.
On
October 23 and 24, 2007, our management team met with Sequoia’s management team
at Sequoia’s offices in Utah to finalize the valuation for
Sequoia. Over the next few weeks, the parties agreed to modify the
valuation for Sequoia to between $46-$48 million and limit the amount of funds
coming from Secure Alliance to $11.3 million, to ensure Sequoia would hold
approximately 80% of our Common Stock following the Merger.
On
October 26, 2007, representatives of Sequoia and CRS met with Olshan at its
offices in New York and discussed the terms of the draft Merger
Agreement. Following these discussions, CRS distributed a revised
draft Merger Agreement on October 29, 2007 which reflected negotiated revisions,
the most significant of which was the agreement that representations and
warranties would not survive the closing of the Merger. During these
negotiations, the Board continued to conduct ongoing due diligence of the
business of Sequoia.
Concurrent
with the negotiation of the Merger Agreement, we negotiated the terms of the
Loan Agreement with Sequoia and its counsel to extend a secured line of credit
to Sequoia for working capital purposes after we realized that the proxy
statement would not be completed until both companies completed their 2007
financial audits, which would not be until the first quarter of
2008.
During
November 2007, the Board continued to negotiate the Merger Agreement, including
without limitation the Merger Consideration under the Merger Agreement and
certain tax effects of the Merger for the Company. The Board also
discussed providing in the Merger Agreement for a distribution of common stock
of a newly formed subsidiary with certain enumerated assets that were to be
transferred to it by the Company, a 1-for-3 reverse stock split of our Common
Stock, the Capitalization Proposal and the Name Change.
On
November 21, 2007, the Company issued a Current Report on Form 8-K disclosing
that it was in negotiations with Sequoia.
On
November 29, 2007, a meeting of the Board was held. Messrs. Griggs
and Clay were present at the meeting, as were representatives from Olshan and
Ladenburg. A general discussion among the members of the Board then
ensued as to the terms of the Merger Agreement. A representative of
Ladenburg then summarized for the Board various aspects of the proposed Merger,
including, among other things, net book value valuations, the impact of the
proposed distribution of common stock of a newly formed subsidiary of the
Company, Sequoia’s financial performance, the indicated value range of the
transaction using various methodologies, certain aspects of Sequoia’s business
model and customer base, and Sequoia’s valuation relative to selected comparable
companies. The Board requested that Ladenburg render an opinion as to
whether the proposed Merger Consideration to be received by the Company was fair
from a financial point of view to the Company’s unaffiliated
stockholders. Ladenburg then delivered to the Board an opinion that,
as of November 29, 2007 and based upon and subject to the factors and
assumptions set forth in the opinion, the Merger Consideration given to members
of Sequoia pursuant to the Merger Agreement is fair, from a financial point of
view, to our stockholders. The full text of the written opinion of
Ladenburg, which sets forth the assumptions made, procedures followed, matters
considered and limitations on the review undertaken in connection with such
opinion, is attached as Annex B to this proxy statement.
The Board
considered its fiduciary obligations in light of the proposed Merger including,
the duty to evaluate the Merger, the Merger Agreement and all related
transactions contemplated therein on behalf of the Company’s unaffiliated
stockholders and to be fully informed and exercise due care in its deliberations
and efforts. The Board discussed a number of factors including the
proposed terms of the Merger Agreement, the risks and merits of the Merger and
the risks and merits of not pursuing the Merger.
The
Board, at a meeting held on November 29, 2007, unanimously approved the Merger
Agreement, unanimously found the Merger Agreement to be fair to, advisable for,
and in the best interests of, the Company and its stockholders and unanimously
resolved to recommend that the Company’s stockholders adopt and approve the
Merger Agreement.
On
December 6, 2007, we executed the Merger Agreement and issued a Current Report
on Form 8-K to announce the signing of the Merger Agreement with Sequoia and to
file a copy of the Merger Agreement as an exhibit.
Concurrent
with the signing of the Merger Agreement, we extended a $2,500,000 secured line
of credit to Sequoia pursuant to the terms of the Loan Agreement, $1,000,000 of
which was advanced on the date of the Loan Agreement, $1,000,000 was advanced on
January 15, 2008, and $500,000 was advanced on February 15,
2008. Pursuant to the terms of the Loan Agreement, Sequoia has agreed
to pay interest on the loan at a rate per annum equal to
10%. Interest on the loan is payable on December 31, 2008, the
scheduled maturity date. In addition, if the loan obligations have
not been paid in full on or prior to the scheduled maturity date, a monthly fee
equal to 10% of the outstanding loan obligations is payable to us by Sequoia on
the last day of each calendar month for which the loan obligations remain
outstanding.
On March
31, 2008, we amended the Merger Agreement to, among other things, (i) effect a
1-for-2 reverse stock split instead of a 1-for-3 reverse stock split, (ii)
provide that, immediately prior to the effectiveness of the Merger, we will
declare and pay the Dividend instead of distributing to stockholders common
stock of a newly formed company with certain enumerated assets that were to be
transferred to it by the Company, (iii) amend the amount of the proposed Merger
Consideration to be provided under the Merger Agreement, such that each issued
and outstanding Sequoia equity interest will automatically be converted into the
right to receive 0.87096285 shares of our Common Stock instead of the right to
receive 0.5806419 shares of our Common Stock, which adjustment was made to
account for the change from a 1-for-3 reverse stock split to a 1-for-2 reverse
stock split, and
(iv) remove the closing condition that we have not less than $9.8 million in net
cash or cash equivalents.
Reasons for the Merger
In
reaching its conclusion regarding the fairness of the Merger to our unaffiliated
stockholders and its decision to approve and adopt the Merger Agreement, the
Board consulted with management and its financial and legal
advisors. The Board considered the following factors and potential
benefits, each of which it believed affected its decision:
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The Company’s Financial
Condition. We are a shell public company with
substantially no operations or employees since October 2,
2006. We also have limited management and other
resources. Sequoia has an experienced management team and an
operating business, which can improve our financial position and provide
greater growth opportunities;
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Best Merger Proposal
Received. At the time the Merger Agreement was executed,
the market check completed by our Board revealed no other firm merger
proposals;
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Strategic Alternatives to a
Merger. Since we became a shell public company, the Board has
reviewed our financial position and considered all available alternatives
including, without limitation, the acquisition of a new business or
alternatively, the possible dissolution of the Company and liquidation of
our assets, the discharge of any remaining liabilities, and the eventual
distribution of the remaining assets to
stockholders;
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Fairness
Opinion. The Board considered the presentation and
fairness opinion of Ladenburg, which provided that, as of November 29,
2007, and based upon and subject to the considerations and assumptions set
forth in their respective opinions, the Merger Consideration given to
members of Sequoia under the Merger Agreement is fair, from a financial
point of view, to our stockholders;
and
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Superior
Proposals. The Board considered that, under the terms of
the Merger Agreement, while we are prohibited from soliciting proposals
from third parties, we may engage in discussions and negotiations with,
and may furnish non-public information to, a third party that makes an
unsolicited superior proposal if, among other things, the Board determines
in good faith that such action with respect to such superior proposal is
necessary for the Board to comply with its fiduciary duties under
applicable law. In addition, the Merger Agreement permits the
Board, in the exercise of its fiduciary duties, to withdraw or modify its
approval or recommendation of the Merger Agreement or the transactions
contemplated therein even if we have not received a superior proposal if
it were to subsequently determine that the Merger Agreement and the
transactions contemplated therein are no longer in the best interest of
the Company or our stockholders. The Board further considered
that the terms of the Merger Agreement provide the Board with the ability
to terminate the Merger Agreement in order to enter into an agreement for
a superior proposal. The Board also considered the possible
effect of these provisions of the Merger Agreement on third parties that
might be interested in making a proposal to acquire
us.
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Potential Benefit of a
Combined Company. Sequoia has been in business for
several years and has recently signed contracts with some of the largest
retailers in the world to carry its products. By completing a
merger with Sequoia, we can infuse equity into Sequoia’s business to
further enhance its products and expand its market position, which may
improve stockholder value. However, there can be no assurance
that Sequoia’s products will receive the widespread market acceptance
necessary to sustain profitable operations or that stockholder value will
improve in the combined company.
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The Board
also recognized the risks inherent in the transaction, including:
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the
risk that the combined company may not be able to realize, fully or at
all, the potential benefits of the
Merger;
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the
possibility that, even if the Merger is approved by our stockholders, it
may not be completed; and
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the
other risks described under “Risk Factors” beginning on page
28.
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After
taking into account all of the factors set forth above, as well as others, the
Board agreed that the potential benefits of the Merger (i.e. the benefit of
Sequoia’s operations, experienced management and growth potential), outweighed
the potential risks, determined that the Merger Agreement and the Related
Proposals are advisable and are fair to and in the best interests of the Company
and its unaffiliated stockholders and approved and adopted the Merger Agreement
and recommends that the Company’s stockholders vote to approve and adopt the
Merger Agreement at the Special Meeting.
The Board
did not assign relative weights to the above factors or the other factors
considered by it. In addition, the Board did not reach any specific
conclusion on each factor considered, but conducted an overall analysis of these
factors. Individual directors may have given different weights to
different factors.
Cautionary Statement Concerning Forward-Looking
Information
This
proxy statement, and the documents to which we refer you in this proxy
statement, contain forward-looking statements based on estimates and
assumptions. Forward-looking statements include information
concerning possible or assumed future results of operations of the Company, the
expected completion and timing of the Merger Agreement and other information
relating to the Merger Agreement and Related Proposals. There are
forward-looking statements throughout this proxy statement, including, among
others, under the headings “Summary,” “The Transactions -- Opinion of Ladenburg”
and in statements containing the words “believes,” “plans,” “expects,”
“anticipates,” “intends,” “estimates” or other similar
expressions. You should be aware that forward-looking statements
involve known and unknown risks and uncertainties. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we cannot assure you that the actual results or developments we
anticipate will be realized, or even if realized, that they will have the
expected effects on the business or operations of the Company. In
addition to other factors and matters contained in this document, we believe the
following factors could cause actual results to differ materially from those
discussed in the forward-looking statements:
Considerations
Relating to the Merger Agreement, Related Proposals and 2008 Plan:
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the
failure to satisfy the conditions to consummation of the Merger Agreement,
including the receipt of stockholder
approval;
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the
failure to receive stockholder approval of the Related Proposals and the
2008 Plan;
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the
occurrence of any event, change or other circumstances that could give
rise to the termination of the Merger
Agreement;
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the
failure of the Merger to close for any other
reason;
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the
outcome of legal proceedings that may be instituted against us and others
in connection with the Merger Agreement;
and
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the
amount of the costs, fees, expenses and charges related to the
Merger.
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Other
Factors:
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risks,
uncertainties and factors set forth in our reports and documents filed
with the Securities and Exchange Commission (the “SEC”) (which reports and
documents should be read in conjunction with this proxy statement; see
“Where You Can Find Additional
Information”).
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All
forward-looking statements contained or incorporated by reference in the proxy
statement speak only as of the date of this proxy statement or as of such
earlier date that those statements were made and are based on current
expectations or expectations as of such earlier date and involve a number of
assumptions, risks and uncertainties that could cause the actual result to
differ materially from such forward-looking statements. Except as
required by law, we undertake no obligation to update or publicly release any
revisions to these forward-looking statements or reflect events or circumstances
after the date of this proxy statement.
Risk Factors
Risks
Related to the Merger Agreement and the Related Proposals
The
Merger will result in substantial dilution of the ownership interest of current
stockholders.
Immediately
following the Merger, our stockholders will own approximately 20% of the
Company’s outstanding Common Stock on a nondiluted basis. This
represents substantial dilution of the ownership interest of current
stockholders.
Failure
to complete the Merger could cause our stock price to decline and could harm our
future business and operations.
The
Merger Agreement contains conditions that we must meet in order to consummate
the Merger. In addition, the Merger Agreement may be terminated by
either us or Sequoia under certain circumstances. If the Merger is
not completed for any reason, we may be subject to a number of risks, including
the following:
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depending
on the reasons for termination, we may be required to pay a termination
fee of $1,000,000 to Sequoia if we have selected a superior
proposal;
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the
market price of our Common Stock may decline to the extent that the
current market price reflects a market assumption that the Merger and the
Related Proposals will be completed;
and
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many
costs related to the Merger and the Related Proposals, such as legal,
accounting, financial advisor and financial printing fees, have to be paid
regardless of whether the Merger is
completed;
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Ladenburg
did not review the terms of the amendment to the Merger Agreement and there can
be no assurance that its fairness opinion is not affected by such
amendment.
On March
31, 2008, we amended the Merger Agreement to, among other things, (i) effect a
1-for-2 reverse stock split instead of a 1-for-3 reverse stock split, (ii)
provide that, immediately prior to the effectiveness of the Merger, we will
declare and pay to our stockholders existing as of the Record Date, the Dividend
instead of distributing to stockholders common stock of a newly formed company
with approximately $2.2 million in cash and shares of stock of a private company
that were to be transferred to it by the Company, (iii) amend the amount of the
proposed Merger Consideration to be provided under the Merger Agreement, such
that each issued and outstanding Sequoia equity interest will automatically be
converted into the right to receive 0.87096285 shares of our Common Stock
instead of the right to receive 0.5806419 shares of our Common Stock, which
adjustment was made to account for the change from a 1-for-3 reverse stock split
to a 1-for-2 reverse stock split, and (iv) remove the closing condition that we
have not less than $9.8 million in net cash or cash equivalents.
The Board
approved the amendment to the Merger Agreement to provide for a 1-for-2 reverse
stock split instead of a 1-for-3 reverse stock split primarily to ensure
sufficient shares were available in the public float to help avoid large pricing
fluctuations. The Merger Consideration was adjusted as a result of
the change from a 1-for-3 reverse stock split to a 1-for-2 reverse stock split
to provide for no change to the respective equity ownership levels following the
Merger. The Board also approved the amendment to provide the Dividend
of approximately $2.0 million, an amount slightly less than originally
contemplated by the Merger Agreement, because it believed (i) this small
reduction in distribution was advisable in exchange for the removal of the
closing condition that we have not less than $9.8 million in net cash or cash
equivalents, and (ii) the dividend mechanic was more feasible than a
distribution of stock.
Ladenburg
has not reviewed our amendment to the Merger Agreement. Although our
Board believes the amendment to the Merger Agreement does not materially impact
Ladenburg’s fairness opinion, which was issued on November 29, 2007, there can
be no assurance that Ladenburg’s opinion, that the Merger Consideration given to
members of Sequoia is fair, from a financial point of view, to our stockholders,
is still accurate.
The
Reverse Stock Split may not increase the market price of our Common Stock by a
multiple we expect.
While we
expect that the Reverse Stock Split will result in an increase in the market
price of our Common Stock, there can be no assurance that the Reverse Stock
Split will increase the market price of our Common Stock by a multiple equal to
the exchange number or result in the permanent increase in the market price
(which is dependent on many factors, including our performance and
prospects). Also, should the market price of our Common Stock
decline, the percentage decline as an absolute number and as a percentage of our
overall market capitalization may be greater than would pertain in the absence
of a reverse stock split.
The
Reverse Stock Split may increase our number of odd lot
stockholders.
The
Reverse Stock Split may increase the number of our stockholders who own odd lots
(owners of less than 100 shares). Stockholders who hold odd lots
typically will experience an increase in the cost of selling their shares as
well as possible greater difficulty in effecting such sales.
Risks
Related to Sequoia’s Business, which will be our primary business following the
Merger
Since
Sequoia’s inception, it has been spending more than it makes which has required
it to rely upon outside financings to fund operations. If Sequoia is
not able to generate sufficient revenues to fund its business plans, Sequoia may
be required to limit operations.
Since
Sequoia’s inception Sequoia has operated at a loss. Sequoia is not
currently generating sufficient revenues to cover its operating
expenses. If its revenues do not begin to grow or if they decline and
its expenses do not slow or decline at a greater rate Sequoia may be unable to
generate positive cash flows. If Sequoia is unable to generate
positive cash flow from operations Sequoia will be required to seek outside
financing to continue operating at its current level or cease
operations. If new sources of financing are required, but are
insufficient or unavailable, Sequoia will be required to modify its growth and
operating plans to the extent of available funding, which would harm its ability
to pursue our business plans. If Sequoia ceases or stops operations,
its members could lose their entire investment. Historically, Sequoia
has funded its operating, administrative and development costs through the sale
of equity capital or debt financing. If Sequoia’s plans and/or
assumptions change or prove inaccurate, or Sequoia is unable to obtain further
financing, or such financing and other capital resources, in addition to
projected cash flow, if any, prove to be insufficient to fund operations,
Sequoia’s continued viability could be at risk. To the extent that
any such financing involves the sale of Sequoia’s membership interests, the
interests of Sequoia’s then existing members could be substantially
diluted. The holders of new membership interests of Sequoia may also
have rights, preferences or privileges which are senior to those of Sequoia’s
existing members. There is no assurance that Sequoia will be
successful in achieving any or all of these objectives over the coming
year.
Sequoia
anticipates its business will become highly seasonal in nature which may cause
its financial results to vary significantly by quarter.
The photo
retail business is very seasonal in nature with a significant proportion of
recurring revenues occurring the fourth quarter of the calendar year,
particularly around the Thanksgiving and Christmas holidays. As a
result, Sequoia’s financial results will be difficult to compare
quarter-to-quarter. Additionally, any disruptions in operations
during the fourth quarter could greatly impact its annual revenues and have a
significant adverse effect on its relationships with its
customers. Sequoia’s limited revenue and operating history makes it
difficult for it to assess the impact of seasonal factors on its business or
whether its business is susceptible to cyclical fluctuations in the
economy.
Sequoia’s
technology solutions and business approach are relatively new and if they are
not accepted in the marketplace, its business could be materially and adversely
affected.
Products
created with Sequoia’s technology have only been available in the marketplace
since 2005. Sequoia has been pursuing a business model that requires
retail and vendor partners to recognize the advantages of its technology to make
it available to end consumers. Having generated limited revenues,
there can be no assurance that Sequoia’s products will receive the widespread
market acceptance necessary to sustain profitable operations. Even if
its services attain widespread acceptance, there can be no assurance that
Sequoia will be able to meet the demands of its customers on an ongoing
basis. Sequoia’s operations may be delayed, halted, or altered for
any of the reasons set forth in these risk factors and other unknown
reasons. Such delays or failure would seriously harm Sequoia’s
reputation and future operations. If Sequoia’s products or its
business model are not accepted in the market place, its business could be
materially and adversely affected.
Sequoia’s
product solution focuses on an aspect of the digital photo industry that has
never been directly addressed in any meaningful way. Sequoia provides
a nearly finished product that takes user images and combines them with stock
images to create context for user images in a themed
presentation. Sequoia also offers a unique DVD product that has not
been widely sold in the marketplace in the form it offers. The degree
of market acceptance of Sequoia’s product solution results in Sequoia’s products
going to the market with a high level of uncertainty and risk. As the
market for its product technology is new and evolving, it is difficult to
predict the size of the market, the future growth rate, if any, or the level of
premiums the market will pay for Sequoia’s services. There can be no
assurance that the market for Sequoia’s services will emerge to a profitable
level or be sustainable. There can be no assurance that any increase
in marketing and sales efforts will result in a larger market or increase in
market acceptance for Sequoia’s services. If the market fails to
develop, develops more slowly than expected or becomes saturated with
competitors, or if Sequoia’s proposed services do not achieve or sustain market
acceptance, Sequoia’s proposed business, results of operations and financial
condition will continue to be materially and adversely affected.
Ultimately,
Sequoia’s success will depend upon consumer acceptance of its product delivery
model and its largely pre-configured products. Sequoia relies on its
retail and internet vending customers to market its products to end
consumers. While Sequoia assists retailers with their marketing
programs, Sequoia cannot assure that retailers will continue to market its
services or that their marketing efforts will be successful in attracting and
retaining end user consumers. The failure to attract end user
consumers will adversely affect Sequoia’s business. In addition, if
Sequoia’s service does not generate revenue for the retailer, whether because of
failure to market it, Sequoia may lose retailers as customers, which would
adversely affect its revenue.
Sequoia
has for the past few years depended on a single customer for a significant
portion of its revenue. If Sequoia is unable to replace that customer
and add additional customers it could materially harm its operating results,
business, and financial condition.
During
2004, 2005, 2006, and 2007, over 90% of Sequoia’s revenue was derived from a
single customer, BigPlanet. Sequoia’s contract with BigPlanet expired
on December 31, 2007. Sequoia is in negotiations to continue its
business relationship with BigPlanet, but it can provide no assurance that it
will enter into a new agreement or what the terms of the new agreement will
be. Sequoia added several additional customer contracts during 2007,
but they have not generated significant revenues to date. If in the
event Sequoia is unable to replace the revenues generated from BigPlanet and
increase the revenues for current customers and enter into additional agreements
with additional customers that generate revenue, Sequoia’s operations and
financial results will significantly suffer, jeopardizing long-term
operations. Sequoia may not succeed in attracting new customers, as
many of its potential customers have pre-existing relationships with Sequoia’s
current or potential competitors. To attract new customers, Sequoia
may be faced with intense price competition, which may affect its gross
margins.
Sequoia
needs to develop and introduce new and enhanced products in a timely manner to
remain competitive.
The
markets in which Sequoia operates are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and relatively short product lives. The pursuit of necessary
technological advances and the development of new products require substantial
time and expense. To compete successfully in the markets in which
Sequoia operates, Sequoia must develop and sell new or enhanced products that
provide increasingly higher levels of performance and
reliability. For example, Sequoia’s business involves new digital
audio and video formats, such as DVD-Video and DVD-Audio, and, more recently,
the new recordable DVD formats including DVD-RAM, DVD-R/RW, and
DVD+RW. Currently, there is extensive activity in Sequoia’s industry
targeting the introduction of new, high definition formats including Blue
Ray®. To the extent that competing new formats remain incompatible,
consumer adoption may be delayed and Sequoia may be required to expend
additional resources to support multiple formats. Sequoia expends
significant time and effort to develop new products in compliance with these new
formats. To the extent there is a delay in the implementation or
adoption of these formats, Sequoia’s business, financial condition and results
of operations could be adversely affected. As new industry standards,
technologies and formats are introduced, there may be limited sources for the
intellectual property rights and background technologies necessary for
implementation, and the initial prices that Sequoia may negotiate in an effort
to bring its products to market may prove to be higher than those ultimately
offered to other licensees, putting Sequoia at a competitive
disadvantage. Additionally, if these formats prove to be unsuccessful
or are not accepted for any reason, there will be limited demand for Sequoia’s
products. Sequoia cannot assure you that the products it is currently
developing or intend to develop will achieve feasibility or that even if it is
successful, the developed product will be accepted by the
market. Sequoia may not be able to recover the costs of existing and
future product development and its failure to do so may materially and adversely
impact its business, financial condition and results of operations.
If
Sequoia is unable to respond to customer technological demands and improve its
products, its business could be materially and adversely affected.
To remain
competitive, Sequoia must continue to enhance and improve the responsiveness,
functionality and features of its solutions and its products. The
photo industry is characterized by rapid technological change, changes in user
and customer requirements and preferences and frequent new product and service
introductions. Sequoia’s success will depend, in part, on its ability
to license leading technologies useful in its business, enhance its existing
software offerings, develop new product offerings and technology that address
the varied needs of its existing and prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. There can be no assurance that
Sequoia will successfully implement new technologies or adapt its solutions,
products, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If Sequoia is unable to
adapt in a timely manner in response to changing market conditions or customer
requirements for technical, legal, financial or other reasons, its business
could be materially adversely affected.
Sequoia
has and expects to continue to experience rapid growth. If it is
unable to manage its growing operations effective, Sequoia’s business could be
negatively impacted.
Expected
rapid growth in all areas of Sequoia’s business may place a significant strain
on its operational, human, and technical resources. Sequoia expects
that operating expenses and staffing levels will increase in the future to keep
pace with its customer demands and requirements. To manage its
growth, Sequoia must expand its operational and technical capabilities and
manage its employee base, while effectively administering multiple relationships
with various third parties, including business partners and
affiliates. Sequoia cannot assure that it will be able to effectively
manage its growth. The failure to effectively manage its growth could
result in an inability to meet its customer demands, leading to customer
dissatisfaction and loss. Loss of customers could negatively impact
Sequoia’s operating results.
Sequoia
competes with others who provide products comparable to its
products. If Sequoia is unable to compete with current and future
competitors, its business could be materially and adversely
affected.
The
digital photography products and services industries are intensely competitive,
and Sequoia expects competition to increase in the future as current competitors
improve their offerings, new participants enter the market or industry
consolidation further develops. Competition may result in pricing
pressures, reduced profit margins or loss of market share, any of which could
substantially harm Sequoia’s business and results of
operations. Sequoia’s success is dependent upon its ability to
maintain its current customers and obtain additional
customers. Digital image services are provided by a wide range of
companies. Competitors in the market for the provision of digital
imaging services include Snapfish (a Hewlett-Packard service), Pixology plc,
LifePics, and Shutterfly among numerous others. In addition, end
consumers have a wide variety of product choices such as prints, photo books,
calendars, and other print and image products. Sequoia competes for
photo imaging output dollars with its DVD and other product
offerings. Internet portals and search engines such as Yahoo!, AOL
and Google also offer digital photography solutions, and home printing solutions
offered by Hewlett Packard, Lexmark, Epson, Canon and others. Most of
Sequoia’s competitors have longer operating histories, significantly greater
financial, technical and marketing resources, greater name and product
recognition, and larger existing customer bases. Although Sequoia has
been able to enter into relationships with many potential competitors, it cannot
provide any assurance its relationships will continue or that its competitors
will not pursue their own product solutions that Sequoia currently provides to
them. With the large and varied competitors and potential competitors
in the marketplace, Sequoia cannot be certain that it will be able to compete
successfully against current and future competitors. If Sequoia is
unable to do so, it will have a material adverse effect on its business, results
of operations and financial condition.
Sequoia
relies on its ability to download software and fulfill orders for its
customers. If Sequoia is unable to maintain reliability of its
network solution it may lose both present and potential customers.
Sequoia’s
ability to attract and retain customers depends on the performance, reliability
and availability of its services and fulfillment network
infrastructure. Sequoia may experience periodic service interruptions
caused by temporary problems in its own systems or software or in the systems or
software of third parties upon whom it relies to provide such
service. Fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events could damage these systems and interrupt
Sequoia’s services. Computer viruses, electronic break-ins or other
similar disruptive events also could disrupt its services. System
disruptions could result in the unavailability or slower response times of the
websites Sequoia hosts for its customers, which would lower the quality of the
consumers’ experiences. Service disruptions could adversely affect
its revenues and, if they were prolonged, would seriously harm its business and
reputation. Sequoia does not carry business interruption insurance to
compensate for losses that may occur as a result of these
interruptions. Sequoia’s customers depend on Internet service
providers and other website operators for access to its
systems. These entities have experienced significant outages in the
past, and could experience outages, delays and other difficulties due to system
failures unrelated to Sequoia’s systems. Moreover, the Internet
network infrastructure may not be able to support continued
growth. Any of these problems could adversely affect Sequoia’s
business.
The
infrastructure relating to Sequoia’s services are vulnerable to unauthorized
access, physical or electronic computer break-ins, computer viruses and other
disruptive problems. Internet service providers have experienced, and
may continue to experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees and others. Anyone who is able to circumvent Sequoia’s
security measures could misappropriate proprietary information or cause
interruptions in its operations. Security breaches relating to its
activities or the activities of third-party contractors that involve the storage
and transmission of proprietary information could damage its reputation and
relationships with its customers and strategic partners. Sequoia
could be liable to its customers for the damages caused by such breaches or it
could incur substantial costs as a result of defending claims for those
damages. Sequoia may need to expend significant capital and other
resources to protect against such security breaches or to address problems
caused by such breaches. Security measures taken by Sequoia may not
prevent disruptions or security breaches.
Sequoia
relies on third parties for the development and maintenance of photo kiosks and
backend Internet connections to reach its customers and such dependence on third
parties may impair its ability to generate revenues.
Sequoia’s
business relies on the use of third party photo kiosks and Internet systems and
connections as a convenient means of consumer interaction and
commerce. The success of Sequoia’s business will depend on the
ability of its customers to use such third party photo kiosks and Internet
systems and connections without significant delays or aggravation. As
such, Sequoia relies on third parties to develop and maintain reliable photo
kiosks and to provide Internet connections having the necessary speed, data
capacity and security, as well as the timely development of complementary
products such as high-speed modems, to ensure its customers have reliable access
to its services. The failure of Sequoia’s customer photo kiosk
providers and the Internet to achieve these goals may reduce its ability to
generate significant revenue.
Sequoia’s
penetration of a broader consumer market will depend, in part, on continued
proliferation of high speed Internet access for customers using kiosk and
vendors providing its software and products via the Internet. The
Internet has experienced, and is likely to continue to experience, significant
growth in the number of users and amount of traffic. As the Internet
continues to experience increased numbers of users, increased frequency of use
and increased bandwidth requirements, the Internet infrastructure may be unable
to support the demands placed on it. In addition, increased users or
bandwidth requirements may harm the performance of the Internet. The
Internet has experienced a variety of outages and other delays and it could face
outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as the level of traffic, and could
result in the Internet becoming an inconvenient or uneconomical source of
products and services, which would cause Sequoia’s revenue to
decrease. The infrastructure and complementary products or services
necessary to make the Internet a viable commercial marketplace for the long term
may not be developed successfully or in a timely manner.
Sequoia
has relied upon its ability to produce products with its proprietary technology
to establish customer relationships. If Sequoia is unable to protect
and enforce its intellectual property rights, Sequoia may suffer a loss of
business.
Sequoia’s
success and ability to compete depends, to a large degree, on its current
technology and, in the future, technology that it might develop or license from
third parties. To protect its technology, Sequoia has used the
following: confidentiality agreements, retention and safekeeping of source
codes, and duplication of such for backup. Despite these precautions,
it may be possible for unauthorized third parties to copy or otherwise obtain
and use Sequoia’s technology or proprietary information. In addition,
effective proprietary information protection may be unavailable or limited in
certain foreign countries. Litigation may be necessary in the future
to: enforce its intellectual property rights, protect its trade secrets, or
determine the validity and scope of the proprietary rights of
others. Such misappropriation or litigation could result in
substantial costs and diversion of resources and the potential loss of
intellectual property rights, which could impair Sequoia’s financial and
business condition. Although currently Sequoia is not engaged in any
form of litigation proceedings in respect to the foregoing, in the future,
Sequoia may receive notice of claims of infringement of other parties'
proprietary rights. Such claims may involve internally developed
technology or technology and enhancements that Sequoia may license from third
parties. Moreover, although Sequoia sometimes may be indemnified by
third parties against such claims related to technology that Sequoia has
licensed, such infringements against the proprietary rights of others and
indemnity there from may be limited, unavailable, or, where the third party
lacks sufficient assets or insurance, ineffectual. Any such claims
could require Sequoia to spend time and money defending against them, and, if
they were decided adversely to Sequoia, could cause serious injury to its
business operations.
The
future success of Sequoia’s business depends on continued consumer adoption of
digital photography.
Sequoia’s
growth is highly dependent upon the continued adoption by consumers of digital
photography. The digital photography market is rapidly evolving,
characterized by changing technologies, intense price competition, additional
competitors, evolving industry standards, frequent new service announcements and
changing consumer demands and behaviors. To the extent that consumer
adoption of digital photography does not continue to grow as expected, Sequoia’s
revenue growth would likely suffer. Moreover, Sequoia faces
significant risks that, if the market for digital photography evolves in ways
that Sequoia is not able to address due to changing technologies or consumer
behaviors, pricing pressures, or otherwise, its current products and services
may become unattractive, which would likely result in the loss of customers and
a decline in net revenues and/or increased expenses.
Other
companies’ intellectual property rights may interfere with Sequoia’s current or
future product development and sales.
Sequoia
has not conducted routine comprehensive patent search relating to its business
models or the technology it uses in its products or services. There
may be issued or pending patents owned by third parties that relate to Sequoia’s
business models, products or services. If so, Sequoia could incur
substantial costs defending against patent infringement claims or it could even
be blocked from engaging in certain business endeavors or selling its products
or services. Other companies may succeed in obtaining valid patents
covering one or more of Sequoia’s business models or key techniques Sequoia
utilizes in its products or services. If so, Sequoia may be forced to
obtain required licenses or implement alternative non-infringing
approaches. Sequoia’s products are designed to adhere to industry
standards, such as DVD-ROM, DVD-Video, DVD-Audio and MPEG video. A
number of companies and organizations hold various patents that claim to cover
various aspects of DVD, MPEG and other relevant technology. Sequoia
has entered into license agreements with certain companies and organizations
relative to some of these technologies. Such license agreements may
not be sufficient in the future to grant Sequoia all of the intellectual
property rights necessary to market and sell its products.
Sequoia’s
products rely upon the use of copyrighted materials that it licenses and its
inability to obtain needed licenses, remain compliant with existing license
agreements, or effectively account for and pay royalties to third parties could
substantially limit product development and deployment.
Sequoia’s
products incorporate copyrighted materials in the form of pictures, video,
audio, music, and fonts. Sequoia actively monitors the use of all
copyrighted materials and pays up-front and usage royalties as it fulfills
customer orders for products. If Sequoia were unable to maintain
appropriate licenses for copyrighted works, it would be required to limit its
product offerings, which would negatively impact its
revenues. Sequoia also seeks to license popular works to build into
its products and the photo merchandizing market is extremely
competitive. In the event Sequoia is unable to license works because
its technology is not competitive or it has inadequate capital to pay royalties,
it may not be able to effectively compete for photo-product production business
which would seriously impart its ability to sell products.
Sequoia
could be liable to some of its customers for damages that they incur in
connection with intellectual property claims.
Sequoia
has exposure to potential liability arising from infringement of third-party
intellectual property rights in its license agreements with
customers. If Sequoia is required to pay damages to or incur
liability on behalf of its customers, its business could be
harmed. Moreover, even if a particular claim falls outside of
Sequoia’s indemnity or warranty obligations to its customers, its customers may
be entitled to additional contractual remedies against it, which could harm
Sequoia’s business. Furthermore, even if Sequoia is not liable to its
customers, its customers may attempt to pass on to it the cost of any license
fees or damages owed to third parties by reducing the amounts they pay for its
products. These price reductions could harm Sequoia’s
business.
Legislation
regarding copyright protection or content interdiction could impose complex and
costly constraints on Sequoia’s business model.
Because
of its focus on automation and high volumes, Sequoia’s operations do not
involve, for the vast majority of its sales, any human-based review of
content. Although use of its software technology terms of use
specifically require customers to represent that they have the right and
authority to reproduce the content they provide and that the content is in full
compliance with all relevant laws and regulations, Sequoia does not have the
ability to determine the accuracy of these representations on a case-by-case
basis. There is a risk that a customer may supply an image or other
content that is the property of another party used without permission, that
infringes the copyright or trademark of another party, or that would be
considered to be defamatory, pornographic, hateful, racist, scandalous, obscene
or otherwise offensive, objectionable or illegal under the laws or court
decisions of the jurisdiction where that customer lives. There is,
therefore, a risk that customers may intentionally or inadvertently order and
receive products from Sequoia that are in violation of the rights of another
party or a law or regulation of a particular jurisdiction. If Sequoia
should become legally obligated in the future to perform manual screening and
review for all orders destined for a jurisdiction, Sequoia will encounter
increased production costs or may cease accepting orders for shipment to that
jurisdiction which could substantially harm its business and results of
operations.
The
loss of any of Sequoia’s executive officers, key personnel, or contractors would
likely have an adverse effect on its business.
Sequoia’s
greatest resource in developing and launching its products is its
labor. Sequoia is dependent upon its management, employees, and
contractors for meeting its business objectives. In particular, the
original founders and members of the senior management team play key roles in
Sequoia’s business and technical development. Sequoia does not carry
key man insurance coverage to mitigate the financial effect of losing the
services of any of these key individuals. Sequoia’s loss of any of
these key individuals most likely would have an adverse effect on its
business.
If
the collocation facility where much of Sequoia’s Internet computer and
communications hardware is located fails, its business and results of operations
would be harmed. If Sequoia’s Internet service to its primary
business office fails, its business relationships could be damaged.
Sequoia’s
ability to provide its services depends on the uninterrupted operation of its
computer and communications systems. Much of its computer hardware
necessary to operate its Internet service for downloading software and receiving
customer orders is located at a single third party hosting facility in Salt Lake
City, Utah. Sequoia’s systems and operations could suffer damage or
interruption from human error, fire, flood, power loss, telecommunications
failure, break-ins, terrorist attacks, acts of war and similar
events. Sequoia does have some redundant systems in multiple
locations, but if its primary location suffers interruptions its ability to
service customers quickly and efficiently will suffer.
Sequoia’s
technology may contain undetected errors that could result in limited capacity
or an interruption in service.
The
development of Sequoia’s software and products is a complex process that
requires the services of numerous developers. Sequoia’s technology
may contain undetected errors or design faults that may cause its services to
fail and result in the loss of, or delay in, acceptance of its
services. If the design fault leads to an interruption in the
provision of Sequoia’s services or a reduction in the capacity of its services,
Sequoia would lose revenue. In the future, Sequoia may encounter
scalability limitations that could seriously harm its business.
Sequoia
may divert its resources to develop new product lines, which may result in
changes to its business plan and fluctuations in its expenditures.
As
Sequoia has developed its technology, customers have required Sequoia to develop
various means of deploying its products. In order to remain
competitive and work around deployment issues inherent in working with third
party kiosk providers, Sequoia is continually developing new deployments and
product lines. Sequoia recently developed a new point-of-scan product
to provide customers with an alternative to getting its products from retail
kiosks that are sometimes busy or out of order. The development of
new product types may result in increased expenditures during the development
and implementation phase, which could negatively impact Sequoia’s results of
operations. In addition, Sequoia is a small company with limited
resources and diverting these resources to the development of new product lines
may result in reduced customer service turn around times and delays in deploying
new customers. These delays could adversely affect Sequoia’s business
and results of operations.
Sequoia
may undertake acquisitions to expand its business, which may pose risks to its
business and dilute the ownership of existing members.
The
digital photo industry is undergoing significant changes. As Sequoia
pursues its business plans, Sequoia may pursue acquisitions of businesses,
technologies, or services. Sequoia is unable to predict whether or
when any prospective acquisition will be completed. Integrating newly
acquired businesses, technologies or services is likely to be expensive and time
consuming. To finance any acquisitions, it may be necessary to raise
additional funds through public or private financings. Additional
funds may not be available on favorable terms and, in the case of equity
financings, would result in additional dilution to Sequoia’s existing
members. If Sequoia does acquire any businesses, if Sequoia is unable
to integrate any newly acquired entities, technologies or services effectively,
its business and results of operations may suffer. The time and
expense associated with finding suitable and compatible businesses,
technologies, or services could also disrupt Sequoia’s ongoing business and
divert management’s attention. Future acquisitions by Sequoia could
result in large and immediate write-offs or assumptions of debt and contingent
liabilities, any of which could substantially harm its business and results of
operations.
Requirements
under client agreements and Sequoia’s method of delivering products could cause
the deferral of revenue recognition, which could harm its operating results and
adversely impact its ability to forecast revenue.
Sequoia’s
agreements with clients provide for various methods of delivering its technology
capability to end consumers and may include service and development requirements
in some instances. As Sequoia provides point-of-scan products that
require future fulfillment of products by it, Sequoia may be required to defer
revenue recognition until the time the consumer submits an order to have a
product fulfilled rather than at the time our point-of-scan product is
sold. In addition, if Sequoia is obligated to provide development and
support services to customers, it may be required to defer certain revenues to
future periods which could harm its short-term operating results and adversely
impact its ability to accurately forecast revenue.
Sequoia’s
pricing model may not be accepted and its product prices may decline, which
could harm its operating results.
Under its
current business model, Sequoia charges a royalty on each product produced using
its technology rather than selling software to its customers. If
Sequoia’s customers are offered software products to purchase that do not
require the payment of royalties, Sequoia’s business could
suffer. Additionally the market for photo products is intensely
competitive. It is likely that prices Sequoia’s customers charge end
consumers will decline due to competitive pricing pressures from other software
providers which will likely affect Sequoia’s product royalties and
revenues.
Sequoia
depends on third-party suppliers for media components of some of its products
and any failure by them to deliver these components could limit its ability to
satisfy customer demand.
Sequoia
currently sources DVD media and other components for use in its products from
various sources. Sequoia does not carry significant inventories of
these components and it has no guaranteed supply agreements for
them. Sequoia may in the future experience shortages of some product
components, which can have a significant negative impact on its
business. Any interruption in the operations of Sequoia’s vendors of
sole components could affect adversely its ability to meet its scheduled product
deliveries to customers. If Sequoia is unable to obtain a sufficient
supply of components from its current sources, it could experience difficulties
in obtaining alternative sources or in altering product designs to use
alternative components. Resulting delays or reductions in product
shipments could damage customer relationships and expose Sequoia to potential
damages that may arise from its inability to supply its customers with
products. Further, a significant increase in the price of one or more
of these components could harm Sequoia’s gross margins and/or operating
results.
Sequoia
relies on sales representatives and retailers to sell its products, and
disruptions to these channels would affect adversely its ability to generate
revenues from the sale of its products.
A large
portion of Sequoia’s projected revenues is derived from sales of products to
end-users via retail channels that it accesses directly and through a third
party network of sales representatives. If Sequoia’s relationship
with its sales representatives is disrupted for any reason, its relationship
with its retail customers could suffer. If Sequoia’s retail customers
do not choose to market its products in their stores, Sequoia’s sales will
likely be significantly impacted and its revenues would decrease. Any
decrease in revenue coming from these retailers or sales representatives and
Sequoia’s inability to find a satisfactory replacement in a timely manner could
affect its operating results adversely. Moreover, Sequoia’s failure
to maintain favorable arrangements with its sales representative may impact
adversely its business.
Changes
in financial accounting standards or practices may cause adverse unexpected
financial reporting fluctuations and affect Sequoia’s reported results of
operations.
A change
in accounting standards or practices can have a significant effect on Sequoia’s
reported results and may even affect its reporting of transactions completed
before the change is effective. New accounting pronouncements and
varying interpretations of accounting pronouncements have occurred and may occur
in the future. Changes to existing rules or the questioning of
current practices may adversely affect Sequoia’s reported financial results or
the way it conducts its business.
Sequoia
is vulnerable to acts of God, labor disputes, and other unexpected
events.
Sequoia’s
corporate business office is located in the Salt Lake City, Utah area near the
major freeway running north and south through Utah. The Salt Lake
valley is also a known seismic zone. A chemical or hazardous material
spill or accident on the freeway or an earthquake or other disaster could result
in an interruption in Sequoia’s business. Sequoia’s business also may
be impacted by labor issues related to its operations and/or those of its
suppliers or customers. Such an interruption could harm Sequoia’s
operating results. Sequoia is not likely to have sufficient insurance
to compensate adequately for losses that Sequoia may sustain as a result of any
natural disasters, labor disputes or other unexpected events.
Government
regulation of the Internet and e-commerce is evolving, and unfavorable changes
or failure by Sequoia to comply with these regulations could substantially harm
its business and results of operations.
Sequoia
is subject to general business regulations and laws as well as regulations and
laws specifically governing the Internet and e-commerce. Existing and
future laws and regulations may impede the growth of the Internet or other
online services. These regulations and laws may cover taxation,
restrictions on imports and exports, customs, tariffs, user privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of online payment
services, broadband residential Internet access and the characteristics and
quality of products and services. It is not clear how existing laws
governing issues such as property ownership, sales and other taxes, libel and
personal privacy apply to the Internet and e-commerce as the vast majority of
these laws were adopted prior to the advent of the Internet and do not
contemplate or address the unique issues raised by the Internet or
e-commerce. Those laws that do reference the Internet are only
beginning to be interpreted by the courts and their applicability and reach are
therefore uncertain. For example, the Digital Millennium Copyright
Act, or DMCA, is intended, in part, to limit the liability of eligible online
service providers for listing or linking to third-party websites that include
materials that infringe copyrights or other rights of others. Portions of the
Communications Decency Act, or CDA, are intended to provide statutory
protections to online service providers who distribute third-party
content. Sequoia relies on the protections provided by both the DMCA
and CDA in conducting its business. Any changes in these laws or
judicial interpretations narrowing their protections will subject Sequoia to
greater risk of liability and may increase its costs of compliance with these
regulations or limit our ability to operate certain lines of
business. The Children’s Online Protection Act and the Children’s
Online Privacy Protection Act are intended to restrict the distribution of
certain materials deemed harmful to children and impose additional restrictions
on the ability of online services to collect user information from
minors. In addition, the Protection of Children From Sexual Predators
Act of 1998 requires online service providers to report evidence of violations
of federal child pornography laws under certain circumstances. The
costs of compliance with these regulations may increase in the future as a
result of changes in the regulations or the interpretation of
them. Further, any failures on Sequoia’s part to comply with these
regulations may subject it to significant liabilities. Those current
and future laws and regulations or unfavorable resolution of these issues may
substantially harm Sequoia’s business and results of operations.
Sequoia’s
failure to protect the confidential information of its customers against
security breaches and the risks associated with credit card fraud could damage
its reputation and brand and substantially harm its business and results of
operations.
A
significant prerequisite to online commerce and communications is the secure
transmission of confidential information over public
networks. Sequoia’s failure to prevent security breaches could damage
its reputation and brand and substantially harm its business and results of
operations for customers using online services. Sequoia relies on
encryption and authentication technology licensed from third parties to effect
the secure transmission of confidential customer information, including credit
card numbers, customer mailing addresses and email
addresses. Advances in computer capabilities, new discoveries in the
field of cryptography or other developments may result in a compromise or breach
of the technology used by Sequoia to protect customer transaction
data. In addition, any party who is able to illicitly obtain a user’s
password could access the user’s transaction data or personal
information. Any compromise of Sequoia’s security could damage its
reputation and brand and expose it to a risk of loss or litigation and possible
liability, which would substantially harm its business and results of
operations. In addition, anyone who is able to circumvent Sequoia’s
security measures could misappropriate proprietary information or cause
interruptions in its operations. Sequoia may need to devote
significant resources to protect against security breaches or to address
problems caused by breaches.
Effects of the Merger
In
connection with the Merger, our stockholders, prior to the effective date of the
Merger, will receive the Dividend. Immediately following the Merger,
members of Sequoia will own, in the aggregate, approximately 80% of our Common
Stock on a nondiluted basis, or approximately 38,899,018 post-split shares of
our Common Stock and our current stockholders will own approximately 20% of the
Company’s outstanding Common Stock on a nondiluted basis. Although
this represents substantial dilution of the percentage ownership interest of
current stockholders, we will receive the benefit of Sequoia’s
operations. We believe Sequoia has an equity value in the range of
$40.2 million to $62.8 million, which upon consummation of the Merger will
increase the value of Secure Alliance significantly. Following the
Merger, we will have a total of 48,619,680 shares of Common Stock
outstanding.
The
Merger will fundamentally change our company from a public shell company with
substantially no operations since October 2006 to an operating company with all
of Sequoia’s assets, business and operations. In addition, Sequoia
will control our management and Board. Upon completion of the Merger,
Jerrell G. Clay, our Chief Executive Officer, and Stephen P. Griggs, our
President, Chief Operating Officer, Principal Financial Officer and Secretary,
will resign as officers of the Company, but will remain directors on our
Board. Following the merger, Sequoia’s officers and members of its
Board of Managers will become our officers and directors. If the
Related Proposals are approved and implemented, we will change our name and
trading symbol and move our corporate headquarters to Utah. We will
also effect the Reverse Stock Split and increase the number of shares of our
authorized capital stock.
If the
Merger Agreement is not approved and the Merger is not completed, our business
may be adversely affected. The market price of our Common Stock may
decline to the extent that the current market price reflects a market assumption
that the Merger and the Related Proposals will be completed and many costs
related to the Merger and the Related Proposals, such as legal, accounting,
financial advisor and financial printing fees, have to be paid regardless of
whether the Merger is completed.
Interests of our Directors and Executive Officers in the
Merger
On March
21, 2007, we granted each of Jerrell G. Clay, currently a director and the Chief
Executive Officer of the Company, and Stephen P. Griggs, currently a director
and Principal Financial Officer, Chief Operating Officer and President of the
Company, options under our 1997 Long-Term Incentive Plan to purchase 950,000
shares of Common Stock at an exercise price of $0.62 per
share. Pursuant to the terms of the 1997 Long Term Incentive Plan if
the Merger is consummated, all options granted thereunder will become fully
vested.
Opinion of Ladenburg
On
November 29, 2007, Ladenburg delivered its presentation to the Board and
subsequently delivered its written opinion to the Board, which stated that based
upon and subject to the assumptions made, matters considered, and limitations on
its review as set forth in the opinion, the Merger Consideration given to
members of Sequoia under the Merger Agreement is fair, from a financial point of
view, to our stockholders. The Ladenburg opinion was based on a
reverse stock split of 1-for-3 and the Merger Consideration of 0.5806419 shares
of our Common Stock. Subsequently,
we amended the Merger Agreement to provide for, among other things, a Reverse
Stock Split of 1-for-2 with a corresponding change to the Merger Consideration
and the distribution of a cash Dividend instead of distributing stock of a newly
formed subsidiary with certain enumerated assets that were to be contributed to
it by the Company. Ladenburg has not reviewed the amendment to the
Merger Agreement. Although our Board believes the amendment to the
Merger Agreement does not materially impact Ladenburg’s fairness opinion, there
can be no assurance that Ladenburg’s opinion is still accurate. The
full text of the written opinion of Ladenburg is attached as Annex B and is
incorporated by reference into this proxy statement.
You are
urged to read the Ladenburg opinion carefully and in its entirety for a
description of the assumptions made, matters considered, procedures followed and
limitations on the review undertaken by Ladenburg in rendering its
opinion. The summary of the Ladenburg opinion set forth in this proxy
statement is qualified by reference to the full text of the
opinion.
The
Ladenburg opinion is for the use and benefit of our Board in connection with its
consideration of the Merger and is not intended to be and does not constitute a
recommendation to you as to how you should vote or proceed with respect to the
Merger.
Ladenburg
was not requested to opine as to, and the opinion does not in any manner
address, the relative merits of the Merger as compared to any alternative
business strategy that might exist for us, our underlying business decision to
proceed with or effect the Merger, and other alternatives to the Merger that
might exist for us. Ladenburg does not express any opinion as to the
underlying valuation or future performance of us or Sequoia or the price at
which our securities might trade at any time in the future.
In
arriving at its opinion, Ladenburg took into account an assessment of general
economic, market and financial conditions, as well as its experience in
connection with similar transactions and securities valuations
generally. In so doing, among other things, Ladenburg:
|
|
·
|
Reviewed
the Merger Agreement;
|
|
|
·
|
Reviewed
publicly available financial information and other data with respect to
Secure Alliance that Ladenburg deemed relevant, including the Company’s
Annual Report on Form 10-K for the year ended September 30, 2006, and the
Company’s Quarterly Report on Form 10-Q for the nine months ended June 20,
2007;
|
|
|
·
|
Reviewed
non-public information and other data with respect to the Company,
including unaudited balance sheet statements as of September 30, 2007, and
other internal financial information and management
reports;
|
|
|
·
|
Reviewed
non-public information and other data with respect to Sequoia, including
unaudited financial statements for the two years ended December 31, 2006
and for the nine months ended September 30, 2007, financial projections
for the four years ending December 31, 2011, and other internal financial
information and management reports;
|
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|
·
|
Reviewed
and analyzed the Merger’s pro forma impact on our securities outstanding
and stockholder ownership;
|
|
|
·
|
Considered
the historical financial results and present financial condition of the
Company and Sequoia;
|
|
|
·
|
Reviewed
and compared the trading of, and the trading market for our Common
Stock;
|
|
|
·
|
Reviewed
and analyzed the indicated value range of the consideration implied by the
Merger Consideration;
|
|
|
·
|
Reviewed
and analyzed Sequoia’s projected unlevered free cash flows and prepared a
discounted cash flow analysis;
|
|
|
·
|
Reviewed
and analyzed certain financial characteristics of publicly-traded
companies that were deemed to have characteristics comparable to
Sequoia;
|
|
|
·
|
Reviewed
and analyzed certain financial characteristics of target companies in
transactions where such target company was deemed to have characteristics
comparable to that of Sequoia;
|
|
|
·
|
Reviewed
and discussed with management representatives of the Company and Sequoia
certain financial and operating information furnished by them, including
financial projections and analyses with respect to Sequoia’s business and
operations; and
|
|
|
·
|
Performed
such other analyses and examinations as were deemed
appropriate.
|
In
arriving at its opinion, Ladenburg relied upon and assumed the accuracy and
completeness of all of the financial and other information that was supplied or
otherwise made available to Ladenburg without assuming any responsibility for
any independent verification of any such information. Further, Ladenburg relied
upon the assurances of our and Sequoia’s management that they were not aware of
any facts or circumstances that would make any such information inaccurate or
misleading. With respect to the financial information and projections utilized,
Ladenburg assumed that such information has been reasonably prepared on a basis
reflecting the best currently available estimates and judgments, and that such
information provides a reasonable basis upon which it could make an analysis and
form an opinion. The projections were solely used in connection with
the rendering of Ladenburg's fairness opinion. The projections were prepared by
Sequoia’s management and are not to be interpreted as projections of future
performance (or “guidance”) by our management. Ladenburg did not
evaluate the solvency or fair value of our Company or Sequoia under any foreign,
state or federal laws relating to bankruptcy, insolvency or similar
matters. Ladenburg did not make a physical inspection of the
properties and facilities of our Company or Sequoia and did not make or obtain
any evaluations or appraisals of either company’s assets or liabilities
(contingent or otherwise). In addition, Ladenburg did not attempt to confirm
whether our Company or Sequoia had good title to their respective
assets.
Ladenburg
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, as
amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and all other applicable foreign, federal and state
statutes, rules and regulations. Ladenburg assumes that the Merger will be
consummated substantially in accordance with the terms set forth in the Merger
Agreement, without any further amendments thereto, and that any amendments,
revisions or waivers thereto will not be detrimental to our stockholders. In
addition, based upon discussions with our management, Ladenburg assumed that for
U.S. federal tax income purposes the Merger shall qualify as a tax-free transfer
pursuant to Section 351 of the Internal Revenue Code of 1986, as
amended.
Ladenburg’s
analysis and opinion are necessarily based upon market, economic and other
conditions, as they existed on, and could be evaluated as of, November 29, 2007.
Accordingly, although subsequent developments may affect its opinion, Ladenburg
has not assumed any obligation to update, review or reaffirm its
opinion.
In
connection with rendering its opinion, Ladenburg performed certain financial,
comparative and other analyses as summarized below. Each of the analyses
conducted by Ladenburg was carried out to provide a different perspective on the
Merger, and to enhance the total mix of information
available. Ladenburg did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to the fairness, from a financial point of view, of the Merger
Consideration to our stockholder’s. Further, the summary of
Ladenburg’s analyses described below is not a complete description of the
analyses underlying Ladenburg’s opinion. The preparation of a fairness opinion
is a complex process involving various determinations as to the most appropriate
and relevant methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, a fairness opinion is not
readily susceptible to partial analysis or summary description. In
arriving at its opinion, Ladenburg made qualitative judgments as to the
relevance of each analysis and factors that it considered. In
addition, Ladenburg may have given various analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions, so that the range of valuations resulting from any
particular analysis described above should not be taken to be Ladenburg’s view
of the value of Sequoia’s assets. The estimates contained in
Ladenburg’s analyses and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, analyses relating to the value of businesses or
assets neither purports to be appraisals nor do they necessarily reflect the
prices at which businesses or assets may actually be sold. Accordingly,
Ladenburg’s analyses and estimates are inherently subject to substantial
uncertainty. Ladenburg believes that its analyses must be considered
as a whole and that selecting portions of its analyses or the factors it
considered, without considering all analyses and factors collectively, could
create an incomplete and misleading view of the process underlying the analyses
performed by Ladenburg in connection with the preparation of its
opinion.
The
summaries of the financial reviews and analyses include information presented in
tabular format. In order to fully understand Ladenburg’s financial
reviews and analyses, the tables must be read together with the accompanying
text of each summary. The tables alone do not constitute a complete
description of the financial analyses, including the methodologies and
assumptions underlying the analyses, and if viewed in isolation could create a
misleading or incomplete view of the financial analyses performed by
Ladenburg.
The
analyses performed were prepared solely as part of Ladenburg’s analysis of the
fairness, from a financial point of view, of the Merger Consideration to our
stockholders, and were provided to our Board in connection with the delivery of
Ladenburg’s opinion. The opinion of Ladenburg was just one of the many factors
taken into account by our Board in making its determination to approve the
Merger, including those described elsewhere in this proxy
statement.
Stock
Performance Review
Ladenburg
reviewed the daily closing market price and trading volume of our Common Stock
for the twelve (12) month period ended November 21, 2007 (the last trading date
prior to the announcement of the Merger). Ladenburg noted that during
the period, our Common Stock price ranged from $0.44 to $0.96 and had a mean
closing stock price of $0.67 and a mean daily trading volume of
29,427.
Consideration
Analysis
Ladenburg
reviewed the consideration implied by the Merger Consideration based on our
pre-announcement stock price (as of November 21, 2007) and one month average
stock price, and after taking into account the effect of the Reverse Stock Split
and Dividend (which was originally contemplated to be a distribution of common
stock of a newly formed subsidiary to the Company’s
stockholders). Based on the Merger Consideration, approximately
38,899,018 shares in our Company will be issued to Sequoia including
approximately 12,074,771 shares underlying options and warrants (utilizing the
treasury stock method). Based on our adjusted historical share price
range of $1.66 and $1.76, Ladenburg determined an indicated value range of the
Consideration between approximately $46.0 million and approximately $48.0
million.
Valuation
Overview
Ladenburg
generated an indicated valuation range for Sequoia based on a discounted cash
flow analysis, a comparable company analysis and a comparable transaction
analysis each as more fully discussed below. Based on discussions with our
management, Ladenburg assumed that no debt or cash will be assumed at the
closing of the Merger. Therefore, enterprise value is also equal to
equity value. For purposes of Ladenburg’s analyses, “enterprise
value” means equity value plus all interest-bearing debt less cash.
Ladenburg
weighted the three approaches equally and arrived at an indicated equity value
range of approximately $41.4 million and approximately $58.9 million. Ladenburg
noted that the indicated value range of the Merger Consideration was within
Sequoia’s indicated equity value range.
Discounted
Cash Flow Analysis
A
discounted cash flow analysis estimates value based upon a company’s projected
future free cash flow discounted at a rate reflecting risks inherent in its
business and capital structure. Unlevered free cash flow represents
the amount of cash generated and available for principal, interest and dividend
payments after providing for ongoing business operations.
While the
discounted cash flow analysis is the most scientific of the methodologies used,
it is dependent on projections and is further dependent on numerous
industry-specific and macroeconomic factors.
Ladenburg
utilized the forecasts provided by Sequoia’s management, which project strong
future growth in revenues from fiscal years 2006 to 2011 from approximately $0.7
million to $103.1 million, respectively. Historically, Sequoia has
not generated significant revenue. Management anticipates significant
increases in revenue as a result of new contracts for their products rolling out
over the next year. Most of this revenue is expected to be derived
from existing signed contracts with major companies including Wal-Mart and
Kodak/Qualex.
The
projections also project an improvement in EBITDA from fiscal years 2006 to
2011, from a loss of approximately $2.8 million to a profit of approximately
$37.0 million, respectively. By 2011, Sequoia’s management projects
Sequoia to generate an EBITDA margin of 35.9%. For purposes of
Ladenburg’s analyses, “EBITDA” means earnings before interest, taxes,
depreciation and amortization, as adjusted for add-backs for non-cash stock
compensation expenses.
In order
to arrive at a present value, Ladenburg utilized discount rates ranging from 28%
to 30%. This was based on an estimated weighted average cost of
capital, or WACC, of 29% (based on Sequoia’s estimated weighted average cost of
debt of 12% and a 30.3% estimated cost of equity). The cost of equity
calculation was derived utilizing the Ibbotson build up method utilizing
appropriate equity risk, industry risk and size premiums and a company specific
risk factor, reflecting the risk associated with being able to generate the
projected sales and EBITDA growth given their product is new and given Sequoia
operates within a highly competitive industry.
Ladenburg
also presented a range of terminal values at the end of the forecast period by
applying a range of long-term perpetual growth rates between 3% and
7%. Based on these assumptions, Ladenburg calculated a range of
indicated enterprise values of between approximately $40.1 million and
approximately $53.0 million.
Comparable
Company Analysis
A
selected comparable company analysis reviews the trading multiples of publicly
traded companies that are similar to Sequoia with respect to business and
revenue model, operating sector, size and target customer base.
Ladenburg
reviewed and compared the trading multiples of two sets of comparable
companies:
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|
·
|
Photo
Media Service Companies – Ladenburg located four companies that provide
digital photo-related services and various personal products to consumers
primarily via online delivery, mail delivery, retail/in-store fulfillment,
and self-service kiosks. These companies
include:
|
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|
o
|
Shutterfly,
Inc.
|
|
|
o
|
MAGIX
AG
|
|
|
o
|
Photoworks,
Inc.
|
|
|
o
|
PhotoChannel
Networks, Inc.
|
|
|
·
|
High
Growth Digital Media Software Companies – Ladenburg located five
high-growth software companies that provide various software services to
consumers in the digital media space. These companies were
selected on the basis of not only exhibiting significant historical
growth, but also projected future growth based on consensus earnings
estimates. These companies
include:
|
|
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o
|
NICE
Systems Ltd.
|
|
|
o
|
X-Rite,
Inc.
|
|
|
o
|
Starent
Networks, Corp.
|
|
|
o
|
DivX,
Inc.
|
|
|
o
|
Sonic
Foundry, Inc.
|
Ladenburg
noted the following:
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|
·
|
All
of the comparable companies are larger than Sequoia in terms of revenue,
with the latest twelve months, or LTM, revenue ranging from approximately
$5.5 million to approximately $490.3 million, compared with approximately
$0.6 million for Sequoia.
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|
·
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Three
out of nine of the comparable companies generated EBITDA losses in the LTM
period.
|
|
|
·
|
Most
of the Photo Media Service Companies, and all of the High Growth Digital
Media Software Companies exhibited strong historical revenue growth of
approximately 38.6% and 48.0%, respectively for the latest fiscal year, or
LFY, period.
|
|
|
·
|
Most
of the Photo Media Service Companies, and all of the High Growth Digital
Media Software Companies exhibited strong historical EBITDA growth of
approximately 55.8% and 127.0%, respectively for the LFY
period.
|
|
|
·
|
Sequoia
is projected to generate revenue and EBITDA growth higher than all of the
comparable companies over the next two
years.
|
|
|
·
|
PhotoChannel
Networks may be considered the most comparable to Sequoia] based on
business model, industry and development stage. Although
PhotoChannel has generated approximately $5.5 million in revenue over the
LTM period and recently completed the purchase of Pixology, PhotoChannel
is expected to have the highest growth rates out of all of the comparable
companies and is expected to continue to generate EBITDA losses until
fiscal year 2008.
|
Multiples
utilizing enterprise value were used in the analyses. For comparison purposes,
all operating profits including EBITDA were normalized to exclude unusual and
extraordinary expenses and income.
Ladenburg
generated a number of multiples worth noting with respect to the comparable
companies:
|
Enterprise Value
Multiple of
|
Mean
|
Median
|
High
|
Low
|
||||||||||||
|
2007
revenue
|
5.15 | x | 3.56 | x | 14.57 | x | 0.48 | x | ||||||||
|
2008
revenue
|
3.28 | x | 2.82 | x | 5.75 | x | 0.44 | x | ||||||||
|
2009
revenue
|
2.56 | x | 2.26 | x | 4.04 | x | 0.42 | x | ||||||||
|
2009
EBITDA
|
9.7 | x | 10.1 | x | 15.8 | x | 1.8 | x | ||||||||
Ladenburg
also noted that the forward 2008 revenue, 2009 revenue and 2009 EBITDA trading
multiples for PhotoChannel Networks was approximately 5.75 times, 4.04 times,
and 10.3 times, respectively.
Ladenburg
also reviewed the historical multiples generated for the comparable companies,
and noted that the mean enterprise value to LTM EBITDA multiple over the last
ten years was 11.2 times.
Ladenburg
selected an appropriate multiple range for Sequoia by examining the range
indicated by the comparable companies and taking into account certain
company-specific factors. Ladenburg expects Sequoia’s fiscal year 2008 valuation
multiples to be slightly above the mean of the comparable companies due to its
higher projected revenue growth, but slightly lower than the mean of the
comparable companies for 2009 due to its stage of infancy and related risks of
being able to generate significant revenues.
Based on
the above factors, Ladenburg applied the following multiples to the respective
statistics:
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|
·
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Multiples
of 3.00x to 5.00x 2008 revenue
|
|
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·
|
Multiples
of 1.50x to 2.50x 2009 revenue
|
|
|
·
|
Multiples
of 5.0x to 6.0x 2009 EBITDA
|
and
calculated a range of enterprise values for Sequoia by weighting the above
indications 80%, 10% and 10% respectively (to reflect the significant risks to
achieving 2009 projections) of between approximately $40.2 million and
approximately $62.8 million.
None of
the comparable companies have characteristics identical to
Sequoia. An analysis of publicly traded comparable companies is not
mathematical; rather it involves complex consideration and judgments concerning
differences in financial and operating characteristics of the comparable
companies and other factors that could affect the public trading of the
comparable companies.
Comparable
Transaction Analysis
A
comparable transaction analysis involves a review of merger, acquisition and
asset purchase transactions involving target companies that are in related
industries to Sequoia. The comparable transaction analysis generally
provides the widest range of value due to the varying importance of an
acquisition to a buyer (i.e., a strategic buyer willing to pay more than a
financial buyer) in addition to the potential differences in the transaction
process (i.e., competitiveness among potential buyers).
Information
is typically not disclosed for transactions involving a private seller, even
when the buyer is a public company, unless the acquisition is deemed to be
“material” for the acquirer. As a result, the selected comparable
transaction analysis is limited to transactions involving the acquisition of a
public company, or substantially all of its assets, or the acquisition of a
large private company, or substantially all of its assets, by a public
company.
Ladenburg
located 11 transactions announced since January 2004 involving target companies
whose primary business is the provision of software products and services
related to digital media and other multimedia applications and for which
detailed financial information was available.
|
Target
|
Acquiror
|
|
Fotolog,
Inc.
|
Hi-Media
|
|
Incando
Corporation
|
Scripps Network,
Inc.
|
|
Phtobucket,
Inc.
|
Fox
Interactive Media, Inc.
|
|
Flektor,
Inc.
|
Fox
Interactive Media, Inc.
|
|
Pixology
PLC
|
PhotoChannel
Networks, Inc.
|
|
InterVideo,
Inc.
|
Corel
Corporation
|
|
Flickr
|
Yahoo,
Inc.
|
|
Pinnacle
Systems, Inc.
|
Avid
Technology, Inc.
|
|
Ulead
Systems, Inc.
|
InterVideo,
Inc.
|
|
Roxio
– Consumer Software Division
|
Sonic
Solutions
|
|
Twofold
Photos, Inc.
|
CNET
Networks, Inc.
|
Based on
the information disclosed with respect to the targets in the each of the
comparable transactions, Ladenburg calculated and compared the enterprise values
as a multiple of LTM revenue and LTM EBITDA.
Ladenburg
noted the following with respect to the multiples generated:
|
Multiple of enterprise
value to
|
Mean
|
Median
|
High
|
Low
|
||||||||||||
|
LTM
revenue
|
7.29 | x | 1.07 | x | 38.71 | x | 0.65 | x | ||||||||
|
LTM
EBITDA
|
12.9 | x | 10.6 | x | 24.3 | x | 5.9 | x | ||||||||
Ladenburg
also noted that the mean LTM revenue multiple excluding the Fotolog transaction
was 2.80 times.
Ladenburg
expects Sequoia’s valuation multiples to be slightly lower than the mean of the
comparable companies due its stage of infancy and related risks of being able to
generate significant revenues from its products.
Based on
the above factors, Ladenburg applied the following multiples to the respective
statistics:
|
|
·
|
Multiples
of 1.00x to 1.50x 2009 revenue,
|
|
|
·
|
Multiples
of 6.0x to 8.0x 2009 EBITDA,
|
and
calculated a range of future enterprise values for Sequoia by weighting the
above indications equally. Ladenburg then discounted this range of
future enterprise values back to present values utilizing Sequoia’s estimated
WACC of 29% to derive an indicated enterprise value range of approximately $43.8
million to approximately $60.8 million.
None of
the target companies in the comparable transactions have characteristics
identical to Sequoia. Accordingly, an analysis of comparable business
combinations is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the target companies in the comparable transactions and other factors that could
affect the respective acquisition values.
Based on
the information and analyses set forth above, Ladenburg delivered its written
opinion to our Board, which stated that, as of November 29, 2007, based upon and
subject to the assumptions made, matters considered, and limitations on its
review as set forth in the opinion, the Merger Consideration is fair, from a
financial point of view, to our stockholders.
Ladenburg
is an investment banking firm that, as part of its investment banking business,
regularly is engaged in the evaluation of businesses and their securities in
connection with mergers, acquisitions, corporate restructurings, private
placements, and for other purposes. We determined to use the services of
Ladenburg because it is a recognized investment banking firm that has
substantial experience in similar matters.
We paid
Ladenburg a fee of $115,000 and reimbursed them for expenses upon the delivery
of its fairness opinion dated November 29, 2007. The terms of the fee
arrangements with Ladenburg, which Ladenburg and we believe are customary in
transactions of this nature, were negotiated at arms’ length between the Board
and Ladenburg. In addition, we have agreed to indemnify Ladenburg for certain
liabilities that may arise out of the rendering of its
opinion. Further, Ladenburg and its affiliate Capitalink have
previously provided non-contingent fairness opinion and other advisory services
to our Company. In the past two years, we have compensated Ladenburg
and Capitalink $112,500 for such services. There are no other pending
agreements to provide any other services to Sequoia or us.
Pursuant
to our policies and procedures, this opinion was not required to be, and was
not, approved or issued by a fairness committee. Further, our opinion
does not express an opinion about the fairness of the amount or nature of the
compensation, if any, to any of the Company’s officers, directors or employees,
or class of such persons, relative to the compensation to the Company’s
stockholders.
In the
ordinary course of business, Ladenburg, certain of Ladenburg’s affiliates, as
well as investment funds in which Ladenburg or its affiliates may have financial
interests, may acquire, hold or sell, long or short positions, or trade or
otherwise effect transactions, in debt, equity, and other securities and
financial instruments (including bank loans and other obligations) of, or
investments in us, any other party that may be involved in the Merger and their
respective affiliates.
The
opinion of Ladenburg was just one of the many factors taken into account by the
Board in making its determination to approve the Merger, including those
described elsewhere in this proxy statement.
Indemnification and Insurance
The
Merger Agreement provides that all rights to indemnification or exculpation
existing in favor of the employees, agents, directors or officers of the Company
and our subsidiaries in effect on the date of the Merger Agreement and to Mark
Levenick and Raymond Landry, former directors, will continue in full force and
effect for a period of six years after the Merger. Additionally, we
will purchase a single payment, run-off policy or policies of directors’ and
officers’ liability insurance covering such parties for a period of six years
after the Merger. We will also indemnify and hold harmless such
parties in respect of acts or omissions occurring at or prior to the closing of
the Merger.
Loan Agreement with Sequoia
Pursuant
to the Loan Agreement, we have agreed to extend (and have extended) $2.5 million
in secured financing to Sequoia. Under the terms of the Loan
Agreement, Sequoia has agreed to pay interest on the loan at a rate per annum
equal to 10%. Interest on the loan is payable on December 31, 2008,
the scheduled maturity date. In addition, if the loan obligations
have not been paid in full on or prior to the scheduled maturity date, a monthly
fee equal to 10% of the outstanding loan obligations is payable to us by Sequoia
on the last day of each calendar month for which the loan obligations remain
outstanding.
We
entered into the Loan Agreement to provide Sequoia with additional capital for
working capital purposes and to provide Sequoia with additional liquidity until
the Merger. If the Merger is not approved, the Loan Agreement
provides for Sequoia to repay the loan as set forth above, under the terms and
conditions set forth in the Loan Agreement. The loan
is secured by a first priority lien on substantially all of the assets of
Sequoia.
Material United States Federal Income Tax Consequences
Our
stockholders should not recognize any gain or loss as a result of the
Merger. However, to the extent we declare and pay the Dividend, a
portion of the distribution may be taxable as “qualified dividend income”,
generally taxable at a federal rate of 15%, to the extent paid out of a
stockholder’s pro rata share of our current or accumulated earnings and
profits. The determination of the portion of the distribution, if
any, that will be treated as qualified dividend income will be reported to you
on a tax information return in early 2009. Any portion of the
distribution in excess of each holder’s pro rata share of our earnings and
profits will be treated first as a tax-free return of capital to the extent of
each stockholder’s tax basis in his, her or its shares of our Common Stock, with
any remaining portion treated as capital gain. Non-United States holders of our
Common Stock generally will be subject to withholding on the gross amount of the
distribution at a rate of 30% or such lower rate as may be permitted by an
applicable income tax treaty. Because individual tax circumstances of
stockholders vary, stockholders should consult their own tax advisors regarding
the tax consequences to them of the distribution.
Regulatory Approvals
We are
not aware of any regulatory requirements or governmental approvals or actions
that may be required to consummate the Merger, except for compliance with the
applicable regulations of the SEC in connection with this proxy statement and
the Delaware General Corporation Law in connection with the Merger.
Board Composition and Management following the Merger
The
Merger Agreement provides that, upon consummation of the Merger, Chett B.
Paulsen, Sequoia’s current President and Chief Executive Officer will become our
President and Chief Executive Officer, Richard B. Paulsen, Sequoia’s Vice
President and Chief Technology Officer will become our Vice President and Chief
Technology Officer, Edward “Ted” B. Paulsen currently Secretary/Treasurer and
Chief Operating Officer of Sequoia will become our Secretary/Treasurer and Chief
Operating Officer and Terry Dickson, currently Sequoia’s Vice President of
Marketing and Business Development will become our Vice President of Marketing
and Business Development.
In
accordance with the Merger Agreement, upon completion of the Merger, the Board
will increase the size of the Board from two to seven, and the Board will fill
the five vacancies created by the increase by appointing as additional directors
Chett B. Paulsen, Richard B. Paulsen, Edward B. Paulsen, John A. Tyson and Tod
M. Turley.
We
anticipate that upon the consummation of the Merger, our directors and executive
officers will be as follows:
|
Name
|
Age
|
Position
|
||
|
Chett
B. Paulsen
|
51
|
President,
Chief Executive Officer, Director
|
||
|
Richard
B. Paulsen
|
48
|
Vice
President, Chief Technology Officer, Director
|
||
|
Edward
B. Paulsen
|
44
|
Secretary/Treasurer,
Chief Operating Officer, Director
|
||
|
Terry
Dickson
|
50
|
Vice
President Marketing and Business Development
|
||
|
Tod
M. Turley
|
46
|
Director
|
||
|
John
E. Tyson
|
65
|
Director
|
||
|
Jerrell
G. Clay
|
66
|
Director
|
||
|
Stephen
P. Griggs
|
50
|
Director
|
Chett B. Paulsen, President and
Chief Executive Officer, Director. Chett co-founded Sequoia in
2003 and serves as its President and Chief Executive Officer. From
1998 to 2002, Chett co-founded, served as President and then as Chief Operating
Officer of Assentive Solutions, Inc. (aka, iEngineer.com, Inc.), which developed
visualization and collaboration technologies for rich media content that was
ultimately sold to Oracle in 2002. During his tenure with Assentive,
the company raised more than $25 million in private and venture capital funding
from entities including Intel, Sun Microsystems, J.W. Seligman, and T.L.
Ventures. From 1995 to 1998, Chett founded and managed Digital
Business Resources, Inc., which sold communications technologies to Fortune 100
companies such as American Stores and Walgreens, among others. From
1984 to 1995, Chett worked at Broadcast International (NASDAQ “BRIN”) playing
key management roles including Executive Vice President, Vice President of
Operations and President of the Instore Satellite Network and Business
Television Network divisions of Broadcast where he implemented and managed
technology deployment in thousands of retail locations for Fortune 500
companies. During Chett’s tenure at BI, market capitalization rose to
over $200 million. Chett graduated from the University of Utah in
1982 with a B.S. degree in Film Studies.
Richard B. Paulsen, Vice President
and Chief Technology Officer, Director. Richard co-founded
Sequoia in 2003 and serves as its Vice President and Chief Technology
Officer. From 1999 to 2003, Richard worked as a senior member of the
technical staff for Wind River Systems (NASDAQ “WIND”), managing a
geographically diverse software development team and continuing work on software
technology Richard pioneered at Zinc Software from 1990 to 1998 as one of Zinc’s
founders. Zinc subsequently sold to Wind River in
1998. From 1998 to 2000, Richard enjoyed a sabbatical and served as
the Director of Administrative Services for Pleasant Grove City, Utah, the
highest appointed office in the city. From 1981 through 1990, Richard
worked as a software consultant and programmer working for the University of
Utah Department of Computer Science conducting software analysis, design and
coding, and Custom Design Systems developing custom user interface tools and
managing the company’s core library used by thousands of developers
worldwide. Richard graduated with a MBA degree, with an emphasis in
financial and statistical methods, from the University of Utah in 1987 after
receiving a B.S. degree in Computer Science from the University of Utah in
1985.
Edward “Ted” B. Paulsen, J.D.,
Secretary/Treasurer, Chief Operating Officer, Director. Ted
has served as legal counsel since co-founding Sequoia in 2003, and joined the
company full time as Chief Operating Officer in September 2006. From
2003 to September 2006, Ted served as the Chief Operating Officer and Corporate
Secretary of Prime Holdings Insurance Services, Inc. where he helped position
the company operationally and financially to secure outside capital and partner
funding to support future growth beyond the company’s then current annual
revenue level. From 1995 through 2003, Ted worked as an associate and
then partner with the law firm of Gibson, Haglund & Paulsen and its
predecessor. With a securities focus, Ted has assisted emerging and
growing businesses with organizational, operational and legal issues and
challenges. His legal practice focused on assisting businesses
properly plan and structure business transactions related to seeking and
obtaining financing. Before moving to Utah and opening the Utah
office of his firm in 1996, Mr. Paulsen worked in Southern California from 1990
to 1995 with the law firm of Chapman, Fuller & Bollard where he practiced in
the areas of business and employment litigation and business
transactions. Ted graduated from the University of Utah College of
Law in 1990 after receiving a B.S. degree in Accounting from Brigham Young
University in 1987.
Terry Dickson, Vice President of
Marketing and Business Development. Terry has served as
Sequoia’s Vice President of Marketing and Business Development since May
2006. Prior to joining Sequoia, Terry was an advisor to Sequoia from
March 2004 through May 2006. Terry brings over 25 years of relevant
software marketing, sales and management experience to Sequoia. From
April 2002 to April 2006, Terry served as the Chief Executive Officer of Avinti,
Inc, a venture-funded startup company developing email security
software. From September 2001 to April 2002, he served as the Vice
President of Marketing at venture-backed Lane15 Software in Austin,
Texas. Prior to that, Terry was the founding Marketing Vice President
at Vinca Corporation from 1998 to 2000, where he played the point role in
negotiating a $92 million acquisition to Legato Systems (NASDAQ: LGTO) in
1999. From 1993 to 1996, Terry served in several marketing positions
at the LANDesk software operation of Intel Corporation, including serving as the
Business Unit Manager. He also served as Intel’s Director of Platform
Marketing, and was appointed as Chairman of the Distributed Management Task
Force, an industry standards body consisting of the top 200 computer hardware
and software vendors. Terry received a BS Degree in Marketing in 1980
from Brigham Young University, and an MBA degree from the University of
Colorado, Boulder in 1981.
Tod M. Turley,
Director. Tod was appointed to the Board of Managers of
Sequoia in March 2006, following an investment in Sequoia by Amerivon
Holdings. Tod has served as the Chairman and Chief Executive Officer
of Amerivon Holdings since 2003. Tod has also served as the Chairman
and Chief Executive Officer of Amerivon Investments LLC, a subsidiary of
Amerivon Holdings (“Amerivon Investments” and, together with Amerivon Holdings,
“Amerivon”), since he co-founded it in April 2007. Amerivon is a
significant equity holder and investor in Sequoia. Through its
integrated approach of sales, consulting and capital, Amerivon accelerates rapid
growth plans for emerging growth companies such as
Sequoia. Previously, Mr. Turley served as the Senior Vice President,
Business Development of Amerivon Holdings from June 2001 to July
2003. Prior to Amerivon, Mr. Turley was the co-founder and Senior
Vice President of Encore Wireless, Inc. (private label wireless service provider
with a focus on “big-box” retailers). Earlier, he served for 13 years
as a corporate attorney and executive with emerging growth companies in the
telecommunications industry. He currently serves as a director on a
number of other boards of private companies, including Wireless Advocates and
Smart Pack Solutions. Tod graduated from the University of Utah in
1985 with a BA in Economics and French, and subsequently graduated from the
University of Southern California with a J.D. in 1988.
John E. Tyson,
Director. John became a member of Sequoia’s Board of Managers
in May 2007 as a representative of Amerivon. John has served as the
President of Amerivon Investments upon its formation in April 2007, and also
serves as Executive Vice President of Amerivon Holdings. John
previously served as the President of Amerivon Holdings from May 2005 through
April 2007. Concurrently, from April 2005 through April 2007, John
served as the President of Xplane Corporation, an information design firm using
visual maps to make complex processes easier to understand and Corporate Visions
Inc., a sales consulting and training company. Prior to that, John founded
etNetworks LLC, an IT training company (broadcasting IBM courses via satellite
directly to the Desktop PC) in 1997 and served as the company’s Chairman, Chief
Executive Officer and President through March 2005. From May 1980
through February 1995, John was the Chairman and Chief Executive Officer of
Compression Labs, Inc. (“CLI”), a NASDAQ company developing Video
Communications Systems. CLI pioneered the development of compressed
digital video, interactive videoconferencing and digital broadcast television,
including the systems used in today’s highly successful Hughes DirecTV®
entertainment network. Prior to CLI, John has held executive
management positions with AT&T, General Electric, and General Telephone
& Electronics. He currently serves as Chairman of the Board of
Provant, Inc., is a director on a number of boards of private companies,
including MicroBlend Technologies, Retail Inkjet Solutions, The Wright Company
and AirTegrity (a wireless networking company) and is an Advisory Board Member
of the University of Nevada-Reno, Engineering School.
Jerrell G. Clay,
Director. Jerrell has served as a Director of Secure Alliance
since December 1990, and as our Chief Executive Officer since October 3,
2006. Concurrently, Jerrell has served as the co-Founder, Chairman of
the Board and Chief Executive Officer of 3 Mark Financial, Inc., an independent
life insurance marketing organization, since January 1997, and has served as
President of Protective Financial Services, Inc., one of the founding companies
of 3 Mark Financial, Inc., since 1985. From 1962-1985, Jerrell held
various positions within the insurance industry, including general agent, branch
manager, vice president and branch agency director with a major life insurance
company. Jerrell currently serves as a member of the Independent
Marketing Organization’s Advisory Committee of Protective Life Insurance Company
of Birmingham, Alabama and is the past President of the Houston Chapter of the
Society of Financial Service Professionals. Jerrell is a Chartered Life
Underwriter and a Registered Securities Principal. Upon
consummation of the Merger, Jerrell will resign as our Chief Executive Officer,
but will remain a director of the Company.
Stephen P. Griggs,
Director. Stephen has served as a Director of Secure Alliance
since June 2002, as our President and Chief Operating Officer since October 3,
2006 and as our Principal Financial Officer and Secretary since April 20,
2007. Stephen has been primarily engaged in managing his personal
investments since 2000. From 1988 to 2000, Stephen held various
positions, including President and Chief Operating Officer of RoTech Medical
Corporation, a NASDAQ-traded company. He holds a Bachelor of Science
degree in Business Management from East Tennessee State University and a
Bachelor of Science degree in Accounting from the University of Central
Florida. Upon consummation of the Merger, Stephen will resign as our
President and Chief Operating Officer, but will remain a director of the
Company.
Chett B.
Paulsen, Richard B. Paulsen and Edward B. Paulsen, the original founders of
Sequoia, are brothers.
Material Legal Proceedings
On
December 17, 2007, Robert L. Bishop, who worked with Sequoia in a limited
capacity in 2004 and is a current member of a limited liability company that
owns an equity interest in Sequoia, filed a legal claim against Sequoia for
unpaid wages and/or commissions (with no amount specified) and promised
equity. Chett B. Paulsen was also named individually in the
suit. The complaint was served on Sequoia and Chett B. Paulsen on
January 7, 2008. Both parties timely filed an Answer denying Mr.
Bishop’s claims.
Related Party Transactions
In
December 2006, Sequoia entered into various loans with executives of Sequoia
totaling $265,783. These loans bore interest at 10% per annum and
were payable on or before December 31, 2007. Loan origination fees of
$20,005 were recorded as an asset to be amortized over the life of the
loans. On January 5, 2007, an additional $20,000 was loaned to
Sequoia. In April and May 2007, total outstanding principal, accrued
interest, and loan origination fees of $285,783, $10,376, and $20,005,
respectively, were repaid and the associated asset was fully
amortized.
Tod M.
Turley, a member of Sequoia’s Board of Managers who will become a member of our
Board if the Merger is approved and consummated, serves as the Chairman and
Chief Executive Officer of Amerivon Investments and Amerivon
Holdings. John E. Tyson, is also a member of Sequoia’s Board of
Managers who will become a member of our Board if the Merger is approved and
consummated, serves as the President of Amerivon Investments and as the Managing
Director of Amerivon’s Retail Capital Markets. Amerivon is a
significant investor and equity holder in Sequoia.
During
2006, Amerivon invested a total of $2,390,000 in Sequoia’s convertible
debt. At the time of its initial investment, Amerivon placed
Tod M. Turley on Sequoia’s Board of Managers. During 2007, Amerivon
(i) converted $2,390,000 of Sequoia’s convertible debt into common units of
Sequoia membership interests, (ii) made a $2,000,000 bridge loan that was later
converted in Series B Preferred Units of Sequoia membership interests (the
“Series B preferred”) and (iii) purchased an additional $4,400,000 of Series B
preferred. Upon the closing of the Series B preferred offering,
Amerivon placed John E. Tyson on Sequoia’s Board of
Managers. Amerivon has agreed to convert all of their preferred units
to common units in the event the Merger is consummated. In exchange
for the conversion, Amerivon has the right to receive 1,525,000 shares of
Sequoia’s common units.
Additionally,
Sequoia entered into a consulting agreement with Amerivon on August 1, 2007
whereby Amerivon will receive up to $775,000 over the next 12 month period for
advising Sequoia will regard to financial transactions and preparing for
entering the public market. The consulting agreement calls for
payment of $10,000 per month for six months from August 2007 to January 2008,
with additional payments of $119,166 for the following six
months. Amerivon has agreed to defer receipt of $109,116 each month
until such time as the Sequoia has additional cash available.
Sequoia
requires full Board of Managers review of any transaction that may result in the
payment of more than $10,000 to any officer, director or related affiliate of
Sequoia. Any member of the Board of Managers that is party to a
transaction under review is required to abstain from the Board of Managers vote
and does not participate in the meeting during which a final vote is taken on
the matter. All members of the Board of Managers are charged with
applying the procedures for related party transactions. Such
procedures are in writing and kept by Sequoia’s corporate
secretary. Each related party transaction during 2007 and 2008
followed Sequoia’s procedure for handling related party
transactions.
Section 16(a) Beneficial Ownership Reporting
Compliance
As of the
date of this proxy statement, Sequoia had been under no obligation to disclose
ownership holdings and transfers under Section 16(a) of the Exchange
Act.
Director Independence
Sequoia
is a privately held company and is not subject to director independence
rules. Following the Merger, a majority of the members on the newly
constituted Board will be independent; four directors will be non-management and
three directors will be employed by Secure Alliance.
Sequoia
established audit and compensation committees in 2007.
Sequoia’s
audit committee consists of Edward B. Paulsen and Tod M. Turley and is charged
with closely reviewing the audit report received from the auditors and providing
a full report to Sequoia’s Board of Managers. Jerrell Clay and
Stephen Griggs currently serve on Secure Alliance’s audit committee, with
Stephen Griggs serving as the audit committee financial expert. See
“Directors, Executive Officers and Corporate Governance” for more information
about our audit committee.
Sequoia’s
compensation committee consists of Chett B. Paulsen and John E. Tyson, an
outside director. Sequoia’s compensation committee gathers
information on industry salaries to set executive compensation
levels. This committee also reviews all equity grants to
employees. Jerrell Clay and Stephen Griggs currently serve on Secure
Alliance’s compensation committee. See “Directors, Executive Officers
and Corporate Governance” for more information about our compensation
committee.
Upon
consummation of the Merger, we intend to form a nominating
committee.
Sequoia Executive Compensation
Compensation
Discussion and Analysis
Sequoia’s
primary objective with respect to executive compensation is to design a reward
system that will align executives’ compensation with Sequoia’s overall business
strategies and attract and retain highly qualified executives. The plan rewards
revenue generation and achievement of revenue opportunities generated by signing
contracts with retailers to carry Sequoia’s products.
The
principle elements of executive compensation are salary, bonus and stock option
grants. Sequoia pays these elements of compensation to stay
competitive in the marketplace with its peers.
During
2007, Sequoia participated in a Pre-IPO and Private Company Total Compensation
Survey which polled 221 companies and just under 14,800 employees (the
“Survey”). Sequoia’s compensation committee, consisting of one
outside manager and one executive manager, examined the software companies who
participated in the Survey and determined to compensate its executives at
approximately the 25th percentile because of the relative small size of Sequoia
and the stage of revenue generation. Each executive position at
Sequoia is represented in the Survey and the data from such positions were used
in determining the executive salary levels for 2008. For years prior
to 2008, all executives were working for salaries Sequoia determined it could
afford and all were making salaries below market and below prior salary
levels.
The
Survey also assessed bonus and total compensation levels. Sequoia’s
executive bonuses for 2008 are consistent with the Survey at about the
25th percentile. For years prior to 2008, bonuses were determined by
assessing revenue generation, contracts signed with customers including large
retailers, value creation through signed contracts and general contribution to
the achievement of company objectives to position the company for revenues and
additional outside capital investment. Sequoia’s
compensation also considered the number of kiosks on which its products were
deployed as a result of an executive’s efforts, since its products are delivered
in one instance on kiosks located in major retailers.
Additional
incentives in the form of options to purchase equity interests in Sequoia were
granted in 2007. Terry Dickson was granted 510,000 options as
incentive to join the company in 2006. The total grant was negotiated
between Sequoia and Mr. Dickson. The remaining executives, Chett B.
Paulsen, Richard B. Paulsen and Edward B. Paulsen have not received any option
grants or equity in the company from its formation until 2007. In
September 2007, Sequoia’s Board of Managers approved stock option grants to the
original founders as recognition of their efforts in generating revenues,
signing major retail accounts, positioning the company for future growth and to
provide additional incentive to continue in their management positions through a
critical time of revenue and operational growth. The options vest
over three years, with 50% vesting upon completion of one year of employment
from the date of grant, or September 28, 2008, with the balance vesting monthly
on a pro-rata basis over the following 24 months.
In
considering the elements of compensation, Sequoia considers its
current cash position in determining whether to adjust salaries, bonuses and
stock option grants. Sequoia, as a small private company, has used
its outside directors who sit on its Board of Managers (Tod M. Turley and
John E. Tyson) to help guide the executive compensation.
Sequoia
does not have a formal equity option plan.
Summary Compensation Table
|
Name
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Option ($)
|
Total
($)
|
|||||
|
Chett
B. Paulsen, PEO, President, Manager
|
2005
|
144,000
|
-
|
144,000
|
||||||
|
2006
|
163,167
|
144,400
|
307,567
|
|||||||
|
2007
|
199,375
|
138,937
|
27,322(1)
|
365,634
|
||||||
|
Richard
B. Paulsen, CTO, Manager
|
2005
|
120,000
|
-
|
120,000
|
||||||
|
2006
|
142,917
|
129,500
|
272,417
|
|||||||
|
2007
|
183,333
|
118,125
|
27,322(1)
|
328,780
|
||||||
|
Edward
B. Paulsen, PFO, COO, Manager
|
2005
|
-
|
-
|
-
|
||||||
|
2006
|
44,423
|
53,495
|
97,918
|
|||||||
|
2007
|
173,854
|
88,000
|
19,125(2)
|
280,979
|
||||||
|
Terry
Dickson, VP Business Development
|
2005
|
-
|
-
|
-
|
||||||
|
2006
|
103,231
|
131,625
|
234,856
|
|||||||
|
2007
|
181,042
|
135,000
|
8,197(3)
|
324,239
|
|
Mark
Petersen, VP Sales
|
2005
|
-
|
-
|
-
|
58,040(4)
|
|||||
|
2006
|
25,000
|
6,250
|
-
|
35,703(5)
|
||||||
|
2007
|
100,000
|
50,000
|
2,732(6)
|
152,732
|
|
(1)
|
Non-qualified
option grant to purchase 1,000,000 common units at $.62 (determined to be
the fair market value on the date of grant). Option vests 50%
upon completing 12 months of employment on September 28, 2008, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
|
(2)
|
Non-qualified
option grant to purchase 700,000 common units at $.62 (determined to be
the fair market value on the date of grant). Option vests
50% upon completing of 12 months of employment at September 28, 2008, with
the balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
|
(3)
|
Non-qualified
option grant to purchase 300,000 common units at $.62 (determined to be
the fair market value on the date of grant). Option vests 50%
upon completing of 12 months of employment at September 28, 2008, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
|
(4)
|
Independent
contractor work.
|
|
(5)
|
Includes
$4,453 of other compensation.
|
|
(6)
|
Non-qualified
option grant to purchase 100,000 common units at $.62 (determined to be
the fair market value on the date of grant). Option vests 50%
upon completing of 12 months of employment at September 28, 2008, with the
balance vesting monthly on a pro rata basis over the next 24 months of
employment.
|
Information Related to Sequoia
Business
General
Development of Sequoia’s Business
Sequoia
is a Utah limited liability company organized on March 28, 2003 under the name
Life Dimensions, LC. In 2003, Sequoia changed its name from Life
Dimensions, LC to Sequoia Media Group, LC. Sequoia’s operations are
currently governed by a Board of Managers made up of five managers, three of
whom are the original founders and two of whom were appointed as part of a
private equity investment. Substantially all of its business is
conducted out of its Draper, Utah office. Sequoia also has an office
in Bentonville, Arkansas to help service Wal-Mart, which is one of its largest
retail customers.
Sequoia
has developed and deployed a software technology that employs “Automated
Multimedia Object Models,” its patent-pending way of turning consumer captured
images, video, and audio into complete digital files in the form of full-motion
movies, DVD’s, photo books, posters and streaming media
files. Sequoia filed its first provisional patent in early 2004 for
patent protection on various aspects of its technology with a full filing
occurring in early 2005, and Sequoia has filed several patents since that time
as part of its intellectual property strategy. Sequoia’s technology
carries the brand names of “aVinci” and “aVinci Experience.”
In May
2004 Sequoia signed its first client agreement with BigPlanet, a division of
NuSkin International, Inc. (“NuSkin”). Under the terms of
its BigPlanet agreement, Sequoia supplied them with its software technology that
they marketed, sold, and fulfilled for their consumers. Revenues from
BigPlanet represent substantially all of Sequoia’s sales through 2007 at
approximately $3.4 million to date. Sequoia’s agreement with
BigPlanet expired on December 31, 2007. Sequoia and BigPlanet are in
negotiations to continue their business relationship.
Since
inception, Sequoia has continued to develop and refine its technology to be able
to provide higher quality products through a variety of distribution models
including in-store kiosks, point of scan kits, and online
downloads. Sequoia’s business strategy has been to avoid providing
traditional multimedia tools and services that focus on providing software for
users to purchase and learn how to use so that they can build their own
products, and instead provide a product solution that provides users with
professionally created templates to be able to automatically create personalized
products by simply adding end customer images.
Sequoia’s
business efforts during 2006 and 2007 were directed at developing relationships
with mass retailers. Sequoia signed an agreement to provide its
technology in Meijer stores at the end of 2006. Due to an integration
problem issue with a third party supplier to Meijer, Sequoia has been delayed in
deploying its software technology in Meijer stores. However, Sequoia
is currently working with a new vendor, Hewlett Packard, to integrate its
software and is scheduled to launch its products in Meijer stores in April
2008.
During
2007, Sequoia signed an agreement with Fujicolor to deploy its technology on
their kiosks located in domestic Wal-Mart stores. Sequoia’s initial
integration and deployment with Fujicolor in domestic Wal-Mart stores took place
in the third quarter of 2007.
Initial
operations before Sequoia’s formal entity organization in March 2003 were funded
through founder contributions. Operations since May 2004 have been
funded by royalty revenue received from BigPlanet, totaling approximately $3.4
million to date, and from outside investment capital, totaling approximately
$9.8 million to date.
From
pre-organization through Sequoia’s initial contract, the founders contributed
approximately $150,000. These initial contributions were provided in
exchange for promissory notes bearing interest at 10%, the principal and
interest of which were converted into convertible debentures bearing interest at
10% with a term of 13 months through January 31, 2005. The debentures
and interest were converted into Series A preferred membership interests (the
“Series A preferred”) during January 2005. The preferences of the
Series A preferred was the right to convert the debenture total into an
investment in a future financing if, at anytime within 12 months of receiving
the Series A preferred, Sequoia raised capital at a lower valuation than such
debenture holders’ initial investment (which did not occur), and the right to
receive distributions upon a liquidating event before common unit holders
receive distributions. The Series A preferred liquidation preference
automatically terminates on the sale of a majority of Sequoia’s assets or
membership interests.
During
the fourth quarter of 2003, Sequoia undertook a small private offering that
closed in the first quarter of 2004. The offering consisted of
12-month convertible debt, bearing interest at the annual rate of
10%. In January 2005, all but $30,000 of the debt converted into
Series A preferred. In February 2005, Sequoia closed a private
offering of approximately $150,000 consisting of the sale of common units, and
it followed that offering with another offering in June of 2005, consisting of
the sale of common units through which Sequoia raised an additional
$173,000.
Needing
more capital to continue pursuing its business plan through 2006, Sequoia
undertook a larger private equity offering consisting of 12-month convertible
debt, bearing interest at 10%. The offering was taken in its entirety
by Amerivon, who invested a total of $830,000. At the time of the
investment, Amerivon placed a member on Sequoia’s Board of
Managers. In August 2006, Amerivon invested an additional $1,560,000
in a convertible debt offering, bearing interest at 9%, intended to bridge
Sequoia to a subsequent preferred equity offering targeting $5 to $7
million. During the first quarter of 2007, Amerivon provided
additional bridge financing of $500,000
and an additional $535,000 of bridge financing during the second quarter of
2007. In May 2007, Sequoia closed the preferred equity
offering with Amerivon at which time they converted approximately $2.4 million
in aggregate convertible debt held by Amerivon, together with accumulated
interest into common units of Sequoia. Amerivon also provided an
additional $4.7 million in cash which, along with $1.5 million of the bridge
financing provided during 2007, plus accumulated interest, was used to purchase
a total of $6.2 million of Sequoia’s Series B preferred. Upon the
closing of the Series B preferred offering, Amerivon placed a second member on
Sequoia’s Board of Managers.
The
Series B preferred entitles its holders to redemption rights after four years,
annual dividends equal to 8% of the principal amount of the investment, and the
right to receive distributions before common and Series A preferred holders
receive distributions upon liquidation. The Series B preferred owners
have agreed to convert all of their preferred units to common units in the event
the Merger is consummated. In exchange for the conversion, Amerivon
has the right to receive 1,525,000 additional common units of
Seqouia.
Financial
Information about Operating Segments
Sequoia
conducts business within one operating segment in the United
States. During the past three years, Sequoia has generated revenues
primarily with one customer, BigPlanet, a division of NuSkin.
Description
of Business
Software
Technology and Products
Sequoia
makes software technology that it packages in various forms available to mass
retailers, specialty retailers, Internet portals and websites that allow end
consumers to use an automated process to create products such as DVD
productions, photo books, posters, calendars, and other print media products
from consumer photographs, digital pictures, video, and other
media. Sequoia’s customers are retailers and other vendors and not
end consumers. Sequoia enables its customers to sell its products to
the end consumer who remain customers of its vendor and do not become its
customers directly. Sequoia currently delivers its technology to end
consumers through (i) third party photo kiosks at mass and specialty retail
outlets, (ii) point of scan shrink wrapped software at mass and specialty retail
outlets, (iii) simple software downloads through third party Internet sites,
(iv) simple software downloads though its own managed Internet site to which
third party Internet sites are linked, and (v) on its own managed web servers on
the world wide web to which third party Internet sites are linked.
Generally
all of Sequoia’s products require the end consumer to simply supply digital
images. Sequoia supplies preformatted templates for an occasion,
event, or style such as a wedding, birthday, or activity that fits a particular
style. A template for a DVD generally includes six to eight different
scenes that incorporate background images related to that particular template
theme. Each scene is built around four to ten digital image frames,
or placeholders, where user supplied images are placed to have the appearance of
being part of the themed contextual images Sequoia supplies to support the
template theme. Sequoia utilizes a technique it calls “layering,”
(which is the subject of its patent) to stitch together its supplied images with
the user-supplied images to produce a themed DVD movie. Scenes may
involve panning over the user images as though they are photographs sitting on a
table, or having user images appear in frames sitting on a mantle as the camera
angle appears to change and move around the mantle piece, to describe a few of
the hundreds of scene effects Sequoia utilizes. Each template also
provides a pre-designated position and font for a unique title, and in some
instances subtitle and other text, to be added by the end
consumer. The scenes are assembled in an order to give the production
a feeling of telling a story. Each template also comes with a default
sound track selected to match the template theme. In some
applications of Sequoia’s software, the consumer can select from one of several
music selections fitted to the selected theme. All of the images and
music Sequoia supplies with the themed templates are owned by Sequoia or have
been fully licensed from the owners of the rights.
Using a
wedding DVD template that is supplied on a retail kiosk as an example, a
consumer brings a CD or photo storage card containing his or her images to a
kiosk located in a retailer’s store. The consumer inserts the image
storage devise into the kiosk reader and the kiosk loads the user images onto
the kiosk. The user then chooses to make a DVD from a menu on the
kiosk at which point our software is launched. The user browses the
categories and selects “wedding” from among four to six categories of templates
and then selects “wedding day” from a few different wedding
templates. The user next selects 40 photos from his or her user
supplied images to be incorporated into the template and can rotate and move the
images into the preferred orientation and order. A title and
subtitle, such as “John and Jessica’s Wedding,” “November 14, 2007,” are typed
into the kiosk by the user and the user specifies the number of copies he or she
wants to purchase. With this, the user has successfully ordered a
wedding DVD.
Upon
completion of an order, Sequoia takes the order information and images and
builds the DVD product remotely at its offices. The user then gets
back a DVD case with the users pictures on the cover containing a DVD with the
users image printed on the DVD as a label and an insert containing thumbnail
sized images of each user image used to make the DVD. The DVD plays
on standard DVD players and starts with a customer or aVinci branded “spin-up”
to get to a standard navigation screen. The navigation screen shows a
user image in a contextual background consisting of wedding
flowers. By pressing the “Play” button, the movie is launched with
the first scene featuring a wedding announcement with John and Jessica’s name in
a rich stylistic font. The perceived camera angle then pans over to a
digitally created frame containing a picture of the bride supplied by the user,
while soft wedding themed music plays. The scenes transition with
pictures of flowers taking the viewer through the wedding day. The
DVD ends with credits for licensed media and audio used to produce the DVD
production.
Sequoia’s
photo books are created in the same fashion as described for DVDs, only
Sequoia’s templates are created and laid out to tell the themed story in the
form of a ten to twenty page, eight by eleven inch photo book. Book
pages are laid out by Sequoia’s design experts, printed on a digital press and
hardbound. Posters incorporate one or more user images into themed
art matching DVD and photo book themes. Sequoia is not currently
selling any photo books, posters, or other print products to end consumers
because Sequoia is still in the final stages of development. Sequoia
plans to launch its first photo book and poster products during the first
quarter of 2008 although it cannot be assured of when the products will
launch.
Product
Delivery Model
Under
Sequoia’s business model, Sequoia integrates with retail or other vending
customers according to each customer’s business plan. Sequoia’s
customers maintain the end consumer relationship and control as much of the
image capture, product creation, and delivery of product as they desire based
largely upon the product delivery method they select. Sequoia does
the rest. Whatever Sequoia’s customers want to pass to it to manage,
Sequoia manages.
With its
kiosk model, Sequoia integrates with a third party kiosk provider and integrates
its software onto the kiosk. End consumers using the kiosk load their
images onto the kiosk and can make a variety of products. With
Sequoia’s software on the kiosk, when the consumer chooses to make a DVD
product, its software launches and takes the consumer through the process of
selecting a theme, a specific production type (called a storyboard), the photos
to be integrated into the product, a title, and the order
quantity. The kiosk then generates an order confirmation for the
consumer who uses the confirmation to pick up and pay for the order when
complete. Upon completion the kiosk order goes either to the
retailer’s lab to be fulfilled in store or to central processing to be fulfilled
remotely.
Retailers
and vendors can stock Sequoia’s point of scan product which consists of a black
case holding a CD containing a simplified version of its production software for
a specific production type (such as Wedding) and a product code. The
end consumer pays for the product at the store and can then use the CD at home
or work to place their prepaid product order. The CD loads the
software onto the customer’s computer and walks the customer through the process
of selecting his or her digital images to be used in creating the product,
typing any unique consumer information such as a customized title and subtitle,
entering order information for shipping, and uploading the order information and
image files for remote fulfillment.
With
third party Internet sites, the process is similar to Sequoia’s point of scan
product except for how the consumer loads the simple software on his or her
computer and how he or she pays for the product order. With an
Internet vendor that manages Sequoia’s software through their site, Sequoia
supplies the vendor with its software download. The consumer then
downloads the simple software from the vendor’s web servers over the
Internet. The software loads and walks the customer through the
process of selecting his or her digital images to be used in creating the
product, typing any unique consumer information such as a customized title and
subtitle, entering order information for shipping, taking the consumer’s credit
card information to process the payment transaction for products ordered via a
secure Internet transaction, and uploading the order for remote
fulfillment.
In the
event a retailer or vendor wants Sequoia to manage the software download, they
simply provide a link on their website to Sequoia and Sequoia provides the
simple software download from its web servers over the Internet. The
consumer process then works as outlined for a third party Internet site
deployment. Following the software download, the software loads and
walks the customer through the process of selecting his or her digital images to
be used in creating the product, typing any unique consumer information such as
a customized title and subtitle, entering order information for shipping, taking
the consumers credit card information to process the payment transaction for
products ordered via a secure Internet transaction, and uploading the order for
remote fulfillment.
As a
companion to the point of scan product, Sequoia is currently developing a web
site that will allow consumers who upload orders using the point of scan
software to order additional copies and additional products on the web
site. Under this business model, the consumer uploads the product
order purchased as a point of scan product. Upon receipt of the
order, Sequoia provides the consumer with a dialogue box asking if they would
like to add additional copies of the created product to his or her order, and if
he or she would like to order a companion photo book or poster to the
order. If the customer chooses to order additional products, Sequoia
processes the payment transaction for the products ordered via a secure Internet
transaction.
To date
Sequoia’s customers have elected to have products fulfilled
remotely. Sequoia fulfills all the products either in house or
through third party vending partners. Once a consumer orders a
product by selecting the product and the pictures and his or her images to be
used in creating the product, the order and images are received by Sequoia’s web
servers deployed by it in-house or with third party vendors Sequoia contracts
with to do its fulfillment work. The servers process the orders and
photos and pass the electronic filed off to computers that build the final
product and send the files to be burned on a DVD or printed on a print media
product such as a photo book or poster. Finished products are shipped
to retail customers for delivery to end customers or directly to end customers
depending on the retail customer’s business model.
Sequoia’s
revenue model generally relies on a per product royalty. With all
product deployments except the point of scan product, each time an end customer
makes a product utilizing Sequoia’s technology, Sequoia receives a royalty from
its retail customers. From the royalty received, Sequoia pays the
royalties associated with licensed media and technology. If Sequoia
is performing product fulfillment, Sequoia also pays the costs of good
associated with production of the product. If Sequoia’s customer
utilizes in-store fulfillment, its customer pays the cost of goods associated
with production.
Sequoia
currently has fulfillment hardware deployed in two locations including its
Draper, Utah office and a Qualex (a subsidiary of Eastman Kodak Company)
facility in Allentown, Pennsylvania that allow for the fulfillment of DVD
products. Both locations have computer server configurations and DVD
burning and printing units. DVD supplies, including DVD media
supplied by Verbatim and Taiyo Yuden, DVD cases, and paper for printing DVD case
covers, are inventoried to be able to meet customer DVD fulfillment
needs. Sequoia’s photo book and poster product fulfillment operations
are in the implementation stage. Sequoia intends to fulfill photo
books and posters with third party fulfillment partners. Currently,
Sequoia has a fulfillment agreement with Qualex to build and ship many of its
DVDs, photo books and posters for select customers. Integration with
Qualex for creating DVD media was completed in February 2008.
Customers
In May
2004, Sequoia signed its first client agreement with BigPlanet, a division of
NuSkin. NuSkin is a global direct selling company. NuSkin
markets premium-quality personal care products under the Nu Skin® brand,
science-based nutritional supplements under the Pharmanex® brand, and
technology-based products and services under the Big Planet®
brand. BigPlanet, NuSkin’s technology division, offers its customers
ways to easily preserve, organize, share and enjoy photos
online. Under the terms of its BigPlanet agreement, Sequoia supplied
software technology to build DVD movies which BigPlanet marketed, sold, and
fulfilled for their consumers under their brand name
“PhotoMax.” Revenues from BigPlanet represented substantially all of
Sequoia’s sales through 2007 at approximately $3.4 million to
date. The agreement required an annual minimum guaranteed royalty of
$1 million, which was payable monthly in the amount of
$83,333.33. Sequoia’s agreement with BigPlanet expired on December
31, 2007 and Sequoia has been paid current through the end of the
term. Sequoia is in negotiations with BigPlanet to continue their
business relationship.
On
September 18, 2006, Sequoia signed an agreement to provide its technology in
Meijer stores. Meijer Distribution, Inc. (“Meijer”) is a
Michigan-based retailer that operates 181 super centers throughout the
mid-west. Sequoia’s agreement term with Meijer continues through a
date two years from the date Meijer first makes Sequoia’s software technology
available to end consumers, subject to automatic renewal for additional 12-month
periods after the initial term. Under the terms, Meijer purchases DVD
kits from Sequoia consisting of a pre-labeled DVD, DVD cover and paper for the
case cover, and inserts printed with thumbnail size images of all the user
photographs provided for use in the DVD production. Meijer placed and
paid for an initial purchase order of DVD kits, for approximately $109,000, but
due to an integration issue with a third party supplier to Meijer, the
deployment was delayed. Meijer entered into an agreement with Hewlett
Packard to deploy a photo kiosk solution in Meijer stores. Sequoia is
currently working with Hewlett Packard to integrate its software on Hewlett
Packard’s kiosks to launch its products in Meijer stores in April
2008.
In
January 2006, Sequoia signed an agreement with Storefront, a photo kiosk
company. Storefront anticipated deploying Sequoia’s software on
client kiosks in retailers such as King Soopers, Smith’s, Fred Meyer, Ralph’s
and others. Storefront has not deployed Sequoia’s software to date
and Sequoia does not know if they will ever deploy Sequoia software with their
customers.
On
September 1, 2007, Sequoia signed an agreement with Qualex, Inc. (“Qualex”) to
allow for the distribution of its software product to Qualex
customers. Qualex, a wholly owned subsidiary of Eastman Kodak, is the
largest wholesale and on-site photofinishing company in the world and it offers
traditional print and digital output solutions by operating a large network of
commercial and in store labs throughout the United States and
Canada. The agreement term is through September 30, 2009, at which
point it is subject to extension for additional 12-month terms at the election
of either party. Qualex will provide the fulfillment services for all
of its customers and Sequoia will get a royalty per product
produced. Sequoia also signed a separate agreement with Qualex at the
same time that provides for Qualex to perform fulfillment services for select
customers. As part of the agreement, Sequoia has deployed its
fulfillment technology and equipment in Qualex’s Allentown, Pennsylvania
fulfillment center. Sequoia began processing live orders in February
2008 with Qualex.
During
2007 at the request of Wal-Mart, Sequoia signed an agreement with Fujicolor to
deploy its technology on Fujicolor kiosks located in domestic Wal-Mart
stores. Wal-Mart is a worldwide retailer with more than 5,000
domestic retail stores. Fujicolor is part of Fujifilm, which is a
world leader in photographic products and technology. Sequoia’s
initial integration and deployment with Fujicolor in domestic Wal-Mart stores
took place in the third quarter of 2007. Sequoia’s DVD product
offering is currently deployed throughout domestic Wal-Mart stores on Fujicolor
kiosks in more than 3,000 stores. Upon deployment with Fujicolor,
Sequoia intended to update the first version of its software within several
months. Because of software updates Fujicolor is making to its kiosks
generally, Sequoia has not been able to deploy any updates. Sequoia
is prepared to and anticipates updating its software in the second quarter of
2008, but has no definitive time for the update, which is dependent upon
Fujicolor.
In
January 2008, Sequoia signed an agreement with Costco.com, to deliver its DVD
product online. The parties intend to launch the product during the
first quarter of 2008.
In
addition to its current customers, Sequoia continues to actively negotiate
agreements and relationships with other mass and specialty retailers and other
vending partners.
Competitors
Sequoia’s
competitors consist primarily of professional videographers on the high-cost end
and slideshow software programs on the low-cost end, with varying software tools
in the middle. Unfamiliar evaluators on the surface may attempt to
compare the low-end slide show creator products with Sequoia’s products, but
when compared side by side differences are readily seen in production quality
and detail. Generally only user images are included in the slide show
and context; graphics, audio, and music are not included. Finished
productions are generally poor quality and lack any meaningful emotional
impact.
Software
providers who supply consumer tools or solutions for consumers to make their own
DVD productions include Adobe, Microsoft, Ulead, PhotoShow, Roxio, among
others. The closest direct competitive products to Sequoia’s
technology are software tools such as iPhoto, iMovie and Final Cut Pro from
Apple, each of which require users to spend a significant sum for the software,
devote extensive time to master software usage, and significant time to create
each individual production. Additional competitors include Simple
Star, MuVee, RocketLife, PhotoDex, and Smilebox all of which offer similar
products.
Common to
software tools are their lack of automation. The user spends a vast
amount of time mastering software to produce the same sort of automated results
that can otherwise be accomplished very quickly with Sequoia’s
products. A software user must first import media, organize it,
choose timing and effects, edit music to length then render the
production. The rendered production must then be committed to DVD
where the user has to then design a DVD interface before burning to DVD to have
any navigation capabilities.
Employees
As of
February 28, 2007, Sequoia had 39 full-time employees, 7 part-time
employees. All of its employees work in its primary business office
in Draper, Utah.
Properties
Sequoia
currently leases approximately 13,000 square feet of office space at 11781 Lone
Peak Parkway, Suite 270, Draper, and Utah 84020. Its current lease
term ends on April 30, 2010. Sequoia has a good relationship with its
landlord, DBSI Draper LeaseCo LLC. Sequoia conducts its corporate,
development, sales, and certain manufacturing operations out of its Draper
office. Sequoia’s main telephone number is (801) 495-5700 and its
facsimile number (801) 495-5701. Sequoia maintains a web site at
www.sequoiamg.com. Sequoia leases space in a computer hardware
collocation facility in Salt Lake City and has a good relationship with the
landlord.
In
Bentonville, Arkansas, Sequoia rents an office in an office suite consisting of
one office of about 300 square feet. Sequoia uses the office when it
visits Wal-Mart corporate offices.
Legal
Proceedings
On
December 17, 2007, Robert L. Bishop, who worked with Sequoia in a limited
capacity in 2004 and is a current member of a limited liability company that
owns an equity interest in Sequoia, filed a legal claim against Sequoia for
unpaid wages and/or commissions (with no amount specified) and promised
equity. The Complaint was served on Sequoia on January 7,
2008. Sequoia timely filed an Answer denying Mr. Bishop’s
claims.
Intellectual
Property
In early
2003, through patent counsel, Sequoia performed an initial patent search for
products and processes similar to its software technology. The search
revealed no prior art. In January 2004, Sequoia filed initial patent
applications seeking broad patent protection for its ideas, technologies,
point-of-sale business concept, and the system of automating solutions through
the use of pre-constructed templates.
Since its
initial filing, Sequoia has completed additional filings to extend and broaden
its patent protection. In February 2005, Sequoia filed for
international patent protection based on its original patents pending, filings
with the individual countries in Europe and Asia to secure the patents
internationally.
As part
of its product development, Sequoia routinely licenses media content such as
pictures, videos and audio to create products. Sequoia has numerous
license agreements with stock image and music sources that it routinely reviews
and keeps current.
Recent
Sales of Unregistered Securities
During
the first half of 2006 Sequoia undertook a private equity offering consisting of
12-month convertible debt, bearing interest at 10%. The offering was
taken in its entirety by Amerivon, who invested a total of
$830,000. At the time of the investment, Amerivon placed a member on
Sequoia’s Board of Managers. In August of 2006, Amerivon invested an
additional $1,560,000 in a convertible debt offering, bearing interest at 9%,
intended to bridge Sequoia to a subsequent preferred equity offering targeting
$5 to $7 million. During the first quarter of 2007, Amerivon provided
additional bridge financing of $500,000
and an additional $535,000 of bridge financing during the second quarter of
2007. In May 2007, Sequoia closed the preferred equity
offering with Amerivon at which time they converted approximately $2.4 million
in aggregate convertible debt held by Amerivon, together with accumulated
interest into common units of Sequoia. Amerivon also provided an
additional $4.7 million in cash, which, along with $1.5 million of the bridge
financing principle provided during 2007, plus accumulated interest, was used to
purchase a total of $6.2 million worth of Sequoia’s Series B
preferred. Upon the closing of the Series B preferred offering,
Amerivon placed a second member on Sequoia’s Board of Managers.
Series B
preferred holders are entitled to redemption rights after four years, annual
dividends equal to 8% of the principal amount of the investment, and the right
to receive distributions before common and Series A preferred holders receive
distributions upon liquidation. Upon the consummation of the Merger,
Series B preferred owners will convert all of their preferred units to ownership
of Sequoia common units. In exchange for the conversion, Amerivon has
the right to receive 1,525,000 shares of Sequoia common units.
Sequoia’s Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Sequoia
makes software technology that it packages in various forms available to mass
retailers, specialty retailers, Internet portals and web sites that allow end
consumers to use an automated process to create products such as DVD
productions, photo books, posters, calendars, and other print media products
from consumer photographs, digital pictures, video, and other
media. Sequoia’s customers are retailers and other vendors and not
end consumers. Sequoia enables its customers to sell its products to
the end consumer who remain customers of the vendor.
Sequoia’s
revenue model generally relies on a per product royalty. With all
product deployments except a point of scan product, each time an end customer
makes a product utilizing Sequoia’s technology, Sequoia receives a royalty from
its retail customer. From the royalties received, Sequoia pays the
royalties associated with licensed media and technology. If Sequoia
is performing product fulfillment, Sequoia also pays the costs of goods
associated with the production of the product. If Sequoia’s customer
utilizes in-store fulfillment, its customer pays the cost of goods associated
with production.
Through
2007, Sequoia generated revenues through the sales of DVD products created using
its technology. During 2008, Sequoia intends to deploy its technology
to create photo books and posters. Sequoia will continue to utilize
its current revenue model of receiving a royalty for each product made using its
technology.
Sequoia
signed its first agreement in 2004 under which it supplied its software
technology to BigPlanet, a company that markets, sells, and fulfilled personal
DVD products for its customers. Through 2006 all of Sequoia’s
revenues were generated through BigPlanet. Under the terms of this
agreement, BigPlanet was required to make minimum annual guaranteed payments to
Sequoia in the amount of $1 million to be paid in 12 equal monthly
installments. The BigPlanet agreement included software development,
software license, post-contract support and training. As a result of
the agreement terms, Sequoia determined to use the percentage-of-completion
method of accounting to record the revenue for the entire
contract. Sequoia utilized the ratio of total actual costs incurred
to total estimated costs incurred related to BigPlanet to determine the
proportional amount of revenue to be recognized at each reporting
date.
During
2006, Sequoia signed an additional agreement to provide its technology in Meijer
stores. The technology has not yet been deployed in Meijer due to an
integration issue with a third party supplier, so the account has not generated
any revenues to date. However, Sequoia is working with a new vendor,
Hewlett Packard, to integrate its software and is scheduled to launch its
products in Meijer stores in April 2008.
In 2007,
Sequoia signed an agreement with Fujicolor to deploy its technology on Fujicolor
kiosks located in domestic Wal-Mart stores. Sequoia has begun
generating limited revenues through Wal-Mart and anticipates generating
additional revenues through its Wal-Mart deployment during 2008.
Sequoia
manufactures its DVDs in its Draper, Utah facility and uses services of local
third-party vendors to produce print DVD covers and inserts and to assemble and
ship final products. Through a services agreement, Sequoia began
using Qualex to manufacture DVD and print product orders for certain
customers. Qualex has deployed equipment in Allentown, Pennsylvania
and Houston, Texas to manufacture Sequoia product orders.
Basis
of Presentation
Net
Revenues. Sequoia generates revenues primarily from licensing
the rights to customers to use its technology to create DVD products and from
providing software through retail and online outlets that allow end consumers
access to the technology to generate product orders which Sequoia produces and
ships. Customers then pay royalties to Sequoia on orders
produced. Sequoia's ongoing revenue agreements are generally multiple
element contracts that may include software licenses, installation and set-up,
training and post contract customer support (PCS). For some of the
agreements, Sequoia produces DVDs for the end customer. For
other agreements, Sequoia provides blank DVD materials and Sequoia's customer
produces DVDs for the end customer. For other contracts, Sequoia does
not provide any materials and Sequoia's customer fulfills the orders for the end
consumer. Vendor specific objective evidence of fair value (VSOE)
does not exist for any of the elements of these contracts. Therefore,
revenue under the majority of Sequoia's contracts is deferred until all
elements of the contract have been delivered except for the training and
PCS. At that time, the revenue is recognized over the remaining term
of the contract on a straight-line basis. Beginning in 2008, Sequoia
will allow customers to place orders via its website and pay using credit
cards. Revenues for orders placed online will be recognized upon
shipment of the product. Sequoia believes that its online product
offering, which will expand beyond DVDs to include photo books and posters in
2008, through its customers’ websites and through its websites linked to
customer websites, will generate significant additional revenues in the
future.
As
Sequoia expands its product offering through additional customers, Sequoia
believes its business and revenues will be subject to seasonal fluctuations
prevalent in the photo industry. A substantial portion of its
revenues will likely occur during the holiday season in the fourth quarter of
the calendar year. Sequoia expects to experience lower net revenues
during the first, second and third quarters than it experiences in the fourth
quarter. This trend follows the typical photo and retail industry
patterns.
Sequoia
has begun tracking key metrics to understand and project revenues and costs in
the future, which include the following:
Average Order
Size. Average order size includes the number of products per
order and the net revenues for a given period of time divided by the total
number of customer orders recorded during that same period. As
Sequoia expands its product offerings, it expects to increase the average order
size in terms of products ordered and revenue generated per order.
Total Number of
Orders. For each customer, Sequoia monitors the total number
of orders for a given period, which provides an indicator of revenue trends for
such customer. Sequoia recognizes the revenues associated with an
order when the products have been shipped. Orders are typically
processed and shipped within three business days after a customer order is
received.
Sequoia
believes the analysis of these metrics provides it with important information on
its overall revenue trends and operating results. Fluctuations in
these metrics are not unusual and no single factor is determinative of its net
revenues and operating results.
Cost of
Revenues. Sequoia’s cost of revenues consist primarily of
direct materials including DVDs, DVD cases, picture sheet inserts, third-party
printing, assembly and packaging costs, payroll and related expenses for direct
labor, shipping charges, packaging supplies, distribution and fulfillment
activities, rent for production facilities and depreciation of production
equipment. Cost of revenues also includes payroll and related
expenses for personnel engaged in customer service. In addition, cost
of revenues includes any third-party software or patents licensed, as well as
the amortization of capitalized website development costs. Sequoia
capitalizes eligible costs associated with software developed or obtained for
internal use in accordance with the American Institute of Certified Public
Accountants, or AICPA, Statement of Position No. 98-1, “Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use” and Emerging Issues
Task Force, or EITF, Issue No. 00-02, “Accounting for Website Development
Costs.” Costs incurred in the development phase are capitalized and
amortized in cost of revenues over the product’s estimated useful
life.
Operating
Expenses. Operating expenses consist of sales and marketing,
research and development and general and administrative
expenses. Sequoia anticipates that each of the following categories
of operating expenses will increase in absolute dollar amounts.
Research
and development expense consists primarily of personnel and related costs for
employees and contractors engaged in the development and ongoing maintenance of
Sequoia’s deployment of its products or various delivery platforms including
online, web and shrinkwrap deployments. These expenses include
depreciation of the computer and network hardware used to run Sequoia’s website
and product final products, as well as amortization of purchased
software. Research and development expense also includes co-location
and bandwidth costs.
Sales and
marketing expense consists of costs incurred for marketing programs and
personnel and related expenses for Sequoia customer acquisition, product
marketing, business development and public relations activities.
General
and administrative expense includes general corporate costs, including rent for
the corporate offices, insurance, depreciation on information technology
equipment and legal and accounting fees. In addition, general and
administrative expense includes personnel expenses of employees involved in
executive, finance, accounting, human resources, information technology and
legal roles. Third-party payment processor and credit card fees will
also be included in general and administrative expense in
2008. Sequoia also anticipates both an additional one-time cost and a
continuing cost associated with public reporting requirements and compliance
with the Sarbanes-Oxley Act of 2002, as well as additional costs such as
investor relations and higher insurance premiums.
Interest
Expense. Interest expense consists of interest costs
recognized under Sequoia’s capital lease obligations and for borrowed
money.
Income
Taxes. Sequoia has been a limited liability company and not
subject to entity taxation. Going forward, Sequoia anticipates making
provision for income taxes depending on the statutory rate in the countries
where it sells its products. Historically, Sequoia has only been
subject to taxation in the United States. If Sequoia continues to
sell its products primarily to customers located within the United States,
Sequoia anticipates that its long-term future effective tax rate will be between
38% and 45%, without taking into account the use of any of Sequoia’s net
operating loss carry forwards. However, Sequoia anticipates that in
the future it may further expand its sales of products to customers located
outside of the United States, in which case it would become subject to taxation
based on the foreign statutory rates in the countries where these sales took
place and our effective tax rate could fluctuate accordingly.
Critical
Accounting Policies and Estimates
Sequoia’s
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, or GAAP. The
preparation of these consolidated financial statements requires Sequoia to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses and related
disclosures. Sequoia bases its estimates on historical experience and
on various other assumptions that Sequoia believes to be reasonable under the
circumstances. In many instances, Sequoia could have reasonably used
different accounting estimates, and in other instances, changes in the
accounting estimates are reasonably likely to occur from period to
period. Accordingly, actual results could differ significantly from
the estimates made by management. To the extent that there are
material differences between these estimates and actual results, Sequoia’s
future financial statement presentation of its financial condition or results of
operations will be affected.
In many
cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application,
while in other cases, management’s judgment is required in selecting among
available alternative accounting standards that allow different accounting
treatment for similar transactions.
Results
of Operations
Comparison
of the Years Ended December 31, 2007 and 2006
Revenues.
|
2007
|
2006
|
%
Change
|
||||||||||
|
Revenues
|
$ | 541,856 | $ | 739,200 | (27 | %) | ||||||
More than
90% of all revenues generated in 2007 and 100% in 2006 came from Sequoia’s
agreement with BigPlanet. Under the terms of the agreement, BigPlanet
was obligated to pay Sequoia $1 million in annual minimum guaranteed royalties,
payable in 12 equal monthly installments of $83,333.33. Big Planet
timely paid each monthly installment during each of the 24 months through 2005
and 2006. The BigPlanet agreement included software development,
software license, post-contract support and training. Because the
contract included the delivery of a software license, Sequoia accounted for the
contract in accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as modified by SOP 98-9, Modification of SOP 97-2 with Respect to
Certain Transactions. SOP 97-2 applies to activities that represent
licensing, selling, leasing, or other marketing of computer
software.
Because
the contract included services to provide significant production, modification,
or customization of software, in accordance with SOP 97-2, Sequoia accounted for
the contract based on the provisions of Accounting Research Bulletin (ARB) No.
45, Long-Term Construction-Type Contracts, and the relevant guidance provided by
SOP 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. In accordance with these provisions,
Sequoia determined to use the percentage-of-completion method of accounting to
record the revenue for the entire contract. Sequoia utilized the
ratio of total actual costs incurred to total estimated costs to determine the
amount of revenue to be recognized at each reporting date. Sequoia
records billings and cash received in excess of revenue earned as deferred
revenue. The deferred revenue balance generally results from
contractual commitments made by customers to pay amounts to Sequoia in advance
of revenues earned. The unbilled accounts receivable represents
revenue that has been earned but which has not yet been
billed. Sequoia considers current information and events regarding
its customers and their contracts and establishes allowances for doubtful
accounts when it is probable that it will not be able to collect amounts due
under the terms of existing contracts.
As a
result of Sequoia’s use of the stated accounting methods, revenue recognition
recognized income in years other that the year cash was received. The
cash received under the BigPlanet agreement was the same in 2007 and 2006, or $1
million each year. As a result of applying the
percentage-of-completion method, revenue decreased from $748,069 in 2006 to
$541,856 in 2007, a 27% drop. The change in revenue recognition in
2007 from 2006 reflects the relationship between the percentage of Sequoia’s
total operating expenses directly associated with the BigPlanet agreement and
those related to other activities of the company during each respective year of
the agreement. During 2006 a much greater percentage of Sequoia’s
resources were dedicated to the BigPlanet agreement than during 2007 because of
Sequoia’s pursuit of and work on additional customer accounts. The
BigPlanet agreement expired on December 31, 2007. The parties are in
negotiations to continue their business relationship.
Under the
original BigPlanet agreement, Sequoia provided its technology to BigPlanet for
it to use to market, sell and product customer products. Accordingly,
Sequoia did not have any costs of goods sold associated with the BigPlanet
revenues, only general and administrative expenses.
Sequoia
maintains its cash in bank demand deposit accounts, which at times may exceed
the federally insured limit. As of December 31, 2007 and 2006,
Sequoia had limited cash generating interest revenue and had not experienced any
losses.
Operating
Expenses.
|
2007
|
2006
|
%
Change
|
||||||||||
|
Research
and Development
|
$ | 1,890,852 | $ | 1,067,687 | 77 | % | ||||||
|
Selling
and Marketing
|
1,351,860 | 547,448 | 147 | % | ||||||||
|
General
and Administrative
|
3,677,326 | 1,755,127 | 110 | % | ||||||||
|
Depreciation
and Amortization
|
490,549 | 201,893 | 143 | % | ||||||||
|
Interest
Expense
|
480,126 | 707,706 | 32 | % | ||||||||
Sequoia’s
research and development expense increased $823,165, or 77%, from 2006 to
2007. The increase is attributable to additional personnel and
related costs for new employees and consultants involved with technology
development for deployments and ongoing maintenance of Sequoia’s products in
Wal-Mart on kiosks, with various retailers online and with various retailers in
the form of hard good kits. In August 2007, Sequoia launched a kiosk
deployment in Wal-Mart and began selling its first hard good kits for the
Christmas season. Sequoia also began developing an online platform in
2007 for selling products online with initial deployment anticipated in the
first quarter of 2008.
Selling
and marketing expense increased $804,412, or 147%, from 2006 to
2007. The increase was attributable to Sequoia’s increased marketing
efforts directed at mass retailers and an increased presence at the Photo
Marketing Association’s (“PMA”) annual trade show in February
2007. Additional personnel were hired to assist with development of
marketing materials resulting in additional personnel and associated costs of
approximately $725,000. An additional $80,000 was incurred in
preparation for the PMA show to pay for floor space, booth rental and set up at
the trade show held in February 2007. Expenses were incurred during
the last quarter of 2006 and the first quarter of 2007 for the PMA
show.
Sequoia’s
general and administrative expense increased $1,922,199, or 110%, from 2006 to
2007. New business development and operations personnel and
associated costs and sales materials accounted for approximately $801,000 of the
increase. Other costs associated with additional personnel such as
health care, office furniture, computers, phones and other infrastructure costs
across all departments totaled approximately $235,000. Approximately
$303,000 of the increase was attributable to an increase of contract labor
associated with platform (online and point-of-scan offerings) and product
development. An increase of approximately $115,000 was attributable
to increased professional consulting services provided by accounting, financial
and legal services associated with Sequoia’s funding activities and pursuit of
the Merger Agreement with Secure Alliance. Sequoia’s lease payments
increased as the company took out more space to house new employee growth by
approximately $301,000. Travel and entertainment costs increased
approximately $121,000 as Sequoia pursued business
opportunities. Equipment taxes, licensing and telephone expenses
increased by $56,000, all as a result of added personnel.
Depreciation
expense increased $288,656, or 143% from 2006 to 2007 as a result of purchasing
computer equipment deployed to fulfill product for new customer accounts and for
office furniture and equipment for new employees which began to be depreciated
by Sequoia.
Sequoia’s
interest expense decreased from $707,706 in 2006 to $480,126 in 2007 due to the
conversion of its convertible debt into equity during 2007. To fund
operations, Sequoia undertook a large private equity offering consisting of
12-month convertible debt, bearing interest at 10%. The offering was
taken in its entirety by Amerivon, who invested a total of
$830,000. In August of 2006, Amerivon invested an additional
$1,560,000 in a convertible debt offering, bearing interest at 9%, intended to
bridge Sequoia to a subsequent preferred equity offering targeting $5 to $7
million.
In
December 2006, Sequoia entered into various short-term loans with members of
Sequoia totaling $265,783 to fund operations until the funding transaction with
Amerivon closed. These loans bore interest at 10% per annum and were
payable on or before December 31, 2007. In May 2007, these loans were
repaid.
Liquidity
and Capital Resources.
|
2007
|
2006
|
|||||||
|
Statements
of Cash Flows
|
||||||||
|
Cash
Flows from Operating Activities
|
$ | (5,513,316 | ) | $ | (1,890,640 | ) | ||
|
Cash
Flows from Investing Activities
|
(577,295 | ) | (414,995 | ) | ||||
|
Cash
Flows from Financing Activities
|
6,780,988 | 2,464,288 | ||||||
Sequoia
anticipates that its current cash, cash equivalents, funds from the Loan
Agreement with Secure Alliance and cash generated from operations will be
sufficient to meet its needs for the next year of operations. If
Sequoia does not close the Merger Agreement with Secure Alliance, it will be
required to significantly reduce operating expenses to continue operations or
raise additional outside capital. Sequoia can provide no guaranty
that it will be able to raise additional outside capital and such funding would
likely have a dilutive effect on Sequoia’s current owners.
Operating
Activities. For 2007, net cash used in operating activities
was $(5,513,316) compared to $(1,890,640) in 2006. The change was due
primarily to Sequoia’s pursuit of new customers and development of additional
delivery methods for its software technology which required substantial
additional human, equipment and property resources.
Investing
Activities. For 2007, Sequoia’s cash flows from investing
activities was $(577,295) compared to $(414,995) in 2006. The change
resulted primarily as a result of purchasing property and equipment to allow for
the fulfillment of products for customers and anticipated
customers.
Financing
Activities. Sequoia has elected to grow its business through
the use of outside capital beyond what has been available from operations to
capitalize on the growth in the digital imaging industry. During the
first half of 2006 Sequoia undertook a private equity offering consisting of
12-month convertible debt, bearing interest at 10%. The offering was
taken in its entirety by Amerivon, who invested a total of
$830,000. At the time of the investment, Amerivon placed a member on
Sequoia’s Board of Managers. In August of 2006, Amerivon invested an
additional $1,560,000 in a convertible debt offering, bearing interest at 9%,
intended to bridge Sequoia to a subsequent preferred equity offering targeting
$5 to $7 million. During the first quarter of 2007, Amerivon provided
additional bridge financing of $500,000
and an additional $535,000 of bridge financing during the second quarter of
2007. In May 2007, Sequoia closed the preferred equity
offering with Amerivon at which time they converted approximately $2.4 million
in aggregate convertible debt held by Amerivon, together with accumulated
interest into common units of Sequoia. Sequoia also provided an
additional $4.7 million in cash, which, along with $1.5 million of the bridge
financing principle provided during 2007, plus accumulated interest, was used to
purchase a total of $6.2 million worth of Sequoia’s Series B
preferred. Upon the closing of the Series B preferred offering,
Amerivon placed a second member on Sequoia’s Board of Managers.
In
anticipation of closing the Merger Agreement, Sequoia entered into a Loan
Agreement with Secure Alliance whereby Secure Alliance agreed to extend (and has
extended) to Sequoia $2.5 million to provide operating capital
through the closing of the transaction. A total of $1 million was
loaned to Sequoia during 2007, with an additional $1.5 million being loaned in
2008.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION
We are
providing the following selected financial information to assist you in your
analysis of the financial aspects of the Merger. The Sequoia balance
sheet data as of December 31, 2006 and 2007 and the statement of operations data
for the years ended December 31, 2006 and 2007 are derived from audited Sequoia
financial statements and are included elsewhere in this proxy
statement. The Sequoia balance sheet data as of December 31, 2005 and
the statement of operations data, except for basic and diluted net income per
unit, for the year ended December 31, 2005 are derived from audited financial
statements of Sequoia not included in this proxy statement. The
Sequoia balance sheet data as of December 31, 2003 and 2004 and the statement of
operations data for the years ended December 31, 2003 and 2004 are derived from
unaudited financial statements of Sequoia not included in this proxy
statement.
Our
balance sheet data as of September 30, 2006 and 2007 and the statement of
operations data for the years ended September 30, 2005, 2006 and 2007 are
derived from our audited financial statements and are included elsewhere in this
proxy statement. Our balance sheet data as of September 30, 2003,
2004 and 2005 and the statement of operations data for the years ended September
30, 2003 and 2004 are derived from our audited financial statements not included
in this proxy statement.
Our
balance sheet data as of December 31, 2007 and the statement of operations data
for the three months ended December 31, 2007 and 2006 are derived from our
unaudited interim financial statements, which are included elsewhere in this
proxy statement. In the opinion of management, the unaudited interim
financial statements include all adjustments (consisting of normal recurring
adjustments) that are necessary for a fair presentation of such financial
statements. The results of operations for the three months ended
December 31, 2007 are not necessarily indicative of the results to be expected
for the entire fiscal year or any future period.
The
selected financial information of Sequoia and Secure Alliance is only a summary
and should be read in conjunction with each company’s historical financial
statements and notes and “The Transactions - Sequoia’s Management’s Discussion
and Analysis of Financial Condition and Results of Operations” contained
elsewhere herein. The historical results included below and elsewhere
in this proxy statement may not be indicative of the future performance of
Sequoia, Secure Alliance, or the combined company resulting from the business
combination.
Sequoia’s Selected Historical Financial Information
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Revenue
|
$ | - | $ | 750,050 | $ | 1,487,269 | $ | 739,200 | $ | 541,856 | ||||||||||
|
Net
income (loss)
|
(154,572 | ) | (258,883 | ) | 170,032 | (3,535,935 | ) | (7,339,401 | ) | |||||||||||
|
Deemed
distribution on Series B redeemable convertible preferred
units
|
- | - | - | - | (190,000 | ) | ||||||||||||||
|
Distributions
on Series B redeemable convertible preferred units
|
- | - | - | - | (308,251 | ) | ||||||||||||||
|
Net
income (loss) applicable to common units
|
(154,572 | ) | (258,883 | ) | 170,032 | (3,535,935 | ) | (7,837,652 | ) | |||||||||||
|
Basic
and diluted net loss per common unit
|
(0.01 | ) | (0.01 | ) | 0.01 | (0.16 | ) | (0.30 | ) | |||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
|
$ | 78,339 | $ | (425 | ) | $ | 10,039 | $ | 168,692 | $ | 859,069 | |||||||||
|
Working
capital (deficit)
|
57,111 | (44,690 | ) | 517,077 | (2,661,857 | ) | (1,089,039 | ) | ||||||||||||
|
Total
assets
|
173,714 | 99,720 | 808,496 | 1,265,211 | 2,854,189 | |||||||||||||||
|
Long-term
liabilities
|
155,319 | 273,941 | - | - | 294,450 | |||||||||||||||
|
Redeemable
convertible preferred stock
|
- | - | - | - | 6,603,182 | |||||||||||||||
|
Total
members’ equity (deficit)
|
(2,832 | ) | (261,715 | ) | 586,299 | (2,171,457 | ) | (6,901,051 | ) | |||||||||||
Secure Alliance's Selected Historical Financial
Information
|
Year
Ended September 30,
|
Three
Months Ended December 31,
|
|||||||||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2006
|
2007
|
||||||||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||||||||||
|
Revenue
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
|
Income
(loss) from continuing operations
|
(4,367,185 | ) | 14,606,170 | (8,359,530 | ) | (1,073,065 | ) | (7,337,377 | ) | (6,716,455 | ) | (160,602 | ) | |||||||||||||||
|
Income
(loss) from continuing operations per share
Basic
|
(0.25 | ) | 0.84 | (0.41 | ) | (0.03 | ) | (0.37 | ) | (0.34 | ) | (0.01 | ) | |||||||||||||||
|
Diluted
|
(0.25 | ) | 0.45 | (0.41 | ) | (0.03 | ) | (0.37 | ) | (0.34 | ) | (0.01 | ) | |||||||||||||||
|
As
of September 30,
|
As
of
December
31,
|
|||||||||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2007
|
|||||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 915,097 | $ | 258,120 | $ | 1,003,663 | $ | 1,264,463 | $ | 882,116 | $ | 2,232,093 | ||||||||||||||||
|
Working
capital (deficit)
|
(20,335,776 | ) | 1,938,940 | 3,731,219 | 7,673,181 | 12,627,895 | 12,385,535 | |||||||||||||||||||||
|
Total
assets
|
14,430,201 | 10,778,244 | 17,536,528 | 19,085,039 | 12,773,296 | 12,637,158 | ||||||||||||||||||||||
|
Total
shareholders' equity (deficit)
|
(17,678,603 | ) | 2,588,449 | 2,263,318 | 7,677,181 | 12,631,895 | 12,389,535 | |||||||||||||||||||||
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION
OF
SEQUOIA AND SECURE ALLIANCE
The
Merger will be accounted for as a reverse acquisition under the purchase method
of accounting. Sequoia will be treated as the continuing reporting
entity for accounting purposes. The assets and liabilities of Secure
Alliance will be recorded, as of the completion of the Merger, at fair value,
which is considered to approximate historical cost, and added to those of
Sequoia.
We have
presented below selected unaudited pro forma combined financial information that
reflects the recapitalization of Sequoia and is intended to provide you with a
better picture of what our business might have looked like had Sequoia and
Secure Alliance actually been combined as of December 31, 2007. The
selected unaudited pro forma combined financial information does not reflect the
effect of any cost savings that may result from the Merger. You
should not rely on the selected unaudited pro forma combined financial
information as being indicative of the historical results that would have
occurred had the companies been combined or the future results that may be
achieved after the Merger. The following selected unaudited pro forma
combined financial information has been derived from, and should be read in
conjunction with, the unaudited pro forma combined condensed financial
statements and related notes thereto included elsewhere in this proxy
statement.
|
Year
Ended December 31,
2007(1)(2)
|
||||
|
Revenues
|
$ | 541,856 | ||
|
Net
loss from continuing operations applicable to common
stockholders
|
(16,286,767 | ) | ||
|
Loss
from continuing operations per share - basic and diluted
|
(0.29 | ) | ||
|
At
December 31, 2007(2)(3)
|
||||
|
Total
assets
|
$ | 13,219,983 | ||
|
Total
current liabilities
|
2,105,231 | |||
|
Long-term
liabilities, net of current portion
|
294,450 | |||
|
Redeemable
convertible preferred stock
|
- | |||
|
Total
shareholders’ equity
|
10,820,302 | |||
Notes:
|
(1)
|
Combines
the year ended December 31 of Sequoia with the year ended September 30 of
Secure Alliance.
|
|
(2)
|
Assumes
the conversion of Sequoia preferred units to Sequoia common units
immediately prior to the closing of the Merger. The conversion
includes an additional 1,525,000 common units that Sequoia has agreed to
issue upon conversion, in order to induce conversion. Also
assumes the exercise of 1,727,605 warrants of Sequoia at an exercise price
of $0.24 immediately prior to the closing of the
Merger.
|
|
(3)
|
Assumes
that certain Secure Alliance assets will be distributed to the Secure
Alliance stockholders in the form of a cash
Dividend.
|
COMPARATIVE PER SHARE DATA
The
following table sets forth selected historical per share information of Sequoia
and Secure Alliance and unaudited pro forma combined per share ownership
information of Sequoia and Secure Alliance after giving effect to the
Merger. You should read this information in conjunction with the
selected summary historical financial statement of Sequoia and Secure Alliance
and related notes that are included elsewhere in this proxy
statement. The unaudited Sequoia and Secure Alliance pro forma
combined financial per share information for the year ended December 31, 2007 is
derived from, and should be read in conjunction with, the unaudited pro forma
combined condensed financial statements and related notes included elsewhere in
this proxy statement.
The
unaudited pro forma combined per share information does not purport to represent
what the actual results of operations of Sequoia or Secure Alliance would have
been had the companies been combined or to project the Sequoia or Secure
Alliance results of operations that may be achieved after the
Merger.
|
Sequoia
|
Secure
Alliance
|
Combined
Company
|
||||||||||
|
Number
of shares of common stock outstanding upon consummation of the Merger(2)(4):
|
48,619,780 | |||||||||||
|
Percentage
of shares that will be held by Sequoia and Secure Alliance stockholders
after completion of the Merger
|
80.01 | % | 19.99 | % | ||||||||
|
Net
income (loss) from continuing operations per share -
historical
|
||||||||||||
|
Year
ended December 31, 2003
|
(0.01 | ) | ||||||||||
|
Year
ended December 31, 2004
|
(0.01 | ) | ||||||||||
|
Year
ended December 31, 2005
|
0.01 | (0.41 | ) | |||||||||
|
Year
ended December 31, 2006
|
(0.16 | ) | (0.03 | ) | ||||||||
|
Year
ended December 31, 2007
|
(0.30 | ) | (0.37 | ) | ||||||||
|
Net
income (loss) from continuing operations per share - pro forma(1)(2)(4):
|
||||||||||||
|
Year
ended December 31, 2007
|
(0.29 | ) | ||||||||||
|
Book
value per share - pro forma(1)(2)(3)(4):
|
||||||||||||
|
At
December 31, 2007
|
n/a | (5) | 0.64 | 0.22 | ||||||||
Notes:
|
(1)
|
Combines
the year ended December 31 of Sequoia with the year ended September 30 of
Secure Alliance.
|
|
(2)
|
Assumes
the conversion of Sequoia preferred units to Sequoia common units
immediately prior to the closing of the Merger. The conversion
includes an additional 1,525,000 common units that Sequoia has agreed to
issue upon conversion, in order to induce conversion. Also
assumes the exercise of 1,727,605 warrants of Sequoia at an exercise price
of $0.24 immediately prior to the closing of the
Merger.
|
|
(3)
|
Assumes
that certain Secure Alliance assets will be distributed to the Secure
Alliance stockholders in the form of a cash
Dividend.
|
|
(4)
|
Assumes
a 1-for-2 reverse stock split of Secure Alliance’s common
stock.
|
|
(5)
|
Sequoia
had a members’ deficit at December 31,
2007.
|
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS
The
following unaudited proforma condensed combined balance sheet aggregates the
balance sheet of Secure Alliance and the balance sheet of Sequoia as of December
31, 2007, accounting for the transaction as a recapitalization of Sequoia with
the issuance of shares for the net assets of Secure Alliance (a reverse
acquisition) and using the assumptions described in the following notes, giving
effect to the transaction, as if the transaction had occurred as of December 31,
2007. The transaction was not completed as of December 31,
2007.
The
following unaudited proforma condensed combined statement of operations combines
the results of operations of Sequoia for the year ended December 31, 2007 and
Secure Alliance for the year ended September 30, 2007, as if the transaction had
occurred as of October 1, 2006.
The
proforma condensed combined financial statements should be read in conjunction
with the separate financial statements and related notes thereto of Sequoia and
Secure Alliance. These proforma financial statements are not
necessarily indicative of the combined financial position, had the acquisition
occurred on the dates indicated above, or the combined results of operations
which might have existed for the periods indicated or the results of operations
as they may be in the future.
Unaudited Pro Forma Condensed Combined Balance Sheet
December
31, 2007
|
Sequoia
|
Secure
Alliance
|
Pro
Forma Adjustments
|
Pro
Forma Combined
|
||||||||||||||
|
Assets
|
|||||||||||||||||
|
Current
assets:
|
|||||||||||||||||
|
Cash
|
$ | 859,069 | $ | 2,232,093 | [C | ] | $ | 414,625 | $ | 3,505,787 | |||||||
|
Certificates
of deposit
|
- | 8,900,000 | [G | ] | (1,300,000 | ) | 7,600,000 | ||||||||||
|
Marketable
securities available-for-sale
|
- | 363,960 | [G | ] | (363,960 | ) | - | ||||||||||
|
Accounts
receivable
|
448,389 | 22,029 | [G | ] | (22,029 | ) | 448,389 | ||||||||||
|
Note
receivable
|
- | 1,000,000 | [H | ] | (1,000,000 | ) | - | ||||||||||
|
Inventory
|
21,509 | - | 21,509 | ||||||||||||||
|
Prepaid
expenses
|
100,799 | 115,076 | 215,875 | ||||||||||||||
|
Deferred
costs
|
294,602 | - | 294,602 | ||||||||||||||
|
Deposits
and other current assets
|
44,201 | - | 44,201 | ||||||||||||||
|
Total
current assets
|
1,768,569 | 12,633,158 | 12,130,363 | ||||||||||||||
|
Property
and equipment, net
|
990,523 | - | 990,523 | ||||||||||||||
|
Intangible
assets, net
|
74,689 | - | 74,689 | ||||||||||||||
|
Other
Assets
|
20,408 | 4,000 | 24,408 | ||||||||||||||
|
Total
assets
|
$ | 2,854,189 | $ | 12,637,158 | $ | 13,219,983 | |||||||||||
|
Liabilities and
Members’ Equity (Deficit)
|
|||||||||||||||||
|
Current
liabilities:
|
|||||||||||||||||
|
Accounts
payable
|
$ | 75,118 | $ | 51,722 | $ | 126,840 | |||||||||||
|
Accrued
liabilities
|
823,772 | 195,901 | 1,019,673 | ||||||||||||||
|
Dividends
payable
|
308,251 | - | 308,251 | ||||||||||||||
|
Current
portion of capital leases
|
118,288 | - | 118,288 | ||||||||||||||
|
Current
portion of deferred rent
|
38,580 | - | 38,580 | ||||||||||||||
|
Note
payable
|
1,000,000 | - | [H | ] | $ | (1,000,000 | ) | - | |||||||||
|
Deferred
revenue
|
493,599 | - | 493,599 | ||||||||||||||
|
Total
current liabilities
|
2,857,608 | 247,623 | 2,105,231 | ||||||||||||||
|
Deferred
rent
|
222,611 | - | 222,611 | ||||||||||||||
|
Capital
lease obligations, net of current portion
|
71,839 | - | 71,839 | ||||||||||||||
|
Total
liabilities
|
3,152,058 | 247,623 | 2,399,681 | ||||||||||||||
|
Series
B redeemable convertible preferred units, no par value, 12,000,000 units
authorized; 8,804,984 outstanding, (liquidation preference of
$6,603,738)
|
6,603,182 | - | [B | ] | (6,603,182 | ) | - | ||||||||||
|
Commitments
and contingencies
|
|||||||||||||||||
|
Members’
equity (deficit):
|
|||||||||||||||||
|
Series
A convertible preferred units, no par value, 3,746,485 units authorized,
3,533,720 units outstanding (liquidation preference of
$474,229)
|
474,229 | - | [B | ] | (474,229 | ) | - | ||||||||||
|
Common
units, no par value, 90,000,000 units authorized; 29,070,777, units
outstanding
|
4,211,737 | - | [B | ] | 8,053,411 | - | |||||||||||
| [C | ] | 414,625 | |||||||||||||||
| [F | ] | (12,679,773 | ) | ||||||||||||||
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 19,441,524 shares
|
- | 194,415 | [A | ] | (97,208 | ) | 486,198 | ||||||||||
| [D | ] | 388,990 | |||||||||||||||
|
Additional
paid-in capital
|
- | 30,067,790 | [A | ] | 97,208 | 22,897,122 | |||||||||||
| [G | ] | (1,622,029 | ) | ||||||||||||||
| [D | ] | (388,990 | ) | ||||||||||||||
| [F | ] | 12,679,773 | |||||||||||||||
| [E | ] | (17,936,630 | ) | ||||||||||||||
|
Accumulated
deficit
|
(11,587,017 | ) | (17,936,630) | [E | ] | 17,936,630 | (12,563,017 | ) | |||||||||
| [B | ] | (976,000 | ) | ||||||||||||||
|
Accumulated
other comprehensive income
|
- | 63,960 | [G | ] | (63,960 | ) | - | ||||||||||
|
Total
members’ equity (deficit)
|
(6,901,051 | ) | 12,389,535 | 10,820,302 | |||||||||||||
|
Total
liabilities and members’ equity (deficit)
|
$ | 2,854,189 | $ | 12,637,158 | $ | 13,219,983 |
Unaudited Pro Forma Condensed Combined Statements of
Operations
|
Sequoia
Year Ended December 31, 2007
|
Secure
Alliance Year Ended September 30, 2007
|
Pro
Forma Adjustments
|
Pro
Forma Combined
|
||||||||||||||
|
Sales
|
$ | 541,856 | $ | - | $ | 541,856 | |||||||||||
|
Operating
expense:
|
|||||||||||||||||
|
Cost
of sales
|
57,068 | - | 57,068 | ||||||||||||||
|
Research
and development
|
1,890,852 | - | 1,890,852 | ||||||||||||||
|
Selling
and marketing
|
1,351,860 | - | 1,351,860 | ||||||||||||||
|
General
and administrative
|
3,677,326 | 1,333,467 | 5,010,793 | ||||||||||||||
|
Depreciation
and amortization
|
490,549 | - | 490,549 | ||||||||||||||
|
Total
operating expense
|
7,467,655 | 1,333,467 | 8,801,122 | ||||||||||||||
|
Income
(loss) from operations
|
(6,925,799 | ) | (1,333,467) | (8,259,266 | ) | ||||||||||||
|
Other
income (expense):
|
|||||||||||||||||
|
Amortization
of debt discount and deferred financing costs
|
- | (6,508,963) | (6,508,963 | ) | |||||||||||||
|
Interest
income
|
66,524 | 580,861 | [I | ] | $ | (52,000 | ) | 595,385 | |||||||||
|
Interest
expense
|
(480,126 | ) | - | (480,126 | ) | ||||||||||||
|
Total
other income (expense)
|
(413,602 | ) | (5,928,102) | (6,393,704 | ) | ||||||||||||
|
Loss
before income taxes and discontinued operations
|
(7,339,401 | ) | (7,261,569) | (14,652,970 | ) | ||||||||||||
|
Income
tax expense
|
- | 159,546 | 159,546 | ||||||||||||||
|
Loss
from continuing operations
|
(7,339,401 | ) | (7,421,115) | (14,812,516 | ) | ||||||||||||
|
Preferred
dividends and deemed dividends
|
(498,251 | ) | - | [B | ] | (976,000 | ) | (1,474,251 | ) | ||||||||
|
Net
loss from continuing operations applicable to common
unit/stockholders
|
$ | (7,837,652 | ) | $ | (7,421,115) | $ | (16,286,767 | ) | |||||||||
|
Basic
earnings (loss) per share:
|
|||||||||||||||||
|
Loss
from continuing operations
|
(0.03) | (0.29 | ) | ||||||||||||||
|
Basic
weighted average common shares outstanding
|
33,499,128 | [A | ] | (16,749,564 | ) | 55,648,582 | |||||||||||
| [J | ] | 38,899,018 | |||||||||||||||
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
Note
1 – Pro Forma Adjustments
On
December 6, 2007, we entered into the Merger Agreement with Sequoia wherein we
will acquire 100% of Sequoia through the issuance of 38,899,018 shares of
restricted common stock in a transaction wherein Sequoia would become one of our
wholly owned subsidiaries. On March 31, 2008, the Merger Agreement
was amended to, among other things, (i) effect a 1-for-2 reverse stock
split instead of a 1-for-3 reverse stock split, (ii) provide for the Dividend,
(iii) amend the amount of the proposed Merger Consideration to be provided under
the Merger Agreement, and
(iv) remove the closing condition that we have not less than $9.8 million in net
cash or cash equivalents. The Merger will become effective
after approval by our stockholders. After effectiveness of the
transaction, the former Sequoia unit holders will own approximately 80% of our
issued and outstanding shares. Because the shares issued in the
transaction represent control of the total shares of our outstanding common
stock immediately following the transaction, the transaction will be accounted
for as a “Reverse Acquisition” for accounting purposes.
Pro forma
adjustments on the attached financial statements include the
following:
|
[A]
|
To
record the 1-for-2 reverse stock split of our common stock, which will
occur upon stockholder approval prior to the
Merger.
|
|
[B]
|
To
reflect the conversion of Sequoia preferred units to Sequoia common units
immediately prior to the closing of the Merger. The conversion
includes an additional 1,525,000 common units that Sequoia has agreed to
issue upon conversion, in order to induce conversion. These
inducement units will be recorded as a preferential dividend, thus
increasing the accumulated deficit and increasing the loss applicable to
Sequoia’s common unit holders.
|
|
[C]
|
To
reflect the exercise of 1,727,605 warrants of Sequoia at an exercise price
of $0.24 immediately prior to the closing of the Merger. The
holders of these warrants have agreed to exercise their warrants prior to
the closing of the Merger.
|
|
[D]
|
To
record the acquisition of Sequoia by Secure Alliance through the issuance
of 38,899,018 shares of our common stock. Sequoia’s ownership
interests in Secure Alliance after the Merger will be greater than that of
our existing stockholders as of the Record Date and, accordingly, the
management of Sequoia will assume operating control of us upon closing of
the Merger. Consequently, the Merger will be accounted for as
the recapitalization of Sequoia, wherein Sequoia purchased the assets of
Secure Alliance and accounted for the transaction as a “Reverse
Acquisition” for accounting
purposes.
|
|
[E]
|
To
eliminate our accumulated deficit on the closing date of the Merger, to
reflect the purchase by Sequoia for accounting
purposes.
|
|
[F]
|
To
eliminate the Sequoia common units for
consolidation.
|
|
[G]
|
To
remove assets that will be distributed to our stockholders existing as of
the Record Date, through a cash Dividend equal to the amount of such
assets.
|
|
[H]
|
To
eliminate amounts loaned from Secure Alliance to
Sequoia.
|
|
[I]
|
To
remove interest income related to the $1.3 million of cash that will be
retained by our stockholders (see note G
above).
|
|
[J]
|
To
record the issuance of 38,899,018 shares of our common stock in connection
with the Merger. Dilutive earnings per share were not
presented, as the effect was anti-dilutive for the periods
presented.
|
THE
MERGER AGREEMENT (PROPOSAL 1)
The Board
is asking our stockholders to vote on a proposal to adopt the Merger Agreement
and approve the transactions contemplated thereby.
The
following summarizes some of the material provisions of the Merger Agreement, as
amended, but is not intended to be an exhaustive discussion of the Merger
Agreement. A copy of the Merger Agreement is attached to this proxy
statement as Annex A. We encourage you to read carefully the Merger
Agreement in its entirety because the rights and obligations of the parties are
governed by the express terms of the Merger Agreement and not by this summary or
any other information contained in this proxy statement.
The
description of the Merger Agreement in this proxy statement has been included to
provide you with information regarding its terms. The Merger
Agreement contains representations and warranties made by and to the Company and
Sequoia as of specific dates. The statements embodied in those
representations and warranties were made for purposes of that contract between
the parties and are subject to qualifications and limitations agreed by the
parties in connection with negotiating the terms of that contract, including
qualifications set forth on the disclosure schedules to the Merger
Agreement. In addition, certain representations and warranties were
made as of a specified date, may be subject to contractual standards of
materiality different from those generally applicable to stockholders, or may
have been used for the purpose of allocating risk between the parties rather
than establishing matters as facts.
General;
Structure of Merger
Pursuant
to the Merger Agreement and subject to the satisfaction of the conditions set
forth therein, the holders of Sequoia Membership Interests and Sequoia
Membership Interest Equivalents (as those terms are defined in the Merger
Agreement) will receive approximately 80% of the equity interests in the Company
in consideration for the contribution to the Company of all of the equity
interests in Sequoia.
The
Merger Agreement provides that, upon the terms and subject to the conditions of
the Merger Agreement and the Utah Revised Limited Liability Company Act, at the
effective time of the Merger, (i) Merger Sub will merge with and into Sequoia,
with Sequoia continuing as the surviving entity in the Merger and as a wholly
owned subsidiary of the Company, and (ii) each Sequoia Membership Interest will
automatically convert into the right to receive 0.87096285 shares of Common
Stock, calculated after the Reverse Stock Split to be effected prior to the
Merger. Upon conversion, Sequoia will receive approximately
38,899,018 shares of Common Stock, and the Company will have a total of
approximately 48,619,680 shares of Common Stock outstanding.
Closing
Closing
under the Merger Agreement will take place on such date as mutually determined
by the parties thereto upon the satisfaction of the conditions described
therein. The Merger is expected to be completed during the second
quarter of 2008. The Merger will become effective upon the filing of
the Articles of Merger with the Department of Commerce, Corporations Division of
the State of Utah.
Merger
Consideration
At the
effective time of the Merger, each Sequoia Membership Interest will
automatically convert into the right to receive 0.87096285 shares of Common
Stock, calculated after the Reverse Stock Split. All such Sequoia
Membership Interests, when so converted, will no longer be
outstanding. We anticipate that approximately 38,899,018 shares of
our common stock will be issued in the Merger, calculated after the Reverse
Stock Split.
Treatment
of Sequoia Membership Interest Equivalents
We will
assume Sequoia’s obligation with respect to Sequoia Membership Interest
Equivalents outstanding at the closing of the Merger such that upon such date,
each Sequoia Membership Interest Equivalent will be deemed to have the right to
receive 0.87096285 shares of Common Stock upon purchase or exercise of such
Sequoia Membership Interest Equivalent.
Additional
Actions
Immediately
prior to the closing of the Merger, Sequoia will convert or cause the holders of
Sequoia Membership Interests to convert all Series A Preferred Membership
Interests and Series B Preferred Membership Interests (as such terms are defined
in the Merger Agreement) outstanding in Sequoia into common units or in the
event, the foregoing conversion fails to occur prior to the closing of the
Merger, the Series A Preferred Membership Interests and Series B Preferred
Membership Interests will instead be exchanged for 12,074,771 shares of Common
Stock, which are included in the total number of shares of Common Stock
(approximately 38,899,018) to be issued in the Merger.
As of the
date of the Merger Agreement, we entered into the Loan Agreement with Sequoia to
provide a secured line of credit to Sequoia of up to $2,500,000, all of which
has been extended to Sequoia as of February 15, 2008.
Representations
and Warranties
The
Merger Agreement contains representations and warranties for each of the Company
and Sequoia relating to, among other things:
|
|
·
|
Organization
of each constituent company;
|
|
|
·
|
Authorization
of the Merger Agreement and the consummation of the transactions
contemplated therein;
|
|
|
·
|
Capitalization
of each constituent company;
|
|
|
·
|
Financial
Statements;
|
|
|
·
|
No
material adverse effects since June 30,
2007;
|
|
|
·
|
Litigation
or Proceedings;
|
|
|
·
|
Tax
Returns and Audits;
|
|
|
·
|
Contracts;
|
|
|
·
|
Intellectual
Property;
|
|
|
·
|
Questionable
Payments;
|
|
|
·
|
Title
to Assets;
|
|
|
·
|
Subsidiaries;
|
|
|
·
|
Books
and Records;
|
|
|
·
|
Consents
and Non-Contravention;
|
|
|
·
|
Compliance
with Securities Laws;
|
|
|
·
|
Environmental
Matters;
|
|
|
·
|
Permits
and Licenses;
|
|
|
·
|
Broker’s
Fees;
|
|
|
·
|
Absence
of Undisclosed Liabilities;
|
|
|
·
|
Changes
since June 30, 2007;
|
|
|
·
|
Real
Property;
|
|
|
·
|
Employees
and Consultants;
|
|
|
·
|
Employee
Benefit Plans; ERISA;
|
|
|
·
|
Condition
of Properties;
|
|
|
·
|
Insurance
Coverage;
|
|
|
·
|
Interested
Party Transactions; and
|
|
|
·
|
Security
Regulatory Investigation.
|
In
addition, in the Merger Agreement, we make additional representations and
warranties to Sequoia, which include:
|
|
·
|
Compliance
with Sarbanes Oxley; and
|
|
|
·
|
SEC
Reports.
|
For the
purposes of the Merger Agreement, a “material adverse effect” means with respect
to any Person (as such term is defined in the Merger Agreement) any event or
events or any change in or effect on such Person’s financial condition,
business, prospects, operations, customers, suppliers, employee relationships,
assets, properties, or results of operations that, when taken as a whole, (i)
has materially interfered or is reasonably likely to materially interfere with
the ongoing operations of such Person’s business or (ii) singly or in the
aggregate has resulted in, or is reasonably likely to have, a material adverse
effect on the ongoing conduct of the business of such Person; provided, however,
that any adverse effect arising out of or resulting from (x) an event or series
of events or circumstances affecting the United States economy generally or the
economy generally of any other country in which the Person operate, or (y) the
entering into of the Merger Agreement and the consummation of the transactions
contemplated therein, shall be excluded in determining whether a Material
Adverse Effect has occurred.
Actions
Prior to Closing
Restrictions
on Certain Actions
Except as
contemplated by the Merger Agreement, the Reverse Stock Split, the Management
Options and the SAH Distribution (as such terms are defined in the Merger
Agreement), (i) there shall be no stock dividend, stock split, recapitalization,
or exchange of shares with respect to or rights, options or warrants issued in
respect of our Common Stock and there shall be no dividends or other
distributions paid on our Common Stock and (ii) we shall not take any action or
enter into any agreement to issue or sell any shares of our capital stock or any
securities convertible into or exchangeable or exercisable for any shares of our
capital stock or repurchase, redeem or otherwise acquire any of our
issued and outstanding capital stock, without the prior written consent of
Sequoia.
Other
Proposals
We may
engage in negotiations or discussions with any person other than Sequoia or its
affiliates that, without prior solicitation by or negotiation with the Company,
has made a superior proposal. Following receipt of such superior
proposal, our Board may fail to make, withdraw or modify in a manner adverse to
Sequoia its recommendation to approve the proposals described in this proxy
statement and may submit such superior proposal to a vote of our stockholders,
and/or take any action advisable or required under law, if our Board determines
in good faith that the Board must take such action to comply with its fiduciary
duties under applicable law.
If the
Merger Agreement is not previously terminated, we shall pay Sequoia a
termination fee of one million dollars ($1,000,000) no later than 10 days after
the date of the first to occur: (i) the execution by us of any agreement with a
third party (other than a confidentiality agreement) providing for the sale of
substantially all of the assets of the Company or providing for the merger of
the Company with a third party, or (ii) the approval or recommendation to the
stockholders of the Company of a superior proposal, or the consummation of a
superior proposal.
Sequoia
agrees that payment of such termination fee, if such fee is actually paid, will
be the sole and exclusive remedy of Sequoia upon termination of the Merger
Agreement.
Stockholders
Meeting
As
reasonably practicable, but in no event prior to 20 days following the date of
the Merger Agreement, we have agreed to duly call and hold a meeting of our
stockholders (the “Stockholders Meeting”) for the purpose of voting on the
approval and adoption of:
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·
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the
Merger Agreement and the transactions contemplated therein (which includes
the appointment of additional directors following the
Merger);
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·
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the
Name Change;
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·
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the
Reverse Stock Split,
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·
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the
2008 Plan,
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·
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the
Capitalization, and
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·
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any
motion for adjournment or postponement of the Stockholder Meeting to
another time or place to permit, among other things, further solicitation
of proxies if necessary to establish a quorum or to obtain additional
votes in favor of the Merger Agreement and the transactions contemplated
therein.
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Certain
Other Covenants
The
Merger Agreement contains additional covenants, including:
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·
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Providing
access to personnel and information regarding the assets, properties,
business and operations of the other
party;
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·
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Keeping
confidential any information or documents obtained from the other party
concerning the assets, properties, business and operations of such
party;
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·
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Issuing
any statement or communications to the public regarding the Merger,
without the prior written consent of the other
party;
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·
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Our
timely filing of all required SEC documents and compliance with the
requirements of the Securities Act, the Exchange Act and state securities
laws and regulations.
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·
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Each
party conducting its business only in the usual and ordinary course and
the character of such business shall not be changed nor shall any
different business be undertaken.
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Post
Closing Covenants
Initial
Directors’ and Officers’ Insurance.
All
rights to indemnification or exculpation existing in favor of our employees,
agents, directors or officers and our subsidiaries and to Mark Levenick and
Raymond Landry (the “D&O Indemnified Parties”) as provided in the respective
charter documents, bylaws, certificate of limited partnership or limited
partnership agreement as in effect on the date of the Merger Agreement shall
continue in full force and effect for a period of six (6) years from and after
the closing date of the Merger Agreement (the “D&O Indemnity
Period”).
Immediately
prior to the effective time of the Merger Agreement, we shall purchase a single
payment, run-off policy or policies of directors’ and officers’ liability
insurance covering the D&O Indemnified Parties for claims currently covered
by our existing directors’ and officers’ liability insurance policies arising in
respect of acts or omissions occurring prior to the effective time amount and
scope at least as favorable, in the aggregate, as our existing policies, and
shall remain in effect for a period of six years after the effective
time.
During
the D&O Indemnity Period, we shall indemnify and hold harmless the D&O
Indemnified Parties in respect of acts or omissions occurring at or prior to the
closing to the fullest extent permitted by Delaware law or any other applicable
laws or provided under our and our subsidiaries’ charter, bylaws, certificate of
limited partnership or limited partnership agreement in effect on the date of
the Merger Agreement.
If we or
any of our successors or assigns:
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·
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consolidates
with or merges into any other Person and shall not be the continuing or
surviving company or entity of such consolidation or merger,
or
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·
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transfers
or conveys all or substantially all of its properties and assets to any
Person,
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then, and
in each such case, to the extent necessary, proper provision shall be made so
that our successors and assigns shall assume the obligations set forth
above.
The
rights of each D&O Indemnified Party hereunder shall be in addition to any
rights such Person may have under our or our subsidiaries’ charter, bylaws,
certificate of limited partnership or limited partnership agreement, or under
Delaware law or any other applicable laws or under any agreement of any D&O
Indemnified Party with us or any of our subsidiaries. These rights
shall survive consummation of the transactions contemplated by the Merger
Agreement and are intended to benefit, and shall be enforceable by, each D&O
Indemnified Party.
Future
Directors’ and Officers’ Insurance
After the
closing date of the Merger Agreement, we shall indemnify and maintain in effect
directors’ and officers’ and fiduciaries’ liability insurance for each
continuing director:
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·
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during
the time such person serves on the Board of the Company or our
subsidiaries; and
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·
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for
a period of not less than six years following the time such continuing
director no longer serves on the Board of the Company or our
subsidiaries.
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The
liability insurance required hereto shall be in amount and scope at least as
favorable, in the aggregate, as our policies immediately prior to the effective
time with comparable terms and conditions and with comparable insurance coverage
as is then in effect for the current officers and directors of the Company and
our subsidiaries and whose amount and scope are reasonably satisfactory to the
continuing directors.
Insurance
in the Event of Dissolution
We agree
that if we are dissolved or cease to exist for any reason prior to:
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the
termination of the D&O Indemnity Period;
or
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·
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the
six-year period following the time a continuing director no longer serves
as a director on the Board of the Company or our
subsidiaries,
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then
prior to such dissolution or cessation we shall extend our then in effect
directors’ and officers’ and fiduciaries’ liability insurance policy on
commercially reasonable terms and conditions and with insurance coverage as
comparable as possible with the insurance policy then in effect for our current
officers and directors, and such extension shall provide such insurance coverage
to each D&O Indemnified Party in accordance with our obligations under the
Merger Agreement. We shall prepay all premiums in connection with
such extension. These rights shall survive consummation of the
transactions contemplated by the Merger Agreement and are intended to benefit,
and shall be enforceable by, each D&O Indemnified Party.
Conditions
to Close
All
obligations of Sequoia under the Merger Agreement are subject to the
fulfillment, prior to or as of the closing of the Merger, of each of the
following conditions:
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the
accuracy of our representations and warranties made, contained in or
pursuant to the Merger Agreement;
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·
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our
performance and compliance with all covenants, agreements, and conditions
set forth or otherwise contemplated in the Merger Agreement and our
execution and delivery of all documents required to be executed and
delivered;
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·
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the
approval by our Board in accordance with Delaware law the execution and
delivery of the Merger Agreement and the consummation of the
Merger;
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·
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the
approval by the holders of a majority of the shares of Common Stock of the
Merger Agreement and the Merger;
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·
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the
sufficiency of shares of our capital stock authorized to complete the
Merger;
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·
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shares
of Common Stock, calculated after the Reverse Stock Split, to be issued to
members of Sequoia will be validly issued, nonassessable and fully paid
under Delaware corporation law;
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·
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we
shall have effected the Reverse Stock Split, the Changes to Authorized
Capital, the Name Change and the adoption of the New Stock Incentive
Plan;
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·
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no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the
Merger;
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·
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no
pending or threatened action, proceeding or investigation before any court
or administrative agency by any government agency, or pending action by
any other person, in which it is sought to restrain or prohibit, or obtain
damages in connection with, the Merger or the ability of Sequoia to
operate its business;
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·
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our
officers shall have tendered their resignations in
writing;
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·
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we
shall have obtained and delivered to Sequoia written consents of any
persons or entities whose consent is required to consummate the Merger, if
any, and all of such consents shall remain in full force and effect at and
as of the closing of the Merger;
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·
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we
shall have instructed our transfer agent to make such changes to its stock
registrar so as to give effect to the Merger, the Reverse Stock Split, and
the Authorized Capital Changes;
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·
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absence
of any material adverse effects since the date of the our unaudited
balance sheet as of June 30, 2007;
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·
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Sequoia
shall receive a certificate of the President of the Company certifying
that the conditions relating to our representations, warranties and
covenants have been satisfied;
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·
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Sequoia
shall receive a certificate of incumbency executed by the Secretary of the
Company certifying (i) the names, titles and signatures of the officers
authorized to execute any documents referred to in the Merger Agreement,
(ii) that our Certificate of Incorporation and By-laws delivered to
Sequoia are true and complete, and (iii) that resolutions adopted by our
Board delivered to Sequoia authorizing the Merger are true and
complete;
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·
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Sequoia
shall have received (i) a certificate from the Secretary of State of the
State of Delaware dated within five business days of the closing date of
the Merger that the Company is in good standing under the laws of said
state, and (ii) and evidence as of a recent date that we are qualified to
transact business as a foreign corporation and are in good standing in
each state of the United States and in each other jurisdiction where the
character of the property owned or leased by it or the nature of its
activities makes such qualification necessary;
and
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Sequoia
shall have received such additional supporting documentation and other
information with respect to the transactions contemplated hereby as it may
reasonably request.
Our
obligations under the Merger Agreement are subject to the fulfillment, prior to
or at the closing of the Merger, of each of the following
conditions:
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the
accuracy of Sequoia’s representations and warranties made, contained in or
pursuant to the Merger Agreement;
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·
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Sequoia’s
performance and compliance with all covenants, agreements, and conditions
set forth or otherwise contemplated in the Merger Agreement and the
execution and delivery of all documents required to be executed and
delivered by Sequoia;
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·
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the
Board of Managers and the members of Sequoia shall have approved in
accordance with Utah law the execution and delivery of the Merger
Agreement and the consummation of the
Merger;
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·
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the
approval by the holders of a majority of the shares of Common Stock of the
Merger Agreement and the Merger;
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·
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no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the
Merger;
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·
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no
pending or threatened action, proceeding or investigation before any court
or administrative agency by any government agency, or pending action by
any other person, in which it is sought to restrain or prohibit, or obtain
damages in connection with, the Merger or the ability of Sequoia to
operate its business;
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·
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we
shall have obtained and delivered to Sequoia written consents of any
persons or entities whose consent is required to consummate the Merger, if
any, and all of such consents shall remain in full force and effect at and
as of the closing of the Merger;
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·
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absence
of any material adverse effects since the date of the unaudited balance
sheet of Sequoia, as of June 30,
2007;
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·
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we
shall have received a certificate of the President of Sequoia certifying
that the conditions relating to its representations, warranties and
covenants have been satisfied;
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·
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we
shall have received a certificate of incumbency executed by the Secretary
of Sequoia certifying (i) the names, titles and signatures of the officers
authorized to execute any documents referred to in the Merger Agreement,
(ii) that the Articles of Organization and Operating Agreement of Sequoia
delivered to us are true and complete, and (iii) that resolutions adopted
by the Board of Managers of Sequoia delivered to us authorizing the Merger
are true and complete;
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·
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we
shall have received (i) a certificate from the Division of Corporations of
the State of Utah dated within five business days of the closing of the
Merger to the effect that Sequoia is in good standing under the laws of
Utah and (ii) and evidence as of a recent date that Sequoia is qualified
to transact business as a foreign corporation and is in good standing in
each state of the United States and in each other jurisdiction where the
character of the property owned or leased by it or the nature of its
activities makes such qualification
necessary;
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the
SAH Distribution (as such term is defined in the Merger Agreement) shall
have been completed;
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·
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the
fairness opinion received by the Board prior to the date of the Merger
Agreement shall not have been withdrawn or materially modified;
and
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we
shall have received such additional supporting documentation and other
information with respect to the transactions contemplated hereby as we may
reasonably request.
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Termination
of the Merger Agreement
The
Merger Agreement may be terminated at any time prior to completion of the
closing of the Merger, as follows:
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by
Sequoia, if (1) there has been a material breach by us and, in the case of
a representation, warranty or covenant breach, such breach shall not have
been cured within ten (10) days after receipt by us of notice specifying
particularly such breach, (2) Sequoia determines in its sole discretion as
a result of its due diligence review of the Company that it does not wish
to proceed with the Merger, provided that Sequoia may not terminate the
Merger Agreement unless Sequoia notifies us in writing on or prior to 20
days following the date of the Merger Agreement that Sequoia intends to
terminate the Merger Agreement, or (3) the closing conditions set forth
above have not been satisfied by the close of business on May 31, 2008,
and Sequoia is not in material breach of any provision of the Merger
Agreement;
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by
us, if (1) there has been a material breach by Sequoia and, in the case of
a representation, warranty or covenant breach, such breach shall not have
been cured within ten (10) days after receipt by Sequoia of notice
specifying particularly such breach, (2) we determine in our sole
discretion as a result of our due diligence review of Sequoia that we do
not wish to proceed with the Merger, provided that we may not terminate
the Merger Agreement, unless we notify Sequoia in writing on or prior to
20 days following the date of the Merger Agreement that we intend to
terminate the Merger Agreement, or (3) the closing conditions set forth
above have not been satisfied by the close of business on May 31, 2008 and
we are not in material breach of any provision of the Merger
Agreement;
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·
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by
us giving notice to Sequoia, in the event we wish to consummate a superior
proposal and pay the termination fee;
or
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by
us and Sequoia upon mutual
agreement.
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Effect
of Termination.
Termination
of the Merger Agreement shall terminate all obligations of the parties
thereunder, except:
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the
parties will remain subject to the confidentiality provisions of the
Merger Agreement,
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there
will be no survival of representations and warranties;
and
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·
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the
parties will remain liable for fees and expenses incurred entirely by the
party that has incurred such costs and
expenses;
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provided,
however, that termination shall not relieve the defaulting or breaching party or
parties from any liability to the other parties hereto.
Amendment
of the Merger Agreement
The
Merger Agreement may be amended only in writing as agreed to by all
parties.
Fees
and Expenses
All fees,
expenses and out-of-pocket costs, including, without limitation, fees and
disbursements of counsel, financial advisors and accountants, incurred by the
parties hereto shall be borne solely and entirely by the party that has incurred
such costs and expenses.
Amendment No. 1 to the Merger
Agreement
On March
31, 2008, we amended the Merger Agreement to, among other things:
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amend
and restate the definition of Reverse Stock Split to effect a 1-for-2
reverse stock split instead of a 1-for-3 reverse stock
split;
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amend
and restate the definition of SAH Distribution, to provide that we will
declare and pay a cash dividend equal to approximately $2 million to our
stockholders immediately prior to the
Merger;
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amend
and restate the amount of the proposed Merger Consideration, such that
each issued and outstanding Sequoia equity interest will now automatically
be converted into the right to receive 0.87096285 shares of the Company’s
Common Stock instead of the right to receive 0.5806419 shares of the
Company’s Common Stock, which adjustment was made to account for the
change from a 1-for-3 reverse stock split to a 1-for-2 reverse stock
split; and
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·
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remove
the closing condition that we have not less than $9.8 million in net cash
or cash equivalents.
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The
Merger Agreement was amended to provide for a 1-for-2 reverse stock split
instead of a 1-for-3 reverse stock split primarily to ensure sufficient shares
were available in the public float to help avoid large pricing
fluctuations. The Merger Consideration was adjusted as a result of
the change from a 1-for-3 reverse stock split to a 1-for-2 reverse stock split
to provide for no change to the respective equity ownership levels following the
Merger.
Required
Vote
The
approval of the Merger Agreement requires the approval of the holders of a
majority of our outstanding shares of Common Stock. Shares that are
voted “FOR” or “AGAINST” the proposal or marked “ABSTAIN” will be counted
towards the vote requirement. Broker non-votes, if any, will not be
counted towards the vote requirement.
If the
Merger Agreement is not approved and the Merger is not completed, our business
may be adversely affected. The market price of our Common Stock may
decline to the extent that the current market price reflects a market assumption
that the Merger and the Related Proposals will be completed and many costs
related to the Merger and the Related Proposals, such as legal, accounting,
financial advisor and financial printing fees, have to be paid regardless of
whether the Merger is completed.
Recommendation
of our Board
Our Board
has:
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·
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determined
that the Merger is advisable and fair to and in the best interests of the
Company and its unaffiliated
stockholders;
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·
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approved
and adopted the Merger Agreement, the Related Proposals and the 2008 Plan;
and
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·
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recommended
that Secure Alliance stockholders vote “FOR” the approval and adoption of
the Merger Agreement and “FOR” the approval and adoption of the Related
Proposals.
|
For the
factors considered by the Board in reaching its decision to approve and adopt
the Merger Agreement, see “The Transactions -- Reasons for the
Merger.”
THE
BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 1.
THE
REVERSE-STOCK-SPLIT (PROPOSAL 2)
The
Merger Agreement requires that prior to the consummation of the Merger, we file
an amendment to our Certificate of Incorporation to effect a 1-for-2 Reverse
Stock Split of our Common Stock, to ensure a sufficient number of shares are
available for issuance to Sequoia upon consummation of the
Merger. The Reverse Stock Split will also result in the reduction of
the total number of shares of our Common Stock issued and outstanding, which may
increase the market price for our Common Stock. However, the effect
of the Reverse Stock Split cannot be predicted and there can be no assurance
that the market price per share of our Common Stock after the Reverse Stock
Split will rise in proportion to the reduction in the number of shares of our
Common Stock outstanding.
We
currently have 19,441,324 shares of Common Stock issued and
outstanding. Without a reverse stock split, there would be
approximately 97,206,620 shares our Common Stock issued and outstanding
following the Merger. Our management and Sequoia believe that such a
large amount of shares issued and outstanding following the Merger may adversely
effect the development of an orderly market. The Reverse Stock Split
will reduce the number of shares of our Common Stock following the Merger to
approximately 48,603,310, which management believes will aid in the potential
development of an orderly market following the Merger and may make our Common
Stock of greater interest to potential market makers.
The
Reverse Stock Split itself will not change the proportionate equity interests of
our stockholders, nor will the respective voting rights and other rights of
stockholders be altered, except to the extent that the Reverse Stock Split
results in any of our stockholders owning a fractional share. No
fractional shares will be issued as a result of the Reverse Stock
Split. Instead, each stockholder whose shares are not evenly
divisible will be rounded up to the nearest whole share of Common
Stock. Although the Reverse Stock Split will not affect any
stockholder’s percentage ownership or proportionate voting power (subject to the
treatment of fractional shares), the number of authorized shares of Common Stock
will not be reduced and will increase the ability of the Board to issue such
authorized and unissued shares without further stockholder action. This issuance
of such additional shares, if such shares were issued, may have the effect of
diluting the earnings per share and book value per share, as well as the stock
ownership and voting rights, of outstanding Common Stock. The effective increase
in the number of authorized but unissued shares of Common Stock may be construed
as having an anti-takeover effect by permitting the issuance of shares to
purchasers who might oppose a hostile takeover bid or oppose any efforts to
amend or repeal certain provisions of our Certificate of Incorporation or
bylaws.
The
Common Stock issued pursuant to the Reverse Stock Split will remain fully paid
and non-assessable. The Reverse Stock Split is not intended as, and
will not have the effect of a “going private transaction” as covered by Rule
13e-3 under the Exchange Act.
The
following table sets forth our existing capital structure prior the Reverse
Stock Split and our proposed capital structure following the Merger and the
Related Proposals:
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Number
of Shares of Common Stock Issued and Outstanding
|
Number
of Shares of Preferred Stock Issued and Outstanding
|
Number
of Shares of Common Stock Authorized and Reserved for
Issuance
|
Number
of Shares of Preferred Stock Authorized and Reserved for
Issuance
|
Number
of Shares of Common Stock Authorized and Unmoved
|
Number
of Shares of Preferred Stock Authorized and Unmoved
|
|||||||||||||||||||
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Existing
Capital Structure
|
19,441,324 |
0
|
1,975,000 |
0
|
78,583,676 |
0
|
||||||||||||||||||
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Proposed
Capital Structure
|
48,619,680 |
0
|
3,487,500 |
0
|
197,892,820 |
50,000,000
|
||||||||||||||||||
A copy of
the proposed certificate of amendment to our Certificate of Incorporation is
attached as Annex C to this proxy statement. You are urged to read
the certificate of amendment carefully as it is the legal document that governs
the amendment to our Certificate of Incorporation. Although we are
asking for stockholder approval of this proposal, if for any reason the Merger
is not completed, this proposal will not be implemented.
The
approval of the Reverse Stock Split is a closing condition under the Merger
Agreement. If the Reverse Stock Split is not approved we cannot
effect the Merger or the other transactions contemplated by the Merger
Agreement. Accordingly, although Sequoia and we have the contractual right to
waive this condition, as a practical matter it may not be waived because we will
not have sufficient shares to issue to Sequoia to consummate the Merger, unless
the Capitalization Proposal is approved and implemented.
Required
Vote
The
approval of the Reverse Stock Split requires the approval of the holders of a
majority of our outstanding shares of Common Stock. Shares that are
voted “FOR” or “AGAINST” the proposal or marked “ABSTAIN” will be counted
towards the vote requirement. Broker non-votes, if any, will not be
counted towards the vote requirement.
Recommendation
of our Board
Our Board
has concluded unanimously that the Reverse Stock Split is in the best interests
of our stockholders and recommends that our stockholders approve this
proposal.
THE
BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 2.
THE
CAPITALIZATION PROPOSAL (PROPOSAL 3)
The
Merger Agreement requires that prior to the consummation of the Merger, the
Company file an amendment to its Certificate of Incorporation to increase our
authorized share capital in order to complete the Merger. The Board
has proposed that the Company increase its authorized share capital to
250,000,000 and to authorize a class of preferred stock consisting of 50,000,000
shares of $.01 par value preferred stock.
The
principal purpose of the Capitalization Proposal is to ensure that the Company
has the ability to issue the number of shares required to complete the
Merger. Additional share capital is also necessary to enable the
Company to undertake any future equity offerings, acquisitions or other
corporate purposes, although as of the date hereof, we have no plans to
undertake any such actions. Increasing our authorized share capital
to 250,000,000 and creating a class of preferred stock consisting of 50,000,000
share of $.01 par value preferred stock should provide us with the share capital
to complete the Merger and address our future needs.
Although
the Capitalization Proposal will not affect any stockholder’s percentage
ownership or proportionate voting power, the number of authorized shares of
Common Stock will be increased and will increase the ability of the Board to
issue such authorized and unissued shares without further stockholder action.
This issuance of such additional shares, if such shares were issued, may have
the effect of diluting the earnings per share and book value per share, as well
as the stock ownership and voting rights, of outstanding Common Stock. The
effective increase in the number of authorized but unissued shares of Common
Stock may be construed as having an anti-takeover effect by permitting the
issuance of shares to purchasers who might oppose a hostile takeover bid or
oppose any efforts to amend or repeal certain provisions of our Certificate of
Incorporation or bylaws.
A copy of
the proposed certificate of amendment is attached as Annex C to this proxy
statement. You are urged to read the certificate of amendment
carefully as it is the legal document that governs the amendment to our
Certificate of Incorporation. Although we are asking for stockholder
approval of this proposal, if for any reason the Merger is not completed, this
proposal will not be implemented.
The
approval of the Capitalization Proposal is a closing condition under the Merger
Agreement. If the Capitalization Proposal is not approved we cannot
effect the Merger or the other transactions contemplated by the Merger
Agreement. Accordingly, although Sequoia and we have the contractual right to
waive this condition, as a practical matter it may not be waived because we will
not have sufficient shares to issue to Sequoia to consummate the
Merger.
Required
Vote
The
approval of the Capitalization Proposal requires the approval of the holders of
a majority of our outstanding shares of Common Stock. Shares that are
voted “FOR” or “AGAINST” the proposal or marked “ABSTAIN” will be counted
towards the vote requirement. Broker non-votes, if any, will not be
counted towards the vote requirement.
Recommendation
of our Board
Our Board
has concluded unanimously that the Capitalization Proposal is in the best
interests of our stockholders and recommends that our stockholders approve this
proposal.
THE
BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 3.
THE
NAME CHANGE (PROPOSAL 4)
The
Merger Agreement requires that prior to the consummation of the Merger, the
Company file an amendment to its Certificate of Incorporation to change its
name. The Board has proposed that the Company’s name be changed from
“Secure Alliance Holdings Corporation” to “aVinci Media Corporation” and at the
Special Meeting, you will be asked to approve an amendment to our Certificate of
Incorporation to implement this change.
A copy of
the proposed certificate of amendment is attached as Annex C to this proxy
statement. You are urged to read the certificate of amendment
carefully as it is the legal document that governs the amendment to our
Certificate of Incorporation. Although we are asking for stockholder
approval of this proposal, if for any reason the Merger is not completed, this
proposal will not be implemented.
The
approval of the Name Change is a closing condition under the Merger
Agreement. If the Name Change Proposal is not approved, absent a
waiver by Sequoia and us, we cannot effect the Merger or the other transactions
contemplated by the Merger Agreement.
Required
Vote
The
approval of the Name-Change requires the approval of the holders of a majority
of our outstanding shares of Common Stock. Shares that are voted
“FOR” or “AGAINST” the proposal or marked “ABSTAIN” will be counted towards the
vote requirement. Broker non-votes, if any, will not be counted
towards the vote requirement.
Recommendation
of our Board
Our Board
has concluded unanimously that the Name-Change is in the best interests of our
stockholders and recommends that our stockholders approve this
proposal.
THE
BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 4.
THE
2008 STOCK INCENTIVE PLAN (PROPOSAL 5)
On
January 15, 2008, the Board unanimously adopted a resolution declaring it
advisable to approve the adoption of the 2008 Plan, which contains 2,500,000
shares of Common Stock available for grant thereunder. The 2008 Plan
is intended as an incentive to retain and to attract new directors, officers,
consultants, advisors and employees, as well as to encourage a sense of
proprietorship and stimulate the active interest of such persons in our and our
subsidiaries’ development and financial success. A copy of the 2008
Plan is attached as Annex D to this proxy statement. As of the date
hereof, no options to purchase shares of Common Stock or other rights have been
granted to any person under the 2008 Plan.
The
benefits and amounts to be derived under the 2008 Plan are not
determinable.
Description
of the 2008 Plan
The
following is a brief summary of certain provisions of the 2008 Plan, which
summary is qualified in its entirety by the actual text of the 2008 Plan
attached hereto as Annex D to this proxy statement.
The
Purpose of the 2008 Plan.
The
purpose of the 2008 Plan is to provide additional incentives to our directors,
officers, consultants, advisors and employees who are primarily responsible for
our management and growth.
We intend
for the 2008 Plan to meet the requirements of Rule 16b-3 (“Rule 16b-3”)
promulgated under the Exchange Act and that transactions of the type specified
in subparagraphs (c) to (f) inclusive of Rule 16b-3 by our officers and
directors pursuant to the 2008 Plan will be exempt from the operation of Section
16(b) of the Exchange Act. Further, the 2008 Plan is intended to
satisfy the performance-based compensation exception to the limitation on our
tax deductions imposed by Section 162(m) of the Code with respect to those
options for which qualification for such exception is intended.
Administration
of the 2008 Plan.
The 2008
Plan is to be administered by a committee consisting of two or more directors
appointed by the Board (the “Committee”). The Committee will be
comprised solely of “non-employee directors” within the meaning of Rule 16b-3
and, “outside directors” within the meaning of Section 162(m) of the Code, which
individuals will serve at the pleasure of the Board. In the event
that for any reason the Committee is unable to act or if the Committee at the
time of any grant, award or other acquisition under the 2008 Plan does not
consist of two or more “non-employee directors,” or if there is no such
Committee, then the 2008 Plan will be administered by the Board, provided that
grants to our Chief Executive Officer or to any of our other four most highly
compensated officers that are intended to qualify as performance-based
compensation under Section 162(m) of the Code may only be granted by the
Committee so comprised of outside directors.
Subject
to the other provisions of the 2008 Plan, the Committee will have the authority,
in its discretion: (i) to designate recipients of options (“Options”), stock
appreciation rights (“Stock Appreciation Rights”), restricted stock (“Restricted
Stock”) and other equity incentives or stock or stock based awards (“Equity
Incentives”), all of which are referred to collectively as “Rights”; (ii) to
determine the terms and conditions of each Right granted (which need not be
identical); (iii) to interpret the 2008 Plan and all Rights granted thereunder;
and (iv) to make all other determinations necessary or advisable for the
administration of the 2008 Plan.
Eligibility.
The
persons eligible for participation in the 2008 Plan as recipients of Options,
Stock Appreciation Rights, Restricted Stock or Equity Incentives include our
directors, officers and employees of, and consultants and advisors to, provided
that incentive stock options may only be granted to our
employees. Approximately 50 individuals will be eligible to
participate in the 2008 Plan following the Merger. In selecting
participants, and determining the number of shares covered by each Right, the
Committee may consider any factors that it deems relevant.
Shares
Subject to the 2008 Plan.
Subject
to the conditions outlined below, the total number of shares of Common Stock
which may be issued pursuant to Rights granted under the 2008 Plan may not
exceed 2,500,000 shares.
In the
event of any merger, reorganization, consolidation, recapitalization, stock
dividend, stock split or similar type of corporate restructuring affecting the
shares of Common Stock, the Committee will make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the 2008
Plan and in the number and exercise price of shares subject to outstanding
Options granted under the 2008 Plan, to the end that after such event each
optionee’s proportionate interest will be maintained as immediately before the
occurrence of such event. The Committee will, to the extent feasible, make such
other adjustments as may be required under the tax laws so that any incentive
stock options previously granted will not be deemed modified within the meaning
of Section 424(h) of the Code. Appropriate adjustments will also be
made in the case of outstanding Stock Appreciation Rights and Restricted Stock
granted under the 2008 Plan.
Options.
An option
granted under the 2008 Plan is designated at the time of grant as either an
incentive stock option (an “ISO”) or as a
non-qualified stock option (a “NQSO”). Upon
the grant of an Option to purchase shares of Common Stock, the Committee will
fix the number of shares of Common Stock that the optionee may purchase upon
exercise of such Option and the price at which the shares may be
purchased. The purchase price of each share of Common Stock
purchasable under an Option will be determined by the Committee at the time of
grant, but may not be less than 100% of the fair market value of such share of
Common Stock on the date the Option is granted; provided, however, that with
respect to an optionee who, at the time an ISO is granted, owns more than 10% of
the total combined voting power of all classes of our stock or of any
subsidiary, the purchase price per share under an ISO must be at least 110% of
the fair market value per share of the Common Stock on the date of
grant.
Stock
Appreciation Rights.
Stock
Appreciation Rights will be exercisable at such time or times and subject to
such terms and conditions as determined by the Committee. Unless
otherwise provided, Stock Appreciation Rights will become immediately
exercisable and remain exercisable until expiration, cancellation or termination
of the award. Such rights may be exercised in whole or in part by
giving us written notice.
Restricted
Stock.
Restricted
Stock may be granted under the 2008 Plan aside from, or in association with, any
other award and will be subject to certain conditions and contain such
additional terms and conditions, not inconsistent with the terms of the 2008
Plan, as the Committee deems desirable. A grantee will have no rights
to an award of Restricted Stock unless and until such grantee accepts the award
within the period prescribed by the Committee and, if the Committee deems
desirable, makes payment to the Company in cash, or by check or such other
instrument as may be acceptable to the Committee. Shares of
Restricted Stock are forfeitable until the terms of the Restricted Stock grant
have been satisfied.
Other
Equity Incentives or Stock Based Awards.
Subject
to the provisions of the 2008 Plan, the Committee may grant Equity Incentives
(including the grant of unrestricted shares) to such key persons, in such
amounts and subject to such terms and conditions, as the Committee in its
discretion determines. Such awards may entail the transfer of actual
shares of the Common Stock to 2008 Plan participants, or payment in cash or
otherwise of amounts based on the value of shares of Common Stock.
Term
of the Rights.
The
Committee, in its sole discretion, will fix the term of each Right, provided
that the maximum term of an Option will be ten years. ISOs granted to
a 10% stockholder will expire not more than five years after the date of
grant. The 2008 Plan provides for the earlier expiration of Rights in
the event of certain terminations of employment of the holder.
Restrictions
on Transferability.
Options
and Stock Appreciation Rights granted hereunder are not transferable and may be
exercised solely by the optionee or grantee during his lifetime or after his
death by the person or persons entitled thereto under his will or the laws of
descent and distribution. The Committee, in its sole discretion, may
permit a transfer of a NQSO to (i) a trust for the benefit of the optionee or
(ii) a member of the optionee’s immediate family (or a trust for his or her
benefit). Any attempt to transfer, assign, pledge or otherwise
dispose of, or to subject to execution, attachment or similar process, any
Option or Stock Appreciation Right contrary to the provisions hereof will be
void and ineffective and will give no right to the purported
transferee. Shares of Restricted Stock are not transferable until the
date on which the Committee has specified such restrictions have
lapsed.
Termination
of the 2008 Plan.
No Right
may be granted pursuant to the 2008 Plan following December 31,
2018.
Amendments
to the 2008 Plan.
The Board
may at any time amend, suspend or terminate the 2008 Plan, except that no
amendment may be made that would impair the rights of any optionee or grantee
under any Right previously granted without the optionee’s or grantee’s consent,
and except that no amendment may be made which, without the approval our
stockholders would (i) materially increase the number of shares that may be
issued under the 2008 Plan except as permitted under the 2008 Plan; (ii)
materially increase the benefits accruing to the optionees or grantees under the
2008 Plan; (iii) materially modify the requirements as to eligibility for
participation in the 2008 Plan; (iv) decrease the exercise price of an ISO to
less than 100% of the fair market value on the date of grant thereof or the
exercise price of a NQSO to less than 100% of the fair market value on the date
of grant thereof; or (v) extend the term of any Option beyond that permitted in
the 2008 Plan.
Federal
Income Tax Consequences
Incentive
Options
Options
that are granted under the 2008 Plan and that are intended to qualify as ISOs
must comply with the requirements of Section 422 of the Code. An
option holder is not taxed upon the grant or exercise of an ISO; however, the
difference between the fair market value of the shares on the exercise date will
be an item of adjustment for purposes of the alternative minimum
tax. If an option holder holds the shares acquired upon the exercise
of an ISO for at least two years following the date of the grant of the option
and at least one year following the exercise of the option, the option holder’s
gain, if any, upon a subsequent disposition of such shares will be treated as
long-term capital gain for federal income tax purposes. The measure
of the gain is the difference between the proceeds received on disposition and
the option holder’s basis in the shares (which generally would equal the
exercise price). If the option holder disposes of shares acquired
pursuant to exercise of an ISO before satisfying the one-and-two year holding
periods described above, the option holder may recognize both ordinary income
and capital gain in the year of disposition. The amount of the
ordinary income will be the lesser of (i) the amount realized on disposition
less the option holder’s adjusted basis in the shares (generally the option
exercise price); or (ii) the difference between the fair market value of the
shares on the exercise date and the option price. The balance of the
consideration received on such disposition will be long-term capital gain if the
shares had been held for at least one year following exercise of the
ISO.
We are
not entitled to an income tax deduction on the grant or the exercise of an ISO
or on the option holder’s disposition of the shares after satisfying the holding
period requirement described above. If the holding periods are not
satisfied, we will generally be entitled to an income tax deduction in the year
the option holder disposes of the shares, in an amount equal to the ordinary
income recognized by the option holder.
Nonqualified
Options
In the
case of a NQSO, an option holder is not taxed on the grant of such
option. Upon exercise, however, the participant recognizes ordinary
income equal to the difference between the option price and the fair market
value of the shares on the date of the exercise. We are generally
entitled to an income tax deduction in the year of exercise in the amount of the
ordinary income recognized by the option holder. Any gain on
subsequent disposition of the shares is long-term capital gain if the shares are
held for at least one year following the exercise. We do not receive
an income tax deduction for this gain.
Restricted
Stock
A
recipient of restricted stock will not have taxable income upon grant, but will
have ordinary income at the time of vesting equal to the fair market value on
the vesting date of the shares (or cash) received minus any amount paid for the
shares. A recipient of restricted stock may instead, however, elect
to be taxed at the time of grant.
Stock
Option Appreciation Rights
No
taxable income will be recognized by an option holder upon receipt of a stock
option appreciation right (“SAR”) and we will not be entitled to a tax deduction
upon the grant of such right.
Upon the
exercise of a SAR, the holder will include in taxable income, for federal income
tax purposes, the fair market value of the cash and other property received with
respect to the SAR and we will generally be entitled to a corresponding tax
deduction.
Required
Vote
The
approval of the 2008 Plan requires the approval of the holders of a majority of
the shares of Common Stock voting at the Special Meeting. Shares that
are voted “FOR” or “AGAINST” the proposal will be counted towards the vote
requirement. Neither broker “non-votes” nor abstentions are included
in the tabulation of the voting results and, therefore, they do not have the
effect of votes against such proposal.
The
approval of the 2008 Plan is not a condition to the consummation of the Merger,
but is being proposed in connection with the Merger and will not be presented at
the meeting for a vote if the Related Proposals that are conditions to the
Merger are not approved or waived (where practical).
Recommendation
of our Board
Our Board
has concluded unanimously that the 2008 Plan is in the best interests of our
stockholders and recommends that our stockholders approve this
proposal.
THE
BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 5.
ADJOURNMENT OF THE SPECIAL MEETING (PROPOSAL 6)
We may
ask our stockholders to vote on a proposal to adjourn the Special Meeting, if
necessary or appropriate, in order to allow for the solicitation of additional
proxies if there are insufficient votes at the time of the meeting to approve
and adopt the Merger Agreement, the Related Proposals and the 2008
Plan.
Required
Vote
The
approval of the adjournment proposal requires the approval of the holders of a
majority of the shares of Common Stock voting at the Special
Meeting. Shares that are voted “FOR” or “AGAINST” the proposal will
be counted towards the vote requirement. Neither broker “non-votes”
nor abstentions are included in the tabulation of the voting results and,
therefore, they do not have the effect of votes against such
proposal.
Recommendation
of our Board
Our Board
has concluded unanimously that the adjournment proposal is in the best interests
of our stockholders and recommends that our stockholders approve this
proposal.
THE BOARD RECOMMENDS A VOTE
“FOR” PROPOSAL
6.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
MANAGEMENT
The
following table and the notes thereto set forth certain information regarding
the beneficial ownership of our Common Stock as of the Record Date,
by:
|
|
·
|
each
current director of the Company;
|
|
|
·
|
the
chief executive officer and the four other most highly compensated
executive officers whose salary and bonus for the fiscal year ended
September 30, 2007 were in excess of $100,000 (collectively, the “named
executive officers”);
|
|
|
·
|
all
named executive officers and directors of the Company as a group;
and
|
|
|
·
|
each
other person known to the Company to own beneficially more than five
percent of the outstanding Common
Stock.
|
We have
determined beneficial ownership in accordance with the rules of the
SEC. The number of shares beneficially owned by a person includes
shares of Common Stock that are subject to stock options that are either
currently exercisable or exercisable within 60 days following April 23,
2008. These shares are also deemed outstanding for the purpose of
computing the percentage of outstanding shares owned by the
person. However, these shares are not deemed outstanding for the
purpose of computing the percentage ownership of any other
person. Unless otherwise indicated, to our knowledge, each
stockholder has sole voting and dispositive power with respect to the securities
beneficially owned by that stockholder. Unless indicated otherwise,
the address of each person listed below is c/o Secure Alliance Holdings
Corporation, 5700 Northwest Central Dr, Ste 350, Houston, Texas
77092. As of the Record Date, there were 19,484,032
shares of Common Stock of the Company outstanding.
|
Name and Address of
Beneficial Owner
|
Amount
and Nature of
Beneficial
Ownership
|
Percent
of
Class(1)
|
||
|
Springview
Group LLC
c/o
Millennium Management, L.L.C., 666 Fifth Avenue, New York, New York
10103
|
1,049,191(2)
|
5.4%(2)
|
||
|
Integrated
Holding Group, L.P.
c/o
Millennium Management, L.L.C., 666 Fifth Avenue, New York, New York
10103
|
1,049,191(2)
|
5.4%(2)
|
||
|
Millennium
Management, L.L.C.
c/o
Millennium Management, L.L.C., 666 Fifth Avenue, New York, New York
10103
|
1,049,191(2)
|
5.4%(2)
|
||
|
Israel
A. Englander
|
1,049,191(2)
|
5.4%(2)
|
||
|
Kellogg
Capital Group LLC
55
Broadway, 4th Floor
New
York, NY 10006
|
2,192,523
|
11.3%
|
||
|
Alliance
Developments
One
Yorkdale Rd., Suite 510
North
York, Ontario M6A 3A1 Canada
|
1,030,362(3)
|
5.3%
|
||
|
Jerrell
G. Clay
|
1,131,405(4)
|
5.8%
|
||
|
Stephen
P. Griggs
|
950,000(4)
|
4.9%
|
||
|
Directors
and Executive
Officers
as a group (2 persons)
|
2,081,405(5)
|
10.7%
|
|
(1)
|
Based
upon 19,484,032
shares outstanding as of the Record
Date.
|
|
(2)
|
Integrated
Holding Group, L.P., a Delaware limited partnership (“Integrated Holding
Group”) is the managing member of Springview Group LLC (“Springview
Group”) and consequently may be deemed to have voting control and
investment discretion over securities owned by Springview
Group. Millennium Management, L.L.C., a Delaware limited
liability company (“Millennium Management”), is the managing partner of
Integrated Holding Group and consequently may be deemed to be the
beneficial owner of any shares deemed to be beneficially owned by
Integrated Holding Group. Israel A. Englander (“Mr. Englander”)
is the managing member of Millennium Management and consequently may be
deemed to be the beneficial owner of any shares deemed to be beneficially
owned by Millennium Management.
|
|
(3)
|
Includes
50,000 shares, which could be acquired within 60 days upon exercise of
outstanding warrants at an exercise price of $0.45 per
share.
|
|
(4)
|
Includes
options to purchase 950,000 shares of Common Stock pursuant to the terms
of the 1997 Long Term Incentive Plan, which will become fully vested upon
the consummation of the Merger.
|
|
(5)
|
Includes
the options to each purchase 950,000 shares of Common Stock referred to in
Note 3 above.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth
below are the names and ages of our current directors and executive officers and
their principal occupations at present and for the past five
years. There are, to our knowledge, no agreements or understandings
by which these individuals were selected. No family relationships
exist between any directors or executive officers (as such term is defined in
Item 401 of Regulation S-K), except as otherwise stated below. If the
Merger is approved and consummated, Jerrell G. Clay, our Chief Executive
Officer, and Stephen P. Griggs, our President, Chief Operating Officer,
Principal Financial Officer and Secretary, will resign from the Company, but
will remain directors on the Board. Following the merger, we expect
our directors and executive officers to be as follows: Chett B. Paulsen, as
President, Chief Executive Officer and director, Richard B. Paulsen, as Vice
President, Chief Technology Officer and director, Edward B. Paulsen, as
Secretary/Treasurer, Chief Operating Officer and director, Terry Dickson, as
Vice President of Marketing and Business Development and Tod M. Turley and John
E. Tyson as directors. See “The Transactions – Board Composition and
Management following the Merger.”
|
Name
|
Age
|
The
Company’s Officers
|
Director
Since
|
|||
|
Jerrell
G. Clay(1)
|
66
|
Chief
Executive Officer
|
1990
|
|||
|
Stephen
P. Griggs(2)
|
50
|
President,
Chief Operating Officer, Principal Financial Officer, and
Secretary
|
2002
|
|
(1)
|
Jerrell
G. Clay was appointed Chief Executive Officer of the Company effective
October 3, 2006.
|
|
(2)
|
Stephen
P. Griggs was appointed President and Chief Operating Officer of the
Company effective October 3, 2006. Mr. Griggs was appointed
Principal Financial Officer and Secretary on April 20,
2007.
|
See “The
Transactions – Board Composition and Management following the Merger” for a
summary of the business background and experience of each of the persons named
above.
Audit
Committee
The
Company had a separately designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act, which is responsible
for reviewing the financial information which will be provided to stockholders
and others, the systems of internal controls, which management and the Board
have established, and the financial reporting processes. On August
26, 2005, Mr. Raymond P. Landry, director, resigned from the Audit Committee and
Mr. Griggs was appointed as Chairman of the Audit Committee, and the Board
determined that Mr. Griggs is an “audit committee financial expert” as defined
in Item 401(h) of Regulation S-K. On September 30, 2005, the Audit
Committee consisted of Messrs. Griggs, and Clay. During the 2007,
2006 and 2005 fiscal years, the Audit Committee held four, three and six
meetings, respectively. Each member of the Audit Committee was an
“independent director” as defined in Rule 4200 of the Marketplace Rules of the
National Association of Securities Dealers, Inc. (“NASD”) as of September 30,
2006. Effective October 3, 2006, Messrs. Griggs and Clay were
appointed executive officers of the Company and were no longer considered
“independent directors”.
Compensation
Committee
The
Compensation Committee consists of Messrs. Clay and Griggs and is responsible
for reviewing the performance and development of management in achieving
corporate goals and objectives and ensuring that the Company’s senior executives
are compensated effectively in a manner consistent with the Company’s strategy,
competitive practice, and the requirements of the appropriate regulatory
bodies. Toward that end, the Compensation Committee oversees all of
the Company’s compensation, equity and employee benefit plans and
payments. The Compensation Committee held one meeting each year
during the fiscal years 2007, 2006 and 2005. For each of the 2006 and
2005 fiscal years, each of the members of the Compensation Committee was an
“independent director” as defined in Rule 4200 of the Marketplace Rules of the
NASD, and an “outside director” as defined in Section 162(m) of the Internal
Revenue Code of 1986. Effective October 3, 2006, Messrs. Griggs and
Clay were appointed executive officers of the Company and were no longer
considered “independent directors” or “outside directors”.
Code
of Conduct and Ethics
The
Company has adopted a Code of Conduct and Ethics that applies to the Company’s
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. This
Code of Conduct and Ethics was filed as an exhibit to our Annual Report on Form
10-K for the 2005 fiscal year. Our Code of Conduct and Ethics
addresses conflicts of interest, usurpation of corporate opportunities, the
protection and proper use of Company assets, confidentiality, compliance with
laws, rules, and regulations, prompt reporting of any illegal or improper
activity to an officer, supervisor, manager, or other appropriate personnel of
the Company. A copy of the Code of Conduct and Ethics is available in
print, free of charge, to any stockholder who requests a
copy. Interested parties may address a written request for a printed
copy of the Code of Conduct and Ethics to: Secure Alliance Holdings Corporation,
5700 Northwest Central Drive, Suite 350, Houston, Texas 77092, Attention:
Corporate Secretary.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
officers, and persons who own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership of such equity
securities with the SEC. Such entities are also required by SEC
regulations to furnish us with copies of all Section 16(a) forms
filed.
Based
solely on a review of the copies of Forms 3, 4 and 5 furnished to us, and any
amendments thereto, and any written representations with respect to the
foregoing, we believe that our directors and officers, and greater than 10%
beneficial owners, have complied with all Section 16(a) filing
requirements.
EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
Overview
This
compensation discussion and analysis describes the material elements of
compensation awarded to, earned by or paid to each of our executive officers who
served as named executive officers during the fiscal year ended September 30,
2007. This compensation discussion focuses on the information
contained in the following tables and related footnotes and narrative for
primarily the last completed fiscal year, but we also describe compensation
actions taken before or after the last completed fiscal year to the extent that
it enhances the understanding of our executive compensation
disclosure. The Board currently oversees the design and
administration of our executive compensation program. We currently
have no operations and, accordingly, our current executive compensation program
provides for a limited cash compensation to our executives in the form of base
salary and for a stock option grant to each executive.
Executive
Compensation Objectives
The
objectives of our executive compensation program are to:
|
|
·
|
Ensure
officer compensation is aligned with our corporate strategies, business
objectives and the long-term interests of our stockholders;
and
|
|
|
·
|
Provide
stability for the Company.
|
Summary
Compensation Table
The
following table sets forth the amount of all cash and other compensation we have
paid for services rendered during the fiscal years ended September 30, 2007,
2006 and 2005 to Jerrell G. Clay, Chief Executive Officer and Stephen P. Griggs,
Principal Financial Officer. On October 3, 2006, Messrs. Clay and
Griggs became the sole executive officers of the Company.
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock Awards
($)
|
Option Awards
($)
|
Non-Equity Incentive
Plan Compensation
($)
|
Non-qualified
Deferred Compensation Earnings ($) |
All
Other Compensation ($)(3) |
Total ($) |
|||||||||||||||||||||||||
|
Jerrell G. Clay(1)
|
2007
|
$ | 100,000 | — | — | $ | 69,746 | — | — | — | $ | 169,746 | ||||||||||||||||||||||
|
Chief
Executive
|
2006
|
— | $ | 100,000 | — | — | — | — | $ | 12,000 | $ | 112,000 | ||||||||||||||||||||||
|
Officer
and director
|
2005
|
— | — | — | — | — | — | $ | 12,000 | $ | 12,000 | |||||||||||||||||||||||
|
Stephen P.
Griggs(1)
|
2007
|
$ | 100,000 | — | — | $ | 69,746 | — | — | — | $ | 169,746 | ||||||||||||||||||||||
|
Principal
Financial
|
2006
|
— | $ | 100,000 | — | — | — | — | $ | 12,000 | $ | 112,000 | ||||||||||||||||||||||
|
Officer
and director
|
2005
|
— | — | — | — | — | — | $ | 12,000 | $ | 12,000 | |||||||||||||||||||||||
|
(1)
|
Jerrell
G. Clay was appointed Chief Executive Officer of the Company effective
October 3, 2006. All compensation for 2006 and 2005 was for Mr.
Clay’s services as a director of the
Company.
|
|
(2)
|
Stephen
P. Griggs was appointed President and Chief Operating Officer of the
Company effective October 3, 2006. Mr. Griggs was appointed
Principal Financial Officer and Secretary on April 20,
2007. All compensation for 2006 and 2005 was for Mr. Griggs’s
services as a director of the
Company.
|
|
(3)
|
Represents
annual board fees paid to each of Mr. Clay and Mr. Griggs in their
capacities as directors for such
years.
|
Narrative
Disclosure to Summary Compensation Table
The
compensation paid to the named executive officers includes salary and equity
compensation. On March 21, 2007, the Company awarded Messrs. Griggs
and Clay each 950,000 stock options to purchase our common stock at an exercise
price of $0.62 per share pursuant to the Company’s 1997 Long-Term Incentive
Plan. Of this award, 34% of the options vest on the first anniversary
of the date of the grant, 33% of the options vest on the second anniversary of
the date of the grant and the remaining 33% of the options vest on the third
anniversary of the date of the grant. In addition, 100% of the
options vest upon a change of control.
For the
year ended September 30, 2007, salaries accounted for approximately 59% of total
compensation for our executive officers.
There is
no employment agreement between the Company and either of our executive officers
regarding their employment with the Company.
Grants
of Plan-Based Awards
The
following table sets forth information concerning each grant of an award made to
named executive officers in the last completed fiscal year under the 1997
Long-Term Incentive Plan.
|
Name
|
Grant
Date
|
Estimated
Future Payouts Under Non-Equity Incentive Plan Awards
($)
|
Estimated
Future payouts Under Equity Incentive Plan Awards
($)
|
All
Other Stock Awards: Number of Shares of Stock or Units
(#)
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Option Awards ($/Sh)
|
Grant
Date Fair Value of Stock and Option Awards
|
|||||||||||||||||||
|
Jerrell
G. Clay
|
03/21/2007
|
— | — | — | 950,000 | $ | 0.62 | $ | 543,472 | |||||||||||||||||
|
Stephen
P. Griggs
|
03/21/2007
|
— | — | — | 950,000 | $ | 0.62 | $ | 543,472 | |||||||||||||||||
The
following table sets forth information concerning unexercised options; stock
that has not vested; and equity incentive plan awards for each named executive
officer in the last completed fiscal year under the 1997 Long-Term Incentive
Plan.
Outstanding
Equity Awards at Fiscal Year-End
|
Option
Awards
|
|||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Stock
Awards
|
|||||||||||||||
|
Jerrell
G. Clay
|
— | 950,000 | — | $ | 0.62 |
03/21/2017
|
— | ||||||||||||||
|
Stephen
P. Griggs
|
— | 950,000 | — | $ | 0.62 |
03/21/2017
|
— | ||||||||||||||
Director
Compensation
No member
of our Board earned any compensation for his services as a member of our Board
of Directors for the year ended September 30, 2007. See the Summary
Compensation Table above for a description of compensation earned by members of
our Board in their capacities as officers of the Company for such
period.
Deferred
Compensation Agreements
Other
than with respect to the vesting of stock options upon a change of control of
the Company discussed above, no plan or arrangement exists which results in
compensation to a named executive officer in excess of $100,000 upon such
officer’s future termination of employment or upon a
change-of-control.
Compensation
Committee Interlocks and Insider Participation
Jerrell
G. Clay and Stephen P. Griggs, the members of our Compensation Committee, have
served as our Chief Executive Officer and Principal Financial Officer,
respectively, since October 3, 2006. None of our executive officers
serves as a member of the board of directors or as a member of the compensation
committee of any other company that has an executive officer serving as a member
of our Board.
Compensation
Committee Report
We
recommend to the Board that the Executive Compensation and Compensation
Discussion and Analysis provisions referred to above be included in this Proxy
Statement.
SUBMITTED
BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Jerrell
G. Clay
Stephen
P. Griggs
NO
RIGHT OF APPRAISAL
Our
stockholders will not experience any change in their rights as stockholders as a
result of the Merger. Neither Delaware law nor our Certificate of
Incorporation or bylaws provides for appraisal or other similar rights for
dissenting stockholders in connection with the Merger. Accordingly,
our stockholders will have no right to dissent and obtain payment for their
shares.
AUDITED
FINANCIAL STATEMENTS OF SECURE ALLIANCE HOLDINGS CORPORATION AND
SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
Report
of Independent Registered Public Accounting Firm
The Board
of Directors
Secure
Alliance Holdings Corporation:
We have
audited the consolidated financial statements of Secure Alliance Holdings
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Secure Alliance Holdings
Corporation and subsidiaries as of September 30, 2007 and 2006, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
further discussed in notes 1 and 2 to the consolidated financial statements, the
Company disposed of its remaining operating assets and liabilities in October
2006, and currently has no operations.
|
/s/
HEIN & ASSOCIATES LLP
|
Houston,
Texas
January 14,
2008
Index
to Financial Statements
|
CONSOLIDATED
FINANCIAL STATEMENTS OF SECURE ALLIANCE HOLDINGS CORPORATION AND
SUBSIDIARIES
|
|
Report
of Independent Registered Public Accounting Firm
|
|
Consolidated
Balance Sheets — September 30, 2007 and 2006
|
|
Consolidated
Statements of Operations for the years ended September 30, 2007, 2006 and
2005
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the years ended September
30, 2007, 2006 and 2005
|
|
Consolidated
Statements of Shareholders’ Equity for the years ended September 30, 2007,
2006 and 2005
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2007, 2006 and
2005
|
|
Notes
to Consolidated Financial Statements
|
|
Schedule
II Valuation and Qualifying
Accounts
|
All other
schedules are omitted because they are not required, are not applicable or the
required information is presented elsewhere herein.
As
of September 30, 2007 and 2006
|
September
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
882,116
|
$
|
1,264,463
|
||||
|
Certificates
of deposit
|
11,177,567
|
—
|
||||||
|
Restricted
cash
|
—
|
5,400,000
|
||||||
|
Marketable
securities held-to-maturity
|
—
|
4,899,249
|
||||||
|
Marketable
securities available-for-sale
|
505,500
|
851,939
|
||||||
|
Interest
and other receivables
|
204,113
|
220,689
|
||||||
|
Prepaid
expenses and other
|
—
|
132,036
|
||||||
|
Assets
held for sale, net of accumulated depreciation of $0 and $1,352,463,
respectively (See Note 2)
|
—
|
6,312,663
|
||||||
|
Total
current assets
|
12,769,296
|
19,081,039
|
||||||
|
Other
assets
|
4,000
|
4,000
|
||||||
|
Total
assets
|
$
|
12,773,296
|
$
|
19,085,039
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$
|
—
|
$
|
221,295
|
||||
|
Accrued
interest payable
|
—
|
2,000,000
|
||||||
|
Shares
subject to redemption
|
—
|
5,400,000
|
||||||
|
Other
accrued liabilities
|
141,401
|
150,194
|
||||||
|
Liabilities
held for sale (See Note 2)
|
—
|
3,636,369
|
||||||
|
Total
liabilities
|
141,401
|
11,407,858
|
||||||
|
Commitments
and contingencies
|
—
|
—
|
||||||
|
Shareholders’
Equity:
|
||||||||
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 19,441,524 shares and 38,677,210 shares,
respectively
|
194,415
|
386,772
|
||||||
|
Additional
paid-in capital
|
30,008,008
|
30,782,187
|
||||||
|
Accumulated
deficit
|
(17,776,028
|
)
|
(24,043,717
|
)
|
||||
|
Accumulated
other comprehensive income
|
205,500
|
551,939
|
||||||
|
Total
shareholders’ equity
|
12,631,895
|
7,677,181
|
||||||
|
Total
liabilities and shareholders’ equity
|
$
|
12,773,296
|
$
|
19,085,039
|
||||
See
accompanying Notes to Consolidated Financial Statements
For
the Years Ended September 30, 2007, 2006 and 2005
|
Years
Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Selling,
general and administrative
|
1,333,467
|
3,065,064
|
1,805,484
|
|||||||||
|
Depreciation
and amortization
|
—
|
2,678
|
4,977
|
|||||||||
|
Operating
loss
|
(1,333,467
|
)
|
(3,067,742
|
)
|
(1,810,461
|
)
|
||||||
|
Other
income (expense):
|
||||||||||||
|
Reorganization
fee paid to Laurus
|
(6,508,963
|
)
|
—
|
—
|
||||||||
|
Gain
on disposal of investment in 3CI pursuant to class-action
settlement
|
—
|
5,380,121
|
—
|
|||||||||
|
Amortization
of debt discount and deferred financing costs
|
—
|
(4,078,738
|
)
|
(3,816,178
|
)
|
|||||||
|
Interest
income
|
580,861
|
392,564
|
—
|
|||||||||
|
Interest
expense
|
—
|
(235,765
|
)
|
(2,732,891
|
)
|
|||||||
|
Gain
on collection of receivable
|
—
|
598,496
|
—
|
|||||||||
|
Gain
on CCC bankruptcy settlement
|
—
|
105,000
|
—
|
|||||||||
|
Other
expense
|
—
|
(7,455
|
)
|
—
|
||||||||
|
Total
other income (expense)
|
(5,928,102
|
)
|
2,154,223
|
(6,549,069
|
)
|
|||||||
|
Loss
before taxes and discontinued operations
|
(7,261,569
|
)
|
(913,519
|
)
|
(8,359,530
|
)
|
||||||
|
Income
tax expense
|
75,808
|
159,546
|
—
|
|||||||||
|
Loss
from continuing operations
|
(7,337,377
|
)
|
(1,073,065
|
)
|
(8,359,530
|
)
|
||||||
|
Discontinued
operations:
|
||||||||||||
|
Income
from discontinued operations
|
—
|
2,399,053
|
5,073,608
|
|||||||||
|
Gain
on sale of ATM business, net of taxes
|
—
|
3,536,105
|
—
|
|||||||||
|
Gain
on sale of Cash Security business, net of taxes
|
13,605,066
|
—
|
—
|
|||||||||
|
Total
discontinued operations
|
13,605,066
|
5,935,158
|
5,073,608
|
|||||||||
|
Net
income (loss)
|
$
|
6,267,689
|
$
|
4,862,093
|
$
|
(3,285,922
|
)
|
|||||
|
Basic
earnings (loss) per share:
|
||||||||||||
|
Loss
from continuing operations
|
$
|
(0.37
|
)
|
$
|
(0.03
|
)
|
$
|
(0.41
|
)
|
|||
|
Income
from discontinued operations
|
0.70
|
0.18
|
0.25
|
|||||||||
|
Net
income (loss)
|
$
|
0.33
|
$
|
0.15
|
$
|
(0.16
|
)
|
|||||
|
Basic
weighted average common shares outstanding
|
19,563,447
|
33,499,128
|
20,292,796
|
|||||||||
|
Diluted
earnings (loss) per share:
|
||||||||||||
|
Loss
from continuing operations
|
$
|
(0.37
|
)
|
$
|
(0.03
|
)
|
$
|
(0.41
|
)
|
|||
|
Income
from discontinued operations
|
0.69
|
0.18
|
0.25
|
|||||||||
|
Net
income (loss)
|
$
|
0.32
|
$
|
0.15
|
$
|
(0.16
|
)
|
|||||
|
Diluted
weighted average common and dilutive shares outstanding
|
$
|
19,674,772
|
$
|
33,499,128
|
$
|
20,292,796
|
||||||
See
accompanying Notes to Consolidated Financial Statements
For
the Years Ended September 30, 2007, 2006 and 2005
|
Years
Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income (loss)
|
$ | 6,267,689 | $ | 4,862,093 | $ | (3,285,922 | ) | |||||
|
Other
comprehensive income:
|
||||||||||||
|
Unrealized
gain (loss) on marketable securities available-for-sale
|
(346,439 | ) | 551,939 | — | ||||||||
|
Unrealized
gain on investment in 3CI
|
— | — | 35,093 | |||||||||
|
Comprehensive
income (loss)
|
$ | 5,921,250 | $ | 5,414,032 | $ | (3,250,829 | ) | |||||
See
accompanying Notes to Consolidated Financial Statements
For
the Years Ended September 30, 2007, 2006 and 2005
|
Shares
Issued
and
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
(Accumulated
Deficit)
|
Other
|
Total
Shareholders
Equity
|
|||||||||||||||||||
|
Balances,
September 30, 2004
|
$
|
17,426,210
|
$
|
174,262
|
$
|
28,100,674
|
$
|
(25,619,888
|
)
|
$
|
(66,599
|
)
|
$
|
2,588,449
|
||||||||||
|
Net
loss
|
—
|
—
|
—
|
(3,285,922
|
)
|
—
|
(3,285,922
|
)
|
||||||||||||||||
|
Issuance
of shares to Laurus in payment of fees
|
1,251,000
|
12,510
|
625,500
|
—
|
—
|
638,010
|
||||||||||||||||||
|
Issuance
of shares in connection with settlement of class-action
litigation
|
2,000,000
|
20,000
|
1,544,490
|
—
|
—
|
1,564,490
|
||||||||||||||||||
|
Shares
received from officer in connection with settlement
|
—
|
—
|
(31,675
|
)
|
—
|
31,675
|
—
|
|||||||||||||||||
|
Unrealized
gain on investment in 3CI
|
—
|
—
|
—
|
—
|
35,093
|
35,093
|
||||||||||||||||||
|
Issuance
of warrants in connection with debt with beneficial conversion premium on
convertible debt
|
—
|
—
|
723,198
|
—
|
—
|
723,198
|
||||||||||||||||||
|
Balances,
September 30, 2005
|
20,677,210
|
206,772
|
30,962,187
|
(28,905,810
|
)
|
169
|
2,263,318
|
|||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
4,862,093
|
—
|
4,862,093
|
||||||||||||||||||
|
Issuance
of shares subject to redemption
|
18,000,000
|
180,000
|
(180,000
|
)
|
—
|
—
|
—
|
|||||||||||||||||
|
Unrealized
gain on marketable securities available-for-sale
|
—
|
—
|
—
|
—
|
551,939
|
551,939
|
||||||||||||||||||
|
Disposal
of investment in 3CI pursuant
to
class-action settlement
|
—
|
—
|
—
|
—
|
(169
|
)
|
(169
|
)
|
||||||||||||||||
|
Balances,
September 30, 2006
|
38,677,210
|
386,772
|
30,782,187
|
(24,043,717
|
)
|
551,939
|
7,677,181
|
|||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
6,267,689
|
—
|
6,267,689
|
||||||||||||||||||
|
Redemption
of shares from Laurus
|
(19,251,000
|
)
|
(192,510
|
)
|
(952,830
|
)
|
—
|
—
|
(1,145,340
|
)
|
||||||||||||||
|
Cancellation
of shares received from officer in connection with
settlement
|
(90,500
|
)
|
(905
|
)
|
905
|
—
|
—
|
—
|
||||||||||||||||
|
Unrealized
loss on marketable securities available-for-sale
|
—
|
—
|
—
|
—
|
(346,439
|
)
|
(346,439
|
)
|
||||||||||||||||
|
Issuance
of stock options to officers
|
—
|
—
|
139,491
|
—
|
—
|
139,491
|
||||||||||||||||||
|
Issuance
of shares pursuant to consulting agreement
|
21,739
|
217
|
9,783
|
—
|
—
|
10,000
|
||||||||||||||||||
|
Issuance
of shares on exercise of warrants and options
|
84,075
|
841
|
28,472
|
—
|
—
|
29,313
|
||||||||||||||||||
|
Balances,
September 30, 2007
|
$
|
19,441,524
|
$
|
194,415
|
$
|
30,008,008
|
$
|
(17,776,028
|
)
|
$
|
205,500
|
$
|
12,631,895
|
|||||||||||
See
accompanying Notes to Consolidated Financial Statements.
For
the Years Ended September 30, 2007, 2006 and 2005
|
Years
Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 6,267,689 | $ | 4,862,093 | $ | (3,285,922 | ) | |||||
|
Amortization
of stock options issued to officers
|
139,491 | — | — | |||||||||
|
Expenses
related to issuance of stock pursuant to consulting
agreement
|
10,000 | — | — | |||||||||
|
Adjustments
to reconcile net income (loss) to net cash used in continuing operating
activities:
|
||||||||||||
|
Reorganization
fee expense
|
6,508,963 | — | — | |||||||||
|
Depreciation
and amortization
|
— | 2,678 | 4,977 | |||||||||
|
Amortization
of debt discount and financing costs
|
— | 4,078,738 | 3,816,178 | |||||||||
|
Gain
on disposal of investment in 3CI pursuant to class-action
settlement
|
— | (5,380,121 | ) | — | ||||||||
|
Loss
on disposal of fixed assets
|
— | 7,455 | — | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Trade
accounts receivable, net
|
— | 250,000 | — | |||||||||
|
Interest
and other receivables
|
16,576 | (207,724 | ) | 1,022,433 | ||||||||
|
Prepaid
expenses and other assets
|
132,036 | 38,196 | (131,140 | ) | ||||||||
|
Accounts
payable and accrued liabilities
|
(174,478 | ) | (487,110 | ) | 2,013,106 | |||||||
|
Net
cash flows used in discontinued operations
|
(13,605,066 | ) | (5,935,675 | ) | (3,901,956 | ) | ||||||
|
Net
cash used in operating activities
|
(707,789 | ) | (2,771,470 | ) | (462,324 | ) | ||||||
|
Cash
flows from continuing investing activities:
|
||||||||||||
|
Increase
in time deposits
|
(11,177,567 | ) | — | — | ||||||||
|
Proceeds
from class-action settlement on investment in 3CI
|
— | 5,659,507 | — | |||||||||
|
Decrease
(increase) in marketable securities held-to-maturity
|
4,899,249 | (4,899,249 | ) | — | ||||||||
|
Purchases
of property, plant and equipment, net
|
— | — | (11,566 | ) | ||||||||
|
Net
cash provided by discontinued investing activities
|
16,228,750 | 10,440,000 | — | |||||||||
|
Net
cash provided by (used in) investing activities
|
9,950,432 | 11,200,258 | (11,566 | ) | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Redemption
of shares held by Laurus
|
(6,545,340 | ) | — | — | ||||||||
|
Proceeds
from exercise of warrants and options
|
29,313 | — | — | |||||||||
|
Proceeds
from borrowings
|
— | — | 2,100,000 | |||||||||
|
Repayments
of notes payable
|
— | (2,767,988 | ) | (600,000 | ) | |||||||
|
Borrowing
on revolver
|
— | 1,204,391 | 2,251,203 | |||||||||
|
Payments
of revolver
|
— | (1,204,391 | ) | (2,251,203 | ) | |||||||
|
Repayments
of convertible debentures
|
— | — | — | |||||||||
|
Decrease
(increase) decrease in restricted cash
|
5,400,000 | (5,400,000 | ) | — | ||||||||
|
Reorganization
fee paid to Laurus
|
(8,508,963 | ) | — | — | ||||||||
|
Increase
in deferred financing costs
|
— | — | (280,567 | ) | ||||||||
|
Net
cash provided by discontinued financing activities
|
— | — | — | |||||||||
|
Net
cash provided by (used in) financing activities
|
(9,624,990 | ) | (8,167,988 | ) | 1,219,433 | |||||||
|
Net
change in cash and cash equivalents
|
(382,347 | ) | 260,800 | 745,543 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
1,264,463 | 1,003,663 | 258,120 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 882,116 | $ | 1,264,463 | $ | 1,003,663 | ||||||
See
accompanying Notes to Consolidated Financial Statements.
Consolidated
Statements of Cash Flows (continued)
For
the Years Ended September 30, 2007, 2006, 2005
|
Years
Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
$ | — | $ | 314,314 | $ | 755,808 | ||||||
|
Cash
paid for taxes
|
$ | 94,402 | $ | 70,962 | $ | — | ||||||
|
Supplemental
disclosure of non-cash financing activities:
|
||||||||||||
|
Conversion
of debt into common stock subject to redemption
|
$ | — | $ | 5,400,000 | $ | — | ||||||
|
Discount
on issuance of debt with beneficial conversion premium and detachable
warrants
|
$ | — | $ | — | $ | 723,198 | ||||||
|
Issuance
of shares to lender in payment of fees
|
$ | — | $ | — | $ | 638,010 | ||||||
|
Issuance
of shares in connection with settlement of class-action
litigation
|
$ | — | $ | — | $ | 1,564,490 | ||||||
|
Unrealized
gain on 3CI investment
|
$ | — | $ | — | $ | 35,093 | ||||||
|
Unrealized
gain (loss) on marketable securities available-for-sale
|
$ | (346,439 | ) | $ | 551,939 | $ | — | |||||
See
accompanying Notes to Consolidated Financial Statements.
of
Secure Alliance Holdings Corporation and Subsidiaries
(A
Development Stage Company)
|
(1)
|
Summary
of Significant Accounting Policies for Continued
Operations
|
Description
of Business
Secure
Alliance Holdings Corporation (the “Company,” “we,” “us,” or “our”) is a
Delaware corporation which, through its wholly-owned subsidiaries, developed,
manufactured, sold and supported automated teller machines (“ATMs”) and
electronic cash security systems, consisting of the Timed Access Cash Controller
(“TACC”) products and the Sentinel products (together, the “Cash Security”
products).
We
completed the sale of our ATM business on January 3, 2006 and the sale of our
Cash Security business on October 2, 2006. On October 2, 2006, we
became a shell public company and have had substantially no
operations.
Principles
of Consolidation
The
consolidated financial statements include our accounts and our wholly-owned
subsidiaries. All significant intercompany items have been eliminated in
consolidation.
Cash
and Cash Equivalents
For
purposes of consolidated financial statement presentation and reporting cash
flows, all liquid investments with original maturities at the date of purchase
of three months or less are considered cash equivalents.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Expenditures
for major renewals and betterments are capitalized; expenditures for repairs and
maintenance are charged to expense as incurred.
Federal
Income Taxes
Income
taxes are accounted for under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in determining income or loss in the period
that includes the enactment date.
Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) includes all non-equity holder changes in
shareholders’ equity. As of September 30, 2007 and 2006, our only component of
accumulated other comprehensive loss relates to unrealized gains and losses on
our investment in Cashbox common stock.
Net
Income (Loss) Per Share
In
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
Per Share” (“SFAS No. 128”), we compute and present both basic and diluted
earnings per share (“EPS”) amounts. Basic EPS is computed by dividing income
(loss) available to common shareholders by the weighted-average number of common
shares outstanding for the period, and excludes the effect of potentially
dilutive securities (such as options, warrants and convertible securities),
which are convertible into common stock. Dilutive EPS reflects the potential
dilution from options, warrants and convertible securities.
Stock-Based
Compensation
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense to
be recognized for all share-based payments made to employees based on the fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures that will change our accounting for stock-based awards in the
future.
The
statement allows companies to adopt its provisions using either of the following
transition alternatives:
|
|
·
|
The
modified prospective method, which results in the recognition of
compensation expense using SFAS 123(R) for all share-based awards granted
after the effective date and the recognition of compensation expense using
SFAS 123 for all previously granted share-based awards that remain
unvested at the effective date; or
|
|
|
·
|
The
modified retrospective method, which results in applying the modified
prospective method and restating prior periods by recognizing the
financial statement impact of share-based payments in a manner consistent
with the pro forma disclosure requirements of SFAS No. 123. The modified
retrospective method may be applied to all prior periods presented or
previously reported interim periods of the year of
adoption.
|
We
adopted SFAS No. 123(R) on October 1, 2005, using the modified prospective
method. This change in accounting has not materially impacted our financial
position. We applied the fair-value criteria established by SFAS No. 123(R) to
previous stock option grants, the impact to our results of operations would have
approximated the impact of applying SFAS No. 123, which was a decrease to net
income of approximately $19,433 in 2005.
We
recognize expense related to stock options and other types of equity-based
compensation beginning in fiscal year 2006 and such cost must be recognized over
the period during which an employee is required to provide service in exchange
for the award. The requisite service period is usually the vesting period. The
standard also requires us to estimate the number of instruments that will
ultimately be issued, rather than accounting for forfeitures as they
occur.
The
following table reflects the pro forma effect of SFAS No. 123 (R) had it been in
effect in 2005.
|
2005
|
||||
|
Net loss
as reported
|
$
|
(3,285,922
|
)
|
|
|
Deduct:
|
||||
|
Total
stock-based employee compensation expense determined under SFAS 123, net
of taxes
|
(19,433
|
)
|
||
|
Net loss
pro forma
|
$
|
(3,305,355
|
)
|
|
|
Basic
earnings (loss) per share:
|
||||
|
As
reported
|
(0.16
|
)
|
||
|
Pro
forma
|
(0.16
|
)
|
||
|
Diluted
earnings (loss) per share:
|
||||
|
As
reported
|
(0.16
|
)
|
||
|
Pro
forma
|
(0.16
|
)
|
||
Use
of Estimates
The
preparation of the accompanying consolidated financial statements requires the
use of estimates by management in determining our assets and liabilities at the
date of the Consolidated Financial Statements and the reported amount of
revenues and expenses during the period. Actual results could differ from these
estimates.
Fair
Value of Financial Instruments
Statement
of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
Financial Instruments,” requires the disclosure of estimated fair values for
financial instruments. Fair value estimates are made at discrete points in time
based on relevant market information. These estimates may be subjective in
nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. We believe that the carrying
amounts of our financial instruments included in current assets and current
liabilities approximate the fair value of such items due to their short-term
nature.
The
carrying amount of long-term debt, excluding the discounts related to the
warrants issued with the debt, approximates its fair value because the interest
rates approximate market.
New
Accounting Pronouncements
In July
2006, the FASB issued Final Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of SFAS 109, which clarifies the accounting for
income taxes by prescribing the minimum recognition threshold an uncertain tax
position is required to meet before tax benefits associated with such uncertain
tax position are recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. In addition, FIN 48
excludes income taxes from the scope of SFAS 5, Accounting for Contingencies.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
Differences between the amounts recognized in the consolidated balance sheets
prior to the adoption of FIN 48 and the amounts reported after adoption are
accounted for as a cumulative-effect adjustment to the beginning balance of
retained earnings upon adoption of FIN 48. FIN 48 also requires that amounts
recognized in the balance sheet related to uncertain tax positions be classified
as a current or non-current liability, based upon the timing of the ultimate
payment to a taxing authority. We will adopt FIN 48 as of October 1, 2007 and
are in the process of finalizing the effect FIN 48 will have on our financial
statements. Under the guidance of FIN 48, management estimates that our income
tax reserve may increase to approximately $2.3 million, which is subject to
revision when management completes an analysis of the impact of FIN 48. Upon
completion of such analysis, it is possible that this difference will be
recorded in retained earnings as a cumulative effect adjustment during the
quarter ended December 31, 2007.
In
September 2006, the Financial Accounting Standards Board 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 will be effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The Company does not
expect SFAS 157 to have a material effect on the Company’s consolidated
financial position or results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS
159”). SFAS 159 permits entities to choose, at specified election
dates, to measure eligible items at fair value (the “fair value option”) and
requires an entity to report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. Upfront costs and fees related to items for which the fair
value option is elected shall be recognized in earnings as incurred and not
deferred. SFAS 159 will be effective for fiscal years beginning after
November 15, 2007. The Company does not expect SFAS 159 to have a
material effect on the Company’s consolidated financial position or results of
operations.
In
November 2007, the FASB issued SFAS No. 141(R), Business Combination and SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51 (FAS 160). FAS 141(R) will change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. FAS 160 will change the accounting
and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. FAS 141(R) and
FAS 160 are effective for both public and private companies for fiscal years
beginning on of after December 15, 2008. FAS 141(R) will be applied
prospectively. FAS 160 requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other
requirements of FAS 160 will be applied prospectively. Early adoption
is prohibited for both standards. Management is currently evaluating
the requirements of FAS 141(R) and FAS 160 but does not expect them to have a
material effect on the Company’s consolidated financial position or results of
operation.
(2) Discontinued
Operations
ATM
Business
On
February 19, 2005, the Company and its wholly-owned subsidiary, Secure Alliance,
L.P., entered into NCR Asset Purchase Agreement with NCR EasyPoint, a wholly
owned subsidiary of NCR Corporation, for the sale of our ATM
Business.
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale for a purchase price was
$10,440,000 of which $8,200,000 was paid to Laurus into a collateral account to
be held by Laurus as collateral for the satisfaction of all monetary obligations
payable to Laurus and the remaining $2,240,000 was paid to the Company. This
transaction resulted in a book gain of $3,536,105.
An
analysis of the discontinued operations of the ATM business is as
follows:
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
Years
Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
sales
|
$ | — | $ | 3,847,874 | $ | 15,497,834 | ||||||
|
Cost
of sales
|
— | 2,592,268 | 9,508,120 | |||||||||
|
Gross
profit
|
— | 1,255,606 | 5,989,714 | |||||||||
|
Selling,
general and administrative
|
— | 880,941 | 4,768,880 | |||||||||
|
Depreciation
and amortization
|
— | 46,048 | 255,967 | |||||||||
|
Operating
loss
|
— | 328,617 | 964,867 | |||||||||
|
Non-operating
(income) expense
|
— | — | — | |||||||||
|
Net
income (loss)
|
$ | — | $ | 328,617 | $ | 964,867 | ||||||
Cash
Security Business
On
September 25, 2006, the holders of a majority of shares of our outstanding
common stock approved the sale of our electronic cash security business,
consisting of (a) timed access cash controllers, (b) the Sentinel products, (c)
the servicing, maintenance and repair of the timed access cash controllers or
Sentinel products and (d) all other assets and business operations associated
with the foregoing (the “Cash Security Business Sale”) to Sentinel Operating,
L.P., a purchaser led by a management buyout team that included our former
director and Interim Chief Executive Officer, Mark K. Levenick, and our former
director, Raymond P. Landry. The Cash Security Asset Purchase Agreement provided
for a cash purchase price of $15,500,000, less $100,000 as consideration for the
Buyer assuming certain potential liability in connection with ongoing
litigation, and less a working capital deficit adjustment of $1,629,968,
resulting in a net purchase price of $13,770,032. In addition, Sentinel
Operating L.P. paid a cash adjustment of $2,458,718 to the Company at closing.
The Cash Security Business Sale was completed on October 2, 2006. During the
year ended September 30, 2007, we recorded a gain on the sale of the Cash
Security business, net of taxes, of $13,605,066.
We
classified the Cash Security business as a discontinued operation for the year
ended September 30, 2007. We classified the Cash Security business as
Assets Held for Sale as of September 30, 2006.
An
analysis of the discontinued operations of the Cash Security business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
September
30,
2007
|
September
30,
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | — | $ | 2,048,275 | ||||
|
Trade
accounts receivable, net of allowance of approximately $0 and $45,000,
respectively
|
— | 1,591,522 | ||||||
|
Inventories
|
— | 2,051,764 | ||||||
|
Prepaid
expenses and other
|
— | 73,089 | ||||||
|
Total
current assets
|
— | 5,764,650 | ||||||
|
Property,
plant and equipment, at cost
|
— | 316,608 | ||||||
|
Accumulated
depreciation
|
— | (18,595 | ) | |||||
|
Net
property, plant and equipment
|
— | 298,013 | ||||||
|
Other
assets
|
— | 250,000 | ||||||
|
Total
assets
|
$ | — | $ | 6,312,663 | ||||
|
LIABILITIES
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
maturities
|
$ | — | $ | 1,981 | ||||
|
Accounts
payable
|
— | 1,514,731 | ||||||
|
Other
accrued expenses
|
— | 2,098,675 | ||||||
|
Total
current liabilities
|
— | 3,615,387 | ||||||
|
Long-term
debt, net of current maturities
|
— | 20,982 | ||||||
|
Total
liabilities
|
$ | — | $ | 3,636,369 | ||||
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
Years
Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
sales
|
$
|
—
|
$
|
16,080,069
|
$
|
19,435,222
|
||||||
|
Cost
of sales
|
—
|
9,476,386
|
10,870,947
|
|||||||||
|
Gross
profit
|
—
|
6,603,683
|
8,564,275
|
|||||||||
|
Selling,
general and administrative
|
—
|
4,541,774
|
4,449,550
|
|||||||||
|
Depreciation
and amortization
|
—
|
—
|
29,868
|
|||||||||
|
Operating
income (loss)
|
—
|
2,061,907
|
4,084,857
|
|||||||||
|
Non-operating
expense
|
—
|
(8,529
|
)
|
(23,884
|
)
|
|||||||
|
Net
income (loss)
|
$
|
—
|
$
|
2,070,436
|
$
|
4,108,741
|
||||||
(3) Notes
to Discontinued Operations which are Classified as Assets Held For
Sale
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the standard
cost method and includes materials, labor and production overhead which
approximates an average cost method. Reserves are provided to adjust any slow
moving materials or goods to net realizable values.
Warranties
Certain
products are sold under warranty against defects in materials and workmanship
for a period of one to three years. A provision for estimated warranty costs is
included in accrued liabilities and is charged to operations at the time of
sale.
Accounts
Receivable
We had
substantially no operations during the fiscal year 2007. We had
significant investments in billed receivables as of September 30, 2006. Billed
receivables represent amounts billed upon the shipments of our products under
our standard contract terms and conditions. Allowances for doubtful accounts and
estimated non-recoverable costs primarily provide for losses that may be
sustained on uncollectible receivables and claims. In estimating the allowance
for doubtful accounts, we evaluate our contract receivables and thoroughly
review historical collection experience, the financial condition of our
customers, billing disputes and other factors. When we ultimately conclude that
a receivable is uncollectible, the balance is charged against the allowance for
doubtful accounts. As of September 30, 2007 and 2006, the allowance for doubtful
contract receivables was $0 and $45,000, respectively.
Revenue
Recognition
Revenues
are recognized at the time products are shipped to customers. We have no
continuing obligation to provide services or upgrades to our products, other
than a warranty against defects in materials and workmanship. We only recognize
such revenues if there is persuasive evidence of an arrangement, the products
have been delivered; there is a fixed or determinable sales price and a
reasonable assurance of our ability to collect from the customer.
Our
products contain imbedded software that is developed for inclusion within the
equipment. We have not licensed, sold, leased or otherwise marketed such
software separately. We have no continuing obligations after the delivery of our
products and we do not enter into post-contract customer support arrangements
related to any software embedded into our equipment.
Research
and Development Cost
Research
and development costs are expensed as incurred. Research and development costs
charged to expense were approximately $0, $1,229,617, and $2,060,071 for the
years ended September 30, 2007, 2006 and 2005, respectively.
Shipping
and Handling Cost
Shipping
and handling costs billed to customers totaled $0, $429,881, and $781,442 for
the years ended September 30, 2007, 2006, and 2005, respectively. We incurred
shipping and handling costs of $0, $458,633, and $978,957 for the years ended
September 30, 2007, 2006 and 2005 respectively. The net expense of $0, $28,752
and $197,515 is included in selling expenses in the accompanying statement of
operations for the years ended September 30, 2007, 2006, and 2005,
respectively.
(4) Major
Customers and Credit Risks
We had
substantially no operations during the fiscal year 2007. Only one
customer accounted for more than 10% of net sales for the fiscal years 2006 and
2005. Two customers accounted for more than 10% of our total outstanding trade
receivable as of September 30, 2006 and 2005.
The vast
majority of our sales in fiscal 2006 and 2005 were to customers within the
United States. Sales to customers outside the United States, as a percentage of
total revenues, were approximately 6.8 % and 14% in the fiscal years ended
September 30, 2006 and 2005, respectively. Most of our foreign sales were to one
customer.
(5) Inventories
Inventories
related to discontinued operations consisted of the following at September 30,
2007 and 2006:
|
2007
|
2006
|
|||||||
|
Raw
materials
|
$ | — | $ | 1,953,305 | ||||
|
Work
in process
|
— | — | ||||||
|
Finished
goods
|
— | 143,459 | ||||||
|
Other
|
— | — | ||||||
| 2,096,764 | ||||||||
|
Inventory
reserve
|
— | (45,000 | ) | |||||
|
Total,
classified as assets held for sale
|
$ | — | $ | 2,051,764 | ||||
(6) Property,
Plant and Equipment
Property,
plant and equipment consisted of the following at September 30, 2007 and
2006:
|
2007
|
2006
|
Useful
Life
|
|||||||
|
Machinery
and equipment
|
$ | — | $ | 544,498 |
2 -
10 years
|
||||
|
Computer
equipment and systems
|
— | 605,712 |
2 -
7 years
|
||||||
|
Furniture,
fixtures and other improvements
|
— | 500,267 |
3 -
5 years
|
||||||
| 1,650,476 | |||||||||
|
Less
classified as discontinued
|
— | (1,650,476 | ) | ||||||
|
Total
property, plant and equipment for continued operations
|
$ | — | $ | — | |||||
Depreciation
expense was $0, $99,789, and $285,835 for the years ended September 30, 2007,
2006 and 2005, respectively. Repairs and maintenance expense was $0, $64,420,
and $86,043 for the years ended September 30, 2007, 2006 and 2005 respectively.
All such amounts are classified in discontinued operations.
(7) Agreements
with Laurus
Pursuant
to the Agreement Regarding the NCR Transaction and Other Asset Sales, dated
November 26, 2004 (the “Asset Sales Agreement”), by and between the Company and
Laurus Master Fund, Ltd. (“Laurus”), the Company agreed to pay to Laurus a
portion of the excess net proceeds from the ATM business sale and the Cash
Security Business Sale.
On June
9, 2006, we and Laurus entered into the Laurus Termination Agreement which,
among other things, provided for the payment of a sale fee of $8,508,963 to
Laurus (the “Sale Fee”) in full satisfaction of all amounts payable to Laurus
under the Asset Sales Agreement, including fees payable in respect of the ATM
business sale and the Cash Security Business Sale. The Laurus Termination
Agreement further provided that, upon payment of the Sale Fee and performance by
the Company of its obligations under the Stock Redemption Agreement described
below, neither the Company nor any of its subsidiaries will have any further
obligation to Laurus. Further, each of the Company and Laurus has granted each
other and their respective affiliates and subsidiaries reciprocal releases from
and against any claims and causes of action that may exist.
We and
Laurus entered a Stock Redemption Agreement on January 12, 2006 and as
subsequently amended. Pursuant to the terms of the Stock Redemption Agreement:
we agreed, among other things, (i) to repurchase from Laurus, upon the closing
of the Cash Security Business Sale, all shares of our common stock held by
Laurus, and (ii) Laurus agreed to the cancellation as of the closing date of the
Cash Security Business Sale of warrants it holds to purchase 4,750,000 shares of
our common stock at an exercise price of $.30 per share, and not to exercise
such warrants prior to the earlier to occur of September 30, 2006 and the date
on which the Asset Purchase Agreement is terminated.
Following
the Cash Security Business Sale, on October 2, 2006, the Company applied the net
purchase price, the cash adjustment, and $5,400,000 in proceeds (together with
accrued interest of $206,799) from the ATM business sale, to pay the following
amounts to Laurus: (i) $8,508,963 pursuant to the terms of the Laurus
Termination Agreement and (ii) $6,545,340 representing the purchase from Laurus
by the Company of 19,251,000 shares of Company common stock pursuant to the
terms of the Stock Redemption Agreement. Following both such payments to Laurus,
the Company received $6,781,246 in net proceeds from the Cash Security Business
Sale.
On
October 2, 2006, following the foregoing payments to Laurus pursuant to the
terms of the Laurus Termination Agreement and the Stock Redemption Agreement, no
further fees remained payable by the Company to Laurus and, to our knowledge,
Laurus does not own any shares of the Company.
(8) Accrued
Expenses
Accrued
expenses consisted of the following at September 30, 2007 and 2006:
|
2007
|
2006
|
|||||||
|
Reserve
for warranty charges
|
$ | — | $ | 826,152 | ||||
|
Taxes:
|
— | — | ||||||
|
Sales
and use
|
— | 11,049 | ||||||
|
Ad
valorem
|
— | 44,000 | ||||||
|
Wages
and related benefits
|
— | 662,348 | ||||||
|
Other
|
— | 555,126 | ||||||
|
Other
accrued expenses related to continuing operations
|
141,401 | 150,194 | ||||||
|
Total
accrued expenses
|
$ | 141,401 | $ | 2,248,869 | ||||
|
Less:
discontinued liabilities
|
(2,098,675 | ) | ||||||
|
Total
accrued expenses related to continuing operations
|
$ | 141,401 | $ | 150,194 | ||||
(9) Warrants
At
September 30, 2007, we had outstanding warrants to purchase 697,500 shares of
common stock that expire at various dates through November 2010. The warrants
have exercise prices ranging from $0.40 to $0.68 per share and, if exercised,
would generate proceeds to us of approximately $419,000.
Common
Stock Purchase Warrants:
|
Warrants
|
Expiration
Date
|
Exercise
Price
|
Relative
Fair
Value
|
|||||||
|
Other
parties in connection with Laurus financing (1)
|
197,500
|
11/24/2010
|
0.40
|
127,951
|
||||||
|
AIG/National
Union Fire Insurance Co. (2)
|
500,000
|
11/01/2007
|
0.68
|
224,490
|
||||||
|
Outstanding
warrants as of September 30, 2007
|
697,500
|
$
|
352,441
|
|||||||
Value
calculated using Black-Scholes:
|
Stock
Price At Issuance |
Expected
Term
|
Volatility
|
Risk
Free Rate
|
||||||||
|
(1)
|
Variables
|
$
|
0.72
|
7
years
|
111.00%
|
3.72%
|
|||||
|
(2)
|
Variables
|
$
|
0.67
|
3
years
|
108.00%
|
3.85%
|
|||||
(10) Employee
Stock Option Plans
We
adopted a Long-Term Incentive Plan in 1997 (the “1997 Plan”) pursuant to which
our Board of Directors may grant stock options to officers and key employees.
The 1997 Plan, as amended, authorizes grants of options to purchase up to
2,000,000 shares of our common stock. Options are granted with an exercise price
equal to the fair market value of the common stock at the date of grant. Options
granted under the 1997 Plan vest over three-year periods and expire no later
than 10 years from the date of grant. At September 30, 2007, there
were 1,900,000 options outstanding and 32,950 shares available for grant under
the 1997 Plan,. There were 648,150 options outstanding and 1,310,800
shares available for grant at September 30, 2006. There were 1,099,810 options
outstanding and 855,890 shares available for grant at September 30,
2005.
On March
21, 2007, the Company awarded Messrs. Griggs and Clay an aggregate of 1,900,000
stock options to purchase our common stock at an exercise price of $0.62 per
share pursuant to the Company's 1997 Long-Term Incentive Plan. Of this award,
34% of the options vest on the first anniversary of the date of the grant, 33%
of the options vest on the second anniversary of the date of the grant and the
remaining 33% of the options vest on the third anniversary of the date of the
grant. In addition, 100% of the options vest upon a change of
control. There were no stock options granted during the fiscal year
ended 2006 and 363,810 stock options granted during the fiscal year ended
2005.
At
September 30, 2007, the options outstanding under the 1997 Plan had exercise
prices of $0.62 per share with a remaining contractual life of 9.47
years. At September 30, 2006, the range of exercise prices was $2.50
to $0.25 per share with a weighted average remaining contractual life of 4.56
years. At September 30, 2005, the range of exercise prices was $2.50 to $0.25
per share with a weighted-average remaining contractual life of the outstanding
options was 5.32 years.
Activity
during the periods indicated was as follows:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
||||
|
Balance
at September 30, 2004
|
786,000
|
1.67
|
|||
|
Granted
|
363,810
|
0.25
|
|||
|
Exercised
|
—
|
—
|
|||
|
Canceled
|
(50,000
|
)
|
1.16
|
||
|
Balance
at September 30, 2005
|
1,099,810
|
1.22
|
|||
|
Granted
|
—
|
—
|
|||
|
Exercised
|
—
|
—
|
|||
|
Canceled
|
(451,660
|
)
|
1.19
|
||
|
Balance
at September 30, 2006
|
648,150
|
1.24
|
|||
|
Granted
|
1,900,000
|
0.62
|
|||
|
Exercised
|
(27,250
|
)
|
0.25
|
||
|
Canceled
|
(620,900
|
)
|
1.28
|
||
|
Balance
at September 30, 2007
|
1,900,000
|
0.62
|
|||
(11) Income
Taxes
Income
tax expense (benefit) attributable to income from operations consisted of the
following for the years ended September 30, 2007, 2006 and 2005:
|
2007
|
2006
|
2005
|
||||||||||
|
Federal
current tax Expense (Benefit)
|
$ | 75,808 | $ | 159,546 | $ | — | ||||||
|
Federal
deferred tax benefit
|
— | — | — | |||||||||
|
State
tax
|
— | — | — | |||||||||
| $ | 75,808 | $ | 159,546 | $ | — | |||||||
The
income tax differed from the amounts computed by applying the U.S. statutory
federal income tax rate of 34% to income (loss) before taxes as a result of the
following:
|
|
2007
|
2006
|
2005
|
|||||||||
|
Computed
“expected” tax expense (benefit)
|
$
|
2,156,789
|
$
|
1,707,357
|
$
|
(1,117,213
|
)
|
|||||
|
Change
in valuation allowances
|
(1,867,170
|
)
|
(4,156,100
|
)
|
1,638,969
|
|||||||
|
Nondeductible
items and permanent differences
|
(272,618
|
)
|
1,499,031
|
(521,756
|
)
|
|||||||
|
AMT
|
75,808
|
70,962
|
—
|
|||||||||
|
Other
|
(17,001
|
)
|
1,038,296
|
—
|
||||||||
|
$
|
75,808
|
$
|
159,546
|
$
|
(0
|
)
|
||||||
The tax
effects of temporary differences that were the sources of the deferred tax
assets consisted of the following at September 30, 2007 and 2006:
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Fixed
assets
|
$
|
—
|
$
|
286,643
|
||||
|
Accounts
receivable
|
—
|
15,151
|
||||||
|
Inventories
|
—
|
268,704
|
||||||
|
Accrued
expenses
|
—
|
511,398
|
||||||
|
Stock
Option
|
47,427
|
|||||||
|
Other
|
—
|
39,332
|
||||||
|
Net
operating losses
|
138,304
|
931,673
|
||||||
|
Total
gross deferred tax assets
|
185,731
|
2,052,900
|
||||||
|
Less:
valuation allowance
|
(185,731
|
)
|
(2,052,900
|
)
|
||||
|
Net
deferred tax assets
|
—
|
—
|
||||||
|
Other
deferred tax liabilities
|
—
|
—
|
||||||
|
Net
deferred tax assets
|
$
|
—
|
$
|
—
|
||||
In
assessing the realizability of deferred assets, management considers whether it
is more likely than not some portion or all of the deferred tax assets will be
realized. The Company has established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
As of
September 30, 2007, the Company had remaining net operating losses of
approximately $406,775, which will begin to expire in 2024. The
Company utilized net operating loss carryforwards of $4,190,420, $2,964,614 and
$3,273,117 in the fiscal years ended September 30, 2007, 2006 and 2005,
respectively, to offset gains as a result of the Cash Security Business Sale,
the ATM Business Sale and other income from discontinued
operations.
(12) Earnings
Per Share
The
following is a reconciliation of the numerators and denominators of the basic
and diluted computations for the years ended September 30, 2007, 2006 and
2005:
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income (loss) (numerator for diluted earnings (loss) per
share)
|
$ | 6,267,689 | $ | 4,862,093 | $ | (3,285,922 | ) | |||||
|
Weighted
average common shares outstanding (denominator for basic earnings (loss)
per share)
|
19,563,447 | 33,499,128 | 20,292,796 | |||||||||
|
Dilutive
shares outstanding
|
111,325 | — | — | |||||||||
|
Weighted
average common and dilutive shares outstanding
|
19,674,772 | 33,499,128 | 20,292,796 | |||||||||
|
Basic
earnings (loss) per share
|
$ | 0.33 | $ | 0.15 | $ | (0.16 | ) | |||||
|
Diluted
earnings (loss) per share
|
$ | 0.32 | $ | 0.15 | $ | (0.16 | ) | |||||
Common
stock equivalent shares consisting of warrants, options and convertible debt
of 1,127,725; 5,874,687 and $29,717,185 were excluded from the
computation of diluted earnings per share due to their anti-dilutive effect for
the years ended September 30, 2007, 2006 and 2005, respectively.
(13) Marketable
Securities Available- for- Sale
We own
2,022,000 of the common stock of Cashbox plc pursuant to our exercise of a
warrant in September 2005. On or about March 27, 2006, shares of Cashbox plc
began trading on the AIM Market of the London Stock Exchange. Prior to Cashbox
plc going public, we considered their shares not marketable, thus the shares
were carried at cost. Since the shares are now public and market value is
readily available, we determined the market value of the shares and pursuant to
SFAS No. 115 “Accounting for Investments in Equity and Debt Securities” we
classified these shares as available for sale. Pursuant to the SFAS No. 115 the
unrealized change in fair value was excluded from earnings and recorded net of
tax as other comprehensive income.
As of
September 30, 2007 and 2006, our common stock in Cashbox plc was recorded at a
fair value of $505,500 and $851,939, respectively. Unrealized gains on these
shares of common stock, which were added to stockholders' equity as of September
30, 2007 and 2006, were $205,500 and $551,939, respectively.
As of
September 30, 2007 we were restricted from selling any shares until the second
anniversary of its admission to the London Stock Exchange unless we (i) consult
with Cashbox’s primary broker prior to the disposal of any shares and (ii)
effect the disposal of the shares through Cashbox’s primary broker from time to
time and in such manner as such broker may require with a view to the
maintenance of an orderly market in the shares of Cashbox.
(14) Investment
in 3CI Complete Compliance Corporation
We
formerly owned 100% of 3CI Complete Compliance Corporation (“3CI”), a company
engaged in the transportation and incineration of medical waste, until we
divested our majority interest in February 1994. At September 30, 2005, we
continued to own 698,889 shares of the common stock of 3CI and the value of our
investment was marked to the market value of $279,556, or $.40 per
share.
On May
30, 2006, we received a settlement payment of $4,489,963 and on September 6,
2006, the Company received an additional settlement payment in the amount of
$1,169,544 arising out of our ownership of the 3CI shares under a class action
settlement paid out to minority shareholders of 3CI. Under the terms of the
settlement and in order to participate in the settlement, we tendered all
698,889 shares that we owned to Stericycle, Inc., the current majority
shareholder of 3CI and the defendant under the class action, and accordingly we
no longer hold any ownership interest in 3CI. As a result, we recognized a gain
of $5,380,121 on the disposal of these shares during the year ended September
30, 2006, which represented the difference between the settlement payment amount
and our carrying amount.
(15) Leases
We had no
leases for real property or equipment in 2007. We leased office
and warehouse space, transportation equipment and other equipment under terms of
operating leases which were transferred in the sale of the Cash Security
business and the sale of the ATM business. Rental expense under those
leases for the years ended September 30, 2006 and 2005, was approximately
$210,820 and $453,000, respectively.
(16) Litigation
We and
our subsidiaries are each subject to certain other litigation and claims arising
in the ordinary course of business. In our management’s opinion, the amounts
ultimately payable, if any, resulting from such litigation and claims will not
have a materially adverse effect on our financial position.
On June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Secure
Alliance Holdings Corporation and our wholly owned subsidiary, Secure Alliance,
L.P. The lawsuit, Civil Action No. 02-C-3421, was filed in the United States
District Court of the Northern District of Illinois, Eastern Division (the “CSS
Lawsuit”). CSS alleges that the Sentinel product sold by Secure Alliance, L.P.
infringes on one or more patent claims found in CSS patent U.S. Patent No.
6,885,281 (the ‘281 patent). CSS sought injunctive relief against future
infringement, unspecified damages for past infringement and attorney’s fees and
costs. Secure Alliance Holdings Corporation was released from this lawsuit, but
Secure Alliance, L.P. remained a defendant.
As part
of the Cash Security Business Sale, the buyer of the Cash Security business,
Sentinel Operating, L.P., agreed to undertake and have the sole right to direct
on behalf of itself and us, the defense of the CSS Lawsuit, with counsel of its
choice, provided that in the event we incur any adverse consequences in
connection with the CSS Lawsuit subsequent to the Cash Security Business Sale,
then Sentinel Operating, L.P. will indemnify us from and against the entirety of
any such adverse consequences to the extent they are incurred as a result of the
breach of the Cash Security Asset Purchase Agreement or our negligent action or
inaction.
On March
31, 2007, CSS, Secure Alliance Holdings Corporation and Secure Alliance, L.P.
(formerly known as Tidel Engineering, L.P.) entered into a settlement and mutual
release agreement whereby the parties jointly moved to dismiss all claims and
counterclaims in the CSS Lawsuit. The parties agreed to pay no monetary
settlement and each bear its own legal costs and expenses. Pursuant to the
settlement, we and our predecessor agreed not to make, use, sell or offer for
sale any safe that infringes upon the ‘281 patent during the period of time the
‘281 patent is valid; however, we and our predecessor may challenge, contest, or
raise as a defense the validity of the ‘281 patent if CSS or any other party
files a claim against us asserting infringement of the ‘281 patent.
On April
16, 2007, Fire King International, LLC (“Fire King”) filed a lawsuit against
Corporate Safe Specialists, Inc., Tidel Technologies, Inc. and Tidel
Engineering, LP. The lawsuit, Civil Action No. 03-07CV0655-G, was filed in the
United States District Court of the Northern District of Texas, Dallas Division.
Fire King alleges that the Sentinel product previously sold by the Company’s
predecessor infringes on one or more patent claims found in Fire King patent
U.S. Patent No. 7,063,252 (the ‘252 patent). Fire King sought injunctive relief
against future infringement, unspecified damages for past infringement and
attorney’s fees and costs.
On
September 14, 2007, Fire King, Secure Alliance Holdings Corporation and Secure
Alliance, L.P. entered into a confidential settlement and mutual release
agreement whereby the parties jointly moved to dismiss all claims in the Fire
King lawsuit. In connection therewith, we paid an undisclosed amount to Fire
King to settle a disputed claim and admitted no liability or
wrongdoing. The court has dismissed Fire King’s claims against the
Company with prejudice.
(17) Subsequent
Events
On
December 6, 2007, we entered into a definitive Agreement and Plan of Merger
(“Merger Agreement”) by and among Sequoia Media Group, LC, a private Utah
limited liability company (“Sequoia”), the Company and SMG Utah, LC, a Utah
limited liability company and wholly owned subsidiary of the Company (“Merger
Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with
and into Sequoia (the “Merger”), with Sequoia continuing as the surviving entity
in the Merger and each issued and outstanding Sequoia equity interest will
automatically be converted into the right to receive 0.5806419 shares of the
Company common stock, calculated after a 1 for 3 reverse stock split of the
Company’s common stock contemplated to be effected prior to the
Merger. Immediately following the Merger, the members of Sequoia, in
aggregate, will own approximately 80% of the equity interests in the Company and
the stockholders of the Company will own the remaining approximately 20% equity
interests in the combined company.
In
addition, pursuant to a Loan and Security Agreement (“Loan Agreement”) entered
into between the Company and Sequoia on December 6, 2007, the Company has agreed
to extend up to $2.5 million in secured financing to Sequoia. Under
the terms of the Loan Agreement, Sequoia has agreed to pay interest on the loan
at a rate per annum equal to 10%. Interest on the loan is payable on
the scheduled maturity date, December 31, 2008. In addition, if the
loan obligations have not been paid in full on or prior to the scheduled
maturity date, a monthly fee equal to 10% of the outstanding loan obligations is
payable to the Company by Sequoia on the last day of each calendar month for
which the loan obligations remain outstanding.
In
addition, prior to the effectiveness of the Merger, the Company proposes to (i)
form a wholly owned subsidiary, and (ii) contribute to such subsidiary
approximately $2.2 million in cash, 2,022,000 shares of Cashbox, a publicly
listed UK company, and amounts receivable under certain promissory notes not
associated with the Sequoia transaction. The common stock of such
subsidiary will be distributed, to the Company stockholders as of a date prior
to the Merger, at such time as the distribution can be effected in compliance
with applicable law, whether pursuant to an effective registration statement or
a valid exemption from registration.
Our Board
of Directors approved the Merger Agreement and the foregoing transactions at a
special meeting on November 29, 2007. The Merger is subject to
stockholder approval and other customary conditions and is expected to be
completed during the first quarter of 2008. If the Company terminates the
Merger Agreement before the consummation of the Merger in connection with the
Company’s acceptance of a superior proposal, the Company has agreed to pay
Sequoia a termination fee of $1,000,000 in cash under certain circumstances. At
closing of the Merger, outstanding stock options granted to our executive
officers, Jerrell G. Clay and Stephen P. Griggs, to purchase an aggregate
1,900,000 shares of our common stock at exercise prices of $0.62 per share will
fully vest and become immediately exercisable.
Sequoia
is committed to revolutionizing the way life events and memories are shared and
treasured through personal digital expressions. Sequoia developed
aVinci Experience products to simplify and automate the process of creating
professional-quality multi-media productions using personal photos and
videos. The patented technology provides complete, refined products,
including DVD’s, photo books and posters. aVinci distributes products
through leading retailers, photo websites and image service
providers.
(18) Status
of Company
On
October 2, 2006, we completed the Cash Security Business Sale and became a shell
public company with approximately $12.9 million in cash, cash equivalents and
marketable securities held-to-maturity; or approximately $0.66 per share based
on 19,426,210 shares outstanding. See Note (17) above for a
discussion of the Merger Agreement and other matters.
SECURE
ALLIANCE HOLDINGS CORPORATION AND SUBSIDIARIES
(FORMERLY
TIDEL TECHNOLOGIES, INC.)
VALUATION
AND QUALIFYING ACCOUNTS
|
Classification
|
Balance
at
Beginning of Period |
Additions
Charged
to Costs
and Expenses
|
Charged
to
Other
Accounts
|
Deductions
|
Balance
at
End
of Period
|
|||||||||||||||
|
For
the year ended September 30, 2007:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts and notes receivable
|
$ | 44,943 | $ | — | — | 44,943 | $ | — | ||||||||||||
|
Inventory
reserve
|
45,000 | — | — | 45,000 | — | |||||||||||||||
| $ | 89,943 | $ | — | — | $ | 89,943 | $ | — | ||||||||||||
|
For
the year ended September 30, 2006:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts and notes receivable
|
$ | 1,132,382 | $ | — | — | 1,087,439 | $ | 44,943 | ||||||||||||
|
Inventory
reserve
|
100,558 | — | — | 55,558 | 45,000 | |||||||||||||||
| $ | 1,232,940 | $ | — | — | $ | 1,142,997 | $ | 89,943 | ||||||||||||
|
For
the year ended September 30, 2005:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts and notes receivable
|
$ | 1,076,055 | $ | 56,327 | — | — | $ | 1,132,382 | ||||||||||||
|
Reserve
for settlement of class action litigation
|
1,564,490 | — | — | 1,564,490 | — | |||||||||||||||
|
Inventory
reserve
|
1,900,000 | — | — | 1,799,442 | 100,558 | |||||||||||||||
| $ | 4,540,545 | $ | 56,327 | — | $ | 3,363,932 | $ | 1,232,940 | ||||||||||||
UNAUDITED
CONDENSED FINANCIAL STATEMENTS OF SECURE ALLIANCE
HOLDINGS CORPORATION AND SUBSIDIARIES
HOLDINGS CORPORATION AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
As
of December 31, 2007 and September 30, 2007
|
December 31,
2007
|
September 30,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
2,232,093
|
$
|
882,116
|
||||
|
Certificates
of deposit
|
8,900,000
|
11,177,567
|
||||||
|
Marketable
securities available-for-sale
|
363,960
|
505,500
|
||||||
|
Note
receivable
|
1,000,000
|
—
|
||||||
|
Interest
and other receivables
|
22,029
|
204,113
|
||||||
|
Prepaid
expenses and other assets
|
115,076
|
—
|
||||||
|
Total
current assets
|
12,633,158
|
12,769,296
|
||||||
|
Other
assets
|
4,000
|
4,000
|
||||||
|
Total
assets
|
$
|
12,637,158
|
$
|
12,773,296
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$
|
51,722
|
$
|
—
|
||||
|
Accrued
liabilities
|
195,901
|
141,401
|
||||||
|
Total
liabilities
|
247,623
|
141,401
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders’
Equity:
|
||||||||
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 19,441,524 shares
|
194,415
|
194,415
|
||||||
|
Additional
paid-in capital
|
30,067,790
|
30,008,008
|
||||||
|
Accumulated
deficit
|
(17,936,630
|
)
|
(17,776,028
|
)
|
||||
|
Accumulated
other comprehensive income
|
63,960
|
205,500
|
||||||
|
Total
shareholders’ equity
|
12,389,535
|
12,631,895
|
||||||
|
Total
liabilities and shareholders’ equity
|
$
|
12,637,158
|
$
|
12,773,296
|
||||
See
accompanying Notes to Unaudited Condensed Financial Statements.
(unaudited)
For
the Three Months Ended December 31, 2007 and 2006|
Three
Months Ended
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Revenues
|
$
|
—
|
$
|
—
|
||||
|
Selling,
general and administrative
|
335,285
|
376,071
|
||||||
|
Operating
loss
|
(335,285
|
)
|
(376,071
|
)
|
||||
|
Other
income (expense):
|
||||||||
|
Interest
income
|
174,683
|
168,579
|
||||||
|
Reorganization
fee paid to Laurus
|
—
|
(6,508,963
|
)
|
|||||
|
Total
other income (expense)
|
174,683
|
(6,340,384
|
)
|
|||||
|
Loss
from continuing operations
|
(160,602
|
)
|
(6,716,455
|
)
|
||||
|
Income
from discontinued operations
|
||||||||
|
Gain
on sale of Cash Security business, net of tax
|
—
|
13,281,116
|
||||||
|
Net
income (loss)
|
$
|
(160,602
|
)
|
$
|
6,564,661
|
|||
|
Basic
earnings (loss) per share:
|
||||||||
|
Loss
from continuing operations
|
$
|
(0.01
|
)
|
$
|
(0.34
|
)
|
||
|
Income
from discontinued operations
|
—
|
0.67
|
||||||
|
Net
income (loss)
|
$
|
(0.01
|
)
|
$
|
0.33
|
|||
|
Weighted
average common shares outstanding
|
19,441,524
|
19,847,452
|
||||||
|
Diluted
earnings (loss) per share:
|
||||||||
|
Loss
from continuing operations
|
$
|
(0.01
|
)
|
$
|
(0.34
|
)
|
||
|
Income
from discontinued operations
|
—
|
0.67
|
||||||
|
Net
income (loss)
|
$
|
(0.01
|
)
|
$
|
0.33
|
|||
|
Weighted
average common and dilutive shares outstanding
|
19,441,524
|
20,017,456
|
||||||
See
accompanying Notes to Unaudited Condensed Financial Statements.
For
the Three Months Ended December 31, 2007 and 2006
|
Three
Months Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Net
income (loss)
|
$
|
(160,602
|
)
|
$
|
6,564,661
|
|||
|
Other
comprehensive income:
|
||||||||
|
Unrealized
gain (loss) on marketable securities available-for-sale
|
(141,540
|
)
|
207,709
|
|||||
|
Comprehensive
income (loss)
|
$
|
(302,142
|
)
|
$
|
6,772,370
|
|||
See
accompanying Notes to Unaudited Condensed Financial Statements.
(unaudited)
For
the Three Months Ended December 31, 2007 and 2006
|
Three
Months Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income (loss)
|
$
|
(160,602
|
)
|
$
|
6,564,661
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
|
Amortization
of stock options issued to officers
|
59,782
|
—
|
||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Interest
and other receivables
|
182,084
|
147,332
|
||||||
|
Prepaid
expenses and other assets
|
(115,076
|
)
|
(14,875
|
)
|
||||
|
Accounts
payable and accrued liabilities
|
106,222
|
(1,987,587
|
)
|
|||||
|
Net
cash flows used in discontinued operations
|
—
|
(13,552,456
|
)
|
|||||
|
Net
cash provided by (used in) operating activities
|
72,410
|
(8,842,925
|
)
|
|||||
|
Cash
flows from continuing investing activities:
|
||||||||
|
(Increase)
decrease in time deposits
|
2,277,567
|
(7,000,000
|
)
|
|||||
|
Increase
in notes receivable
|
(1,000,000
|
)
|
—
|
|||||
|
Decrease
in marketable securities held-to-maturity
|
—
|
1,174,674
|
||||||
|
Net
cash flows provided by discontinued investing activities
|
—
|
16,228,750
|
||||||
|
Net
cash provided by investing activities
|
1,277,567
|
10,403,424
|
||||||
|
Cash
flows from continuing financing activities:
|
||||||||
|
Redemption
of shares held by Laurus
|
—
|
(6,545,340
|
)
|
|||||
|
Proceeds
from exercise of warrants and options
|
—
|
29,313
|
||||||
|
Decrease
in restricted cash
|
—
|
5,400,000
|
||||||
|
Net
cash used in financing activities
|
—
|
(1,116,027
|
)
|
|||||
|
Net
increase in cash and cash equivalents
|
1,349,977
|
444,472
|
||||||
|
Cash
and cash equivalents at beginning of period
|
882,116
|
1,264,463
|
||||||
|
Cash
and cash equivalents at end of period
|
$
|
2,232,093
|
$
|
1,708,935
|
||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for taxes
|
$
|
—
|
$
|
90,000
|
||||
|
Supplemental
disclosure of non-cash financing activities:
|
||||||||
|
Unrealized
gain (loss) on marketable securities available-for-sale
|
$
|
(141,540
|
)
|
$
|
207,709
|
|||
See
accompanying Notes to Unaudited Condensed Financial Statements.
of
Secure Alliance Holdings Corporation and Subsidiaries
(A
Development Stage Company)
(1) Organization
and Summary of Significant Accounting Policies
Organization
and Nature of Business
Secure
Alliance Holdings Corporation (the “Company,” “we,” “us,” or “our”) is a
Delaware corporation formerly engaged in the development, manufacture, sale and
support of automated teller machines (“ATMs”) and electronic cash security
systems, consisting of the Timed Access Cash Controller (“TACC”) products and
the Sentinel products (together, the “Cash Security” products), which were
designed for the management of cash`
Basis
of Financial Presentation
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 amount of assets and
liabilities, and the disclosure of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. In management’s opinion, all adjustments
necessary for a fair presentation of the results of the interim periods have
been reflected in the interim financials. All adjustments to the
financial statements are of a normal recurring nature.
Significant
Accounting Policies
There has
been no change in our significant accounting policies from those contained in
our Annual Report on Form 10-K for the year ended September 30, 2007, except as
discussed in the following paragraph.
In July
2006, the FASB issued Final Interpretation No. (“FIN”) 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of SFAS 109, which clarifies the
accounting for income taxes by prescribing the minimum recognition threshold an
uncertain tax position is required to meet before tax benefits associated with
such uncertain tax position are recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. In addition, FIN 48 excludes
income taxes from the scope of SFAS 5, Accounting for
Contingencies. FIN 48 is effective for fiscal years beginning after
December 15, 2006. Differences between the amounts recognized in the
consolidated balance sheets prior to the adoption of FIN 48 and the amounts
reported after adoption are accounted for as a cumulative-effect adjustment to
the beginning balance of retained earnings upon adoption of FIN
48. FIN 48 also requires that amounts recognized in the balance sheet
related to uncertain tax positions be classified as a current or non-current
liability, based upon the timing of the ultimate payment to a taxing
authority. We adopted FIN 48 as of October 1, 2007 and management had
determined that no tax reserve needs to be recorded during the quarter ended
December 31, 2007.
Earnings
(Loss) Per Share
Basic
income (loss) per share is computed by dividing the net income (loss)
attributable to the common stockholders (the numerator) by the weighted average
number of shares of common stock outstanding (the denominator) during the
reporting periods. Diluted income (loss) per share is computed by
increasing the denominator by the weighted average number of additional shares
that could have been outstanding from securities convertible into common stock,
such as stock options and warrants.
(2) Merger
Agreement with Sequoia
On
December 6, 2007, we entered into a definitive Agreement and Plan of Merger
(“Merger Agreement”) by and among Sequoia Media Group, LC, a private Utah
limited liability company (“Sequoia”), the Company and SMG Utah, LC, a Utah
limited liability company and wholly owned subsidiary of the Company (“Merger
Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with
and into Sequoia (the “Merger”), with Sequoia continuing as the surviving entity
in the Merger and each issued and outstanding Sequoia equity interest will
automatically be converted into the right to receive 0.5806419 shares of the
Company’s common stock, calculated after a 1 for 3 reverse stock split of the
Company’s common stock contemplated to be effected prior to the
Merger. Immediately following the Merger, the members of Sequoia, in
aggregate, will own approximately 80% of the equity interests in the Company and
the stockholders of the Company will own the remaining approximately 20% equity
interests in the combined company.
In
addition, pursuant to a Loan and Security Agreement (“Loan Agreement”) entered
into between the Company and Sequoia on December 6, 2007, the Company has agreed
to extend up to $2.5 million in secured financing to Sequoia. Under
the terms of the Loan Agreement, Sequoia has agreed to pay interest on the loan
at a rate per annum equal to 10%. Interest on the loan is payable on
the scheduled maturity date, December 31, 2008. In addition, if the
loan obligations have not been paid in full on or prior to the scheduled
maturity date, a monthly fee equal to 10% of the outstanding loan obligations is
payable to the Company by Sequoia on the last day of each calendar month for
which the loan obligations remain outstanding.
In
addition, prior to the effectiveness of the Merger, the Company proposes to (i)
form a wholly owned subsidiary, and (ii) contribute to such subsidiary
approximately $2.2 million in cash, 2,022,000 shares of Cashbox, a publicly
listed UK company, and amounts receivable under certain promissory notes not
associated with the Sequoia transaction. The common stock of such
subsidiary will be distributed, to the Company stockholders as of a date prior
to the Merger, at such time as the distribution can be effected in compliance
with applicable law, whether pursuant to an effective registration statement or
a valid exemption from registration.
Our Board
of Directors approved the Merger Agreement and the foregoing transactions at a
special meeting on November 29, 2007. The Merger is subject to
stockholder approval and other customary conditions and is expected to be
completed during the second calendar quarter of 2008. If the Company
terminates the Merger Agreement before the consummation of the Merger in
connection with the Company’s acceptance of a superior proposal, the Company has
agreed to pay Sequoia a termination fee of $1,000,000 in cash under certain
circumstances. At closing of the Merger, outstanding stock options
granted to our executive officers, Jerrell G. Clay and Stephen P. Griggs, to
purchase an aggregate 1,900,000 shares of our common stock at exercise prices of
$0.62 per share will fully vest and become immediately exercisable.
Sequoia
is committed to revolutionizing the way life events and memories are shared and
treasured through personal digital expressions. Sequoia developed
aVinci Experience products to simplify and automate the process of creating
professional-quality multi-media productions using personal photos and
videos. The patented technology provides complete, refined products,
including DVD’s, photo books and posters. aVinci distributes products
through leading retailers, photo websites and image service
providers.
(3) Marketable
Securities Available-for-Sale
We own
2,022,000 shares of the common stock of Cashbox plc pursuant to our exercise of
a warrant in September 2005. On or about March 27, 2006, shares of
Cashbox plc began trading on the AIM Market of the London Stock
Exchange. Prior to Cashbox plc going public, we considered their
shares not marketable, thus the shares were carried at cost. Since
the shares are now public and market value is readily available, we determined
the market value of the shares and pursuant to SFAS No. 115 “Accounting for
Investments in Equity and Debt Securities” we classified these shares as
available for sale. Pursuant to the SFAS No. 115 the unrealized
change in fair value was excluded from earnings and recorded net of tax as other
comprehensive income.
As of
December 31, 2007 and September 30, 2007, our common stock in Cashbox plc was
recorded at a fair value of $363,960 and $505,500,
respectively. Unrealized gains on these shares of common stock, which
were added to stockholders’ equity as of December 31, 2007 and September 30,
2007, were $63,960 and $205,500, respectively.
Until
March 28, 2008, we are restricted from selling any shares unless we (i) consult
with Cashbox’s primary broker prior to the disposal of any shares and (ii)
effect the disposal of the shares through Cashbox’s primary broker from time to
time and in such manner as such broker may require with a view to the
maintenance of an orderly market in the shares of Cashbox.
(4) Note
Receivable
Pursuant
to the Loan Agreement, we loaned $1,000,000 to Sequoia on December 6,
2007. The note bears interest at 10% per annum and is due December
31, 2008. Further, we agreed to loan Sequoia an additional $1,000,000
on January 15, 2008 and $500,000 on February 15, 2008 on the same terms and
conditions. The loan and any future advances under the Loan Agreement
are secured by a pledge of all of the assets of Sequoia.
(5) Discontinued
Operations
Sale
of Cash Security Business and Related Agreements with Laurus
On
September 25, 2006, the holders of a majority of shares of our outstanding
common stock approved the sale of our electronic cash security business,
consisting of (a) timed access cash controllers, (b) the Sentinel products, (c)
the servicing, maintenance and repair of the timed access cash controllers or
Sentinel products and (d) all other assets and business operations associated
with the foregoing (the “Cash Security Business Sale”) to Sentinel Operating,
L.P., a buyer led by a management buyout team that included our former director
and Interim Chief Executive Officer, Mark K. Levenick, and our former director,
Raymond P. Landry. The Cash Security Asset Purchase Agreement provided for a
cash purchase price of $15,500,000, less $100,000 as consideration for the buyer
assuming certain potential liability in connection with ongoing litigation, and
less a working capital deficit adjustment of $1,629,968, resulting in a net
purchase price of $13,770,032. In addition, Sentinel Operating L.P.
paid a cash adjustment of $2,458,718 to the Company at closing. The
Cash Security Business Sale was completed on October 2, 2006. During
the year ended September 30, 2007, we recorded a gain on the sale of the Cash
Security business of $13,605,066.
Pursuant
to the Agreement Regarding the NCR Transaction and Other Asset Sales, dated
November 26, 2004 (the “Asset Sales Agreement”), by and between the Company and
Laurus Master Fund, Ltd. (“Laurus”), the Company agreed to pay to Laurus a
portion of the excess net proceeds from the ATM business sale and the Cash
Security Business Sale.
On June
9, 2006, we and Laurus entered into the Laurus Termination Agreement which,
among other things, provided for the payment of a sale fee of $8,508,963 to
Laurus (the “Sale Fee”) in full satisfaction of all amounts payable to Laurus
under the Asset Sales Agreement, including fees payable in respect of the ATM
Business Sale and the Cash Security Business Sale. The Laurus
Termination Agreement further provided that, upon payment of the Sale Fee and
performance by the Company of its obligations under the Stock Redemption
Agreement described below, neither the Company nor any of its subsidiaries will
have any further obligation to Laurus. Further, each of the Company
and Laurus has granted each other and their respective affiliates and
subsidiaries reciprocal releases from and against any claims and causes of
action that may exist.
We and
Laurus entered a Stock Redemption Agreement on January 12, 2006 and as
subsequently amended. Pursuant to the terms of the Stock Redemption
Agreement: we agreed, among other things, (i) to repurchase from Laurus, upon
the closing of the Cash Security Business Sale, all shares of our common stock
held by Laurus, and (ii) Laurus agreed to the cancellation as of the closing
date of the Cash Security Business Sale of warrants it holds to purchase
4,750,000 shares of our common stock at an exercise price of $.30 per share, and
not to exercise such warrants prior to the earlier to occur of September 30,
2006 and the date on which the Cash Security Asset Purchase Agreement is
terminated.
Following
the Cash Security Business Sale, on October 2, 2006, the Company applied the net
purchase price, the cash adjustment, and $5,400,000 in proceeds (together with
accrued interest of $206,799) from the ATM business sale, to pay the following
amounts to Laurus: (i) $8,508,963 pursuant to the terms of the Laurus
Termination Agreement and (ii) $6,545,340 representing the purchase from Laurus
by the Company of 19,251,000 shares of Company common stock pursuant to the
terms of the Stock Redemption Agreement. Following both such payments to Laurus,
the Company received $6,781,246 in net proceeds from the Cash Security Business
Sale.
On
October 2, 2006, following the foregoing payments to Laurus pursuant to the
terms of the Laurus Termination Agreement and the Stock Redemption Agreement, no
further fees remain payable by the Company to Laurus and, to our knowledge,
Laurus does not own any shares of the Company.
AUDITED
FINANCIAL STATEMENTS OF SEQUOIA MEDIA GROUP, LC
Report
Of Independent Registered
Public
Accounting Firm
To the
Members of
Sequoia
Media Group, LC
We have
audited the accompanying balance sheets of Sequoia Media Group, LC (the
Company), as of December 31, 2007 and 2006, and the related statements of
operations, changes in members’ deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Sequoia Media Group, LC as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended, in conformity with U.S. generally accepted accounting
principles.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As more fully described in Note 2,
the Company has incurred negative cash flows from operating activities and
losses from operations in 2007 and 2006, expects to incur additional losses, and
has a deficit in members’ equity as of December 31, 2007. These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are
described in Note 2, which describes a Merger Agreement into which the Company
has entered that, if completed, would result in a cash infusion of approximately
$7.3 million into the Company (net of repayment of loans). The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/
Tanner LC
Salt Lake
City, Utah
February 22,
2008
SEQUOIA MEDIA GROUP,
LC
Balance
Sheets
As
of December 31, 2007 and 2006
|
December
31,
|
December
31,
|
|||||||
|
Assets
|
2007
|
2006
|
||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 859,069 | $ | 168,692 | ||||
|
Accounts
receivable
|
448,389 | 10,000 | ||||||
|
Unbilled
accounts receivable
|
- | 465,472 | ||||||
|
Inventory
|
21,509 | 4,331 | ||||||
|
Prepaid
expenses
|
100,799 | 53,757 | ||||||
|
Deferred
costs
|
294,602 | - | ||||||
|
Deposits
and other current assets
|
44,201 | 72,559 | ||||||
|
Total
current assets
|
1,768,569 | 774,811 | ||||||
|
Property
and equipment, net
|
990,523 | 309,008 | ||||||
|
Intangibles,
net
|
74,689 | 70,381 | ||||||
|
Other
Assets
|
20,408 | 111,011 | ||||||
|
Total
assets
|
$ | 2,854,189 | $ | 1,265,211 | ||||
|
Liabilities and
Member's Deficit
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 75,118 | $ | 104,832 | ||||
|
Accrued
liabilities
|
823,772 | 820,143 | ||||||
|
Distribution
payable
|
308,251 | - | ||||||
|
Current
portion of capital leases
|
118,288 | - | ||||||
|
Current
portion of deferred rent
|
38,580 | - | ||||||
|
Note
payable
|
1,000,000 | - | ||||||
|
Convertible
debentures and notes payable
|
2,234,660 | |||||||
|
Related
party notes payable
|
- | 265,783 | ||||||
|
Deferred
revenue
|
493,599 | 11,250 | ||||||
|
Total
current liabilities
|
2,857,608 | 3,436,668 | ||||||
|
Capital
lease obligations, net of current portion
|
222,611 | - | ||||||
|
Deferred
rent, net of current portion
|
71,839 | - | ||||||
|
Total
liabilities
|
3,152,058 | 3,436,668 | ||||||
|
Series
B redeemable convertible preferred units, no par value, 12,000,000 units
authorized; 8,804,984 and 0 units outstanding, respectively (liquidation
preference of $6,603,182 at December 31, 2007)
|
6,603,182 | - | ||||||
|
Commitments
and contingencies
|
||||||||
|
Members'
deficit
|
||||||||
|
Series
A convertible preferred units, no par value, 3,746,485 units authorized;
3,533,720 units outstanding (liquidation preference of
$474,229)
|
474,229 | 474,229 | ||||||
|
Common
units, no par value, 90,000,000 units authorized; 29,070,777 and
21,547,422 units outstanding, respectively.
|
4,211,737 | 1,103,679 | ||||||
|
Accumulated
deficit
|
(11,587,017 | ) | (3,749,365 | ) | ||||
|
Total
members' deficit
|
(6,901,051 | ) | (2,171,457 | ) | ||||
|
Total
liabilities and members' deficit
|
$ | 2,854,189 | $ | 1,265,211 | ||||
See accompanying notes to financial statements
SEQUOIA MEDIA GROUP, LC
Statements
of Operations
For
the Years Ended December 31, 2007 and 2006
|
2007
|
2006
|
|||||||
|
Revenues
|
$ | 541,856 | $ | 739,200 | ||||
|
Operating
expense:
|
||||||||
|
Cost
of sales
|
57,068 | - | ||||||
|
Research
and development
|
1,890,852 | 1,067,687 | ||||||
|
Selling
and marketing
|
1,351,860 | 547,448 | ||||||
|
General
and administrative
|
3,677,326 | 1,755,127 | ||||||
|
Depreciation
and amortization
|
490,549 | 201,893 | ||||||
|
Total
operating expense
|
7,467,655 | 3,572,155 | ||||||
|
Loss
from operations
|
(6,925,799 | ) | (2,832,955 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Interest
income
|
66,524 | 4,726 | ||||||
|
Interest
expense
|
(480,126 | ) | (707,706 | ) | ||||
|
Net
other income (expense)
|
(413,602 | ) | (702,980 | ) | ||||
|
Net
loss
|
(7,339,401 | ) | (3,535,935 | ) | ||||
|
Deemed
distribution on Series B redeemable convertible preferred
units
|
(190,000 | ) | - | |||||
|
Distributions
on Series B redeemable convertible preferred units
|
(308,251 | ) | - | |||||
|
Net
loss applicable to common units
|
$ | (7,837,652 | ) | $ | (3,535,935 | ) | ||
|
Loss
per common unit - basic and diluted
|
$ | (0.30 | ) | $ | (0.16 | ) | ||
|
Weighted
average common units - basic and diluted
|
26,453,062 | 21,547,422 | ||||||
See accompanying notes to
financial statements
SEQUOIA MEDIA GROUP, LC
Statements
of Changes in Members’ Equity (Deficit)
Years Ended December 31, 2007 and
2006
|
Series
A Convertible
|
||||||||||||||||||||||||
|
Preferred
|
Common
|
Accumulated
|
Member's
|
|||||||||||||||||||||
|
Units
|
Amount
|
Units
|
Amount
|
Deficit
|
Deficit
|
|||||||||||||||||||
|
Balance,
January 1, 2006
|
3,533,720 | $ | 474,229 | 21,547,422 | $ | 325,500 | $ | (213,430 | ) | $ | 586,299 | |||||||||||||
|
Issuance
of detachable warrants in connection with debentures
payable
|
- | - | - | 251,552 | - | 251,552 | ||||||||||||||||||
|
Beneficial
conversion feature of convertible debentures payable
|
- | - | - | 489,268 | - | 489,268 | ||||||||||||||||||
|
Equity-based
payments made to employees
|
- | - | - | 37,359 | - | 37,359 | ||||||||||||||||||
|
Net
loss
|
- | - | - | - | (3,535,935 | ) | (3,535,935 | ) | ||||||||||||||||
|
Balance,
December 31, 2006
|
3,533,720 | 474,229 | 21,547,422 | 1,103,679 | (3,749,365 | ) | (2,171,457 | ) | ||||||||||||||||
|
Conversion
of debentures payable and accrued interest payable into common
units
|
- | - | 7,523,355 | 2,602,668 | - | 2,602,668 | ||||||||||||||||||
|
Employee
equity-based compensation
|
- | - | - | 505,390 | - | 505,390 | ||||||||||||||||||
|
Accretion
of Issuance costs on Series B redeemable convertible preferred
units
|
- | - | - | - | (190,000 | ) | (190,000 | ) | ||||||||||||||||
|
Distributions
on Series B redeemable convertible preferred units
|
- | - | - | - | (308,251 | ) | (308,251 | ) | ||||||||||||||||
|
Net
loss
|
- | - | - | - | (7,339,401 | ) | (7,339,401 | ) | ||||||||||||||||
|
Balance,
December 31, 2007
|
3,533,720 | $ | 474,229 | 29,070,777 | $ | 4,211,737 | $ | (11,587,017 | ) | $ | (6,901,051 | ) | ||||||||||||
See accompanying notes to financial statements
SEQUOIA MEDIA GROUP, LC
Statements
of Cash Flows
For
the Years Ended December 31, 2007 and 2006
|
2007
|
2006
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (7,339,401 | ) | $ | (3,535,935 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
|
Depreciation
and amortization
|
490,549 | 201,893 | ||||||
|
Accretion
of debt discount
|
338,594 | 582,230 | ||||||
|
Equity-based
compensation
|
505,390 | 37,359 | ||||||
|
Loss
on disposal of equipment
|
1,063 | 1,668 | ||||||
|
Decrease
(increase) in:
|
||||||||
|
Accounts
receivable
|
(438,389 | ) | (10,000 | ) | ||||
|
Unbilled
accounts receivable
|
465,472 | 260,508 | ||||||
|
Inventory
|
(17,178 | ) | (4,331 | ) | ||||
|
Prepaid
expenses
|
(47,042 | ) | (50,502 | ) | ||||
|
Deferred
costs
|
(294,602 | ) | - | |||||
|
Other
current assets
|
28,358 | (72,559 | ) | |||||
|
Deposits
|
(5,409 | ) | (14,999 | ) | ||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(29,714 | ) | 5,761 | |||||
|
Accrued
liabilities
|
236,225 | 775,350 | ||||||
|
Deferred
rent
|
110,419 | - | ||||||
|
Deferred
revenue
|
482,349 | (67,083 | ) | |||||
|
Net
cash used in operating activities
|
(5,513,316 | ) | (1,890,640 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(562,987 | ) | (344,995 | ) | ||||
|
Purchase
of intangible assets
|
(14,308 | ) | (70,000 | ) | ||||
|
Net
cash used in investing activities
|
(577,295 | ) | (414,995 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from convertible notes and debentures
|
1,535,000 | 2,393,250 | ||||||
|
Proceeds
from note payable
|
1,000,000 | - | ||||||
|
Payments
of loan costs
|
(117,080 | ) | (194,745 | ) | ||||
|
Proceeds
from related party notes payable
|
20,000 | 265,783 | ||||||
|
Payments
on related party notes payable
|
(285,783 | ) | - | |||||
|
Payments
on obligation under capital lease
|
(46,149 | ) | - | |||||
|
Proceeds
from issuance of Series B preferred units net of issuance costs of
$190,000
|
4,675,000 | - | ||||||
|
Net
cash provided by financing activities
|
6,780,988 | 2,464,288 | ||||||
|
Net
change in cash
|
690,377 | 158,653 | ||||||
|
Cash
at beginning of year
|
168,692 | 10,039 | ||||||
|
Cash
at end of year
|
$ | 859,069 | $ | 168,692 | ||||
|
Cash
paid for interest and income taxes
|
$ | - | $ | - | ||||
See accompanying notes to
financial statements
SEQUOIA
MEDIA GROUP, LC
Statements
of Cash Flow
(Continued)
Supplemental
schedule of non-cash investing and financing activities:
During
the year ended December 31, 2007:
|
·
|
The
Company converted notes payable of $1,535,000 and $23,178 of related
accrued interest into 2,318,318 Series B redeemable convertible preferred
units.
|
|
·
|
The
Company converted $2,393,250 of debentures and notes payable and $209,418
of related accrued interest into 7,523,355 common
units.
|
|
·
|
The
Company recorded a debt discount of $8,129 and a beneficial conversion
feature of $171,875 in connection with the issuance of Series B redeemable
convertible preferred units.
|
|
·
|
The
Company accrued distributions payable on Series B redeemable convertible
preferred units of $308,251.
|
|
·
|
The
Company acquired $387,048 of fulfillment equipment and office furniture
through capital lease
agreements.
|
|
·
|
The
Company recorded a deemed distribution of $190,000 due to the accretion of
issuance costs related to the Series B
offering.
|
During
the year ended December 31, 2006:
|
·
|
The
Company recorded a debt discount of $251,552 and a beneficial conversion
feature of $489,268 in connection with the issuance of convertible
debt.
|
See accompanying notes to financial statements.
SEQUOIA MEDIA GROUP, LC
Notes
to Financial Statements
|
1.
|
Description
of Organization and Summary of Significant Accounting
Policies
|
Organization
and Nature of Operations
Sequoia
Media Group, LC (the Company), a Utah limited liability company, was formed on
March 15, 2003. The Company develops and sells an engaging way for
anyone to tell their “Story” with personal digital expressions. The
Company’s products simplify and automate the process of creating
professional-quality multi-media productions using personal photos and
videos.
Basis
of Presentation
The
accompanying financial statements are presented in accordance with U.S.
generally accepted accounting principles.
Concentration
of Credit Risk and Significant Customer
The
Company maintains its cash in bank demand deposit accounts, which at times may
exceed the federally insured limit or may be maintained in non-insured
institutions. As of December 31, 2007 and December 31, 2006, the Company had
approximately $952,752 and $153,874 respectively, in excess of the insured
limits, primarily in cash equivalents. The Company has not experienced any
losses in these accounts and believes it is not exposed to any significant
credit risk with respect to cash.
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of accounts receivable. In the normal course of business,
the Company provides credit terms to its customers and requires no collateral.
Concentrations of accounts receivable and revenue were as follows:
|
2007
|
||||||||
|
Revenue
|
Accounts
Receivable
|
|||||||
|
Customer
A
|
97.1 | % | 18.6 | % | ||||
|
Customer
B
|
5.9 | % | 3.9 | % | ||||
|
Customer
C
|
0 | % | 77.5 | % | ||||
|
2006
|
||||||||
|
Revenue
|
Accounts
Receivable
|
|||||||
|
Customer
A
|
100.0 | % | 100.0 | % | ||||
Net
Loss per Common Unit
Basic
earnings (loss) per unit (EPS) is calculated by dividing income (loss) available
to common unit holders by the weighted-average number of common units
outstanding during the period.
Diluted
EPS is similar to Basic EPS except that the weighted-average number of common
units outstanding is increased using the treasury stock method to include the
number of additional common units that would have been outstanding if the
dilutive potential common units had been issued. Such potentially dilutive
common units include stock options and warrants, convertible preferred stock,
redeemable convertible preferred stock and convertible notes and debentures.
Units having an antidilutive effect on periods presented are not included in the
computation of dilutive EPS.
The
average number of units of all stock options and warrants granted, all
convertible preferred stock, redeemable convertible preferred stock and
convertible debentures have been omitted from the computation of diluted net
loss per common unit because their inclusion would have been anti-dilutive for
the years ended December 31, 2007 and 2006.
For the
years ended December 31, 2007 and 2006, the Company had 21,749,309 and 7,269,325
potentially dilutive units of common stock, respectively, not included in the
computation of diluted net loss per common unit because it would have decreased
the net loss per common unit. These options and warrants, convertible preferred
stock, redeemable convertible preferred stock and convertible notes and
debentures could be dilutive in the future.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates. Key estimates made by management in the accompanying
financial statements include the economic useful lives assigned to property and
equipment, recoverability of long-lived assets based on expected future
undiscounted cash flows, the fair value of the Company’s units on the dates of
share-based compensation awards and the assumptions used in the Black-Scholes
option-pricing model.
Cash
Equivalents
The
Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
Accounts
Receivable
Accounts
receivable are recorded at net realizable values and are due within 30 days from
the invoice date. The Company maintains allowances for doubtful accounts, when
necessary, for estimated losses resulting from the inability of customers to
make required payments. These allowances are based on specific facts and
circumstances pertaining to individual customers and historical experience.
Provisions for losses on receivables are charged to operations. Receivables are
charged off against the allowances when they are deemed
uncollectible. As of December 31, 2007 and 2006, there were no
allowances for doubtful accounts required against the Company’s
receivables.
Inventories
Inventories
are stated at the lower of cost or market determined using the first-in,
first-out method.
Intangible
Assets
Intangible
assets consist of costs to acquire patents and licenses for use of certain music
tracks. All of the Company’s intangible assets have finite useful
lives.
Intangible
assets with finite useful lives are carried at cost, less accumulated
amortization. Amortization is calculated using the straight-line
method over estimated useful lives. Intangible assets subject to
amortization are reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be
recoverable. As of December 31, 2007 and 2006, management determined
that the carrying amounts of the Company’s intangible assets were not
impaired.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Property and equipment consists of computers, software
and equipment, and furniture and fixtures. Depreciation and amortization are
calculated using the straight-line method over the estimated economic useful
lives of the assets or over the related lease terms (if shorter), which are
three and five years, respectively.
Expenditures
that materially increase values or capacities or extend useful lives of property
and equipment are capitalized. Routine maintenance, repairs, and renewal costs
are expensed as incurred. Gains or losses from the sale or retirement of
property and equipment are recorded in the statements of
operations.
The
Company reviews its property and equipment for impairment when events or changes
in circumstances indicate that the carrying amount may be
impaired. If it is determined that the related undiscounted future
cash flows are not sufficient to recover the carrying value, an impairment loss
is recognized for the difference between carrying value and fair value of the
asset.
As of
December 31, 2007 and 2006, management determined the carrying amounts of the
Company’s property and equipment were not impaired.
Revenue
Recognition and Deferred Revenue
Through
December 31, 2007, the Company generated the majority of its revenue from one
customer. The contract with this customer included software
development, software license, post-contract support (PCS), and
training. Because the contract included the delivery of a software
license, the Company accounted for the contract in accordance with Statement of
Position (SOP) 97-2, Software Revenue Recognition, as modified by SOP 98-9,
Modification of SOP 97-2 with Respect to Certain Transactions. SOP
97-2 applies to activities that represent licensing, selling, leasing, or other
marketing of computer software.
Because
the contract included services to provide significant production, modification,
or customization of software, in accordance with SOP 97-2, the Company accounted
for the contract based on the provisions of Accounting Research Bulletin (ARB)
No. 45, Long-Term Construction-Type Contracts and the relevant guidance provided
by SOP 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. In accordance with these provisions, the
Company determined to use the percentage-of-completion method of accounting to
record the revenue for the entire contract. The Company utilized the
ratio of total actual costs incurred to total estimated costs to determine the
amount of revenue to be recognized at each reporting date.
As of
December 31, 2007, this contract was completed and all revenue under this
contract had been recognized. The Company has no further obligations under this
contract.
The
Company records billings and cash received in excess of revenue earned as
deferred revenue. The deferred revenue balance generally results from
contractual commitments made by customers to pay amounts to the Company in
advance of revenues earned. The unbilled accounts receivable represents revenue
that has been earned but which has not yet been billed. The Company bills
customers as payments become due under the terms of the customer’s contract. The
Company considers current information and events regarding its customers and
their contracts and establishes allowances for doubtful accounts when it is
probable that it will not be able to collect amounts due under the terms of
existing contracts.
Under the
current business model, the Company generates revenue from the sale of software,
equipment, software licenses, applications development and implementation
services, support, training services, and product royalties. The
Company continues to apply the guidance provided in SOP 97-2 to recognize
revenue on contracts that include a software component. SOP 97-2
generally provides that until vendor specific objective evidence (VSOE) of fair
value exists for the various components within the contract, that revenue is
deferred until delivery of all elements except for PCS and training has
occurred. After all elements are delivered except for PCS and training, deferred
revenue is recognized over the remaining term of the
contract. Because of the Company’s limited sales history, it does not
have VSOE for the different components that may be included in sales
contracts.
Once VSOE
is established, the Company will allocate a portion of the contract fee to each
undelivered element based on the relative fair values of the elements and
allocate the fee for delivered software licenses using the residual
method. The Company plans to establish VSOE for the various elements
of its contracts based on the price charged when the same element is sold
separately. For consulting services, the Company plans to base VSOE on the rates
charged when the services are sold separately under time-and-materials
contracts. The Company intends to base VSOE for training on the rates
charged when training is sold separately for supplemental training
courses.
For PCS,
VSOE will be determined by reference to the renewal rate charged to the customer
in future periods.
For
time-and-materials contracts, the Company plans to estimate a profit range and
recognize the related revenue using the lowest probable level of profit
estimated in the range. Billings in excess of revenue recognized under
time-and-material contracts will be deferred and recognized upon completion of
the time-and-materials contract or when the results can be estimated more
precisely.
For
fixed-price contracts, the Company intends to recognize revenue using the
percentage-of-completion method of accounting and following the guidance in SOP
81-1. The Company will make adjustments, if necessary, to the estimates used in
the percentage-of-completion method of accounting as work progresses under the
contract and as experience is gained.
The
Company intends to recognize support revenue from contracts for ongoing
technical support and unspecified product updates ratably over the support
period.
The
Company plans to recognize training revenue as the services are
performed.
The
Company plans to recognize license revenues from software licenses that do not
include services or where the related services are not considered essential to
the functionality of the software, when the following criteria are met: a signed
noncancellable license agreement with nonrefundable fees has been obtained; the
software product has been delivered; there are no uncertainties surrounding
product acceptance; the fees are fixed and determinable; and collection is
considered probable.
For
certain contracts for which reasonably dependable estimates cannot be made or
for which inherent hazards make estimates doubtful, the Company recognizes
revenue under the completed-contract method of contract accounting. In one
contract entered into during 2007, the Company sold fulfillment equipment,
hardware and software installation, and software licenses. The Company currently
has deferred all revenues related to these contracts as there is no VSOE
established for the software portion of the product. Revenues will continue to
be deferred, in accordance with SOP 97-2, until delivery of all elements except
for PCS and training have occurred.
Deferred
revenues will be recognized over the remaining term of the
contract. The Company capitalized the direct cost of the equipment
and will amortize it as the related revenue is recognized.
The
Company entered into two additional contracts during 2007 in which the Company
sells its product through a retailer. The product includes both software and the
means to submit data to the Company for fulfillment. The Company currently has
deferred all revenues related to these contracts as there is no VSOE established
for the software portion of the product. Revenues will continue to be deferred,
in accordance with SOP 97-2, until the time fulfillment is complete or the
obligation to fulfill the order has expired.
Software
Development Costs
Costs for
the development of new software products and substantial enhancements to
existing software products are expensed as incurred until technological
feasibility has been established, at which time any additional costs are
capitalized. The costs to develop software have not been capitalized
as management has determined that its software development process is
essentially completed concurrent with the establishment of technological
feasibility.
Accounting
for Equity Based Compensation
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123(R) (revised 2004), Share-Based Payment which amends SFAS No. 123,
Accounting for Stock-Based Compensation and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company adopted SFAS No.123(R) using the modified
prospective method. The modified prospective method requires that compensation
cost be recognized beginning with the effective date based on the requirements
of SFAS No. 123(R) for all equity-based payments granted after the effective
date and all non-vested equity-based payments granted prior to the effective
date. The Company did not issue any
employee equity-based payments prior to January 1, 2006. The effect
of accounting for equity-based awards under SFAS No. 123(R) for the years ended
December 31, 2007 and 2006, was to record $505,390, and $37,359, respectively,
of equity-based compensation expense in general and administrative
expense.
The fair
value of each share-based award was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions.
|
Expected
dividend yield
|
—
|
|||
|
Expected
share price volatility
|
40%
|
|||
|
Risk-free
interest rate
|
4.06%
- 4.89%
|
|||
|
Expected
life of options
|
2.5
years – 4.25 years
|
Income
Taxes
Under the
provisions of the Internal Revenue Code and applicable state laws, the Company
is taxed similar to a partnership, and as a result, is not directly subject to
income taxes. The results of its operations are included in the tax returns of
its members. Therefore, no provision or benefit for income taxes has been
included in the accompanying financial statements.
Pro forma
income tax expense, as if the Company had been a taxable entity would have been
$0 for each year presented in the statements of operations
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141R), Business
Combinations and SFAS No. 160 (SFAS 160), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51. SFAS 141R will change how business acquisitions are accounted for and
will impact financial statements both on the acquisition date and in subsequent
periods. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 141R and SFAS 160 are effective for us
beginning in the first quarter of fiscal 2010. Early adoption is not permitted.
The adoption of SFAS 141R and SFAS 160 is not expected to have a material impact
on the Company’s financial statements.
In
February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option
for Financial Assets and Financial Liabilities. Under SFAS 159, companies may
elect to measure certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on items for which
the fair value option has been elected be reported in earnings. SFAS 159 is
effective beginning in the first quarter of fiscal 2008.
In
September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value
Measurements, which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007.
However, in February 2008, the FASB issued FSP FAS 157-b which delays the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This FSP
partially defers the effective date of Statement 157 to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP. Effective for fiscal 2008, the Company will adopt
SFAS 157 except as it applies to those nonfinancial assets and nonfinancial
liabilities as noted in FSP FAS 157-b. The adoption of SFAS 157 is not expected
to have a material impact on the Company’s financial statements.
In July
2006, the FASB issued Financial Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before being recognized
in the financial statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2007 and as a result, is effective our first quarter of fiscal
2008. The cumulative effects, if any, of applying FIN 48 will be recorded as an
adjustment to retained earnings as of the beginning of the period of adoption.
Additionally, in May 2007, the FASB published FSP No. FIN 48-1 (FSP FIN 48-1),
Definition of Settlement in FASB Interpretation No. 48. FSP FIN 48-1 is an
amendment to FIN 48. It clarifies how an enterprise should determine whether a
tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. If the Company closes the merger with
Secure Alliance Holdings Corporation as noted in note 11, the Company will be
required to comply with FIN 48-1 on the merger date. The actual
impact of the adoption of FIN 48 and FSP FIN 48-1 on our consolidated results of
operations and financial condition will depend on facts and circumstances that
exist on the date of adoption. The Company is currently calculating the impact
of the adoption of FIN 48 and FSP FIN 48-1 but does not expect it to have a
material impact on the financial statements.
Reclassifications
Certain
amounts in the 2006 financial statements have been reclassified to confirm to
the 2007 presentation.
|
2.
|
Going
Concern
|
The
Company has not achieved profitability since its inception. As of
December 31, 2007, the Company had a deficit in members’ equity, negative
working capital and recurring negative cash flows from operations.These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying financial statements do not contain
any adjustments that might result from the outcome of this
uncertainty.
Management
believes that the Company’s potential merger with Secure Alliance Holdings
Corporation (see Note 11) and associated Loan and Security Agreement (see Note
11) will provide the necessary liquidity, in the form of approximately $7.3
million in cash (net of repayment of loans), to fund the Company’s operations
beyond December 31, 2008. However, there can be no assurance that the
merger will occur or that the available funds from the Loan and Security
Agreement will be sufficient to sustain operations beyond 2008. If the merger
does not occur or the funds available under the Loan and Security Agreement are
not sufficient to sustain operations, the Company will be required to obtain
additional financing through the sale of equity securities; however, such
financing may not be available on agreeable terms. If the Company is unable to
secure sufficient funds through one of the sources noted above, it will be
required to significantly reduce spending and may be unable to continue
operations, and further product development, and sales efforts.
|
3.
|
Property
and Equipment
|
Property
and equipment consisted of the following as of December 31:
|
2007
|
2006
|
|||||||
|
Computers,
software and equipment
|
$ | 1,212,558 | $ | 381,391 | ||||
|
Furniture
and fixtures
|
125,676 | 13,159 | ||||||
|
Leasehold
Improvements
|
4,100 | - | ||||||
| 1,342,334 | 394,550 | |||||||
|
Less
accumulated depreciation and amortization
|
(351,811 | ) | (85,542 | ) | ||||
| $ | 990,523 | $ | 309,008 | |||||
Depreciation
of property and equipment for the years ended December 31, 2007 and 2006 was
$267,457 and $95,660, respectively.
|
4.
|
Intangible
Assets
|
Intangible
assets consisted of the following at December 31:
|
2007
|
2006
|
|||||||
|
Patent
costs
|
$ | 62,189 | $ | 47,881 | ||||
|
License
– music tracks
|
30,000 | 30,000 | ||||||
| 92,189 | 77,881 | |||||||
|
Accumulated
amortization
|
(17,500 | ) | (7,500 | ) | ||||
| $ | 74,689 | $ | 70,381 | |||||
Amortization
expense for the years ended December 31, 2007 and 2006 was $10,000 and $7,500,
respectively.
As of
December 31, 2007, the Company had not begun to amortize capitalized patent
costs as the patent had not yet been granted. Amortization related to the
license for music tracks for the years ended December 31, 2008 and 2009 will be
$10,000 and $2,500, respectively.
|
5.
|
Accrued
Liabilities
|
Accrued
liabilities consisted of the following as of December 31:
|
2007
|
2006
|
|||||||
|
Bonuses
payable
|
$ | 554,000 | $ | 538,222 | ||||
|
Payroll
and payroll taxes payable
|
229,245 | 136,318 | ||||||
|
Interest
payable
|
- | 125,476 | ||||||
|
Other
|
40,527 | 20,127 | ||||||
| $ | 823,772 | $ | 820,143 | |||||
|
6.
|
Notes
and Convertible Debentures Payable
|
Notes and
convertible debentures payable consisted of the following as of December
31:
|
2007
|
2006
|
|||||||
|
Note
payable to Secure Alliance Holdings Corporation (see Note 11), interest at
10% per annum, due December 31, 2008, secured by all assets of the
Company
|
$ | 1,000,000 | $ | - | ||||
|
Convertible
notes payable to an institutional investor, interest at 10% per annum, due
June 5, 2007, less debt discount of $44,497 as of December 31,
2006. As noted below, during 2007, these notes were converted
into common units.
|
- | 1,519,503 | ||||||
|
Convertible
debentures payable to an institutional investor, with interest at 10% per
annum, due January 31, 2007, less debt discount of $114,093 as of December
31, 2006. As noted below, during 2007, these debentures were
converted into common units.
|
- | 715,157 | ||||||
| $ | 1,000,000 | $ | 2,234,660 | |||||
During
the first quarter of 2006, the Company entered into a convertible debenture
financing arrangement with an institutional investor, through which the Company
issued convertible debentures totaling $829,250. This amount
consisted of cash of $775,000 and loan origination fees of $54,250, which were
recorded as an asset to be amortized over the life of the loan. These
convertible debentures payable had a stated interest rate of 10% per annum. On
May 8, 2007, these debentures and accrued interest of $106,832 were converted
into 3,900,341 common units.
Detachable
warrants for the purchase of 1,727,605 common units, which expire in 2008, were
granted in connection with these convertible debentures. The warrants
were valued at a total of $178,330 and were recorded as a discount to debt, with
a corresponding increase to members’ equity.
In
addition, at the date of issuance the conversion rate of the convertible
debentures was less than the fair value of the Company’s common
units. Therefore, a beneficial conversion feature valued at $489,268
was recorded as a discount to debt, with a corresponding increase recorded as
members’ equity.
During
the year ended December 31, 2007 and 2006, the Company accreted $114,093 and
$553,505, respectively, of the debt discount arising from the warrants and the
beneficial conversion feature to interest expense using the effective interest
method.
During
August, September and October 2006, the Company entered into a convertible note
payable financing arrangement with an institutional investor, through which the
Company issued convertible notes payable totaling $1,564,000. This
amount consisted of cash of $1,443,510 and loan origination fees of $120,490,
which were recorded as an asset to be amortized over the life of the
loan. These convertible notes payable had a stated interest
rate of 10% per annum. On May 8, 2007, these convertible notes payable of
$1,564,000 along with accrued interest of $102,586 were converted to 3,623,014
common units. The remaining unamortized loan costs and debt discount were
recognized as interest expense on the conversion date.
Warrants
for the purchase of 1,190,000 common units were granted in 2006 in connection
with these convertible notes payable and expire in 2009. The warrants
were valued at a total of $73,222 and were recorded as a discount to debt, with
a corresponding increase to members’ equity.
During
the years ended December 31, 2007 and 2006, the Company accreted $44,497 and
$28,725, respectively, of the debt discount related to the warrants to interest
expense using the effective interest method.
As of
December 31, 2007, the debt discount had been fully amortized. As of
December 31, 2006, the unamortized debt discount was $44,497.
On
January 19, 2007 and again on February 14, 2007, the Company issued $500,000 of
convertible notes payable to an institutional investor. These
convertible notes payable accrued interest at 9% per annum, and were due on June
30, 2007. These convertible notes payable, plus accrued interest of
$23,178, were converted into 1,604,985 Series B redeemable convertible preferred
units at $.6375 per unit. A beneficial conversion feature in the amount of
$171,875, was accreted to interest expense in full during the year ended
December 31, 2007.
On April
9, 2007, the Company issued a convertible note payable to an institutional
investor for $535,000. This amount consisted of cash of $500,000 and
financing costs of $35,000. This convertible note payable bore no
interest, and was due on June 30, 2007. On June 5, 2007, this
convertible note payable of $535,000 was converted into 713,333 Series B
redeemable convertible preferred units at $.75 per unit.
In
connection with the Agreement and Plan of Merger (see Note 11), the Company
entered into a Loan and Security Agreement and Secured Note with Secure Alliance
Holdings Corporation on December 6, 2007 in order to ensure adequate funds
through the merger closing date. The agreement provides for Secure to loan a
total of up to $2.5 million to the Company through the merger closing date. A
total of $1 million was received under the Secured Note as of December 31,
2007. The amounts advanced under the Secured Note are secured by all
assets of the Company, accrue interest at 10% per annum and principal and
interest are due and payable on December 31, 2008.
If the
Company receives additional capital or conducts any sale of its assets other
than in the ordinary course of business prior to the due date, the Company is
obligated to use said proceeds to reduce the principal and interest then payable
under the Secured Note, up to the amount required to pay the Secured Note in
full.
|
7.
|
Capital
Lease Obligations
|
The
Company leases certain equipment and fixtures under noncancelable long-term
leases. These leases provide the Company the option to purchase the
leased assets at the end of the initial lease terms at a bargain purchase
price. Assets held under these capital leases included in property
and equipment were as follows at December 31:
|
2007
|
2006
|
|||||||
|
Computers
and equipment
|
$ | 349,448 | $ | - | ||||
|
Furniture
and fixtures
|
37,600 | - | ||||||
| 387,048 | - | |||||||
|
Less
accumulated amortization
|
(53,623 | ) | - | |||||
| $ | 333,425 | $ | - | |||||
Depreciation
expense for assets held under capital leases during the year ended December 31,
2007 was $53,623.
Capital
lease obligations have imputed interest rates from approximately 7% to 22% and
are payable in aggregate monthly installments of approximately $13,000, maturing
through 2010. The leases are secured by equipment.
Future
maturities and minimum lease payments on the capital lease obligations are as
follows as of December 31, 2007:
|
Minimum
Lease Payments:
|
||||
|
2008
|
$ | 156,609 | ||
|
2009
|
154,089 | |||
|
2010
|
98,416 | |||
| 409,114 | ||||
|
Amount
representing interest
|
(68,215 | ) | ||
|
Total
principle
|
340,899 | |||
|
Current
portion
|
(118,288 | ) | ||
|
Long-term
portion
|
$ | 222,611 | ||
|
8.
|
Related
Party Transactions
|
In
December 2006, the Company entered into various loans with members of the
Company totaling $265,783. These loans bore interest at 10% per annum
and were payable on or before December 31, 2007. Loan origination
fees of $20,005 were recorded as an asset to be amortized over the life of the
loans. On January 5, 2007, an additional $20,000 was loaned to the
Company. In April and May 2007, total outstanding principal, accrued
interest, and loan origination fees of $285,783, $10,376, and $20,005,
respectively, were paid and the associated asset was fully
amortized.
The
institutional investor holding the convertible debentures and convertible notes
payable referenced in Note 6 qualifies as a related party based upon its
beneficial ownership. As described in Note 6, as of December 31,
2006, a related party investor held convertible debentures in the amount of
$2,393,250 (before discount). As described in Note 6, on May 8, 2007,
these debentures and related accrued interest were converted into 7,523,355
common units, or approximately 26% of the common units outstanding after
conversion.
Additionally,
as described in Note 6, in January, February, and April of 2007, the Company
issued $1,535,000 of additional convertible notes payable to the same
institutional investor. In May and June of 2007, the notes payable and related
accrued interest were converted into 2,318,318 Series B redeemable convertible
preferred units.
In May
and June of 2007, the Company also issued 6,486,666 Series B redeemable
convertible preferred units to the same institutional investor in exchange for
$2,000,000, net of issuance costs of $190,000, and a subscription receivable of
$2,675,000. The subscription receivable was received in two installments on
August 3, 2007 and September 11, 2007.
The
Series B preferred units vote on an “as converted” to common units basis.
Therefore, when combined with the 8,180,255 common units held, the institutional
investor holds 16,985,239 equivalent votes, equivalent to 41% of the voting
units outstanding at December 31, 2007. In connection with the sale of the
Series B preferred units, the institutional investor appointed two individuals
to the Board of Managers.
Additionally,
the Company entered into a Consulting Agreement (see Note 11) with the related
party investor on August 1, 2007 whereby the investor will receive up to
$775,000 over the next 12 month period for advising the Company with regard to
financial transactions. The Company may terminate the agreement upon
30 days notice.
On July
1, 2007, the Company finalized a Sales Representative Agreement with the related
party investor whereby such investor is entitled to receive up to a 10%
commission on adjusted sales to customers brought to the Company by the
investor. The investor also received an option to purchase a total of
2,250,000 common units of the Company. A total of 1,500,000 of these
options have an exercise price of $.16 and the remaining 750,000 options have an
exercise price of $.52. The options vest at the rate of 750,000 per
year at year end in 2007, 2008 and 2009 upon the achievement of certain sales
levels. A formalized option agreement was executed on November 20, 2007 changing
the exercise price of 750,000 options from $0.52 to $0.62 and the vesting dates
to 2008, 2009, and 2010. The sales goals for the first group of 750,000 options
was met and the options vested at the end of July, 2007, resulting in
equity-based compensation expense of $371,955.
|
9.
|
Common
and Preferred Units
|
As of
December 31, 2006, the Company had authorized 90,000,000 common units and
10,000,000 preferred units, all with no par value. As of December 31,
2006, the Company had designated 3,746,485 preferred units as Series
A. On May 1, 2007, the Company modified the operating agreement,
thereby increasing the number of authorized preferred units to 20,000,000 and
designating 12,000,000 preferred units as Series B.
Series
A Convertible Preferred Units
During
the years ended December 31, 2007 and 2006, there were no Series A preferred
units issued. As of December 31, 2007 and 2006, there were 3,533,720
Series A preferred units outstanding.
Series
B Redeemable Convertible Preferred Units
During
the year ended December 31, 2007, there were 8,804,984 Series B preferred units
issued as follows:
On
January 19, 2007 and again on February 14, 2007, the Company issued $500,000 of
convertible notes payable to an institutional investor. These
convertible notes payable accrued interest at 9% per annum, and were due on June
30, 2007. These convertible notes payable, plus accrued interest of
$23,178, were converted into 1,604,985 Series B redeemable convertible preferred
units at $.6375 per unit. A beneficial conversion feature in the amount of
$171,875, was accreted to interest expense in full during the year ended
December 31, 2007.
On April
9, 2007, the Company issued a convertible note payable to an institutional
investor for $535,000. This amount consisted of cash of $500,000 and
financing costs of $35,000. This convertible note payable bore no
interest, and was due on June 30, 2007. This convertible note payable
of $535,000 was converted into 713,333 Series B redeemable convertible preferred
units at $.75 per unit.
In May
and June of 2007, the Company issued 6,486,666 Series B redeemable convertible
preferred units at $0.75 per unit to an institutional investor for a payment of
$2,000,000, net of issuance costs of $190,000, and the issuance of a
subscription receivable of $2,675,000. Payment of the subscription receivable
was received in two installments on August 3, 2007 and September 11,
2007.
As of
December 31, 2007, there were 8,804,984 units of Series B preferred units
outstanding.
Rights
and Preferences of Convertible Preferred Units
The
rights, terms, and preferences of the Series A convertible preferred units and
Series B redeemable convertible preferred units are as follows:
|
|
·
|
Voting - The Series A
convertible preferred units and the Series B redeemable convertible
preferred units vote on an “as if converted” to common unit basis together
with the Company’s common units on all matters put to a vote of the
holders of the common units. As long as at least 6.4 million Series B
redeemable convertible preferred units are outstanding, the Board of
Managers shall consist of five managers, two of whom shall be elected by a
majority of the outstanding Series B redeemable convertible preferred unit
holders and the remainder elected by the holders of Series A convertible
preferred units and common units, voting as a single
class.
|
|
|
·
|
Distributions - Series B
redeemable convertible preferred units holders are entitled to a
cumulative annual distribution of $.06 per unit. Series A
convertible preferred unit holders are entitled to receive distributions
from the Company as established by the Board of
Managers.
|
|
|
·
|
Liquidation – The assets
of the Company are distributed as follows in the event of liquidation,
dissolution or winding up of the Company (including the sale of
substantially all of the assets of the Company): i) the Series B
redeemable convertible preferred units are entitled to a liquidation
preference of $0.75 per unit, plus all accrued and unpaid distributions;
ii) the Series A convertible preferred units are entitled to a liquidation
preference in the amount of $0.1335 per unit; iii) the common units are
entitled to $0.1335 per unit; and iv) any remaining assets are distributed
among the holders of Series A convertible preferred units, Series B
redeemable convertible preferred units and common units, pro rata, on an
as-converted to common unit basis.
|
|
In
the event that there are not sufficient assets available for the entire
liquidation preference of a given class, the assets of the Company are
distributed ratably among the holders of such class on a pro rata
basis.
|
|
|
·
|
Redemption (Series B
only) – The Company has the right to redeem Series B redeemable
convertible preferred units for $.75 per unit plus all accrued and unpaid
distributions, with a written notice of not less than 45 days and not more
than 60 days, subject to holders’ first right to convert Series B
redeemable convertible preferred units to common units. The Series B
redeemable convertible preferred unit holders have at least 45 days from
receiving notice from the Company to decide whether to have Series B
redeemable convertible preferred units redeemed for cash or converted to
common units. At anytime after four years from the date of
issuance, the Series B redeemable convertible preferred unit holders have
the right to have the Company redeem all or a portion of Series B
redeemable convertible preferred units. Within 60 days after
receipt of a written notice, the Company is required to redeem such units
at $.75 per unit plus all accrued and unpaid
distributions.
|
|
|
·
|
Conversion (Series A) -
The Series A convertible preferred units are convertible at any
time at the option of the holder into common units, one for
one. Series A convertible preferred units automatically convert
on the earliest of i) the effective date of the registration statement for
the Company’s initial public offering of the common units, ii) the date on
which the common units are listed or sale on a national stock exchange or
have their sales or bid price quoted on NASDAQ, iii) the merger or
consolidation of the Company with another company, iv) the sales of all of
the outstanding common units, v) the sales of substantially all of the
Company’s assets, or vi) the approval of the holders of a majority of the
outstanding Series A convertible preferred
units.
|
|
|
·
|
Conversion (Series B) -
The Series B redeemable convertible preferred units are convertible at any
time at the option of the holder into common units, one for
one. However, if the Company subsequently sells common units
(New Issuance) for less than the Series B redeemable convertible preferred
unit purchase price of $.75 (Conversion Price), a broad based, weighted
average adjustment is made to the Conversion Price by multiplying the
Conversion Price by the following fraction: the numerator is
the number of units outstanding prior to a New Issuance plus the number of
units the new consideration would purchase at the conversion price in
effect prior to a New Issuance, and the denominator is the number of units
outstanding prior to a New Issuance plus the number of additional units
issued in the New Issuance. Series B redeemable convertible
preferred units automatically convert to common units on the earliest of
i) the effective date of the registration statement for the Company’s
initial public offering of the common units if a) the per common units
offering price is at least 200% of the redemption price of the Series B
redeemable convertible preferred units, and b) the public offering will
result in gross proceeds of at least $40 million, or ii) thirty days after
written the Company if within ninety days after a merger or consolidation
of the Company with another company all of the following have occurred: a)
the common units issuable upon conversion are registered for resale, b)
the average volume weighted average per common unit price of the common
units for twenty consecutive trading days prior to the date of notice of
conversion is given is not less than 200% of the redemption price of the
Series B redeemable convertible preferred units, and c) the daily average
trading volume for twenty consecutive trading days prior to the date
notice of conversion is given is not less than 5% of the outstanding
common units.
|
|
|
·
|
Common Units Reserved -
The Company must at all times reserve and keep available out of its
authorized but unissued common units, solely for the purpose of effecting
the conversion of preferred units, the number of units needed to do
so. This totaled 12,338,704 and 3,533,720 as of December 31,
2007 and December 31, 2006,
respectively.
|
Common
Units
Subject
to the rights of holders of Series A convertible preferred units and Series B
redeemable convertible preferred units, common unit holders are entitled to
receive distributions when, as and if declared by the Board of
Managers. Common unit holders are entitled to one vote for each
common unit held.
|
10.
|
Options
and Warrants
|
Common
Unit Warrants
The
following tables summarize information about common unit warrants as of December
31, 2007 and December 31, 2006:
|
As
of December 31, 2007
Outstanding and Exercisable |
||||||||||||||
|
Number
of Warrants Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
||||||||||||
| $ | 0.24 | 1,727,605 | 0.1 | $ | 0.24 | |||||||||
| 0.46 | 1,190,000 | 1.5 | 0.46 | |||||||||||
| $ | .24-.46 | 2,917,605 | 0.7 | $ | 0.33 | |||||||||
| $ | 0.24 | 1,727,605 | 1.1 | $ | 0.24 | |||||||||
| 0.46 | 1,190,000 | 2.5 | 0.46 | |||||||||||
| $ | .24-.46 | 2,917,605 | 1.7 | $ | 0.33 | |||||||||
Warrants
for the purchase of 2,917,605 common units were granted in 2006 in connection
with convertible debt and expire in 2008, and 2009. The warrants were valued at
a total of $251,552 and are included as a component of members’ deficit in the
accompanying statements of members’ deficit.
Subsequent
to December 31, 2007, 1,727,605 warrants with an exercise price of $.24 were
exercised for total proceeds of $414,625 received by the Company in January
2008.
Common
Unit Options
The
following tables summarize information about common unit options:
|
December 31,
2007
|
December 30,
2006
|
|||||||||||||||
|
Number
of shares
|
Weighted-
Average Exercise Price
|
Number
of Shares
|
Weighted-
Average Exercise Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
818,000 | $ | 0.29 | - | $ | - | ||||||||||
|
Granted
|
5,695,000 | 0.50 | 818,000 | 0.29 | ||||||||||||
|
Exercised
|
- | - | - | - | ||||||||||||
|
Cancelled
|
(20,000 | ) | 0.36 | - | - | |||||||||||
|
Outstanding
at end of year
|
6,493,000 | 0.47 | 818,000 | 0.29 | ||||||||||||
|
Exercisable
at year end
|
1,253,250 | 0.21 | - | |||||||||||||
|
Weighted
average fair value of
options
granted during the year
|
$ | 0.29 | $ | 0.14 | ||||||||||||
|
As
of December 31, 2007
|
|
Outstanding
|
Exercisable
|
||||||||||||||||||||||||
|
Exercise
Price
|
Number
of Options Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Number
of Options Exercisable
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (Years)
|
|||||||||||||||||||
| $ | 0.16 | 1,500,000 | 4.5 | $ | 0.16 | 750,000 | $ | 0.16 | 4.0 | ||||||||||||||||
| 0.24 | 510,000 | 3.3 | .24 | 340,000 | .24 | 3.3 | |||||||||||||||||||
| 0.36 | 288,000 | 3.7 | .36 | 163,250 | .36 | 3.7 | |||||||||||||||||||
| 0.62 | 4,195,000 | 5.2 | 0.62 | - | |||||||||||||||||||||
| $ | .16-.62 | 6,493,000 | 4.8 | $ | 0.47 | 1,253,250 | $ | 0.21 | 3.8 | ||||||||||||||||
|
As
of December 31, 2006
|
|
Outstanding
|
Exercisable
|
||||||||||||||||||||||||
|
Exercise
Price
|
Number
of Options Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Number
of Options Exercisable
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (Years)
|
|||||||||||||||||||
| $ | 0.24 | 510,000 | 4.3 | $ | 0.24 | - | $ | - | - | ||||||||||||||||
| 0.36 | 308,000 | 4.7 | 0.36 | - | - | - | |||||||||||||||||||
| $ | .24–.36 | 818,000 | 4.5 | $ | .24–.36 | - | - | - | |||||||||||||||||
As of
December 31, 2007 and 2006, options outstanding had an aggregate intrinsic value
of $471,864 and $45,900, respectively.
As of
December 31, 2007 and 2006, there was approximately $780,636 and $77,015,
respectively, of total unrecognized equity-based compensation cost related to
option grants that will be recognized over a weighted average period of 2.6 and
2.4 years.
|
11.
|
Commitments
and Contingencies
|
Litigation
On
December 17, 2007, Robert L. Bishop, who worked with the Company in a limited
capacity in 2004 and is a current member of a limited liability company that
owns an equity interest in the Company, filed a legal claim against the Company
for unpaid wages and/or commissions (with no amount specified) and promised
equity. The complaint was served on the Company on January 7,
2008. The Company timely filed an answer denying Mr. Bishop’s
claim. Management believes the demand for payment is without basis,
evidence, or meaningful information and intends to vigorously defend against
it. Due to the early stage of the proceedings, management is unable
to estimate the likelihood of a negative outcome or estimate the potential
liability due to this claim.
Operating
Leases
The
Company has operating leases for office space and co-location services with
terms expiring in 2009, 2010, and 2012. Future minimum lease payments are
approximately as follows:
|
Years
Ending December 31,
|
Amount
|
||
|
2008
|
$
|
218,300
|
|
|
2009
|
211,900
|
||
|
2010
|
67,600
|
||
|
2011
|
5,400
|
||
|
2012
|
3,600
|
||
|
$
|
506,800
|
||
Rental
expense under operating leases totaled $340,828 and $71,831 for the years ended
December 31, 2007 and 2006, respectively.
Agreement
and Plan of Merger
Effective
December 6, 2007, Secure Alliance Holdings Corporation (SAH) a publicly held
company and the Company executed an Agreement and Plan of Merger, whereby SAH
agreed to acquire 100% of the issued and outstanding equity units of the
Company. Each issued and outstanding membership interest of the Company will be
converted into the right to receive .87096285 post-split shares of the SAH’s
common stock, or approximately 80% of its post-reorganization outstanding common
stock.
The
Company is considered the acquirer for accounting purposes; therefore, this
merger will be accounted for as a reverse acquisition. As a result of
the merger, the Company will receive approximately $7.3 million in cash (net of
loans described below) to fund operations.
In
connection with the Agreement and Plan of Merger, the Company entered into a
Loan and Security agreement and Secured Note with SAH on December 6, 2007 in
order to ensure adequate funds through the closing date. The agreement provides
for SAH to loan a total of up to $2.5 million to the Company through the closing
date. A total of $1 million was received under the Secured Note on December 6,
2007. On January 15, 2008 and February 15, 2008, the Company received
$1,000,000 and $500,000, respectively, under the Secured Note (see Note
6).
Contingency
The
Company has executed a letter agreement with an institutional investor which
provides for the issuance of an additional 1,525,000 common units upon the
voluntary conversion of all outstanding Series B preferred units owned by the
investor. The agreement calls for the conversion of the Series B preferred units
into common units immediately preceding the closing of the merger described
above.
Purchase
Commitments
On
November 29, 2007, the Company entered into an agreement, which includes a
noncancelable purchase commitment for minimum guaranteed royalties in the amount
of $97,000.
Warranty
Obligations
The
Company provides a 90-day warranty on certain manufactured products. As of
December 31, 2007, these obligations have not been significant. The Company does
not expect these obligations to become significant in the future and no related
liability has been accrued as of December 31, 2007 and 2006.
|
12.
|
Retirement
Plan
|
On
January 1, 2007, the Company established a 401(k) defined contribution plan that
covers eligible employees who have completed a minimum of three months of
service and who are 21 years of age or older. Employees may elect to
contribute to the plan up to 100 percent of their annual compensation up to a
limit of $16,000 in 2008, and increasing by $500 each year thereafter for
inflation or as defined and limited by the Internal Revenue Code. To
date, the Company has not made any employer contributions to the plan and is not
required to do so.
|
13.
|
Subsequent
Events
|
Note
Payable
In
January and February 2008, the Company received an additional $1,500,000 under
the Secured Note (see Note 6).
Warrant
Exercise
On
January 31, 2008, an institutional investor exercised warrants to purchase
1,727,605 common equity units of the Company with an exercise price of $.24 per
unit and total proceeds of $414,625.
Modification
to Merger Agreement
The
Company agreed to amend its agreement with Secure Alliance Holdings, Inc. (SAH)
to provide for a 1 for 2 reverse stock split rather than a 1 for 3 reverse stock
split upon consummation of the merger. Accordingly, each outstanding
membership interest in the Company will be converted into the right to receive
..87096285 post-split shares of SAH common stock.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any reports, proxy statements or
other information that we file with the SEC at the following location of the
SEC, Public Reference Room, 100 F Street, N.E., Washington, D.C.
20549.
Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. You may also obtain copies of this information by mail from
the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C.
20549, at prescribed rates. Our public filings are also available to
the public from document retrieval services and the Internet website maintained
by the SEC at www.sec.gov.
Any
person, including any beneficial owner, to whom this proxy statement is
delivered may request copies of reports, proxy statements or other information
concerning us, including any information incorporated into this proxy statement
by reference, without charge, by written or telephonic request directed to us at
Secure Alliance Holdings Corporation, 5700 Northwest Central Dr, Ste 350,
Houston, Texas 77092, (713) 783-8200,
Attention: Secretary.
No
persons have been authorized to give any information or to make any
representations other than those contained in this proxy statement and, if given
or made, such information or representations must not be relied upon as having
been authorized by us or any other person. You should not assume that
the information contained in this proxy statement is accurate as of any date
other than that date, and the mailing of this proxy statement to stockholders
shall not create any implication to the contrary.
INCORPORATION BY REFERENCE
The SEC
allows us to incorporate by reference information into this proxy
statement. This means that we can disclose important information to
you by referring you to another document filed separately with the
SEC. The information incorporated by reference is considered to be
part of this proxy statement. This proxy statement and the
information that we file later with the SEC may update and supersede the
information in this proxy statement. We incorporate by reference each
document we file under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of the initial filing of this proxy statement and before the
Special Meeting. We also incorporate by reference into this proxy
statement the following documents filed by it with the SEC under the Exchange
Act:
|
|
·
|
Our
Annual Report on Form 10-K for our fiscal year ended September 30, 2007,
as filed on January 14, 2008.
|
|
|
·
|
Our
Quarterly Report on Form 10-Q for the quarterly period ended December 31,
2007, as filed on February 14,
2008.
|
OTHER MATTERS
The SEC
has adopted rules that permit companies and intermediaries, such as brokers, to
satisfy delivery requirements for proxy statements with respect to two or more
stockholders sharing the same address by delivering a single proxy statement
addressed to those stockholders. This process, known as
“householding,” potentially means extra convenience for stockholders and cost
savings for companies. In connection with this proxy solicitation, a
number of brokers with customers who are our stockholders will be “householding”
our proxy materials unless contrary instructions have been received from the
customers. We will promptly deliver, upon oral or written request, a
separate copy of the proxy statement to any stockholder sharing an address to
which only one copy was mailed. Requests for additional copies should
be directed to Secure Alliance Holdings Corporation, 5700 Northwest Central Dr,
Ste 350, Houston, Texas 77092, (713) 783-8200, Attention:
Secretary.
Once a
stockholder has received notice from his or her broker that the broker will be
“householding” communications to the stockholder’s address, “householding” will
continue until the stockholder is notified otherwise or until the stockholder
revokes his or her consent. If, at any time, a stockholder no longer
wishes to participate in “householding” and would prefer to receive separate
copies of the proxy statement, the stockholder should so notify his or her
broker. Any stockholder who currently receives multiple copies of the
proxy statement at his or her address and would like to request “householding”
of communications should contact his or her broker or, if shares are registered
in the stockholder’s name, our Investor Relations Department at the address or
telephone number provided above.
REQUEST
TO VOTE, SIGN AND RETURN PROXIES
If you do
not intend to be present at the Special Meeting of stockholders on May 29, 2008
please vote the enclosed proxy at your earliest convenience.
By Order
of the Board of Directors,
/s/
Stephen P.
Griggs
Stephen
P. Griggs
President
April 23,
2008
180
Annex
A
AGREEMENT
AND PLAN OF MERGER
by and
among
Sequoia
Media Group, LC,
Secure
Alliance Holdings Corporation,
and
SMG Utah,
LC
AGREEMENT AND PLAN OF
MERGER
This
Agreement and Plan of Merger (this “Agreement”) is made
and entered into as of December 6, 2007 by and among Sequoia Media Group, LC, a
Utah limited liability company (“Sequoia”), Secure
Alliance Holdings Corporation, a Delaware corporation (“SAH”), and SMG Utah,
LC, a Utah limited liability company and a wholly owned subsidiary of SAH
(“Merger
Sub”).
WITNESSETH:
A. The
Board of Managers of Sequoia and Merger Sub and the Board of Directors of the
SAH deem it advisable and in the best interests of their respective members or
stockholders that the holders of Sequoia Membership Interests and Sequoia
Membership Interest Equivalents (as those terms are defined herein) receive 80%
of the equity interests in SAH in consideration for the contribution to SAH of
all the equity interests in Sequoia upon the terms and subject to the conditions
provided for in this Agreement.
B. In
furtherance thereof, it is proposed that the acquisition be accomplished by
means of the merger of Merger Sub with and into Sequoia (the “Merger”), with
Sequoia continuing as the surviving entity in the Merger, and each issued and
outstanding Sequoia Membership Interest and each Sequoia Membership Interest
Equivalent will automatically be converted into the right to receive .5806419
shares of common stock, par value $.01 per share, calculated after the Reverse
Stock Split, (the “SAH
Common Stock”), of SAH (such shares of SAH Common Stock being hereinafter
referred to as the “Merger Shares”) upon
the terms and subject to the conditions set forth in this
Agreement.
C. The
Board of Directors of SAH (the “SAH Board”) (on its
own behalf and as the sole member of Merger Sub) has unanimously approved the
Agreement and the Merger, and has determined that this Agreement, the Merger and
the other transactions contemplated hereby are in the best interests of SAH and
its stockholders, and has resolved to recommend that its stockholders adopt this
Agreement and the Merger.
D. The
Boards of Managers of each of Sequoia and Merger Sub have respectively
unanimously approved the Agreement and the Merger, and have determined that this
Agreement, the Merger and the other transactions contemplated hereby are in the
best interests of Sequoia or Merger Sub, as the case may be.
NOW,
THEREFORE, in consideration of the representations, warranties, covenants and
agreements contained in this Agreement and intending to be legally bound hereby,
the parties hereto agree as follows:
ARTICLE I
TERMS OF THE
MERGER
1.1 The
Merger. Upon the terms and subject to the conditions of
this Agreement, the Merger shall be consummated in accordance with the Utah
Revised Limited Liability Company Act (“URLLCA”). At
the Effective Time (as defined below), upon the terms and subject to the
conditions of this Agreement, Merger Sub shall be merged with and into Sequoia
in accordance with the URLLCA and the separate existence of Merger Sub shall
thereupon cease and Sequoia, as the surviving limited liability company in the
Merger (the “Surviving
LLC”), shall continue its corporate existence under the laws of the State
of Utah as a wholly owned subsidiary of SAH. It is intended that the
Merger shall effectuate a tax-free transfer by the Sequoia Members of their
respective Sequoia Membership Interests to SAH in exchange for Merger Shares
pursuant to Section 351 of the Code.
1.2 The Closing; Effective
Time. The closing of the Merger (the “Closing”) shall take
place on such date (the “Closing Date”) as
mutually determined by the parties hereto when all conditions precedent have
been met and all required documents have been executed and delivered by
overnight courier or in electronic format (or as otherwise agreed) to the
parties. The “Effective Time” of
the Merger shall be that date and time the Articles of Merger has been accepted
for filing by the Department of Commerce, Corporations Division of the State of
Utah, or at such later time as is provided in the Articles of Merger, and the
“Effective
Date” shall be the date of the Effective Time.
1.3 Conversion of
Securities.
At the
Effective Time, by virtue of the Merger and without any action on the part of
the holders of any securities of Merger Sub or Sequoia:
(a) Each
Sequoia Membership Interest shall automatically be converted into the right to
receive .5806419 Merger Shares (the “Merger
Consideration”), payable, to the holder of such Sequoia Membership
Interest upon surrender, in the manner provided in Section 1.4 hereof, of
the certificate that formerly evidenced such Sequoia Membership
Interest. All such Sequoia Membership Interests, when so converted,
shall no longer be outstanding, and each holder of a certificate representing
any such Sequoia Membership Interest shall cease to have any rights with respect
thereto, except the right to receive the Merger Consideration therefor upon the
surrender of such certificate thereof in accordance with Section 1.4
hereof; and
(b) Each
issued and outstanding membership interest of Merger Sub shall be converted into
one validly issued, fully paid and non-assessable membership interest of the
Surviving LLC.
1.4 Tender of and Payment for
Certificates.
(a) Exchange
Procedures. Promptly after the Effective Time, SAH and the
Surviving LLC shall cause to be mailed to each holder of record, as of the
Effective Time, of a Sequoia Membership Interest whose Sequoia Membership
Interest was converted pursuant to Section 1.3(a) hereof into the right to
receive the Merger Consideration, a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Sequoia
Membership Interests shall pass, only upon proper delivery of the Sequoia
Membership Interests to the Transfer Agent and shall be in such form and have
such other provisions as SAH may reasonably specify) and instructions for use in
effecting the surrender of the Sequoia Membership Interests in exchange for the
Merger Consideration. Upon surrender of a Sequoia Membership Interest for
cancellation to the Transfer Agent or to such other agent or agents as may be
appointed by SAH, together with such letter of transmittal, properly completed
and duly executed in accordance with the instructions thereto, the holder of
such Sequoia Membership Interest shall be entitled to receive in exchange
therefor the Merger Consideration for each such Sequoia Membership Interest, and
the Sequoia Membership Interest so surrendered shall forthwith be
canceled. If payment of the Merger Consideration is to be made to a
Person other than the Person in whose name the surrendered Sequoia Membership
Interest is registered, it shall be a condition of payment that the Sequoia
Membership Interest so surrendered shall be properly endorsed or shall be
otherwise in proper form for transfer and that the person requesting such
payment shall have paid all transfer and other Taxes required by reason of the
issuance to a person other than the registered holder of the Sequoia Membership
Interest surrendered or shall have established to the satisfaction of the
Surviving LLC that such Tax either has been paid or is not applicable. Until
surrendered as contemplated by this Section 1.4, each Sequoia Membership
Interest shall be deemed at any time after the Effective Time to represent only
the right to receive the Merger Consideration in Merger Shares as contemplated
by Section 1.3(a) hereof.
(b) Transfer Books; No Further
Ownership Rights in the Sequoia Membership Interests. At the
Effective Time, the membership interest transfer books of Sequoia shall be
closed, and thereafter there shall be no further registration of transfers of
Sequoia Membership Interests on the records of Sequoia. From and
after the Effective Time, the holders of Sequoia Membership Interests
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to such Sequoia Membership Interest, except as otherwise
provided for herein or by applicable Law. If, after the Effective
Time, Sequoia Membership Interests are presented to the Surviving LLC for any
reason, they shall be canceled and exchanged as provided in this
Article I.
(c) Lost, Stolen or Destroyed
Certificates. In the event certificate(s) respecting Sequoia
Membership Interests shall have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming such certificate(s) to be
lost, stolen or destroyed and, if required by Sequoia Membership Interests, the
posting by such person of a bond in such sum as Sequoia Membership Interests may
reasonably direct as indemnity against any claim that may be made against any
party hereto or the Surviving LLC with respect to such certificate(s), the
Transfer Agent will disburse the Merger Consideration pursuant to
Section 1.3(a) payable in respect of the Sequoia Membership Interests
represented by such lost, stolen or destroyed certificate(s).
1.5 Sequoia Membership Interest
Equivalents. SAH will assume Sequoia’s obligation with
regard to Sequoia Membership Interest Equivalents outstanding at the Closing
such that upon the Closing each Sequoia Membership Interest Equivalent shall be
deemed to have the right to receive .5806419 Merger Shares upon purchase or
exercise of such Sequoia Membership Interest Equivalent.
1.6 Operating Agreement and Articles of
Organization. Subject to Article VI hereof, at and
after the Effective Time until the same have been duly amended, the Operating
Agreement and Articles of Organization of the Surviving LLC shall be identical
to the Operating Agreement and Articles of Organization of the Merger Sub in
effect at the Effective Time.
1.7 Directors, Managers and
Officers. At and after the Effective Time, the
directors and/or managers, as applicable, and officers of SAH and Merger Sub
shall be the individuals set forth on Exhibit A, in each case until their
respective successors are duly elected or appointed and
qualified. If, at the Effective Time, a vacancy shall exist on the
governing body or in any office of the Surviving LLC, such vacancy may
thereafter be filled in the manner provided by Law.
1.8 Other Effects of
Merger. The Merger shall have all further effects as
specified in the applicable provisions of the URLLCA.
1.9 Additional
Actions.
(a) Immediately
prior to Closing, Sequoia will convert or cause the holders of Sequoia
Membership Interests to convert all Series A Preferred Membership Interests and
Series B Preferred Membership Interests outstanding in Sequoia into common units
or in the event, the foregoing conversion fails to occur prior to Closing, the
Series A Preferred Membership Interests and Series B Preferred Membership
Interests will instead be exchanged for .5806419 Merger Shares in accordance
with Section 1.4.
(b) If,
at any time after the Effective Time, the Surviving LLC shall consider or be
advised that any deeds, bills of sale, assignments, assurances or any other
actions or things are necessary or desirable to vest, perfect or confirm of
record or otherwise in the Surviving LLC its right, title or interest in, to or
under any of the rights, properties or assets of Merger Sub or Sequoia or
otherwise carry out this Agreement, the officers and managers of the Surviving
LLC shall be authorized to execute and
deliver,
in the name and on behalf of Merger Sub or Sequoia, all such deeds, bills of
sale, assignments and assurances and to take and do, in the name and on behalf
of Merger Sub or Sequoia, all such other actions and things as may be necessary
or desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties or assets in the Surviving LLC or
otherwise to carry out this Agreement.
(c) On
the date hereof, SAH has extended the Bridge Financing to Sequoia pursuant to
the terms of a separate Loan and Security Agreement.
ARTICLE II
DEFINITIONS
2.1 Defined Terms.
For
purposes of this Agreement and the Exhibits and Schedules attached hereto, the
following terms shall have the meanings specified or referred to below, unless
the context otherwise requires:
“Acquisition Proposal”
means, other than the transactions contemplated by this Agreement, any offer or
proposal relating to (a) any acquisition or purchase, direct or indirect, of
over twenty percent (20%) of any class of equity or voting securities of SAH,
(b) any tender offer (including a self-tender offer) or exchange offer that, if
consummated, would result in such third party’s beneficially owning twenty
percent (20%) or more of any class of equity or voting securities of SAH, or (c)
a merger, consolidation, share exchange, business combination, sale of
substantially all the assets, reorganization, recapitalization, liquidation,
dissolution or other similar transaction involving SAH.
“Affiliate” means with
respect to a specified Person, any other Person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, the specified Person; it being understood and agreed that,
for purposes of this definition, the term “control” means the possession, direct
or indirect, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
other ownership interest, by contract or otherwise.
“Agreement” means this
Agreement and Plan of Merger, including all amendments hereof and all Exhibits
and Schedules hereto.
“Articles of Merger”
means the articles of merger substantially in the form set forth on Exhibit B
hereto and as referenced in Section 1.2.
“Authorized Capital
Changes” means to amend the amendment of SAH’s Certificate of
Incorporation to (i) increase the number of authorized shares of SAH Common
Stock to 250,000,000 and (ii) authorize a class of preferred stock
consisting of 50,000,000 shares of $.01 par value preferred stock.
“Bridge Financing”
means a $2,500,000 secured line of credit to be made available by SAH to Sequoia
pursuant to the Loan and Security Agreement dated the date hereof by and between
SAH and Sequoia.
“Business Day” means a
day other than Saturday, Sunday or any day on which banks located in the State
of New York are authorized or obligated to close.
“Code” means the
Internal Revenue Code of 1986, as amended.
“Common Stock
Equivalents” means any securities of SAH which would entitle the
holder thereof to acquire at any time any SAH common stock, including, without
limitation, any debt, preferred stock, rights, options, warrants or other
instrument that is at any time convertible into or exercisable or exchangeable
for, or otherwise entitles the holder thereof to receive, common
stock.
“Consent” means any
approval, consent, ratification, waiver, or other authorization, release or
similar action that is necessary (including any Governmental
Authorization).
“Diligence Drop Dead
Date” means the date which is 20 days following the date of this
Agreement.
“Exchange Act” means
the Securities Exchange Act of 1934, as amended.
“Environmental Law”
means all federal, state, local and foreign Laws, (including all common law),
orders, decrees, judgments, codes and ordinances and all rules and regulations
promulgated thereunder, civil or criminal, whenever enacted or in effect,
relating to pollution or the protection of the environment, or human health or
safety
“GAAP” means United
States generally accepted accounting principles as in effect from time to
time.
“Governmental
Authorizations” means any: (a) permit, license,
certificate, franchise, concession, approval, consent, ratification, permission,
clearance, confirmation, endorsement, waiver, certification, designation,
rating, registration, qualification or authorization issued, granted, given or
otherwise made available by or under the authority of any Governmental Body or
pursuant to any Law; or (b) right under any contract with any Governmental
Body.
“Governmental Body”
means any (i) nation, state, county, city, town, village, district, or
other jurisdiction of any nature; (ii) federal, state, local, municipal,
foreign, or other government; (iii) governmental or quasi-governmental
authority of any nature, including any governmental agency, branch, department,
board, official, or entity and any court or other tribunal; (iv) body
exercising, or entitled to exercise, any administrative, executive, judicial,
legislative, police, regulatory, or taxing authority or power of any nature; and
any Person, directly or indirectly, owned by and subject to the control of any
of the foregoing.
“Hazardous Material”
means (i) any chemicals, materials, substances or wastes which are now or
hereafter become defined as or included in the definition of “hazardous
substances,” “hazardous wastes,” “hazardous materials,” “extremely hazardous
wastes,” “restricted hazardous wastes,” “toxic substances,” “toxic pollutants”
or words of similar meaning and regulatory effect, under any Environmental Law;
(ii) petroleum or petroleum products, radioactive materials, asbestos, urea
formaldehyde foam insulation, transformers or other equipment that contain
dielectric fluid containing levels of polychlorinated biphenyls (PCBs); and
(iii) any other chemical, material, substance or waste, which is now or
hereafter regulated by any Governmental Body because of its hazardous or
dangerous properties.
“Intellectual Property”
means collectively, the following intangible assets that are owned or used by
Sequoia in connection with the business conducted by Sequoia:
(i) all
fictitious business names, and any trade names, registered and unregistered
trademarks, servicemarks and logos, together with all translations, adaptations,
derivations and combinations
thereof that are used in connection therewith and including all goodwill
associated therewith and any applications or registrations therefor, and
renewals in connection therewith;
(ii) all
patents and patent applications and patent disclosures, together with all
reissuances, continuations (in whole or in part), revisions and reexaminations
thereof;
(iii) all
copyrights in both published works and unpublished works that are material to
the business conducted by Sequoia and all applications, renewals and
registrations thereof;
(iv) all
inventions (whether or not patentable), all proprietary rights and business
information (including, but not limited to, ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications,
customer/subscriber lists, supplier lists, pricing and cost information, and
business and marketing plans and proposals); and
(v) all
computer software and databases (including data and related documentation) other
than “off-the-shelf” software.
“Knowledge” means, when
referring to any person or entity, the actual knowledge of such person or entity
of a particular matter or fact, and what that person or entity would have
reasonably known after due inquiry. An entity will be deemed to have
“knowledge” of a particular fact or other matter if any individual who is
serving, or who has served, as an executive officer of such entity has actual
“knowledge” of such fact or other matter, or had actual “knowledge” during the
time of such service of such fact or other matter, or would have had “knowledge”
of such particular fact or matter after due inquiry.
“Law” means any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
“Liability” means any
liability or obligation (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, whether incurred or consequential and
whether due or to become due), including any liability for Taxes.
“Lien” means any
mortgage, pledge, lien, security interest, charge, claim, equitable interest,
encumbrance, restriction on transfer, conditional sale or other title retention
device or arrangement (including a capital lease), deposit arrangement,
collateral assignment, or restriction on the creation of any of the foregoing,
whether relating to any property or right or the income or profits
therefrom.
“Material Adverse
Effect” means with respect to any Person, any event or events or
any change in or effect on such Person’s financial condition, business,
prospects, operations, customers, suppliers, employee relationships, assets,
properties, or results of operations that, when taken as a whole, (i) has
materially interfered or is reasonably likely to materially interfere with the
ongoing operations of such Person’s business or (ii) singly or in the
aggregate has resulted in, or is reasonably likely to have, a material adverse
effect on the ongoing conduct of the business of such Person; provided, however,
that any adverse effect arising out of or resulting from (x) an event or series
of events or circumstances affecting the United States economy generally or the
economy generally of any other country in which the Person
operate, or (y) the entering into of this Agreement and the consummation of the
transactions contemplated thereby, shall be excluded in determining whether a
Material Adverse Effect has occurred.
“Merger Shares” means
the shares of SAH Common Stock, calculated after the Reverse Stock Split, to be
issued to the Sequoia Members pursuant to the Merger.
“Name Change” means the
amendment to SAH’s Certificate of Incorporation regarding the change of SAH’s
name to Sequoia Media Group Inc. or, if that name is not available, to such
other name as may be selected by the Sequoia Board of Managers.
“New Stock Incentive
Plan” means the SAH stock incentive plan to be submitted to a vote
of the SAH stockholders at the SAH Stockholders Meeting called in respect of
this Agreement and the Merger.
“Ordinary Course of
Business” means the ordinary course of business consistent with
past custom and practice (including with respect to quantity and
frequency).
“Permitted Liens” means
with respect to a Person (a) mechanics’, materialmens’, carriers’, workmens’,
repairmens’, contractors’ or other similar Liens arising or incurred in the
ordinary course of business and for amounts which are not delinquent and which
would not be reasonably expected to have a Material Adverse Effect, (b)
easements, rights-of-way, restrictions and other similar charges and
encumbrances of record contained in the schedules of the title insurance
policies for such real property or not interfering materially with the ordinary
conduct of the business of such Person or detracting materially from the use,
occupancy, value or marketability of title of the assets subject thereto, (c)
Liens for Taxes not yet due and payable or for Taxes that the taxpayer is
contesting in good faith and where appropriate reserves have been taken, (d)
purchase money Liens securing rental payments under capital lease arrangements
so long as (i) such Lien attaches only to the asset purchased or acquired
and the proceeds thereof, and (ii) such Lien only secures the indebtedness
that was incurred to acquire the asset purchased or acquired, and (e) other
Liens arising in the ordinary course of business and not incurred in connection
with the borrowing of money.
“Person” means an
individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a Governmental Body (or any department, agency, or political
subdivision thereof).
“Reverse Stock Split”
means a 1 for 3 reverse split of SAH Common Stock on such terms and conditions
as agreed to by the SAH Board of Directors and the Sequoia Board of Managers and
approved by the SAH Shareholders.
“SAH Balance Sheet”
means the unaudited balance sheet of SAH as of June 30, 2007.
“SAH Common Stock”
means the shares of common stock of SAH, $.01 par value per share.
“SAH Continuing
Directors” means the directors of
SAH immediately prior to the Effective Date.
“SAH Disclosure
Schedule” means additional disclosures and qualifications of SAH’s
representations and warranties as set forth in Article IV
hereof.
“SAH Distribution”
means collectively (i) the formation by SAH of a wholly owned subsidiary, (ii)
the contribution by SAH of the assets listed on Schedule A hereto to such
subsidiary, (iii) the distribution of
the common stock of such subsidiary to the shareholders of SAH prior to the
Effective Time in compliance with applicable law, whether pursuant to an
effective registration statement or a valid exemption from
registration, and (iv) all actions of SAH incidental to and taken in
furtherance of the foregoing.
“SAH Financial
Statements” means the audited financial statements of SAH as of
and for the years ended September 30, 2006 and September 30, 2005, and the
unaudited financial statements as of and for the nine-month period ended June
30, 2007.
“SAH Management
Options” means options to purchase SAH Common Stock issued to
Jerrell G. Clay and Steven Griggs pursuant to the SAH 1997 Long-Term Incentive
Plan.
“SEC” means the United
States Securities and Exchange Commission.
“Securities Act” means
the Securities Act of 1933, as amended.
“Sequoia Balance Sheet”
means the unaudited balance sheet of Sequoia as of June 30, 2007.
“Sequoia Disclosure
Schedule” means additional disclosures and qualifications of
Sequoia’s representations and warranties as set forth in Article III
hereof.
“Sequoia Financial
Statements” means the audited financial statements of Sequoia as
of and for the years ended December 31, 2005 and December 31, 2006 and the
unaudited financial statements as of and for the six-month period ended June 30,
2007.
“Sequoia Members” means
the holders of Sequoia Membership Interests.
“Sequoia Membership
Interest(s)” means the Membership Interests of Sequoia (e.g.,
Series A Preferred Membership Interests, Series B Preferred Membership
Interests, Common Units) as more fully described in Section 3.3 of the
Sequoia Disclosure Schedule.
“Sequoia Membership Interest
Equivalents” means any securities of Sequoia which would entitle
the holder thereof to acquire at any time any Sequoia Membership Interest,
including, without limitation, any debt, preferred interest, rights, options,
warrants or other instrument that is at any time convertible into or exercisable
or exchangeable for, or otherwise entitles the holder thereof to receive,
Sequoia Membership Interests, and in each case to the extent set forth on
Section 3.3 of the Sequoia Disclosure Schedule.
“Subsidiary” means with
respect to any Person, (i) any corporation at least a majority of whose
outstanding voting stock is owned, directly or indirectly, by such Person or by
one or more of its Subsidiaries, or by such Person and one or more of its
Subsidiaries; (ii) any general partnership, joint venture or similar
entity, at least a majority of whose outstanding partnership or similar
interests shall at the time be owned by such Person, or by one or more of its
Subsidiaries, or by such Person and one or more of its Subsidiaries; and
(iii) any limited partnership of which such Person or any of its
Subsidiaries is a general partner. For the purposes of this
definition, “voting stock” means shares, interests, participations or other
equivalents in the equity interest (however designated) in such Person having
ordinary voting power for the election of a majority of the directors (or the
equivalent) of such Person other than shares, interests, participations or other
equivalents having such power only by reason of the occurrence of a
contingency.
“Super Majority
Interest” means with respect to a vote of the Sequoia Members, the
affirmative vote of the holders of not less than 65% of the Sequoia Membership
Interests
“Superior Proposal”
means any bona fide, unsolicited written Acquisition Proposal on terms that the
SAH Board of Directors determine in good faith, and taking into account all of
the terms and conditions of the Acquisition Proposal, are more favorable and
provide greater value to all SAH’s stockholders than provided under this
Agreement and which is reasonably likely to be consummated.
“Tax” or “Taxes” means
any federal, state, local, or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental (including Taxes under Section 59A of the Code), customs
duties, capital stock, franchise, profits, withholding, social security (or
similar, including FICA), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
“Tax Return” means any
return, filing, questionnaire, information return, election or other document
required or permitted to be filed, including requests for extensions of time,
filings made with respect to estimated tax payments, claims for refund and
amended returns that may be filed, for any period with any Tax authority
(whether domestic or foreign) in connection with any Tax (whether or not a
payment is required to be made with respect to such filing), including any
schedule or attachment thereto and any amendment thereof.
“Transfer Agent” means
Compushare Investor Services, the stock transfer agent of SAH.
2.2 Additional Definitions.
The
following terms are defined in the corresponding section of this
Agreement.
|
Term
|
Section
|
|
“Articles
of Merger”
|
Section 1.2
|
|
“Breach”
|
Section 9.1
|
|
“Closing”
|
Section 1.2
|
|
“Closing
Date”
|
Section 1.2
|
|
“Effective
Time”
|
Section 1.2
|
|
“Evaluation
Date”
|
Section 4.28
|
|
“Merger
Consideration”
|
Section 1.3(a)
|
|
“Merger
Sub”
|
Preamble
|
|
“SAH”
|
Preamble
|
|
“SAH
Board”
|
Recitals
|
|
“SAH
Employee Benefit Plan”
|
Section 4.23
|
|
“SAH
Leased Property”
|
Section 4.21
|
|
“SAH
SEC Documents”
|
Section 4.27
|
|
“SAH
Stockholders Meeting”
|
Section 5.8
|
|
“SAH
Termination Fee”
|
Section 5.7
|
|
“Sequoia”
|
Preamble
|
|
“Sequoia
Employee Benefit Plan”
|
Section 3.23
|
|
“Sequoia
Leased Property”
|
Section 3.21
|
|
“Surviving
LLC”
|
Section 1.1
|
|
“Tax
Sharing Agreements”
|
Section 3.7
|
|
“Third
Party”
|
Section 5.7
|
|
“URLLCA”
|
Section 1.1
|
ARTICLE III
REPRESENTATIONS AND
WARRANTIES
OF SEQUOIA
Sequoia
hereby represents and warrants as follows, which warranties and representations
inclusive of the additional disclosures and qualifications contained the Sequoia
Disclosure Schedule attached hereto and incorporated herein, shall also be true
as of the Closing: (The Sequoia Disclosure
Schedule is arranged in paragraphs corresponding to the numbered
paragraphs contained in this Article III.)
3.1 Organization. Sequoia is duly
organized as a limited liability company and is validly existing and in good
standing under the laws of the State of Utah, and has the power to own, lease
and operate its property and to carry on its business as now being conducted and
is duly qualified to do business and in good standing to do business in each
jurisdiction where so required except where the failure to so qualify would have
no Material Adverse Effect on Sequoia.
3.2 Authorization of
Transaction. Sequoia has the power to enter into this
Agreement and to perform its obligations hereunder subject to the terms and
conditions of this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the Board of Managers of Sequoia and has received the
necessary Super Majority Interest approval. All of the acts and other
proceedings required for the due and valid authorization, execution, delivery
and performance of this Agreement, and the consummation of the Merger, have been
validly and appropriately taken. This Agreement has been duly
executed and delivered by Sequoia and constitutes a legal, valid and binding
obligation of Sequoia, enforceable against Sequoia in accordance with its terms,
except as enforcement may be limited by applicable bankruptcy, insolvency or
other laws affecting creditor’s rights generally or by legal principles of
general applicability governing the availability of equitable
remedies.
3.3 Capitalization. A
true and complete description of all outstanding Sequoia Membership Interests is
set forth on Section 3.3 of the
Sequoia Disclosure Schedule attached hereto. All outstanding
Sequoia Membership Interests are, and shall be at Closing, validly issued, fully
paid and nonassessable. There are no voting trusts, proxies or other
agreements, commitments or understandings of any character to which Sequoia is a
party or by which Sequoia is bound with respect to the voting of any Sequoia
Membership Interest. Except as set forth in Section 3.3 of the
Sequoia Disclosure Schedule, there are no outstanding options, rights or
commitments to issue Sequoia Membership Interests or obligations to repurchase,
redeem or otherwise acquire any Sequoia Membership Interest and there are no
outstanding securities convertible or exercisable into or chargeable for Sequoia
Membership Interests. To the Knowledge of Sequoia, there is no voting
trust, agreement or arrangement among any of the beneficial holders of Sequoia
Membership Interests affecting the nomination or election of directors or
managers or the exercise of the voting rights of Sequoia Membership
Interests.
3.4 Financial
Statements. Sequoia has delivered to SAH a true and
complete copy of the Sequoia Financial Statements. The Sequoia
Financial Statements fairly present, in all material respects, the financial
condition of Sequoia as of the date thereof and the results of its operations
for the periods then ended. Other than as set forth herein, including
the Bridge Financing, or in Section 3.4 of the
Sequoia Disclosure Schedule, there are no material Liabilities
(including, but not limited to, Tax Liabilities), obligations or claims (whether
such Liabilities or claims are contingent or absolute, direct or indirect, and
matured or unmatured) not disclosed or referenced in the Sequoia Financial
Statements or in any exhibit thereto or notes thereto other than contracts or
obligations occurring in the Ordinary Course of Business since June 30, 2007;
and no such contracts or obligations occurring in the ordinary course of
business constitute Liens or other Liabilities which materially alter the
financial condition of Sequoia as reflected in the Sequoia Financial
Statements. The Sequoia Financial Statements have been prepared in
accordance with GAAP (except as may be indicated therein or in the notes thereto
and except for the absence of footnotes, in the case of unaudited financial
statements).
3.5 No Material Adverse
Effect. Since June 30,
2007, Sequoia has experienced no Material Adverse Effect.
3.6 No Litigation or
Proceeding. Other than as set forth on Section 3.6 of the
Sequoia Disclosure Schedule, Sequoia is not a party to, or the subject
of, any pending action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand or governmental investigation or proceeding, and to
the Knowledge of Sequoia there are no lawsuits, claims, assessments,
investigations, or similar matters, threatened or contemplated against or
affecting Sequoia or the management or properties of Sequoia. There
is no legal action, suit, arbitration or other legal, administrative or other
governmental proceeding pending or, to the Knowledge of Sequoia, threatened
against or affecting Sequoia or its properties, assets or business, and after
reasonable investigation, Sequoia is not aware of any incident, transaction,
occurrence or circumstance that might reasonably be expected to result in or
form the basis for any such action, suit, arbitration or other
proceeding. Sequoia is not in default with respect to any order,
writ, judgment, injunction, decree, determination or award of any court or any
Governmental Body or arbitration authority.
3.7 Tax Returns and
Audits. All required federal, state and local Tax
Returns of Sequoia have been accurately prepared and duly and timely filed, and
all federal, state and local Taxes required to be paid with respect to the
periods covered by such returns have been paid. Sequoia is not and
has not been delinquent in the payment of any Tax. Sequoia has not
had a Tax deficiency proposed or assessed against it and has not executed a
waiver of any statute of limitations on the assessment or collection of any
Tax. None of Sequoia’s federal income tax returns nor any state or
local income or franchise tax returns has been audited by Governmental
Bodies. The reserves for Taxes reflected on the Sequoia Balance
Sheet, if any, are and will be sufficient for the payment of all unpaid Taxes
payable by Sequoia
as of
December 31, 2006. Since December 31, 2006, Sequoia has made adequate
provisions on its books of account for all Taxes with respect to its business,
properties, and operations for such period. Sequoia has withheld or
collected from each payment made to each of its employees the amount of all
taxes (including, but not limited to, federal, state and local income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper Tax receiving officers or authorized depositaries. There are
no federal, state, local or foreign audits, actions, suits, proceedings,
investigations, claims or administrative proceedings relating to Taxes or any
Tax Returns of Sequoia now pending, and Sequoia has not received any notice of
any proposed audits, investigations, claims or administrative proceedings
relating to Taxes or any Tax Returns. Sequoia is not obligated to
make a payment, or is a party to an agreement that under certain circumstances
could obligate it to make a payment, that would not be deductible under
Section 280G of the Code. Sequoia has not agreed nor is required
to make any adjustments under Section 481(a) of the Code (or any similar
provision of state, local and foreign law) by reason of a change in accounting
method or otherwise for any Tax period for which the applicable statute of
limitations has not yet expired. Sequoia (i) is not a party to,
is bound by or has any obligation under, any Tax sharing agreement, Tax
indemnification agreement or similar contract or arrangement, whether written or
unwritten (collectively, “Tax Sharing
Agreements”), or (ii) does not have any potential liability or
obligation to any person as a result of, or pursuant to, any such Tax Sharing
Agreements.
3.8 Contracts.
(a) Except
as expressly set forth on Section 3.8 of the
Sequoia Disclosure Schedule, Sequoia is not a party to any written or
oral agreement not made in the ordinary course of business that is material to
Sequoia. Except as expressly set forth on Section 3.8 of the
Sequoia Disclosure Schedule Sequoia is not a party to or otherwise barred
by any written or oral (i) agreement with any labor union or other collective
bargaining unit, (ii) agreement for the purchase of fixed assets or for the
purchase of materials, supplies or equipment in excess of normal operating
requirements, (iv) agreement for the employment of any officer, individual
employee or other Person on a full-time basis or any agreement with any Person
for consulting services, (v) bonus, pension, profit sharing, retirement, stock
purchase, stock option, deferred compensation, medical, hospitalization or life
insurance or similar plan, contract or understanding with respect to any or all
of the employees of Sequoia or any other Person, (vi) indenture, loan or credit
agreement, note agreement, deed of trust, mortgage, security agreement,
promissory note or other agreement or instrument relating to or evidencing
Indebtedness for borrowed money or subjecting any asset or property of Sequoia
to any Lien or evidencing any Indebtedness, (vii) guaranty of any Indebtedness,
(viii) lease or agreement under which Sequoia is lessee of or holds or operates
any property, real or personal, owned by any other Person under which payments
to such Person exceed $50,000 per year or with an unexpired term (including any
period covered by an option to renew exercisable by any other party) of more
than 60 days, (ix) lease or agreement under which Sequoia is lessor or permits
any Person to hold or operate any property, real or personal, owned or
controlled by Sequoia, (x) agreement granting any preemptive right, right
of first refusal or similar right to any Person, (xi) agreement or arrangement
with any Affiliate or any “associate” (as such term is defined in Rule 405 under
the Securities Act) of Sequoia or any present or former officer, director or
stockholder of Sequoia, (xii) agreement obligating Sequoia to pay any royalty or
similar charge for the use or exploitation of any tangible or intangible
property, (xiii) covenant not to compete or other restriction on its ability to
conduct a business or engage in any other activity, (xiv) material distributor,
dealer, manufacturer’s representative, sales agency, franchise or advertising
contract or commitment, (xv) agreement to register securities under the
Securities Act, or (xvi) agreement or other commitment or arrangement with any
Person continuing for a period of more than three months from the Closing Date
which involves an expenditure or receipt by Sequoia in excess of
$50,000. Except as expressly set forth on Section 3.8 of the
Sequoia Disclosure Schedule, none of the agreements, contracts, leases,
instruments or other documents or arrangements described on Section 3.8 of the
Sequoia Disclosure Schedule requires the consent of any of the parties
thereto
other than Sequoia to permit the contract, agreement, lease, instrument or other
document or arrangement to remain effective following consummation of the Merger
and the transactions contemplated hereby.
(b) Sequoia
has in all material respects performed all obligations required to be performed
by it to date and is not in default in any respect under any of the contracts,
agreements, leases, documents, commitments or other arrangements to which it is
a party or by which it or any of its property is otherwise bound or
affected. To the Knowledge of Sequoia, all parties having material
contractual arrangements with Sequoia are in substantial compliance therewith
and none are in material default thereunder. Sequoia does not have
outstanding any power of attorney.
3.9 Intellectual
Property. Sequoia owns or has the right to use pursuant
to license, sublicense, agreement, or permission all Intellectual Property
necessary or desirable for the operation of the business of Sequoia as presently
conducted. Each item of Intellectual Property owned or used by
Sequoia immediately prior to the Closing will be owned or available for use by
Sequoia on identical terms and conditions immediately subsequent to the
Closing. Sequoia has taken all necessary action to maintain and
protect each item of Intellectual Property that it owns or
uses. Sequoia has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties. Section 3.9 of the
Sequoia Disclosure Schedule identifies each patent with respect to any of
its Intellectual Property, identifies each pending trademark, service mark,
trade name, copyrighted license and right application for registration which
Sequoia has made with respect to any of its Intellectual Property, and
identifies each license, agreement, or other permission which Sequoia has
granted to any third party with respect to any of its Intellectual Property
(together with any exceptions). With respect to each item of
Intellectual Property required to be identified in Section 3.9 of the
Sequoia Disclosure Schedule and except as disclosed in Section 3.9 of the
Sequoia Disclosure Schedule:
(a) Sequoia
possesses all right, title, and interest in and to the item, free and clear of
any lien, charge, encumbrance, license or other restriction;
(b) the
item is not subject to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(c) no
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand is pending or is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(d) Section 3.9 of the
Sequoia Disclosure Schedule identifies each material item of Intellectual
Property that any third party owns and that Sequoia uses pursuant to license,
sublicense, agreement, or permission and all amounts payable by Sequoia in
respect of such Intellectual Property by way of royalties, fee or otherwise with
respect to Sequoia’s use thereof or in connection with the conduct of its
business or otherwise. With respect to each material item of
Intellectual Property required to be identified in Section 3.9 of the
Sequoia Disclosure Schedule:
(i) the
license, sublicense, agreement, or permission covering the item is legal, valid,
binding, enforceable, and in full force and effect;
(ii) the
license, sublicense, agreement, or permission will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby;
(iii) no
party to the license, sublicense, agreement, or permission is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(iv) no
party to the license, sublicense, agreement, or permission has repudiated any
provision thereof;
(v) with
respect to each sublicense, the representations and warranties set forth in
subsections (i) through (iv) above are true and correct with respect
to the underlying license;
(vi) the
underlying item of Intellectual Property is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge; and
(vii) no
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand is pending or is threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual Property.
3.10 Questionable
Payments. Neither Sequoia, nor any employee, agent or
representative of Sequoia has, directly or indirectly, made any bribes,
kickbacks, illegal payments or illegal political contributions using Sequoia
funds or made any payments from Sequoia’s funds to governmental officials for
improper purposes or made any illegal payments from Sequoia’s funds to obtain or
retain business.
3.11 Title to
Assets. Sequoia is the owner of, or has a valid
leasehold interest in, the properties and assets shown on the Sequoia Financial
Statements or acquired after the date thereof, free and clear of all Liens other
than Permitted Liens, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Sequoia Financial
Statements.
3.12 NoSubsidiaries. Sequoia
has no Subsidiary.
3.13 Books andRecords. True
and complete copies of the financial records, minute books, and other documents
and records of Sequoia have been made available to SAH prior to the date
hereof.
3.14 Consents and
Non-Contravention. The business,
products and operations of Sequoia have been and are being conducted in
compliance with all applicable laws, rules and regulations, except for such
violations thereof for which the penalties, individually or in the aggregate,
would not have a Material Adverse Effect. The execution and delivery
by Sequoia of this Agreement and the consummation by Sequoia of the Merger do
not and will not (i) require the consent, approval or action of, or any
filing or notice to, any corporation, firm, person or other entity or any
public, governmental or judicial authority (except for such consents, approvals,
actions, filing or notices the failure of which to make or obtain will not
individually or in the aggregate have a Material Adverse Effect);
(ii) violate any order, writ, injunction, decree, judgment, ruling, law,
rule or regulation of any Governmental Body applicable to Sequoia, or its
business or assets; (iii) violate or be in conflict with any agreement,
indenture, mortgage, license or other instrument or document to which Sequoia is
a party or to which it is otherwise subject except as would not have a Material
Adverse Effect; and (iv) violate or conflict with any provision of the
Articles of Organization, Operating Agreement or other organizational documents
of Sequoia. Sequoia is not subject to, or a party to or bound by, any
mortgage, lien, lease, agreement, contract, instrument, order, judgment or
decree or any other material restriction of any kind or character which would
prevent, hinder, restrict or impair the continued operation of the business or
assets of Sequoia after the Closing.
3.15 Compliance with Securities
Laws. Sequoia has complied with all of the provisions
relating to the issuance of securities, and for the registration thereof, under
the Securities Act, other applicable securities laws, and all applicable blue
sky laws in connection with any and all of its Membership Interest
issuances. There are no outstanding, pending or threatened stop
orders or other actions or investigations relating thereto involving federal and
state securities laws. All issued and outstanding Sequoia Membership
Interests were offered and sold in compliance with federal and state securities
laws and were not offered, sold or issued in violation of any preemptive right,
right of first refusal or right of first offer and are not subject to any right
of rescission. All information regarding Sequoia which has been
provided to SAH by Sequoia or set forth in any document or other communication,
disseminated to any former, existing or potential shareholders of Sequoia or to
the public or filed with the NASD, the SEC or any state securities regulators or
authorities is true, complete, accurate in all material respects, not
misleading, and was and is in full compliance with all securities laws and
regulations.
3.16 Environmental
Matters.
(a) To
the Knowledge of Sequoia, Sequoia has never generated, used, handled, treated,
released, stored or disposed of any Hazardous Materials on any real property on
which it now has or previously had any leasehold or ownership interest, except
in compliance with all applicable Environmental Laws.
(b) To
the Knowledge of Sequoia, the historical and present operations of the business
of Sequoia are in compliance with all applicable Environmental Laws, except
where any non-compliance has not had and would not reasonably be expected to
have a Material Adverse Effect on Sequoia.
(c) There
are no material pending or, to the Knowledge of Sequoia, threatened, demands,
claims, information requests or notices of noncompliance or violation against or
to Sequoia relating to any Environmental Law; and, to the Knowledge of Sequoia,
there are no conditions or occurrences on any of the real property used by
Sequoia in connection with its business that would reasonably be expected to
lead to any such demands, claims or notices against or to Sequoia, except such
as have not had, and would not reasonably be expected to have, a Material
Adverse Effect on Sequoia.
(d) To
the Knowledge of Sequoia, (i) Sequoia has not sent or disposed of,
otherwise had taken or transported, arranged for the taking or disposal of (on
behalf of itself, a customer or any other party) or in any other manner
participated or been involved in the taking of or disposal or release of a
Hazardous Material to or at a site that is contaminated by any Hazardous
Material or that, pursuant to any Environmental Law, (A) has been placed on the
“National Priorities List”, the “CERCLIS” list, or any similar state or federal
list, or (B) is subject to or the source of a claim, an administrative order or
other request to take “removal”, “remedial”, “corrective” or any other
“response” action, as defined in any Environmental Law, or to pay for the costs
of any such action at the site; (ii) Sequoia is not involved in (and has no
basis to reasonably expect to be involved in) any suit or proceeding and has not
received (and has no basis to reasonably expect to receive) any notice, request
for information or other communication from any Governmental Body or other third
party with respect to a release or threatened release of any Hazardous Material
or a violation or alleged violation of any Environmental Law, and has not
received (and has no basis to reasonably expect to receive) notice of any claims
from any Person relating to property damage, natural resource damage or to
personal injuries from exposure to any Hazardous Material; and
(iii) Sequoia has timely filed every report required to be filed, acquired
all necessary certificates, approvals and permits, and generated and maintained
all required data, documentation and records under all Environmental Laws, in
all such instances except where the failure to do so would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
Sequoia.
3.17 Permits and
Licenses. Sequoia possesses all Governmental
Authorizations of all Governmental Bodies required for the conduct of its
business as presently conducted, all of which are in full force and
effect.
3.18 Broker's
Fees. Neither Sequoia, nor anyone on its behalf, has
any liability to any broker, finder, investment banker or agent, or has agreed
to pay any brokerage fees, finder’s fees or commissions, or to reimburse any
expenses of any broker, finder, investment banker or agent in connection with
this Agreement or the transactions contemplated hereby.
3.19 Absence of Undisclosed
Liabilities. Sequoia has no material obligation or
Liability (whether accrued, absolute, contingent, liquidated or otherwise,
whether due or to become due), arising out of any transaction entered into at or
prior to the Closing, except (a) to the extent set forth on or reserved against
in the Sequoia Balance Sheet or the notes to the Sequoia Financial Statements,
or (b) current liabilities incurred and obligations under agreements entered
into in the usual and ordinary course of business since June 30, 2007, none of
which (individually or in the aggregate) has had or will have a Material Adverse
Effect.
3.20 Changes. Except
in the Ordinary Course of Business or as set forth on Section 3.20 of the
Sequoia Disclosure Schedule, since June 30, 2007, Sequoia has not (a)
incurred any debts, obligations or Liabilities, absolute, accrued, contingent or
otherwise, whether due or to become due, except for fees, expenses and
liabilities incurred in connection with the Merger and related transactions and
current liabilities incurred in the usual and ordinary course of business, (b)
discharged or satisfied any Liens other than those securing, or paid any
obligation or liability other than, current liabilities shown on the Sequoia
Balance Sheet and current liabilities incurred since December 31, 2006, in each
case in the usual and ordinary course of business, (c) mortgaged, pledged or
subjected to Lien any of its assets, tangible or intangible other than in the
usual and ordinary course of business, (d) sold, transferred or leased any of
its assets, except in the usual and ordinary course of business, (e) cancelled
or compromised any debt or claim, or waived or released any right, of material
value, (f) suffered any physical damage, destruction or loss (whether or not
covered by insurance) that would have a Material Adverse Effect, (g) entered
into any transaction other than in the usual and ordinary course of business,
(h) encountered any labor union difficulties, (i) made or granted any wage
or salary increase or made any increase in the amounts payable under any profit
sharing, bonus, deferred compensation, severance pay, insurance, pension,
retirement or other employee benefit plan, agreement or arrangement, other than
in the ordinary course of business consistent with past practice, or entered
into any employment agreement, (j) issued or sold any shares of capital stock,
bonds, notes, debentures or other securities or granted any options (including
employee stock options), warrants or other rights with respect thereto, (k)
declared or paid any dividends on or made any other distributions with respect
to, or purchased or redeemed, any of its outstanding capital stock, (l) suffered
or experienced any Material Adverse Effect other than changes, events or
conditions in the usual and ordinary course of its business, none of which
(either by itself or in conjunction with all such other changes, events and
conditions) has been materially adverse, (m) made any change in the accounting
principles, methods or practices followed by it or depreciation or amortization
policies or rates theretofore adopted, (n) made or permitted any amendment or
termination of any material contract, agreement or license to which it is a
party, (o) suffered any material loss not reflected in the Sequoia Balance Sheet
or its statement of income for the year ended on December 31, 2006, (p) paid, or
made any accrual or arrangement for payment of, bonuses or special compensation
of any kind or any severance or termination pay to any present or former
officer, director, employee, stockholder or consultant, (q) made or agreed to
make any charitable contributions or incurred any non-business expenses in
excess of $50,000 in the aggregate, or (r) entered into any agreement, or
otherwise obligated itself, to do any of the foregoing.
3.21 Real Property. Section 3.21 of the
Sequoia Disclosure Schedule contains a true and complete list of all real
property leased by Sequoia (such real property, the “Sequoia Leased
Property”), including a brief description of each item thereof and of the
nature of Sequoia’s interest therein. All the Sequoia Leased Property
is leased by Sequoia under valid and enforceable leases having the rental terms,
termination dates and renewal and purchase options described on Section 3.21 of the
Sequoia Disclosure Schedule; such leases are enforceable in accordance
with their terms, and there is not, under any such lease, any existing default
or event of default or event which with notice or lapse of time, or both, would
constitute a default by Sequoia or any other party thereto, and Sequoia has not
received any notice or claim of any such default. The Sequoia Leased
Property constitutes all of the real property currently used or necessary for
the current operations of Sequoia. The Sequoia Leased Property is
free and clear of any Liens, title defects, contractual restrictions, covenants
or reservations of interests in title except for Permitted
Liens. Sequoia owns no real property.
3.22 Employees. Sequoia
has complied in all material respects with all laws relating to the employment
of labor. Sequoia has not entered into or agreed to enter into any
collective bargaining agreements that are now in effect with respect to its
employees. During the two (2) years prior to the date hereof, there
has not been any labor strike, labor dispute, or work stoppage or lockout
pending or, to Sequoia’s Knowledge, threatened against or affecting Sequoia, and
there has not been any unfair labor practice charge or complaint pending against
Sequoia, Other than pursuant to ordinary arrangements of employment
compensation, Sequoia is not under any obligation or liability to any officer,
director or employee of Sequoia and in connection with or as a result of the
transactions contemplated by this Agreement, there are no severance, change of
control, termination or other payments due to employees, consultants or other
persons who are employed by, or who render services to Sequoia.
3.23 Employee Benefit Plans;
ERISA. a) Except as disclosed in Section 3.23 of the
Sequoia Disclosure Schedule, there are no “employee benefit plans”
(within the meaning of Section 3(3) of ERISA) nor any other employee
benefit or fringe benefit arrangements, practices, contracts, policies or
programs of every type other than programs merely involving the regular payment
of wages, commissions, or bonuses established, maintained or contributed to by
Sequoia, whether written or unwritten and whether or not funded. The
plans listed in Section 3.23 of the
Sequoia Disclosure Schedule are hereinafter referred to as the “Sequoia Employee Benefit
Plans.”
(b) All
current and prior material documents, including all amendments thereto, with
respect to each Sequoia Employee Benefit Plan have been made available to
SAH.
(c) To
the Knowledge of Sequoia, all Sequoia Employee Benefit Plans are in material
compliance with the applicable requirements of ERISA, the Code and any other
applicable state, federal or foreign law.
(d) There
are no pending claims or lawsuits which have been asserted or instituted against
any Sequoia Employee Benefit Plan, the assets of any of the trusts or funds
under the Sequoia Employee Benefit Plans, the plan sponsor or the plan
administrator of any of the Sequoia Employee Benefit Plans or against any
fiduciary of an Sequoia Employee Benefit Plan with respect to the operation of
such plan, nor does Sequoia have any Knowledge of any incident, transaction,
occurrence or circumstance which might reasonably be expected to form the basis
of any such claim or lawsuit.
(e) There
is no pending or, to the Knowledge of Sequoia, contemplated investigation, or
pending or possible enforcement action by the Pension Benefit Guaranty
Corporation, the Department of Labor, the Internal Revenue Service or any other
government agency with respect to any Sequoia Employee Benefit Plan and Sequoia
has no Knowledge of any incident, transaction, occurrence
or circumstance which might reasonably be expected to trigger such an
investigation or enforcement action.
(f) No
actual or, to the Knowledge of Sequoia, contingent liability exists with respect
to the funding of any Sequoia Employee Benefit Plan or for any other expense or
obligation of any Sequoia Employee Benefit Plan, except as disclosed on the
financial statements of Sequoia, and no contingent liability exists under ERISA
with respect to any “multi-employer plan,” as defined in Section 3(37) or
Section 4001(a)(3) of ERISA.
(g) No
events have occurred or are expected to occur with respect to any Sequoia
Employee Benefit Plan that would cause a material change in the costs of
providing benefits under such Sequoia Employee Benefit Plan or would cause a
material change in the cost of providing for other liabilities of such Sequoia
Employee Benefit Plan.
3.24 Condition of
Properties. All material facilities, machinery,
equipment, fixtures and other properties owned, leased or used by Sequoia are in
reasonably good operating condition and repair, subject to ordinary wear and
tear, and are adequate and sufficient for Sequoia’s business.
3.25 Insurance
Coverage. Section 3.25 of the
Sequoia Disclosure Schedule sets forth the following information with
respect to each material insurance policy (including policies providing
property, casualty, liability, and workers’ compensation coverage and bond and
surety arrangements) with respect to which the Sequoia is a party, a named
insured, or otherwise the beneficiary of coverage. With respect to
each such insurance policy: (i) the policy is legal, valid, binding,
enforceable, and in full force and effect in all material respects; (ii) neither
Sequoia or, to the Knowledge of Sequoia, any other party to the policy is in
material breach or default (including with respect to the payment of premiums or
the giving of notices), and no event has occurred that, with notice or the lapse
of time, would constitute such a material breach or default, or permit
termination, modification, or acceleration, under the policy; and (iii) no party
to the policy has repudiated any material provision thereof.
3.26 Interested Party
Transactions. Except as set forth in Section 3.26 of the
Sequoia Disclosure Schedule, no officer, manager or member of Sequoia or
any Affiliate or “associate” (as such term is defined in Rule 405 under the
Securities Act) of any such Person or Sequoia has or has had, either directly or
indirectly, (a) an interest in any Person that (i) furnishes or sells
services or products that are furnished or sold or are proposed to be furnished
or sold by Sequoia or (ii) purchases from or sells or furnishes to Sequoia
any goods or services, or (b) a beneficial interest in any contract or agreement
to which Sequoia is a party or by which it may be bound or affected, that would
require disclosure pursuant to Item 404 of Regulation S-K as promulgated under
the Securities Act.
3.27 Utah Control Shares Acquisition
Act. Neither Sequoia nor the Merger is subject to the
provisions of the Utah Control Shares Acquisition Act.
3.28 No Dissenter
Rights. No dissenter, appraisal or similar rights are
available to the Sequoia Members under the URLLCA in respect of the Merger and
the transactions contemplated by this Agreement.
3.29 Investment. Each officer,
director and manager of Sequoia who is a Sequoia Member, and to the Knowledge of
Sequoia, each other Sequoia Member (a) is acquiring the Merger Shares solely for
his/her/its own account for investment purposes, and not with a view to the
distribution thereof, (b) is a sophisticated investor with knowledge and
experience in business and financial matters, (c) has received certain
information concerning SAH and has had the opportunity to obtain additional
information as desired in order to evaluate the merits and the risks inherent in
holding the Merger Shares, and (d) is able
to bear
the economic risk of acquiring the Merger Shares pursuant to the terms of this
Agreement, including a complete loss of his/her/its investment in the Merger
Shares. The Merger Shares shall bear a restrictive legend indicating
such Merger Shares have not been registered under the Securities Act and
constitute “restricted securities” as that term is defined in Rule 144
promulgated under the Securities Act.
3.30 No Security Regulatory
Investigation. Neither Sequoia
nor its present officers or directors is, or has been within the prior five
years, the subject of any formal or informal inquiry or investigation by the
SEC or the NASD.
3.31 Representations and
Warranties. No representation or warranty by Sequoia
contained in this Agreement and no statement contained in any certificate,
schedule or other communication furnished pursuant to or in connection with the
provisions hereof contains or shall contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except for the representations and warranties of Sellers
expressly set forth in Article 3 of this Agreement, Sequoia makes no other
representations and warranties (whether express or implied) with respect to the
subject matter of this Agreement or the Merger, or the transactions contemplated
hereby or thereby, and hereby disclaim any such other representations and
warranties. There is no current or prior event or condition of any
kind or character pertaining to Sequoia that may reasonably be expected to have
a Material Adverse Effect on Sequoia. Except as specifically
indicated elsewhere in this Agreement, all documents delivered by Sequoia in
connection herewith have been and will be complete originals, or exact copies
thereof.
ARTICLE IV
REPRESENTATIONS AND
WARRANTIES
OF SAH
SAH
hereby represents and warrants as follows, which warranties and representations
inclusive of the additional disclosures and qualifications of the SAH Disclosure
Schedule attached hereto and incorporated herein, shall also be true as of the
Closing. (The SAH Disclosure
Schedule is arranged in paragraphs corresponding to the numbered
paragraphs contained in this Article IV.)
4.1 Organization. SAH is duly
organized as a corporation and is validly existing and in good standing under
the laws of the State of Delaware, and has the power to own, lease and operate
its property and to carry on its business as now being conducted and is duly
qualified to do business and in good standing to do business in each
jurisdiction where so required except where the failure to so qualify would have
no Material Adverse Effect on SAH
4.2 Authorization of
Transaction. SAH has the corporate power to enter into
this Agreement and to perform its obligations hereunder subject to the terms and
conditions of this Agreement. The execution and delivery of this
Agreement and the consummation of the Merger have been duly authorized by the
Board of Directors of SAH. This Agreement will be submitted to the
stockholders of SAH for their consideration and vote. This Agreement
has been duly executed and delivered by SAH and, upon the receipt of requisite
stockholder approval, will constitute a legal, valid and binding obligation of
SAH, enforceable against SAH in accordance with its terms except as enforcement
may be limited by applicable bankruptcy, insolvency or other laws affecting
creditor’s rights generally or by legal principles of general applicability
governing the availability of equitable remedies.
4.3 Capitalization. As
of the date of this Agreement, SAH’s authorized capital stock consists of
100,000,000 shares of SAH Common Stock, of which 19,441,524 shares of SAH Common
Stock are issued and outstanding. SAH shall, prior to the Closing Date, effect
the Reverse Stock Split. Following the Reverse Stock Split, but before the
Effective Time, there will be approximately 6,480,441 shares of SAH
Common Stock issued and outstanding. All shares of capital stock of
SAH are, and shall be at Closing, validly issued, fully paid and
nonassessable. Except as described in Section 4.3 of the SAH
Disclosure Schedule, there are no existing options, convertible or
exchangeable securities, calls, claims, warrants, preemptive rights,
registration rights or commitments of any character relating to the issued or
unissued capital stock or other securities of SAH. There are no
voting trusts, proxies or other agreements, commitments or understandings of any
character to which SAH is a party or by which SAH is bound with respect to the
voting of any capital stock of SAH. There are no outstanding stock
appreciation rights, phantom stock or similar rights with respect to any capital
stock of SAH. There are no outstanding obligations to repurchase,
redeem or otherwise acquire any shares of capital stock of
SAH.
4.4 Financial
Statements. SAH has delivered to SAH a true and
complete copy of the SAH Financial Statements. The SAH Financial
Statements fairly present, in all material respects, the financial condition of
SAH as of the date thereof and the results of its operations for the periods
then ended. Other than as set forth herein or in Section 4.4 of the SAH
Disclosure Schedule, there are no material Liabilities (including, but
not limited to, Tax Liabilities), obligations or claims (whether such
Liabilities or claims are contingent or absolute, direct or indirect, and
matured or unmatured) not disclosed or referenced in the SAH Financial
Statements or in any exhibit thereto or notes thereto other than contracts or
obligations occurring in the Ordinary Course of Business since June 30, 2007;
and no such contracts or obligations occurring in the ordinary course of
business constitute Liens or other Liabilities which materially alter the
financial condition of SAH as reflected in the SAH Financial
Statements. The SAH Financial Statements have been prepared in
accordance with GAAP (except as may be indicated therein or in the notes thereto
and except for the absence of footnotes, in the case of unaudited financial
statements).
4.5 No Material Adverse
Effect. Since June 30,
2007, SAH has experienced no Material Adverse Effect.
4.6 No Litigation or
Proceeding. SAH is not a party to, or the subject of,
any pending action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand or governmental investigation or proceeding, and to the
Knowledge of SAH there are no lawsuits, claims, assessments, investigations, or
similar matters, threatened or contemplated against or affecting SAH or the
management or properties of SAH. There is no legal action, suit,
arbitration or other legal, administrative or other governmental proceeding
pending or, to the Knowledge of SAH, threatened against or affecting SAH or its
properties, assets or business, and after reasonable investigation, SAH is not
aware of any incident, transaction, occurrence or circumstance that might
reasonably be expected to result in or form the basis for any such action, suit,
arbitration or other proceeding. SAH is not in default with respect
to any order, writ, judgment, injunction, decree, determination or award of any
court or any Governmental Body or arbitration authority.
4.7 Tax Returns and
Audits. All required federal, state and local Tax
Returns of SAH have been accurately prepared and duly and timely filed, and all
federal, state and local Taxes required to be paid with respect to the periods
covered by such returns have been paid. SAH is not and has not been
delinquent in the payment of any Tax. SAH has not had a Tax
deficiency proposed or assessed against it and has not executed a waiver of any
statute of limitations on the assessment or collection of any
Tax. None of SAH’s federal income tax returns nor any state or local
income or franchise tax returns has been audited by Governmental
Bodies. The reserves for Taxes reflected on the SAH Balance Sheet, if
any, are and will be sufficient for the payment of all unpaid Taxes payable by
SAH as of June 30, 2007. Since June 30, 2007, SAH has made adequate
provisions on its books of account for all Taxes with respect to its business,
properties, and operations for such period. SAH has withheld or
collected from each payment made to each of its employees the amount of all
taxes (including, but not limited to, federal, state and local income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper Tax receiving officers
or
authorized depositaries. There are no federal, state, local or
foreign audits, actions, suits, proceedings, investigations, claims or
administrative proceedings relating to Taxes or any Tax Returns of SAH now
pending, and SAH has not received any notice of any proposed audits,
investigations, claims or administrative proceedings relating to Taxes or any
Tax Returns. SAH is not obligated to make a payment, or is a party to
an agreement that under certain circumstances could obligate it to make a
payment, that would not be deductible under Section 280G of the
Code. SAH has not agreed nor is required to make any adjustments
under Section 481(a) of the Code (or any similar provision of state, local
and foreign law) by reason of a change in accounting method or otherwise for any
Tax period for which the applicable statute of limitations has not yet
expired. SAH (i) is not a party to, is bound by or has any
obligation under, any Tax Sharing Agreement, or (ii) does not have any
potential liability or obligation to any person as a result of, or pursuant to,
any such Tax Sharing Agreements.
4.8 Contracts.
(a) Except
as expressly set forth on Section 4.8 of the SAH
Disclosure Schedule, SAH is not a party to any written or oral agreement
not made in the ordinary course of business that is material to
SAH. SAH is not a party to or otherwise barred by any written or oral
(a) agreement with any labor union or other collective bargaining unit, (b)
agreement for the purchase of fixed assets or for the purchase of materials,
supplies or equipment in excess of normal operating requirements, (c) agreement
for the employment of any officer, individual employee or other Person on a
full-time basis or any agreement with any Person for consulting services, (d)
bonus, pension, profit sharing, retirement, stock purchase, stock option,
deferred compensation, medical, hospitalization or life insurance or similar
plan, contract or understanding with respect to any or all of the employees of
SAH or any other Person, (e) indenture, loan or credit agreement, note
agreement, deed of trust, mortgage, security agreement, promissory note or other
agreement or instrument relating to or evidencing Indebtedness for borrowed
money or subjecting any asset or property of SAH to any Lien or evidencing any
Indebtedness, (f) guaranty of any Indebtedness, (g) lease or agreement under
which SAH is lessee of or holds or operates any property, real or personal,
owned by any other Person under which payments to such Person exceed $50,000 per
year or with an unexpired term (including any period covered by an option to
renew exercisable by any other party) of more than 60 days, (h) lease or
agreement under which SAH is lessor or permits any Person to hold or operate any
property, real or personal, owned or controlled by SAH, (i) agreement
granting any preemptive right, right of first refusal or similar right to any
Person, (j) agreement or arrangement with any Affiliate or any “associate” (as
such term is defined in Rule 405 under the Securities Act) of SAH or any present
or former officer, director or stockholder of SAH, (k) agreement obligating SAH
to pay any royalty or similar charge for the use or exploitation of any tangible
or intangible property, (1) covenant not to compete or other restriction on its
ability to conduct a business or engage in any other activity, (m) material
distributor, dealer, manufacturer’s representative, sales agency, franchise or
advertising contract or commitment, (n) agreement to register securities under
the Securities Act, or (o) agreement or other commitment or arrangement with any
Person continuing for a period of more than three months from the Closing Date
which involves an expenditure or receipt by SAH in excess of
$50,000. None of the agreements, contracts, leases, instruments or
other documents or arrangements described on Section 4.8 of the SAH
Disclosure Schedule requires the consent of any of the parties thereto
other than SAH to permit the contract, agreement, lease, instrument or other
document or arrangement to remain effective following consummation of the Merger
and the transactions contemplated hereby.
(b) SAH
has in all material respects performed all obligations required to be performed
by it to date and is not in default in any respect under any of the contracts,
agreements, leases, documents, commitments or other arrangements to which it is
a party or by which it or any of its property is otherwise bound or
affected. To the Knowledge of SAH, all parties having material
contractual arrangements with SAH are in substantial compliance therewith and
none are in material default thereunder. SAH does not have
outstanding any power of attorney.
4.9 Intellectual
Property. SAH owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Intellectual Property
necessary or desirable for the operation of the business of SAH as presently
conducted. Each item of Intellectual Property owned or used by SAH
immediately prior to the Closing will be owned or available for use by SAH on
identical terms and conditions immediately subsequent to the
Closing. SAH has taken all necessary action to maintain and protect
each item of Intellectual Property that it owns or uses. SAH has not
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of third
parties. Section 4.9 of the SAH
Disclosure Schedule identifies each patent with respect to any of its
Intellectual Property, identifies each pending trademark, service mark, trade
name, copyrighted license and right application for registration which SAH has
made with respect to any of its Intellectual Property, and identifies each
license, agreement, or other permission which SAH has granted to any third party
with respect to any of its Intellectual Property (together with any
exceptions). With respect to each item of Intellectual Property
required to be identified in Section 4.9 of the SAH
Disclosure Schedule:
(a) SAH
possesses all right, title, and interest in and to the item, free and clear of
any lien, charge, encumbrance, license or other restriction;
(b) the
item is not subject to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(c) no
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand is pending or is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(d) Section 4.9 of the SAH
Disclosure Schedule identifies each item of Intellectual Property that
any third party owns and that SAH uses pursuant to license, sublicense,
agreement, or permission and all amounts payable by SAH in respect of such
Intellectual Property by way of royalties, fee or otherwise with respect to
SAH’s use thereof or in connection with the conduct of its business or
otherwise. With respect to each item of Intellectual Property
required to be identified in Section 4.9 of the SAH
Disclosure Schedule:
(i) the
license, sublicense, agreement, or permission covering the item is legal, valid,
binding, enforceable, and in full force and effect;
(ii) the
license, sublicense, agreement, or permission will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby;
(iii) no
party to the license, sublicense, agreement, or permission is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(iv) no
party to the license, sublicense, agreement, or permission has repudiated any
provision thereof;
(v) with
respect to each sublicense, the representations and warranties set forth in
subsections (i) through (iv) above are true and correct with respect
to the underlying license;
(vi) the
underlying item of Intellectual Property is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge; and
(vii) no
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand is pending or is threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual Property.
4.10 Questionable
Payments. Neither SAH, nor any employee, agent or
representative of SAH has, directly or indirectly, made any bribes, kickbacks,
illegal payments or illegal political contributions using SAH funds or made any
payments from SAH’s funds to governmental officials for improper purposes or
made any illegal payments from SAH’s funds to obtain or retain
business.
4.11 Title to Assets. SAH has good,
valid and indefeasible marketable title (except for property held under valid
and subsisting leases which are in full force and effect and which are not in
default) to the properties and assets used by it, or shown on the SAH Balance
Sheet or acquired after the date thereof, free and clear of any free of all
Liens and other encumbrances, except Permitted Liens and such ordinary and
customary imperfections of title, restrictions and encumbrances as do not,
individually or in the aggregate, materially detract from the value of the
property or assets or materially impair the use made thereof by SAH in its
business. Without limiting the generality of the foregoing, SAH has good and
indefeasible title to all of its properties and assets reflected in the SAH
Balance Sheet, except for property disposed of in the usual and ordinary course
of business since June 30, 2007 and for property held under valid and subsisting
leases which are in full force and effect and which are not in
default.
4.12 NoSubsidiaries. SAH
has no Subsidiaries, except as set forth on Section 4.12 of the SAH
Disclosure Schedule.
4.13 Books andRecords. True
and complete copies of the financial records, minute books, and other documents
and records of SAH have been made available to SAH prior to the date
hereof.
4.14 Consents and
Non-Contravention. The business,
products and operations of SAH have been and are being conducted in compliance
with all applicable laws, rules and regulations, except for such violations
thereof for which the penalties, individually or in the aggregate, would not
have a Material Adverse Effect. The execution and delivery by SAH of
this Agreement and the consummation by SAH of the Merger do not and will not
(i) require the consent, approval or action of, or any filing or notice to,
any corporation, firm, person or other entity or any public, governmental or
judicial authority (except for such consents, approvals, actions, filing or
notices the failure of which to make or obtain will not individually or in the
aggregate have a Material Adverse Effect); (ii) violate any order, writ,
injunction, decree, judgment, ruling, law, rule or regulation of any
Governmental Body applicable to SAH, or its business or assets;
(iii) violate or be in conflict with any agreement, indenture, mortgage,
license or other instrument or document to which SAH is a party or to which it
is otherwise subject except as would not have a Material Adverse Effect; and
(iv) violate or conflict with any provision of the Certificate of
Incorporation or By-laws of SAH. SAH is not subject to, or a party to
or bound by, any mortgage, lien, lease, agreement, contract, instrument, order,
judgment or decree or any other material restriction of any kind or character
which would prevent, hinder, restrict or impair the continued operation of the
business or assets of SAH after the Closing.
4.15 Compliance with Securities
Laws. SAH has complied with all of the provisions
relating to the issuance of securities, and for the registration thereof, under
the Securities Act, other applicable securities laws, and all applicable blue
sky laws in connection with any and all of its stock issuances. There
are no outstanding, pending or threatened stop orders or other actions or
investigations relating thereto involving federal and state securities
laws. All issued and outstanding SAH Common Stock were
offered
and sold in compliance with federal and state securities laws and were not
offered, sold or issued in violation of any preemptive right, right of first
refusal or right of first offer and are not subject to any right of
rescission. All information regarding SAH which has been provided to
Sequoia by SAH or set forth in any document or other communication, disseminated
to any former, existing or potential shareholders of SAH or to the public or
filed with the NASD, the SEC or any state securities regulators or authorities
is true, complete, accurate in all material respects, not misleading, and was
and is in full compliance with all securities laws and regulations.
4.16 Environmental
Matters.
(a) To
the Knowledge of SAH, SAH has never generated, used, handled, treated, released,
stored or disposed of any Hazardous Materials on any real property on which it
now has or previously had any leasehold or ownership interest, except in
compliance with all applicable Environmental Laws.
(b) To
the Knowledge of SAH, the historical and present operations of the business of
SAH are in compliance with all applicable Environmental Laws, except where any
non-compliance has not had and would not reasonably be expected to have a
Material Adverse effect on SAH.
(c) There
are no material pending or, to the Knowledge of SAH, threatened, demands,
claims, information requests or notices of noncompliance or violation against or
to SAH relating to any Environmental Law; and, to the Knowledge of SAH, there
are no conditions or occurrences on any of the real property used by SAH in
connection with its business that would reasonably be expected to lead to any
such demands, claims or notices against or to SAH, except such as have not had,
and would not reasonably be expected to have, a Material Adverse effect on
SAH.
(d) To
the Knowledge of SAH, (i) SAH has not sent or disposed of, otherwise had
taken or transported, arranged for the taking or disposal of (on behalf of
itself, a customer or any other party) or in any other manner participated or
been involved in the taking of or disposal or release of a Hazardous Material to
or at a site that is contaminated by any Hazardous Material or that, pursuant to
any Environmental Law, (A) has been placed on the “National Priorities List”,
the “CERCLIS” list, or any similar state or federal list, or (B) is subject to
or the source of a claim, an administrative order or other request to take
“removal”, “remedial”, “corrective” or any other “response” action, as defined
in any Environmental Law, or to pay for the costs of any such action at the
site; (ii) SAH is not involved in (and has no basis to reasonably expect to
be involved in) any suit or proceeding and has not received (and has no basis to
reasonably expect to receive) any notice, request for information or other
communication from any Governmental Body or other third party with respect to a
release or threatened release of any Hazardous Material or a violation or
alleged violation of any Environmental Law, and has not received (and has no
basis to reasonably expect to receive) notice of any claims from any Person
relating to property damage, natural resource damage or to personal injuries
from exposure to any Hazardous Material; and (iii) SAH has timely filed
every report required to be filed, acquired all necessary certificates,
approvals and permits, and generated and maintained all required data,
documentation and records under all Environmental Laws, in all such instances
except where the failure to do so would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on SAH.
4.17 Permits and
Licenses. SAH possesses all Governmental Authorizations
of all Governmental Bodies required for the conduct of its business as presently
conducted, all of which are in full force and effect.
4.18 Broker's
Fees. Neither SAH, nor anyone on its behalf, has any
liability to any broker, finder, investment banker or agent, or has agreed to
pay any brokerage fees, finder’s fees or commissions, or to
reimburse any expenses of any broker, finder, investment banker or agent in
connection with this Agreement or the transactions contemplated
hereby.
4.19 Absence of Undisclosed
Liabilities. SAH has no material obligation or
Liability (whether accrued, absolute, contingent, liquidated or otherwise,
whether due or to become due), arising out of any transaction entered into at or
prior to the Closing, except (a) to the extent set forth on or reserved against
in the SAH Balance Sheet or the notes to the SAH Financial Statements, or (b)
current liabilities incurred and obligations under agreements entered into in
the usual and ordinary course of business since June 30, 2007, none of which
(individually or in the aggregate) has had or will have a Material Adverse
Effect.
4.20 Changes. Except
as set forth on Section 4.20 of the SAH
Disclosure Schedule, since June 30, 2007, SAH has not (a) incurred any
debts, obligations or Liabilities, absolute, accrued, contingent or otherwise,
whether due or to become due, except for fees, expenses and liabilities incurred
in connection with the Merger and related transactions and current liabilities
incurred in the usual and ordinary course of business, (b) discharged or
satisfied any Liens other than those securing, or paid any obligation or
liability other than, current liabilities shown on the SAH Balance Sheet and
current liabilities incurred since June 30, 2007, in each case in the usual and
ordinary course of business, (c) mortgaged, pledged or subjected to Lien any of
its assets, tangible or intangible other than in the usual and ordinary course
of business, (d) sold, transferred or leased any of its assets, except in the
usual and ordinary course of business, (e) cancelled or compromised any debt or
claim, or waived or released any right, of material value, (f) suffered any
physical damage, destruction or loss (whether or not covered by insurance) that
would have a Material Adverse Effect, (g) entered into any transaction other
than in the usual and ordinary course of business, (h) encountered any labor
union difficulties, (i) made or granted any wage or salary increase or made
any increase in the amounts payable under any profit sharing, bonus, deferred
compensation, severance pay, insurance, pension, retirement or other employee
benefit plan, agreement or arrangement, other than in the ordinary course of
business consistent with past practice, or entered into any employment
agreement, (j) issued or sold any shares of capital stock, bonds, notes,
debentures or other securities or granted any options (including employee stock
options), warrants or other rights with respect thereto, (k) declared or paid
any dividends on or made any other distributions with respect to, or purchased
or redeemed, any of its outstanding capital stock, (l) suffered or experienced
any Material Adverse Effect other than changes, events or conditions in the
usual and ordinary course of its business, none of which (either by itself or in
conjunction with all such other changes, events and conditions) has been
materially adverse, (m) made any change in the accounting principles, methods or
practices followed by it or depreciation or amortization policies or rates
theretofore adopted, (n) made or permitted any amendment or termination of any
material contract, agreement or license to which it is a party, (o) suffered any
material loss not reflected in the SAH Balance Sheet or its statement of income
for the nine months ended on June 30, 2007, (p) paid, or made any accrual or
arrangement for payment of, bonuses or special compensation of any kind or any
severance or termination pay to any present or former officer, director,
employee, stockholder or consultant, (q) made or agreed to make any charitable
contributions or incurred any non-business expenses in excess of $50,000 in the
aggregate, or (r) entered into any agreement, or otherwise obligated itself, to
do any of the foregoing.
4.21 Real Property. Section 4.21 of the SAH
Disclosure Schedule contains a true and complete list of all real
property leased by SAH (such real property, the “SAH Leased
Property”), including a brief description of each item thereof and of the
nature of SAH’s interest therein. All the SAH Leased Property is
leased by SAH under valid and enforceable leases having the rental terms,
termination dates and renewal and purchase options described on Section 4.21 of the SAH
Disclosure Schedule; such leases are enforceable in accordance with their
terms, and there is not, under any such lease, any existing default or event of
default or event which with notice or lapse of time, or both, would constitute a
default by SAH or any other party thereto, and SAH has not received any notice
or claim of any such
default. The SAH Leased Property constitutes all of the real property
currently used or necessary for the current operations of
Sequoia. The SAH Leased Property is free and clear of any Liens,
title defects, contractual restrictions, covenants or reservations of interests
in title except for Permitted Liens. SAH owns no real
property.
4.22 Employees and
Consultants. SAH has provided
to Sequoia an accurate and complete list of all of its current employees,
consultants or independent contractors. SAH is not a party to or
bound by any employment agreement or any union contract, collective bargaining
agreement or similar contract or agreement, or any other contract or agreement
to provide severance payments or benefits to any employee upon termination of
employment. As of the Closing, SAH will have no employees,
consultants or independent contractors. As of the date hereof, there
are no labor disputes or requests for arbitration involving
SAH. Except with respect to the 1997 Long-Term Incentive Plan, SAH
has no pension, retirement, savings, profit sharing, stock-based, incentive
compensation or other similar employee benefit plan.
4.23 Employee Benefit Plans;
ERISA. b) Except as disclosed in Section 4.23 of the SAH
Disclosure Schedule, there are no “employee benefit plans” (within the
meaning of Section 3(3) of ERISA) nor any other employee benefit or fringe
benefit arrangements, practices, contracts, policies or programs of every type
other than programs merely involving the regular payment of wages, commissions,
or bonuses established, maintained or contributed to by SAH, whether written or
unwritten and whether or not funded. The plans listed in Section 4.23 of the SAH
Disclosure Schedule are hereinafter referred to as the “SAH Employee Benefit
Plans.”
(b) All
current and prior material documents, including all amendments thereto, with
respect to each Employee Benefit Plan have been made available to
Sequoia.
(c) To
the Knowledge of SAH, all SAH Employee Benefit Plans are in material compliance
with the applicable requirements of ERISA, the Code and any other applicable
state, federal or foreign law.
(d) There
are no pending claims or lawsuits which have been asserted or instituted against
any SAH Employee Benefit Plan, the assets of any of the trusts or funds under
the SAH Employee Benefit Plans, the plan sponsor or the plan administrator of
any of the SAH Employee Benefit Plans or against any fiduciary of an Employee
Benefit Plan with respect to the operation of such plan, nor does SAH have any
Knowledge of any incident, transaction, occurrence or circumstance which might
reasonably be expected to form the basis of any such claim or
lawsuit.
(e) There
is no pending or, to the Knowledge of SAH, contemplated investigation, or
pending or possible enforcement action by the Pension Benefit Guaranty
Corporation, the Department of Labor, the Internal Revenue Service or any other
government agency with respect to any SAH Employee Benefit Plan and SAH has no
Knowledge of any incident, transaction, occurrence or circumstance which might
reasonably be expected to trigger such an investigation or enforcement
action.
(f) No
actual or, to the Knowledge of SAH, contingent liability exists with respect to
the funding of any SAH Employee Benefit Plan or for any other expense or
obligation of any SAH Employee Benefit Plan, except as disclosed on the
financial statements of SAH, and no contingent liability exists under ERISA with
respect to any “multi-employer plan,” as defined in Section 3(37) or
Section 4001(a)(3) of ERISA.
(g) No
events have occurred or are expected to occur with respect to any SAH Employee
Benefit Plan that would cause a material change in the costs of providing
benefits under such SAH
Employee Benefit Plan or would cause a material change in the cost of providing
for other liabilities of such SAH Employee Benefit Plan.
4.24 Condition of
Properties. All facilities, machinery, equipment,
fixtures and other properties owned, leased or used by SAH are in reasonably
good operating condition and repair, subject to ordinary wear and tear, and are
adequate and sufficient for SAH’s business.
4.25 Insurance
Coverage. There is in full force and effect one or more
policies of insurance issued by insurers of recognized responsibility, insuring
SAH and its properties, products and business against such losses and risks, and
in such amounts, as are customary for corporations of established reputation
engaged in the same or similar business and similarly situated. SAH
has not been refused any insurance coverage sought or applied for, and SAH has
no reason to believe that it will be unable to renew its existing insurance
coverage as and when the same shall expire upon terms at least as favorable to
those currently in effect, other than possible increases in premiums that do not
result from any act or omission of SAH. No suit, proceeding or action
or, to the Knowledge of SAH, threat of suit, proceeding or action has been
asserted or made against SAH within the last five years due to alleged bodily
injury, disease, medical condition, death or property damage arising out of the
function or malfunction of a product, procedure or service designed,
manufactured, sold or distributed by SAH.
4.26 Interested Party
Transactions. Except as set forth in Section 4.26 of the SAH
Disclosure Schedule, no officer, director or stockholder of SAH or any
Affiliate or “associate” (as such term is defined in Rule 405 under the
Securities Act) of any such Person or SAH has or has had, either directly or
indirectly, (a) an interest in any Person that (i) furnishes or sells
services or products that are furnished or sold or are proposed to be furnished
or sold by SAH or (ii) purchases from or sells or furnishes to SAH any
goods or services, or (b) a beneficial interest in any contract or agreement to
which SAH is a party or by which it may be bound or affected, that would require
disclosure pursuant to Item 404 of Regulation S-K as promulgated under the
Securities Act.
4.27 SEC
Reports. Except with respect to reports set forth on
Section 4.27 of
the SAH Disclosure Schedule, since January 1, 2006, SAH has timely filed
all documents, reports and schedules required to be filed with the SEC
(collectively, the “SAH SEC
Documents”). As of their respective dates, the SAH SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act, and, at the respective times they were
filed, none of the SAH SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements
(including, in each case, any notes thereto) of SAH included in the SAH SEC
Documents complied as to form and substance in all material respects with
applicable accounting requirements and the rules and regulations of the SEC with
respect thereto, were prepared in accordance with GAAP (except as may be
indicated therein or in the notes thereto) applied on a consistent basis during
the periods involved (except as may be indicated therein or in the notes
thereto) and fairly presented in all material respects the financial position of
SAH as of the respective dates thereof and the results of its operations and its
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments and to any other adjustments
described therein).
4.28 Compliance with Sarbanes
Oxley. SAH is in compliance with the requirements of
the Sarbanes-Oxley Act of 2002 applicable to it as of the date of this
Agreement. SAH maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management’s general or
specific
authorization, and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. SAH has established disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for SAH
and designed such disclosures controls and procedures to ensure that material
information relating to SAH, is made known to the certifying officers by others
within SAH, particularly during the periods in which SAH’s reports on Form 10-K
or Form 10-Q, as the case may be, are prepared. SAH’s certifying
officers have evaluated the effectiveness of SAH’s controls and procedures as of
the date of its most recently filed periodic report (such date, the “Evaluation
Date”). SAH presented in its most recently filed periodic
report the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no
significant changes in SAH’s internal control over financial reporting (as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) or in other
factors that could significantly affect SAH’s internal control over financial
reporting.
4.29 No Security Regulatory
Investigation. Neither SAH nor
its present officers or directors is, or has been within the prior five years,
the subject of any formal or informal inquiry or investigation by the SEC or the NASD.
4.30 Representations and
Warranties. No representation or warranty by SAH
contained in this Agreement and no statement contained in any certificate,
schedule or other communication furnished pursuant to or in connection with the
provisions hereof contains or shall contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. There is no current or prior event or condition of any
kind or character pertaining to SAH that may reasonably be expected to have a
Material Adverse Effect on SAH. Except as specifically indicated
elsewhere in this Agreement, all documents delivered by SAH in connection
herewith have been and will be complete originals, or exact copies
thereof.
ARTICLE V
ACTIONS PRIOR TO
CLOSING
5.1 Access. Prior to the
Closing, Sequoia and SAH, shall be entitled to make such investigations of the
assets, properties, business and operations of the other party, and to examine
the books, records, tax returns, financial statements and other materials of the
other party as such investigating party deems necessary in connection with this
Agreement and the Merger. Any such investigation and examination
shall be conducted at reasonable times and under reasonable circumstances, and
the parties hereto shall cooperate fully therein.
5.2 Confidentiality. Until
the Closing, and if the Closing shall not occur, thereafter, each party shall
keep confidential and shall not use in any manner inconsistent with the
transactions contemplated by this Agreement, and shall not disclose, nor use for
their own benefit, any information or documents obtained from the other party
concerning the assets, properties, business and operations of such party, unless
such information (i) is readily ascertainable from public or published
information, (ii) is received from a third party not under any obligation
to keep such information confidential, or (iii) is required to be disclosed
by any law or order (in which case the disclosing party shall promptly provide
notice thereof to the other party in order to enable the other party to seek a
protective order or to otherwise prevent such disclosure). If the Merger is not
consummated for any reason, each party shall return to the other all such
confidential information, including notes and compilations thereof, promptly
after the date of such termination.
5.3 Public
Disclosures. Prior to the Closing, Sequoia and SAH
agree not to issue any statement or communications to the public or the press
regarding the Merger without the prior written consent of the other party,
except as SAH reasonably determines to be necessary in order to comply with the
rules of the SEC or of the principal trading exchange or market for SAH Common
Stock, provided that in such case SAH will use its reasonable efforts to allow
Sequoia to review same prior to its release.
5.4 Restrictions on Certain
Actions. Prior to the Closing, except as contemplated
by this Agreement, the Reverse Stock Split, the Management Options, and the SAH
Distribution, there shall be no stock dividend, stock split, recapitalization,
or exchange of shares with respect to or rights, options or warrants issued in
respect of SAH Common Stock and there shall be no dividends or other
distributions paid on SAH Common Stock. Prior to the Closing, except
as contemplated by the Reverse Stock Split, the Management Options, the New
Stock Incentive Plan, and the SAH Distribution, SAH shall not take any action or
enter into any agreement to issue or sell any shares of capital stock of SAH or
any securities convertible into or exchangeable or exercisable for any shares of
capital stock of SAH or to repurchase, redeem or otherwise acquire any of the
issued and outstanding capital stock of SAH, without the prior written consent
of Sequoia.
5.5 Filing of SEC
Documents. Prior to the Closing, SAH will timely file
all required SAH SEC Documents and comply in all material respects with the
requirements of the Securities Act, the Exchange Act and state securities laws
and regulations.
5.6 Conduct of
Business. Prior to the
Closing, each party shall conduct its business only in the usual and ordinary
course and the character of such business shall not be changed nor shall any
different business be undertaken. Prior to the Closing, except as
contemplated hereby, neither party shall not incur any Liabilities without the
prior written consent of the other party, except for Liabilities incurred in the
ordinary course of business.
5.7 Other
Proposals.
(a) The
Board of Directors of SAH may engage in negotiations or discussions with any
person other than Sequoia or its Affiliates (any such person a “Third Party”) that,
without prior solicitation by or negotiation with SAH, has made a Superior
Proposal and furnish to such Third Party nonpublic information relating to SAH
or any of its Subsidiaries pursuant to a confidentiality agreement; provided that Sequoia shall
be promptly furnished with such nonpublic information following the furnishing
thereof to such Third Party (to the extent such nonpublic information has not
been previously furnished by SAH to Sequoia). Following receipt of
such Superior Proposal, SAH’s Board of Directors may fail to make, withdraw or
modify in a manner adverse to Sequoia its recommendation to its stockholders
referred to in Section 5.8 below, submit such Superior Proposal to a vote
of its stockholders, and/or take any action advisable or required under law, if
SAH’s Board of Directors determines in good faith that the board must take such
action to comply with its fiduciary duties under applicable
law. Nothing contained herein shall prevent SAH’s Board of Directors
from complying with Rule 14e-2(a) or Rule 14d-9 under the Exchange Act with
regard to an Acquisition Proposal or from making other disclosures to SAH’s
stockholders if required under applicable law; provided, however, that any
such actions shall comply with the other requirements of this
Section 5.7.
(b) SAH
shall continue to keep Sequoia informed, on a current basis, with respect to
such Superior Proposal after taking such action. In addition, SAH
shall notify Sequoia promptly after receipt by SAH of any Acquisition Proposal,
any written indication that a third party is considering making an Acquisition
Proposal or of any request for information relating to SAH or any of its
Subsidiaries or for access to the business, properties, assets, books or records
of SAH or any of its Subsidiaries by any third party that may be considering
making, or has made, an Acquisition Proposal.
SAH shall
provide such notice orally and within one (1) Business Day in writing and shall
identify the third party making, and the terms and conditions of, any such
Acquisition Proposal, indication or request. SAH shall provide within
one (1) Business Day of receipt a copy of any documentation of the terms of any
such inquiry, proposal or offer, and thereafter shall keep Sequoia informed, on
a current basis, of the status and terms of any such proposals or offers and the
status of any such discussions or negotiations (including by delivering any
further documentation of the type referred to above).
(c) If
this Agreement shall not have previously terminated, SAH shall pay Sequoia a fee
of one million dollars ($1,000,000) (the “SAH Termination Fee”)
no later than 10 days after the date of the first to occur: (i) of the execution
by SAH of any agreement with a Third Party (other than a confidentiality
agreement) providing for the sale of substantially all of the assets of SAH or
providing for the merger of SAH with a Third Party, (ii) the approval or
recommendation to the stockholders of SAH of a Superior Proposal, or the
consummation of a Superior Proposal. Sequoia agrees that payment of
the SAH Termination Fee, if such fee is actually paid as provided herein, will
be the sole and exclusive remedy of Sequoia upon termination of this
Agreement. SAH acknowledges that the agreements contained in this
Section 5.7 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Sequoia would not enter into this
Agreement.
5.8 SAH Stockholders
Meeting. SAH shall cause a meeting of its stockholders
(the “SAH Stockholders
Meeting”) to be duly called and held as soon as reasonably practicable
but in no event prior to the Diligence Drop Dead Date, for the purpose of voting
on the approval and adoption of (A) this Agreement and the Mergers,
(B) the Name Change, (C) the Reverse Stock Split, (D) the New
Stock Incentive Plan, (E) the Authorized Capital Changes, (F) the
director nominees listed on Exhibit B hereto to serve as the directors of SAH
following the Merger, and, (G) any motion for adjournment or postponement
of the SAH Stockholder Meeting to another time or place to permit, among other
things, further solicitation of proxies if necessary to establish a quorum or to
obtain additional votes in favor of this Agreement and the transactions
contemplated hereby and the Amendment. Subject to Section 5.7
above, the Board of Directors of SAH shall recommend approval and adoption of
the items set forth in subsections (A) through (G) of this
Section 5.8. The only matters on the ballot at the SAH
Stockholders Meeting shall be the matters set forth above in subsections (A)
through (G) of this Section 5.8. In connection with the SAH
Stockholders Meeting, SAH shall (1) promptly prepare and file with the SEC,
use its commercially reasonable best efforts to have cleared by the SEC and
thereafter mail to its stockholders as promptly as practicable, the SAH proxy
statement and all other proxy materials for such meeting, (2) use its
commercially reasonable best efforts to obtain the necessary approvals by its
stockholders of this Agreement and the transactions contemplated hereby,
(3) otherwise comply with all legal requirements applicable to such
meeting.
ARTICLE VI
POST CLOSING
COVENANTS
6.1 Initial Directors’ and Officers’
Insurance.
(a) SAH
agrees that all rights to indemnification or exculpation now existing in favor
of the employees, agents, directors or officers of SAH and its Subsidiaries and
to Mark Levenick and Raymond Landry (the “SAH D&O Indemnified
Parties”) as provided in their respective charter documents, bylaws,
certificate of limited partnership or limited partnership agreement as in effect
on the date of this Agreement shall continue in full force and effect for a
period of six (6) years from and after the Closing Date (the “SAH D&O Indemnity
Period”); provided, however, that, in the event any claim or claims are
asserted or made within the Indemnity Period, all rights to indemnification in
respect of any such claim or claims shall continue to final and non-appealable
disposition of any and all such claims.
Any
determination required to be made with respect to whether the SAH D&O
Indemnified Party’s conduct complies with the standards set forth in such
charter documents, bylaws, certificate of limited partnership or limited
partnership agreement or otherwise shall be made by independent counsel selected
by the SAH D&O Indemnified Parties, which counsel shall be reasonably
satisfactory to SAH (whose fees and expenses shall be paid by Sequoia), which
such determination shall be final and binding on the parties
thereto.
(b) Immediately
prior to the Effective Time, SAH shall purchase a single payment, run-off policy
or policies of directors’ and officers’ liability insurance covering the SAH
D&O Indemnified Parties for claims currently covered by SAH’s existing
directors’ and officers’ liability insurance policies arising in respect of acts
or omissions occurring prior to the Effective Time in amount and scope at least
as favorable, in the aggregate, as SAH’s existing policies, such policy or
policies to become effective at the Effective Time and remain in effect for a
period of six years after the Effective Time.
(c) During
the SAH D&O Indemnity Period, SAH shall indemnify and hold harmless the SAH
D&O Indemnified Parties in respect of acts or omissions occurring at or
prior to the Closing to the fullest extent permitted by Delaware law or any
other applicable laws or provided under SAH’s and its Subsidiaries’ charter,
bylaws, certificate of limited partnership or limited partnership agreement in
effect on the date of this Agreement; provided that such indemnification shall
be subject to any limitation imposed from time to time under applicable
law.
(d) If
SAH or any of its successors or assigns (A) consolidates with or merges into any
other Person and shall not be the continuing or surviving company or entity of
such consolidation or merger, or (B) transfers or conveys all or substantially
all of its properties and assets to any Person, then, and in each such case, to
the extent necessary, proper provision shall be made so that the successors and
assigns of SAH shall assume the obligations set forth in this
Article VI.
(e) The
rights of each SAH D&O Indemnified Party under this Article VI shall be
in addition to any rights such Person may have under the charter, bylaws,
certificate of limited partnership or limited partnership agreement of SAH or
any of its Subsidiaries, or under Delaware law or any other applicable laws or
under any agreement of any SAH D&O Indemnified Party with SAH or any of its
Subsidiaries. These rights shall survive consummation of the
transactions contemplated by this Agreement and are intended to benefit, and
shall be enforceable by, each SAH D&O Indemnified Party.
6.2 Future Directors’ and Officers’
Insurance.
(a) In
addition to the rights of indemnification provided during the SAH D&O
Indemnity Period pursuant to Section 6.1, after the Closing Date, SAH shall
indemnify and maintain in effect directors’ and officers’ and fiduciaries’
liability insurance for each SAH Continuing Director (i) during the time such
person serves on the board of SAH or its Subsidiaries; and (ii) for a period of
not less than six years following the time such SAH Continuing Director no
longer serves on the board of SAH or its Subsidiaries.
(b) The
liability insurance required pursuant to this Section 6.2 shall be in amount and
scope at least as favorable, in the aggregate, as SAH’s policies immediately
prior to the Effective Time with comparable terms and conditions and with
comparable insurance coverage as is then in effect for the current officers and
directors of SAH and its Subsidiaries and whose amount and scope are reasonably
satisfactory to the SAH Continuing Directors.
6.3 Insurance in the Event of
Dissolution. SAH agrees that if it is dissolved or ceases to exist
for any reason prior to, (i) in case of indemnification pursuant to Section 6.1,
the termination of the SAH D&O Indemnity Period; or (ii) in case of
indemnification pursuant to Section 6.2, the six-year period following the
time a SAH Continuing Director shall no longer serve as a director on
the board of SAH or its Subsidiaries, then prior to such dissolution or
cessation SAH shall extend SAH’s then in effect directors’ and officers’ and
fiduciaries’ liability insurance policy on commercially reasonable terms and
conditions and with insurance coverage as comparable as possible with the
insurance policy then in effect for the current officers and directors of SAH,
and such extension shall provide such insurance coverage to each SAH D&O
Indemnified Party in accordance with SAH’s obligations under Section 6.1 and 6.2
of this Agreement. SAH shall prepay all premiums in connection with
such extension. These rights shall survive consummation of the
transactions contemplated by this Agreement and are intended to benefit, and
shall be enforceable by, each SAH D&O Indemnified Party.
ARTICLE VII
CONDITIONS TO
CLOSE
7.1 Conditions Precedent to the
Obligations of Sequoia. All obligations of Sequoia
under this Agreement are subject to the fulfillment, prior to or as of the
Closing, of each of the following conditions:
(a) The
representations and warranties made by SAH contained in or pursuant to this
Agreement shall be true and correct in all respects at and as of the Closing as
though such representations and warranties were made at and as of such time,
except to the extent that where any such representation or warranty relates to
an earlier date then such representation or warranty shall be true and correct
as of such date.
(b) SAH
shall have performed and complied with all covenants, agreements, and conditions
set forth or otherwise contemplated in, and shall have executed and delivered
all documents required by, this Agreement to be performed or complied with or
executed and delivered by it.
(c) The
Board of Directors of SAH shall have approved in accordance with Delaware law
the execution and delivery of this Agreement and the consummation of the
Merger.
(d) The
holders of a majority of the shares of SAH Common Stock shall have approved this
Agreement and the Merger.
(e) SAH
shall have sufficient shares of its capital stock authorized to complete the
Merger.
(f) The
Merger Shares will be validly issued, nonassessable and fully paid under
Delaware corporation law.
(g) SAH
shall have effected the Reverse Stock Split, the Changes to Authorized Capital,
the Name Change and the adoption of the New Stock Incentive Plan.
(h) No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger shall be in
effect.
(i) There
shall not be pending or threatened any action, proceeding or investigation
before any court or administrative agency by any government agency, or be any
pending action by any other
person, in which it is sought to restrain or prohibit, or obtain damages in
connection with, the Merger or the ability of Sequoia to operate its
business.
(j) All
officers and directors of SAH shall have tendered their resignations in writing
and the persons listed on Exhibit B shall have been elected as directors of
SAH.
(k) SAH
shall have obtained and delivered to Sequoia written consents of any persons or
entities whose consent is required to consummate the Merger, if any, and all of
such consents shall remain in full force and effect at and as of the
Closing.
(l) SAH
shall have net cash or cash equivalents, including all amounts loaned pursuant
to the Bridge Financing, of not less than $9.8 million.
(m) SAH
shall have instructed its Transfer Agent to make such changes to its stock
registrar so as to give effect to the Merger, the Reverse Stock Split, and the
Authorized Capital Changes.
(n) Since
the date of the SAH Balance Sheet, there shall have occurred no Material Adverse
Effect on SAH.
(o) Sequoia
shall have received a certificate of the President of SAH as to the matters in
Section 7.1(a).
(p) Sequoia
shall have received a certificate of incumbency executed by the Secretary of SAH
certifying (i) the names, titles and signatures of the officers authorized
to execute any documents referred to in this Agreement, (ii) that the
Certificate of Incorporation and By-laws of SAH delivered to Sequoia are true
and complete, and (iii) that resolutions adopted by the Board of Directors
of SAH delivered to Sequoia authorizing the Merger are true and
complete.
(q) Sequoia
shall have received (i) a certificate from the Secretary of State of the
State of Delaware dated within five Business Days of the Closing Date that SAH
is in good standing under the laws of said state, and (ii) and evidence as
of a recent date that SAH is qualified to transact business as a foreign
corporation and is in good standing in each state of the United States and in
each other jurisdiction where the character of the property owned or leased by
it or the nature of its activities makes such qualification
necessary.
(r) Sequoia
shall have received such additional supporting documentation and other
information with respect to the transactions contemplated hereby as it may
reasonably request.
7.2 Conditions Precedent to the
Obligations of SAH. All obligations of SAH under this
Agreement are subject to the fulfillment, prior to or at the Closing, of each of
the following conditions:
(a) The
representations and warranties made by Sequoia contained in or pursuant to this
Agreement shall be true and correct in all respects at and as of the Closing as
though such representations and warranties were made at and as of such time,
except to the extent that where any such representation or warranty relates to
an earlier date then such representation or warranty shall be true and correct
as of such date.
(b) Sequoia
shall have performed and complied with all covenants, agreements, and conditions
set forth or otherwise contemplated in, and shall have executed and delivered
all documents required by, this Agreement to be performed or complied with or
executed and delivered by it.
(c) The
Board of Managers and the Members of Sequoia shall have approved in accordance
with Utah law the execution and delivery of this Agreement and the consummation
of the Merger.
(d) The
holders of a majority of the shares of SAH Common Stock shall have approved this
Agreement and the Merger.
(e) No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger shall be in
effect.
(f) There
shall not be pending or threatened any action, proceeding or investigation
before any court or administrative agency by any government agency, or be any
pending action by any other person, in which it is sought to restrain or
prohibit, or obtain damages in connection with, the Merger or the ability of
Sequoia to operate its business.
(g) SAH
shall have obtained and delivered to Sequoia written consents of any persons or
entities whose consent is required to consummate the Merger, if any, and all of
such consents shall remain in full force and effect at and as of the
Closing.
(h) Since
the date of the Sequoia Balance Sheet, there shall have occurred no Material
Adverse Effect on Sequoia.
(i) SAH
shall have received a certificate of the President of Sequoia as to the matters
in Section 7.1(a).
(j) SAH
shall have received a certificate of incumbency executed by the Secretary of
Sequoia certifying (i) the names, titles and signatures of the officers
authorized to execute any documents referred to in this Agreement,
(ii) that the Articles of Organization and Operating Agreement of Sequoia
delivered to SAH are true and complete, and (iii) that resolutions adopted
by the Board of Managers of Sequoia delivered to SAH authorizing the Merger are
true and complete.
(k) SAH
shall have received (i) a certificate from the Division of Corporations of
the State of Utah dated within five Business Days of the Closing to the effect
that Sequoia is in good standing under the laws of Utah and (ii) and
evidence as of a recent date that Sequoia is qualified to transact business as a
foreign corporation and is in good standing in each state of the United States
and in each other jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification
necessary.
(l) The
SAH Distribution shall have been completed;
(m) The
fairness opinion received by the Board of Directors prior to the date of this
Agreement shall not have been withdrawn or materially modified.
(n) SAH
shall have received such additional supporting documentation and other
information with respect to the transactions contemplated hereby as it may
reasonably request.
ARTICLE VIII
NO SURVIVAL OF REPRESENTATIONS AND
WARRANTIES
The
representations and warranties made by SAH and Sequoia and the Sequoia Members
(including the representations and warranties set forth in Articles III and IV
and the representations and warranties set forth in any certificate delivered at
closing by an officer of SAH and Sequoia) shall not survive the
Closing. For purposes of this Agreement, each statement or other item
of information set forth in any Schedule of a party hereto shall be deemed to be
a part of the representations and warranties made by such party in this
Agreement.
ARTICLE IX
TERMINATION
9.1 Events of
Termination. This Agreement may, by notice given in the
manner hereinafter provided, be terminated at any time prior to completion of
the Closing, as follows:
(a) by
Sequoia if (1) there has been a material Breach by SAH and, in the case of
a representation, warranty or covenant Breach, such Breach shall not have been
cured within ten (10) days after receipt by SAH of notice specifying
particularly such Breach, (2) Sequoia determines in its sole discretion as
a result of its due diligence review of SAH that it does not wish to proceed
with the Merger, provided that Sequoia may not terminate this Agreement pursuant
to this Section 9.1(a)(2), unless Sequoia notifies SAH in writing on or
prior to the Diligence Drop Dead Date that Sequoia intends to terminate the
Agreement pursuant to this provision, or (3) the closing conditions set
forth in Section 7.1 have not been satisfied by the close of business on
May 31, 2008, and Sequoia is not in material Breach of any provision of this
Agreement;
(b) by
SAH if (1) there has been a material Breach by Sequoia and, in the case of
a representation, warranty or covenant Breach, such Breach shall not have been
cured within ten (10) days after receipt by Sequoia of notice specifying
particularly such Breach, (2) SAH determines in its sole discretion as a
result of its due diligence review of Sequoia that it does not wish to proceed
with the Merger, provided that SAH may not
terminate this Agreement pursuant to this Section 9.1(b)(2), unless SAH
notifies Sequoia in writing on or prior to the Diligence Drop Dead Date that SAH
intends to terminate the Agreement pursuant to this provision, or (3) the
closing conditions set forth in Section 7.2 have not been satisfied by the
close of business on May 31, 2008 and SAH is not in material Breach of any
provision of this Agreement;
(c) by
SAH giving notice to Sequoia, in the event SAH wishes to consummate a Superior
Proposal and pay the SAH Termination Fee; or
(d) by
mutual agreement of Sequoia and SAH.
This
Agreement may not be terminated after completion of the
Closing. There shall be deemed to be a “Breach” of a
representation, warranty, covenant, obligation, or other provision of this
Agreement if there is or has been (a) any inaccuracy (subject to applicable
knowledge and materiality qualifiers, if any) in, or breach of, or any failure
to comply with, or perform, such representation, warranty, covenant, obligation,
or other provision, or (b) any claim (by any Person) or other circumstance
that is inconsistent with such representation, warranty, covenant, obligation,
or other provision; and the term “Breach” shall be deemed to refer to any such
inaccuracy, breach, failure, claim, or circumstance.
9.2 Effect of
Termination. Termination of this Agreement pursuant to
Section 9.1 shall terminate all obligations of the parties hereunder,
except for the obligations under Section 5.2, Article VIII
and Section 10.11; provided, however, that termination shall not relieve
the defaulting or breaching party or parties from any liability to the other
parties hereto.
ARTICLE X
MISCELLANEOUS
10.1 Further
Assurances. At any time, and from time to time, after
Closing, each party will execute such additional instruments and take such
action as may be reasonably requested by the other to carry out the intent and
purposes of this Agreement.
10.2 Waiver. Any
failure on the part of any party hereto to comply with any of its obligations,
agreements or conditions hereunder may be waived in writing by the party (in its
sole discretion) to whom such compliance is owed.
10.3 Amendment. This
Agreement may be amended only in writing as agreed to by all parties
hereto.
10.4 Nature of
Representations. All of the parties hereto are
executing and carrying out the provisions of this Agreement in reliance solely
on the representations, warranties and covenants and agreements contained in
this Agreement and the other documents delivered at the Closing and not upon any
representation warranty, agreement, promise or information, written or oral,
made by the other party or any other person other than as specifically set forth
herein.
10.5 Notices. All
notices, requests, demands, claims, and other communications hereunder shall be
in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed duly given (i) one Business Day
after being sent to the recipient by reputable overnight courier service
(charges prepaid), (iii) the same Business Day it is sent to the recipient
by facsimile transmission or electronic mail if sent prior to 3 p.m. Eastern
Time, otherwise the next Business Day if sent after 3 p.m. Eastern Time, or
(iv) four Business Days after being mailed to the recipient by certified or
registered mail, return receipt requested and postage prepaid, and addressed to
the intended recipient as set forth below:
|
If
to Sequoia:
|
Sequoia
Media Group, LC
|
|
11781
Lone Peak Parkway, Suite 270
|
|
|
Draper,
Utah 84020
|
|
|
Attention:
Edward B. Paulsen
|
|
|
Facsimile:
(801) 495-5701
|
|
|
With
a copy to:
|
Cohne,
Rappaport & Segal, P.C.
|
|
257
E. 200 S., Suite 700
|
|
|
Salt
Lake City, Utah 84111
|
|
|
Attention:
A.O. Headman, Jr., Esq.
|
|
|
Facsimile:
(801) 238.4606
|
|
|
If
to SAH:
|
Secure
Alliance Holdings Corporation
|
|
2900
Wilcrest Drive, Suite 105
|
|
|
Houston,
Texas 77042
|
|
|
Attention:
Chief Executive Officer
|
|
|
Facsimile: (713)
895-7773
|
|
|
With
a copy to:
|
Olshan
Grundman Frome Rosenzweig & Wolosky LLP
|
|
Park
Avenue Tower
|
|
|
65
East 55th Street
|
|
|
New
York, NY 10022-1106
|
|
|
Attention:
Adam Finerman, Esq.
|
|
|
Facsimile:
(212) 451-2222
|
10.6 Headings. The
section and subsection headings in this Agreement are inserted for convenience
only and shall not affect in any way the meaning or interpretation of this
Agreement.
10.7 Counterparts. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Delivery of a copy of this Agreement
bearing an original signature by facsimile transmission or by electronic mail in
“portable document format” shall have the same effect as physical delivery of
the paper document bearing the original signature.
10.8 Binding
Effect. This Agreement shall be binding upon the
parties hereto and inure to the benefit of the parties, their respective heirs,
administrators, executors, successors and assigns.
10.9 Entire
Agreement. This Agreement and the attached Schedules
and Exhibits, is the entire agreement of the parties covering everything agreed
upon or understood in the transaction. There are no oral promises,
conditions, representations, understandings, interpretations or terms of any
kind as conditions or inducements to the execution hereof.
10.10 Severability. If
any part of this Agreement is deemed to be unenforceable, the balance of the
Agreement shall be enforced to the maximum extent permitted by law.
10.11 Responsibility and
Costs. Subject to Section 9.2, all fees, expenses
and out-of-pocket costs, including, without limitation, fees and disbursements
of counsel, financial advisors and accountants, incurred by the parties hereto
shall be borne solely and entirely by the party that has incurred such costs and
expenses.
10.12 Assignment. This
Agreement may not be assigned by any party hereto without the prior written
consent of the other parties.
10.13 Applicable
Law. This Agreement shall be construed and governed by
the internal laws of the State of Delaware.
10.14 Jurisdiction and
Venue. The parties hereto hereby agree and consent to
be subject to the exclusive jurisdiction of the United States District Court for
the District of Delaware, and in the absence of such Federal jurisdiction, the
parties consent to be subject to the exclusive jurisdiction of the state courts
located in Wilmington, Delaware, and hereby waive the right to assert the lack
of personal or subject matter jurisdiction or improper venue in connection with
any such suit, action or other proceeding. In furtherance of the
foregoing, each of the parties (i) waives the defense of inconvenient
forum, (ii) agrees not to commence any suit, action or other proceeding
arising out of this Agreement or any transactions contemplated hereby other than
in any such court, and (iii) agrees that a final judgment in any such suit,
action or other proceeding shall be conclusive and may be enforced in other
jurisdictions by suit or judgment or in any other manner provided by
law.
IN WITNESS WHEREOF, the
parties have executed this Agreement as of the day and year first above
written.
SIGNATURE
PAGE
|
SEQUOIA MEDIA GROUP,
LC,
a Utah limited liability
company
|
|||
|
By:
|
/s/
Chett B. Paulsen
|
||
|
Name:
|
Chett
B. Paulsen
|
||
|
Title:
|
CEO/President
|
||
|
SECURE ALLIANCE HOLDINGS
CORPORATION,
a Delaware
corporation
|
|||
|
By:
|
/s/
Stephen P. Griggs
|
||
|
Name:
|
Stephen
P. Griggs
|
||
|
Title:
|
President
|
||
|
SMG UTAH,
LC,
a Utah limited liability
company
|
|||
|
By: Secure Alliance
Holdings Corporation, its sole member
|
|||
|
By:
|
/s/
Stephen P. Griggs
|
||
|
Name:
|
Stephen
P. Griggs
|
||
|
Title:
|
President
|
||
AMENDMENT NO. 1 TO AGREEMENT
AND PLAN OF MERGER
This Amendment No. 1 (this “Amendment”) dated as of March 31, 2008
to the Agreement and Plan of Merger referred to below by and among Sequoia Media
Group, LC, a Utah limited liability company (“Sequoia”),
Secure Alliance Holdings Corporation, a Delaware corporation (“SAH”),
and SMG Utah, LC, a Utah limited liability company and wholly owned subsidiary
of SAH (“Merger
Sub”).
WITNESSETH:
WHEREAS, Sequoia, SAH and Merger Sub
are party to that certain Agreement and Plan of Merger dated as of December 6,
2007 (as such agreement may be amended, and supplemented or otherwise modified
from time to time the “Merger
Agreement”); and
WHEREAS, the parties hereto desire to
amend certain provisions of the Merger Agreement pursuant to Section 10.3 of the
Merger Agreement.
NOW THEREFORE, in consideration of the
premises and for other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties have agreed to amend
the Merger Agreement as follows:
SECTION 1. Capitalized
Terms. Capitalized terms that are not defined in this
Amendment have the respective meanings set forth in the Merger
Agreement.
SECTION
2. Amendments to Merger
Agreement. The Merger Agreement is hereby amended as
follows:
(a) All
references to the number “.5806419” in Paragraph B of the Recitals and Article I
is hereby amended and restated to read “0.87096285”.
(b) The
definition of Reverse Stock Split in Section 2.1 is hereby amended and restated
as follows:
““Reverse Stock
Split” means a 1 for 2 reverse split of SAH Common Stock on such terms
and conditions as agreed to by the SAH Board of Directors and the Sequoia Board
of Managers and approved by the shareholders of SAH.”
(c) The
definition of SAH Distribution in Section 2.1 is hereby amended and restated as
follows:
““SAH
Distribution” means a cash dividend to the shareholders of SAH
immediately prior to the Effective Time distributing, pro rata, $2.0
million.”
|
|
(d)
|
Section
4.3 is hereby amended and restated as
follows:
|
“Capitalization. As
of the date of this Agreement, SAH’s authorized capital stock consists of
100,000,000 shares of SAH Common Stock, of which 19,441,524 shares of SAH Common
Stock are issued and outstanding. SAH shall, prior to the Closing Date, effect
the Reverse Stock Split. Following the Reverse Stock Split, but
before the Effective Time, there will be approximately 9,720,762 shares of SAH
Common Stock issued and outstanding. All shares of capital stock of
SAH are, and shall be at Closing, validly issued, fully paid and
nonassessable. Except as described in Section 4.3 of the SAH
Disclosure Schedule, there are no existing options, convertible or exchangeable
securities, calls, claims, warrants, preemptive rights, registration rights or
commitments of any character relating to the issued or unissued capital stock or
other securities of SAH. There are no voting trusts, proxies or other
agreements, commitments or understandings of any character to which SAH is a
party or by which SAH is bound with respect to the voting of any capital stock
of SAH. There are no outstanding stock appreciation rights, phantom
stock or similar rights with respect to any capital stock of
SAH. There are no outstanding obligations to repurchase, redeem or
otherwise acquire any shares of capital stock of SAH.”
|
|
(e)
|
Section
7.1(j) is hereby amended and restated as
follows:
|
“On the
Closing Date, all officers of SAH shall have tendered their resignations in
writing.”
(f) Section
7.1(l) is hereby deleted in its entirety and shall be replaced with
“[Intentionally deleted]”.
(g) Schedule
A is hereby deleted in its entirety and shall be replaced with “[Intentionally
deleted]”.
SECTION 3. Effect on Merger
Agreement. Except as otherwise expressly amended herein, the
Merger Agreement and each other Transaction Documents shall remain in full force
and effect. All references in any document or agreement to the Merger
Agreement shall refer to the Merger Agreement, as amended hereby.
SECTION 4. Execution in
Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
[Signature Page
Follows]
IN WITNESS WHEREOF, the undersigned
have duly executed this Amendment No. 1 as of the 31st day of
March 2008.
|
SEQUOIA
MEDIA GROUP, LC,
a
Utah limited liability company
|
|||
|
By:
|
/s/ Chett B. Paulsen | ||
|
Name:
|
Chett B. Paulsen | ||
|
Title:
|
CEO | ||
|
SECURE
ALLIANCE HOLDINGS CORPORATION,
a
Delaware corporation
|
|||
|
By:
|
/s/ Stephen P. Griggs | ||
|
Name:
|
Stephen P. Griggs | ||
|
Title:
|
President | ||
|
SMG
UTAH, LC,
a
Utah limited liability company
|
|||
|
By:
|
/s/ Stephen P. Griggs | ||
|
Name:
|
Stephen P. Griggs | ||
|
Title:
|
President | ||
Annex
B
November
29, 2007
The Board
of Directors
Secure
Alliance Holdings Corporation
2900
Wilcrest Dr.
Suite
105
Houston,
TX 77042
Gentlemen:
We have
been advised that, pursuant to the draft Agreement and Plan of Merger dated
November 27, 2007 (the “Agreement”), by and among Sequoia Media Group, LC
(“Sequoia”), Secure Alliance Holdings Corporation (the “Company”), and SMG, LC
(“Merger Sub”), Merger Sub shall be merged with and into Sequoia (the “Equity
Exchange”) resulting in Sequoia becoming a wholly-owned subsidiary of the
Company. Pursuant to the Agreement, each Sequoia membership interest
shall automatically be converted into the right to receive 0.5806419 shares
(after giving effect to the proposed reverse stock split) of Company common
stock (the “Exchange Ratio”). In addition, pursuant to the Agreement
and prior to the Equity Exchange, the Company shall effect a one for three
reverse stock split of the Company’s shares (the “Reverse Stock Split”) and will
contribute approximately $2.2 million in cash, a note receivable and common
shares owned in a publicly listed UK company, to a to-be-formed subsidiary, and
the shares of such subsidiary will be distributed to all existing Company
shareholders (the “SAH Distribution”).
The
Equity Exchange, Reverse Stock Split, and the SAH Distribution are hereinafter
defined as the “Merger”. The terms and conditions of the Merger are more
specifically set forth in the Agreement.
We have
been retained to render an opinion as to whether, on the date of such opinion,
the Exchange Ratio is fair, from a financial point of view, to the Company’s
shareholders.
We have
not been requested to opine as to, and our opinion does not in any manner
address, the relative merits of the Merger as compared to any alternative
business strategy that might exist for Company, the decision of whether the
Company should complete the Merger, and other alternatives to the Merger that
might exist for Company. The financial terms and other terms of the
Merger were determined pursuant to negotiations between the Company and
Sequoia.
|
Ladenburg
Thalmann & Co. Inc.
4400
Biscayne Boulevard, 14TH
Floor
Miami,
FL 33137
Phone
305.572.4200 · Fax
305.572.4220
MEMBER
NYSE, AMEX, FINRA, SIPC
|
 |
In
arriving at our opinion, we took into account an assessment of general economic,
market and financial conditions as well as our experience in connection with
similar transactions and securities valuations generally and, among other
things:
|
|
·
|
Reviewed
the Agreement.
|
|
|
·
|
Reviewed
publicly available financial information and other data with respect to
the Company that we deemed relevant, including the Annual Report on Form
10-K for the year ended September 30, 2006, and the Quarterly Report on
Form 10-Q for the nine months ended June 20,
2007.
|
|
|
·
|
Reviewed
non-public information and other data with respect to the Company,
including unaudited balance sheet statements as of September 30, 2007, and
other internal financial information and management
reports.
|
|
|
·
|
Reviewed
non-public information and other data with respect to Sequoia, including
unaudited financial statements for the two years ended December 31, 2006
and for the nine months ended September 30, 2007, financial projections
for the four years ending December 31, 2011, and other internal financial
information and management reports.
|
|
|
·
|
Reviewed
and analyzed the Merger’s pro forma impact on the Company’s securities
outstanding and stockholder
ownership.
|
|
|
·
|
Considered
the historical financial results and present financial condition of the
Company and Sequoia.
|
|
|
·
|
Reviewed
and compared the trading of, and the trading market for the Company’s
common stock.
|
|
|
·
|
Reviewed
and analyzed the indicated value range of the consideration implied by the
Exchange Ratio.
|
|
|
·
|
Reviewed
and analyzed Sequoia’s projected unlevered free cash flows and prepared a
discounted cash flow analysis.
|
|
|
·
|
Reviewed
and analyzed certain financial characteristics of publicly-traded
companies that were deemed to have characteristics comparable to
Sequoia.
|
|
|
·
|
Reviewed
and analyzed certain financial characteristics of target companies in
transactions where such target company was deemed to have characteristics
comparable to that of Sequoia.
|
|
|
·
|
Reviewed
and discussed with management representatives of the Company and Sequoia
certain financial and operating information furnished by them, including
financial projections and analyses with respect to Sequoia’s business and
operations.
|
|
|
·
|
Performed
such other analyses and examinations as were deemed
appropriate.
|
In
arriving at our opinion we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was supplied or
otherwise made available to us without assuming any responsibility for any
independent verification of any such information and we have further relied upon
the assurances of Company and Sequoia management that they were not aware of any
facts or circumstances that would make any such information inaccurate or
misleading. With respect to the financial information and projections
utilized, we assumed that such information has been reasonably prepared on a
basis reflecting the best currently available estimates and judgments, and that
such information provides a reasonable basis upon which we could make our
analysis and form an opinion. We have not evaluated the solvency or fair
value of the Company or Sequoia under any foreign, state
or
federal laws relating to bankruptcy, insolvency or similar matters. We have not
made a physical inspection of the properties and facilities of the Company or
Sequoia and have not made or obtained any evaluations or appraisals of either
company’s assets and liabilities (contingent or otherwise). In
addition, we have not attempted to confirm whether the Company or Sequoia have
good title to their respective assets.
We
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, and all other
applicable foreign, federal and state statutes, rules and
regulations. We assumed that the Merger will be consummated
substantially in accordance with the terms set forth in the Agreement, without
any further amendments thereto, and without waiver by the Company of any of the
conditions to any obligations or in the alternative that any such amendments,
revisions or waivers thereto will not be detrimental to the Company or its
shareholders in any material respect. We have further assumed that
for U.S. federal tax income purposes the Merger shall qualify as a tax-free
transfer pursuant to Section 351 of the Internal Revenue Code of 1986, as
amended.
Our
analysis and opinion are necessarily based upon market, economic and other
conditions, as they exist on, and could be evaluated as of, November 29,
2007. Accordingly, although subsequent developments may affect our
opinion, we do not assume any obligation to update, review or reaffirm our
opinion.
Our
opinion is for the use and benefit of the Board of Directors of the Company in
connection with its consideration of the Merger and is not intended to be and
does not constitute an opinion or recommendation to any shareholder of the
Company as to how such shareholder should vote with respect to the
Merger. We do not express any opinion as to the underlying valuation
or future performance of the Company or Sequoia, or the price at which the
Company’s securities might trade at any time in the future.
Based
upon and subject to the foregoing, it is our opinion that, as of the date of
this letter, the Exchange Ratio is fair, from a financial point of view, to the
Company’s shareholders.
In
connection with our services, we have previously received a retainer and will
receive the balance of our fee when we notify the Company that we are prepared
to deliver the opinion. Our fee for providing the fairness opinion is
not contingent on the completion of the Merger. Ladenburg, and its
affiliate Capitalink, LC have previously provided non-contingent fairness
opinion and other advisory services to the Company. There are no
other pending agreements to provide, any other services to the Company or
Sequoia. In addition, the Company has agreed to indemnify us for
certain liabilities that may arise out of the rendering this
opinion.
In the
ordinary course of business, Ladenburg, certain of our affiliates, as well as
investment funds in which we or our affiliates may have financial interests, may
acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and
financial instruments (including bank loans and other obligations) of, or
investments in, the Company, any other party that may be involved in the Merger
and their respective affiliates.
Pursuant
to our policies and procedures, this opinion was not required to be, and was
not, approved or issued by a fairness committee. Further, our opinion
does not express an opinion about the fairness of the amount or nature of the
compensation, if any, to any of the Company’s officers, directors or employees,
or class of such persons, relative to the compensation to the Company’s
shareholders.
Our
opinion is for the use and benefit of the Board of Directors of the Company and
is rendered in connection with its consideration of the Merger and may not be
used by the Company for any other purpose or reproduced, disseminated, quoted or
referred to by the Company at any time, in any manner or for any purpose,
without our prior written consent, except that this opinion may be reproduced in
full in, and references to the opinion and to us and our relationship with the
Company may be included in filings made by the Company with the Securities and
Exchange Commission, if required by Securities and Exchange Commission rules,
and in any proxy statement or similar disclosure document disseminated to
shareholders if required by the Securities and Exchange Commission
rules.
Very
truly yours,
/s/ Ladenburg
Thalmann & Co. Inc.
Ladenburg
Thalmann & Co. Inc.
Annex
C
Certificate
of Amendment
of
Certificate
of Incorporation
of
SECURE
ALLIANCE HOLDINGS CORPORATION
Under
Section 242 of the General Corporation Law
It is
hereby certified that:
1. The
name of the corporation is Secure Alliance Holdings Corporation (the
“Corporation”).
2. The
Certificate of Incorporation of the Corporation is hereby amended by deleting
ARTICLE I thereof and inserting in its place the following:
“ARTICLE
I: The name of the corporation (which is hereinafter referred to as the
“Corporation”) is: aVinci Media Corporation.”
3. The
Certificate of Incorporation of the Corporation is hereby amended by deleting
ARTICLE IV thereof and inserting in its place the following:
“ARTICLE IV: The number of shares which
this corporation shall have authority to issue, itemized by classes, par value
of shares, shares without par value, and series, if any, within a class,
is
|
Class
|
Number of Shares
|
Par Value Per Share
|
|
Common
|
250,000,000
|
U.S.
$ 0.01
|
|
Preferred
|
50,000,000
|
U.S.
$ 0.01
|
The
holders of stock of the Corporation shall have no preemptive rights to subscribe
for any securities of the Corporation.
Simultaneously
with the effective date of this Certificate of Amendment (the “Effective Date”),
all issued and outstanding shares of common stock (“Existing Common Stock”)
shall be and hereby are automatically combined and reclassified as follows: each
two (2) shares of Existing Common Stock shall be combined and reclassified (the
“Reverse Stock Split”) as one share of issued and outstanding common stock (“New
Common Stock”), provided, that there
shall be no fractional shares of New Common Stock. In the case of any
holder of fewer than two (2) shares of Existing Common Stock or any number of
shares of Existing Common Stock which, when divided by two (2), does not result
in a whole number (a “Fractional Shareholder”), the fractional share interest of
New Common Stock held by any Fractional Shareholder as a result of the Reverse
Stock Split shall be rounded up to the nearest whole share of New Common
Stock.
The
Corporation shall, through its transfer agent, provide certificates representing
New Common Stock to holders of Existing Common Stock in exchange for
certificates representing Existing Common Stock. From and after the
Effective Date, certificates representing shares of Existing Common Stock are
hereby canceled and shall represent only the right of the holders thereof to
receive New Common Stock.
From and
after the Effective Date, the term “New Common Stock” as used in this Article 4
shall mean common stock as provided in this Certificate of
Incorporation. The par value of the common stock shall remain as
otherwise provided in Article 4 of this Certificate of
Incorporation.”
4. The
Amendment of Certificate of Incorporation herein certified has been duly adopted
in accordance with the provisions of Section 242 of the General Corporation Law
of the State of Delaware (the “DGCL”) and requisite consent of a majority of the
outstanding stock of the Corporation has been given in accordance with the
DGCL.
IN
WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of
Certificate of Incorporation to be executed on this
[ ] day of
[ ],
2008.
|
SECURE
ALLIANCE HOLDINGS CORPORATION
|
|||
|
By:
|
|||
|
Name:
|
Leonard
L. Carr
|
||
|
Title:
|
Secretary
|
||
[Note: To
the extent one of the Related Proposals set forth in the proxy statement is not
approved by stockholder vote at the Special Meeting, this Form of Amendment to
our Certificate of Incorporation will be appropriately
revised.]
Annex
D
SECURE
ALLIANCE HOLDINGS CORPORATION
2008
INCENTIVE STOCK PLAN
1. Purpose of the
Plan.
This 2008
Incentive Stock Plan (the “Plan”) is intended as an incentive, to retain in the
employ of and as directors, officers, consultants, advisors and employees to
Secure Alliance Holdings Corporation, a Delaware corporation (the “Company”) and
any Subsidiary of the Company, within the meaning of Section 424(f) of the
United States Internal Revenue Code of 1986, as amended (the “Code”), persons of
training, experience and ability, to attract new directors, officers,
consultants, advisors and employees whose services are considered valuable, to
encourage the sense of proprietorship and to stimulate the active interest of
such persons in the development and financial success of the Company and its
Subsidiaries.
Certain
options granted pursuant to the Plan may constitute incentive stock options
within the meaning of Section 422 of the Code (the “Incentive Options”) while
certain other options granted pursuant to the Plan may be nonqualified stock
options (the “Nonqualified Options”). Incentive Options and
Nonqualified Options are hereinafter referred to collectively as
“Options.”
The
Company intends that the Plan meet the requirements of Rule 16b-3 (“Rule 16b-3”)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) and that transactions of the type specified in subparagraphs (c) to (f)
inclusive of Rule 16b-3 by officers and directors of the Company pursuant to the
Plan will be exempt from the operation of Section 16(b) of the Exchange
Act. Further, the Plan may satisfy the performance-based compensation
exception to the limitation on the Company's tax deductions imposed by Section
162(m) of the Code with respect to those Options for which qualification for
such exception is intended. In all cases, the terms, provisions,
conditions and limitations of the Plan shall be construed and interpreted
consistent with the Company's intent as stated in this Section 1.
2. Administration of the
Plan.
The Board
of Directors of the Company (the “Board”) shall appoint and maintain as
administrator of the Plan a Committee (the “Committee”) consisting of two or
more directors who are “Non-Employee Directors” (as such term is defined in Rule
16b-3) and “Outside Directors” (as such term is defined in Section 162(m) of the
Code), which shall serve at the pleasure of the Board. The Committee,
subject to Sections 3 and 5 hereof, shall have full power and authority to
designate recipients of Options, stock appreciation rights (“Stock Appreciation
Rights”), restricted stock (“Restricted Stock”) and other equity incentives or
stock or stock based awards (“Equity Incentives”) and to determine the terms and
conditions of respective Option, Stock Appreciation Rights, Restricted Stock and
Equity Incentives agreements (which need not be identical) and to interpret the
provisions and supervise the administration of the Plan. The
Committee shall have the authority, without limitation, to designate which
Options granted under the Plan shall be Incentive Options and which shall be
Nonqualified Options. To the extent any Option
does not qualify as an Incentive Option, it shall constitute a separate
Nonqualified Option.
Subject
to the provisions of the Plan, the Committee shall interpret the Plan and all
Options, Stock Appreciation Rights, Restricted Stock and Equity Incentives
granted under the Plan, shall make such rules as it deems necessary for the
proper administration of the Plan, shall make all other determinations necessary
or advisable for the administration of the Plan and shall correct any defects or
supply any omission or reconcile any inconsistency in the Plan or in any
Options, Stock Appreciation Rights, Restricted Stock or Equity Incentives
granted under the Plan in the manner and to the extent that the Committee deems
desirable to carry into effect the Plan or any Options, Stock Appreciation
Rights, Restricted Stock or Equity Incentives. The act or
determination of a majority of the Committee shall be the act or determination
of the Committee and any decision reduced to writing and signed by all of the
members of the Committee shall be fully effective as if it had been made by a
majority at a meeting duly held. Subject to the provisions of the
Plan, any action taken or determination made by the Committee pursuant to this
and the other Sections of the Plan shall be conclusive on all
parties.
In the
event that for any reason the Committee is unable to act or if the Committee at
the time of any grant, award or other acquisition under the Plan does not
consist of two or more Non-Employee Directors, or if there shall be no such
Committee, then the Plan shall be administered by the Board, and references
herein to the Committee (except in the proviso to this sentence) shall be deemed
to be references to the Board, and any such grant, award or other acquisition
may be approved or ratified in any other manner contemplated by subparagraph (d)
of Rule 16b-3; provided, however, that grants
to the Company's Chief Executive Officer or to any of the Company's other four
most highly compensated officers that are intended to qualify as
performance-based compensation under Section 162(m) of the Code may only be
granted by the Committee.
3. Designation of Optionees and
Grantees.
The
persons eligible for participation in the Plan as recipients of Options (the
“Optionees”), Stock Appreciation Rights, Restricted Stock or Equity Incentives
(respectively, the “Grantees”) shall include directors, officers and employees
of, and consultants and advisors to, the Company or any Subsidiary; provided
that Incentive Options may only be granted to employees of the Company and the
Subsidiaries. In selecting Optionees and Grantees, and in determining
the number of shares to be covered by each Option, Stock Appreciation Right,
Restricted Stock or Equity Incentive granted to Optionees or Grantees, the
Committee may consider any factors it deems relevant, including without
limitation, the office or position held by the Optionee or Grantee or the
Optionee or Grantee’s relationship to the Company, the Optionee or Grantee’s
degree of responsibility for and contribution to the growth and success of the
Company or any Subsidiary, the Optionee or Grantee’s length of service,
promotions and potential. An Optionee or Grantee who has been granted
an Option, Stock Appreciation Right, Restricted Stock or Equity Incentive
hereunder may be granted an additional Option or Options, Stock Appreciation
Right(s), Restricted Stock or Equity Incentive(s) if the Committee shall so
determine.
4. Stock Reserved for the
Plan.
Subject
to adjustment as provided in Section 10 hereof, a total of 800,000 shares of the
Company's Common Stock, $0.01 par value per share (the “Stock”), shall be
subject to the Plan, all of which may be issued as Incentive
Options. The maximum number of shares of Stock that may be subject to
Options and Stock Appreciation Rights granted under the Plan to any individual
in any calendar year shall not exceed 200,000 and the method of counting such
shares shall conform to any requirements applicable to performance-based
compensation under Section 162(m) of the Code, if qualification as
performance-based compensation under Section 162(m) of the Code is
intended. The shares of Stock subject to the Plan shall consist of
unissued shares, treasury shares or previously issued shares held by any
Subsidiary of the Company, and such amount of shares of Stock shall be and is
hereby reserved for such purpose. Any of such shares of Stock that
may remain unsold and that are not subject to outstanding Options at the
termination of the Plan shall cease to be reserved for the purposes of the Plan,
but until termination of the Plan the Company shall at all times reserve a
sufficient number of shares of Stock to meet the requirements of the
Plan. Should any Option, Stock Appreciation Right, Restricted Stock,
or Equity Incentives expire or be canceled prior to its exercise or vesting in
full or should the number of shares of Stock to be delivered upon the exercise
or vesting in full of an Option, Stock Appreciation Right, Restricted Stock, or
Equity Incentives be reduced for any reason, the shares of Stock theretofore
subject to such Option, Stock Appreciation Right, Restricted Stock, or Equity
Incentives may be subject to future Options under the Plan, except in the case
of an Option or Stock Appreciation Right where such reissuance is inconsistent
with the provisions of Section 162(m) of the Code where qualification as
performance-based compensation under Section 162(m) of the Code is
intended.
5. Terms and Conditions of
Options.
Options
granted under the Plan shall be subject to the following conditions and shall
contain such additional terms and conditions, not inconsistent with the terms of
the Plan, as the Committee shall deem desirable:
(a) Option
Price. The purchase price of each share of Stock purchasable
under an Option shall be determined by the Committee at the time of grant, but
shall not be less than 100% of the Fair Market Value (as defined below) of such
share of Stock on the date the Option is granted; provided, however, that with
respect to an Optionee who, at the time an Incentive Option is granted, owns
(within the meaning of Section 424(d) of the Code) more than 10% of the total
combined voting power of all classes of stock of the Company or of any
Subsidiary, the purchase price per share of Stock under an Incentive
Option shall be at least 110% of the Fair Market Value per share of
Stock on the date of grant. The exercise price for each Option shall
be subject to adjustment as provided in Section 10 below. “Fair Market Value” means
the closing price of publicly traded shares of Stock on the business day
immediately prior to the grant on the principal securities exchange on which
shares of Stock are listed (if the shares of Stock are so listed), or on the
NASDAQ Stock Market (if the shares of Stock are regularly quoted on the NASDAQ
Stock Market), or, if not so listed or regularly quoted, the mean between the
closing bid and asked prices of publicly traded shares of Stock in the
over-the-counter market, or, if such bid and asked prices shall not be
available, as reported by any nationally recognized quotation service selected
by the Company, or as determined by the Committee
in a manner consistent with the provisions of the Code. Anything in
this Section 5(a) to the contrary notwithstanding, in no event shall the
purchase price of a share of Stock be less than the minimum price permitted
under the rules and policies of any national securities exchange on which the
shares of Stock are listed.
(b) Option
Term. The term of each Option shall be fixed by the Committee,
but no Option shall be exercisable more than ten years after the date such
Option is granted and in the case of an Incentive Option granted to an Optionee
who, at the time such Incentive Option is granted, owns (within the meaning of
Section 424(d) of the Code) more than 10% of the total combined voting power of
all classes of stock of the Company or of any Subsidiary, no such Incentive
Option shall be exercisable more than five years after the date such Incentive
Option is granted.
(c) Exercisability. Subject
to Section 5(e) hereof, Options shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the
Committee.
Upon the
occurrence of a “Change in Control” (as hereinafter defined), the Committee may
accelerate the vesting and exercisability of outstanding Options, in whole or in
part, as determined by the Committee in its sole discretion. In its
sole discretion, the Committee may also determine that, upon the occurrence of a
Change in Control, each outstanding Option shall terminate within a specified
number of days after notice to the Optionee thereunder, and each such Optionee
shall receive, with respect to each share of Company Stock subject to such
Option, an amount equal to the excess of the Fair Market Value of such shares
immediately prior to such Change in Control over the exercise price per share of
such Option; such amount shall be payable in cash, in one or more kinds of
property (including the property, if any, payable in the transaction) or a
combination thereof, as the Committee shall determine in its sole
discretion.
For
purposes of the Plan, a Change in Control shall be deemed to have occurred
if:
(i) a
tender offer (or series of related offers) shall be made and consummated for the
ownership of 50% or more of the outstanding voting securities of the Company,
unless as a result of such tender offer more than 50% of the outstanding voting
securities of the surviving or resulting corporation shall be owned in the
aggregate by the stockholders of the Company (as of the time immediately prior
to the commencement of such offer), any employee benefit plan of the Company or
its Subsidiaries, and their affiliates;
(ii) the
Company shall be merged or consolidated with another corporation, unless as a
result of such merger or consolidation more than 50% of the outstanding voting
securities of the surviving or resulting corporation shall be owned in the
aggregate by the stockholders of the Company (as of the time immediately prior
to such transaction), any employee benefit plan of the Company or its
Subsidiaries, and their affiliates;
(iii) the
Company shall sell substantially all of its assets to another corporation
that is not wholly owned by the Company, unless as a result of such sale more
than 50% of such assets shall be owned in the aggregate by the stockholders of
the Company (as of the time immediately prior to such transaction), any employee
benefit plan of the Company or its Subsidiaries and their affiliates;
or
(iv) a
Person (as defined below) shall acquire 50% or more of the outstanding voting
securities of the Company (whether directly, indirectly, beneficially or of
record), unless as a result of such acquisition more than 50% of the outstanding
voting securities of the surviving or resulting corporation shall be owned in
the aggregate by the stockholders of the Company (as of the time immediately
prior to the first acquisition of such securities by such Person), any employee
benefit plan of the Company or its Subsidiaries, and their
affiliates.
For
purposes of this Section 5(c), ownership of voting securities shall take into
account and shall include ownership as determined by applying the provisions of
Rule 13d-3(d)(I)(i) (as in effect on the date hereof) under the Exchange
Act. In addition, for such purposes, “Person” shall have the meaning
given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections
13(d) and 14(d) thereof; however, a Person shall not include (A) the Company or
any of its Subsidiaries; (B) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its Subsidiaries; (C) an
underwriter temporarily holding securities pursuant to an offering of such
securities; or (D) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company.
(d) Method of
Exercise. Options to the extent then exercisable may be
exercised in whole or in part at any time during the option period, by giving
written notice to the Company specifying the number of shares of Stock to be
purchased, accompanied by payment in full of the purchase price, in cash, or by
check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at
or after grant, payment in full or in part may be made at the election of the
Optionee (i) in the form of Stock owned by the Optionee (based on the Fair
Market Value of the Stock on the trading day before the Option is exercised)
which is not the subject of any pledge or security interest, (ii) in the form of
shares of Stock withheld by the Company from the shares of Stock otherwise to be
received with such withheld shares of Stock having a Fair Market Value on the
date of exercise equal to the exercise price of the Option, or (iii) by a
combination of the foregoing, provided that the combined value of all cash and
cash equivalents and the Fair Market Value of any shares surrendered to the
Company is at least equal to such exercise price and except with respect to (ii)
above, such method of payment will not cause a disqualifying
disposition of all or a portion of the Stock received upon exercise of an
Incentive Option. An Optionee shall have the right to dividends and
other rights of a stockholder with respect to shares of Stock purchased upon
exercise of an Option at such time as the Optionee (i) has given written notice
of exercise and has paid in full for such shares and (ii) has satisfied such
conditions that may be imposed by the Company with respect to the withholding of
taxes.
(e) Limit on Value of Incentive
Option. The aggregate Fair Market Value, determined as of the
date the Incentive Option is granted, of Stock for which Incentive
Options
are
exercisable for the first time by any Optionee during any calendar year under
the Plan (and/or any other stock option plans of the Company or any Subsidiary)
shall not exceed $100,000.
(f) Incentive Option
Shares. A grant of an Incentive Option under this Plan shall
provide that (a) the Optionee shall be required as a condition of the exercise
to furnish to the Company any payroll (employment) tax required to be withheld,
and (b) if the Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any share or
shares of Stock issued to him upon exercise of an Incentive Option granted under
the Plan within the two-year period commencing on the day after the date of the
grant of such Incentive Option or within a one-year period commencing on the day
after the date of transfer of the share or shares to him pursuant to the
exercise of such Incentive Option, he shall, within 10 days after such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of United States federal, state and local income tax withholding
required by law.
6. Terms and Conditions of Stock
Appreciation Rights.
Stock
Appreciation Rights shall granted with an exercise price that is not less than
100% of the Fair Market Value (as defined in Section 5(a) herein) of a share of
Common Stock on the date the Stock Appreciation Right is granted and shall be
exercisable at such time or times and subject to such other terms and conditions
as shall be determined by the Committee. Unless otherwise provided, Stock
Appreciation Rights shall become immediately exercisable and shall remain
exercisable until expiration, cancellation or termination of the
award. Such rights may be exercised in whole or in part by giving
written notice to the Company. Stock Appreciation Rights to the
extent then exercisable may be exercised for payment in cash, shares of Common
Stock or a combination of both, as the Committee shall deem desirable, equal to:
(i) the excess of the Fair Market Value as defined in Section 5(a) herein of a
share of Common Stock on the date of exercise over (ii) the exercise price of
such Stock Appreciation Right.
7. Terms and Conditions of Restricted
Stock.
Restricted
Stock may be granted under this Plan aside from, or in association with, any
other award and shall be subject to the following conditions and shall contain
such additional terms and conditions (including provisions relating to the
acceleration of vesting of Restricted Stock upon a Change of Control), not
inconsistent with the terms of the Plan, as the Committee shall deem
desirable:
(a) Grantee
rights. A Grantee shall have no rights to an award of
Restricted Stock unless and until Grantee accepts the award within the period
prescribed by the Committee and, if the Committee shall deem desirable, makes
payment to the Company in cash, or by check or such other instrument as may be
acceptable to the Committee. After acceptance and issuance of a
certificate or certificates, as provided for below, the Grantee shall have the
rights of a stockholder with respect to Restricted Stock subject to the
non-transferability and forfeiture restrictions described in section 7(d)
below.
(b) Issuance of
certificates. The Company shall issue in the Grantee’s name
a
certificate
or certificates for the shares of Common Stock associated with the award
promptly after the Grantee accepts such award.
(c) Delivery of
certificates. Unless otherwise provided, any certificate or certificates
issued evidencing shares of Restricted Stock shall not be delivered to the
Grantee until such shares are free of any restrictions specified by the
Committee at the time of grant.
(d) Forfeitability,
Non-transferability of Restricted Stock. Shares of Restricted
Stock are forfeitable until the terms of the Restricted Stock grant have been
satisfied. Shares of Restricted Stock are not transferable until the
date on which the Committee has specified such restrictions has
lapsed. Unless otherwise provided, distributions of additional shares
or property in the form of dividends or otherwise in respect of shares of
Restricted Stock shall be subject to the same restrictions as such shares of
Restricted Stock.
(e) Change of
Control. Upon the occurrence of a Change in Control, the
Committee may accelerate the vesting of outstanding Restricted Stock, in whole
or in part, as determined by the Committee in its sole discretion.
8. Other Equity Incentives or Stock
Based Awards.
The
Committee may grant Equity Incentives (including the grant of unrestricted
shares) to such key persons, in such amounts and subject to such terms and
conditions, as the Committee shall in its discretion determine, subject to the
provisions of the Plan. Such awards may entail the transfer of actual
shares of Common Stock to Plan participants, or payment in cash or otherwise of
amounts based on the value of shares of Common Stock.
9. Term of Plan.
No
Option, Stock Appreciation Rights, Restricted Stock or Equity Incentives shall
be granted pursuant to the Plan on the date which is ten years from the
effective date of the Plan, but Options, Stock Appreciation Rights or Equity
Incentives theretofore granted may extend beyond that date.
10. Capital Change of the
Company.
In the
event of any merger, reorganization, consolidation, recapitalization, stock
dividend, or similar type of corporate restructuring affecting the Stock, the
Committee shall make an appropriate and equitable adjustment in the number and
kind of shares reserved for issuance under the Plan and in the number and option
price of shares subject to outstanding Options granted under the Plan, to the
end that after such event each Optionee's proportionate interest shall be
maintained as immediately before the occurrence of such event. The
Committee shall, to the extent feasible, make such other adjustments as may be
required under the tax laws so that any Incentive Options previously granted
shall not be deemed modified within the meaning of Section 424(h) of the Code.
Appropriate adjustments shall also be made in the case of outstanding Stock
Appreciation Rights and Restricted Stock granted under the Plan.
11. Purchase for
Investment.
Unless
the Options and shares covered by the Plan have been registered under the
Securities Act of 1933, as amended (the “Securities Act”), or the Company has
determined that such registration is unnecessary, each person exercising or
receiving Options, Stock Appreciation Rights, Restricted Stock or Equity
Incentives under the Plan may be required by the Company to give a
representation in writing that he is acquiring the securities (if issued) for
his own account for investment and not with a view to, or for sale in connection
with, the distribution of any part thereof.
12. Taxes.
(a) The
Company may make such provisions as it may deem appropriate, consistent with
applicable law, in connection with any Options, Stock Appreciation Rights,
Restricted Stock or Equity Incentives granted under the Plan with respect to the
withholding of any taxes (including income or employment taxes) or any other tax
matters.
(b) If
any Grantee, in connection with the acquisition of Restricted Stock, makes the
election permitted under section 83(b) of the Code (that is, an election to
include in gross income in the year of transfer the amounts specified in section
83(b)), such Grantee shall notify the Company of the election with the Internal
Revenue Service pursuant to regulations issued under the authority of Code
section 83(b).
(c) If
any Grantee shall make any disposition of shares of Stock issued pursuant to the
exercise of an Incentive Option under the circumstances described in section
421(b) of the Code (relating to certain disqualifying dispositions), such
Grantee shall notify the Company of such disposition within 10 days
hereof.
13. Effective Date of
Plan.
The Plan
shall be effective on January 15, 2008; provided, however, that if, and
only if, certain options are intended to qualify as Incentive Stock Options, the
Plan must subsequently be approved by majority vote of the Company's
stockholders no later than January 14, 2009, and further, that in the event
certain Option grants hereunder are intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the Code, the requirements
as to shareholder approval set forth in Section 162(m) of the Code are
satisfied.
14. Amendment and Termination, Section
409A of the Code.
The Board
may amend, suspend, or terminate the Plan, except that no amendment shall be
made that would impair the rights of any Optionee or Grantee under any Option,
Stock Appreciation Right, Restricted Stock or Equity Incentive theretofore
granted without the Optionee or Grantee’s consent, and except that no amendment
shall be made which, without the approval of the stockholders of the Company
would:
(a) materially
increase the number of shares that may be issued under the Plan, except as is
provided in Section 10;
(b) materially
increase the benefits accruing to the Optionees or Grantees under the
Plan;
(c) materially
modify the requirements as to eligibility for participation in the
Plan;
(d) decrease
the exercise price of an Incentive Option to less than 100% of the Fair Market
Value per share of Stock on the date of grant thereof or the exercise price of a
Nonqualified Option to less than 100% of the Fair Market Value per share of
Stock on the date of grant thereof;
(e) extend
the term of any Option beyond that provided for in Section 5(b); or
(f) the
Committee may amend the terms of any Option, Stock Appreciation
Right, Restricted Stock or Equity Incentive theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Optionee or Grantee without the Optionee or Grantee’s
consent. The Committee may also substitute new Options, Stock
Appreciation Rights or Restricted Stock for previously granted Options, Stock
Appreciation Rights or Restricted Stock including options granted under other
plans applicable to the participant and previously granted Options
having higher option prices, upon such terms as the Committee may deem
appropriate.
It is the
intention of the Board that the Plan comply strictly with the provisions of
Section 409A of the Code and Treasury Regulations and other Internal Revenue
Service guidance promulgated thereunder (the “Section 409A Rules) and the
Committee shall exercise its discretion in granting Options, Stock Appreciation
Rights or Restricted Stock hereunder (and the terms of such grants),
accordingly. The Plan and any grant of an Option, Stock Appreciation
right or Restricted Stock hereunder may be amended from time to time (without,
in the case of an Award, the consent of the Participant) as may be necessary or
appropriate to comply with the Section 409A Rules.
15. Government
Regulations.
The Plan,
and the grant and exercise of Options, Stock Appreciation Rights, Restricted
Stock and Equity Incentives hereunder, and the obligation of the Company to sell
and deliver shares under such Options, Stock Appreciation Rights, Restricted
Stock and Equity Incentives shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies, national
securities exchanges and interdealer quotation systems as may be
required.
16. General
Provisions.
(a) Certificates. All
certificates for shares of Stock delivered under the Plan shall be subject to
such stop transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations and other requirements of the Securities
and Exchange Commission, or other securities commission having jurisdiction, any
applicable Federal or state securities law, any stock exchange or interdealer
quotation system upon which the Stock is then listed or traded and the Committee
may cause a legend or legends to be placed on any such certificates to make
appropriate reference to such restrictions.
(b) Employment
Matters. The adoption of the Plan shall not confer upon any
Optionee or Grantee of the Company or any Subsidiary any right to continued
employment or, in the case of an Optionee or Grantee who is a director,
continued service as a director, with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or any
Subsidiary to terminate the employment of any of its employees, the service of
any of its directors or the retention of any of its consultants or advisors at
any time.
(c) Limitation of
Liability. No member of the Board or the Committee, or any
officer or employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action, determination or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Committee and each and any officer or employee of
the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(d) Registration of
Stock. Notwithstanding any other provision in the Plan, no
Option may be exercised unless and until the Stock to be issued upon the
exercise thereof has been registered under the Securities Act and applicable
state securities laws, or are, in the opinion of counsel to the Company, exempt
from such registration in the United States. The Company shall not be
under any obligation to register under applicable federal or state securities
laws any Stock to be issued upon the exercise of an Option granted hereunder in
order to permit the exercise of an Option and the issuance and sale of the Stock
subject to such Option, although the Company may in its sole discretion register
such Stock at such time as the Company shall determine. If the
Company chooses to comply with such an exemption from registration, the Stock
issued under the Plan may, at the direction of the Committee, bear an
appropriate restrictive legend restricting the transfer or pledge of the Stock
represented thereby, and the Committee may also give appropriate stop transfer
instructions with respect to such Stock to the Company's transfer
agent.
(e) Non-transferability. Options
and Stock Appreciation Rights granted hereunder are not transferable and may be
exercised solely by the Optionee or Grantee during his lifetime or after his
death by the person or persons entitled thereto under his will or the laws of
descent and distribution. The Committee, in its sole discretion, may
permit a transfer of a Nonqualified Option to (i) a trust for the benefit of the
Optionee or (ii) a member of the Optionee’s immediate family (or a trust for his
or her benefit). Any attempt to transfer, assign, pledge or otherwise
dispose of, or to subject to execution, attachment or similar process, any
Option or Stock Appreciation Right contrary to the provisions hereof shall be
void and ineffective and shall give no right to the purported
transferee.
(f) No rights as a
Stockholder. No Optionee or Grantee (or other person having the right to
exercise such award) shall have any of the rights of a stockholder of the
Company with respect to shares subject to such award until the issuance of a
stock certificate to such person for such shares. Except as otherwise
provided herein, no adjustment shall be made for dividends, distributions or
other rights (whether ordinary or extraordinary, and whether in cash, securities
or other property) for which the record date is prior to the date such stock
certificate is issued.
(g) Termination by
Death. Unless otherwise determined by the Committee, if any
Optionee or Grantee’s employment with or service to the Company or any
Subsidiary terminates by reason of death, the Option or Stock Appreciation Right
may thereafter be exercised, to the extent then exercisable (or on such
accelerated basis as the
Committee
shall determine at or after grant), by the legal representative of the estate or
by the legatee of the Optionee or Grantee under the will of the Optionee or
Grantee, for a period of one year after the date of such death or until the
expiration of the stated term of such Option or Stock Appreciation Right as
provided under the Plan, whichever period is shorter.
(h) Termination by Reason of
Disability. Unless otherwise determined by the Committee, if
any Optionee or Grantee’s employment with or service to the Company or any
Subsidiary terminates by reason of total and permanent disability, any Option or
Stock Appreciation Right held by such Optionee or Grantee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised
after 60 days after the date of such termination of employment or service or the
expiration of the stated term of such Option or Stock Appreciation Right,
whichever period is shorter; provided, however, that, if the
Optionee or Grantee dies within such 60-day period, any unexercised Option or
Stock Appreciation Right held by such Optionee or Grantee shall thereafter be
exercisable to the extent to which it was exercisable at the time of death for a
period of one year after the date of such death or for the stated term of such
Option or Stock Appreciation Right, whichever period is shorter.
(i) Termination by Reason of
Retirement. Unless otherwise determined by the Committee, if
any Optionee or Grantee’s employment with or service to the Company or any
Subsidiary terminates by reason of Normal or Early Retirement (as such terms are
defined below), any Option or Stock Appreciation Right held by such Optionee or
Grantee may thereafter be exercised to the extent it was exercisable at the time
of such Retirement (or on such accelerated basis as the Committee shall
determine at or after grant), but may not be exercised after 60 days after the
date of such termination of employment or service or the expiration of the
stated term of such Option or Stock Appreciation Right, whichever period is
shorter; provided, however, that, if the Optionee or Grantee dies within such
60-day period, any unexercised Option or Stock Appreciation Right held by such
Optionee or Grantee shall thereafter be exercisable, to the extent to which it
was exercisable at the time of death, for a period of one year after the date of
such death or for the stated term of such Option or Stock Appreciation Right,
whichever period is shorter.
For
purposes of this paragraph (i), "Normal Retirement" shall mean retirement from
active employment with the Company or any Subsidiary on or after the normal
retirement date specified in the applicable Company or Subsidiary pension plan
or if no such pension plan, age 65, and "Early Retirement" shall mean retirement
from active employment with the Company or any Subsidiary pursuant to the early
retirement provisions of the applicable Company or Subsidiary pension plan or if
no such pension plan, age 55.
(j) Other
Termination. Unless otherwise determined by the Committee, if
any Optionee or Grantee’s employment with or service to the Company or any
Subsidiary terminates for any reason other than death, Disability or Normal or
Early Retirement, the Option or Stock Appreciation Right shall thereupon
terminate, except that the portion of any Option or Stock Appreciation Right
that was exercisable on the date of such termination of employment or service
may be exercised for the lesser of 30 days after the date of termination or the
balance of such Option or Stock Appreciation Right’s term if the Optionee or
Grantee’s employment or service with the Company or any Subsidiary is terminated
by
the
Company or such Subsidiary without cause or for good reason by the Optionee or
Grantee (the determination as to whether termination was for cause or for good
reason to be made by the Committee). The transfer of an Optionee or
Grantee from the employ of or service to the Company to the employ of or service
to a Subsidiary, or vice versa, or from one Subsidiary to another, shall not be
deemed to constitute a termination of employment or service for purposes of the
Plan. A sale or other disposition of a Subsidiary shall constitute a
termination of employment or service for purposes of the Plan
SECURE
ALLIANCE HOLDINGS CORPORATION
January
15, 2008
D-12
|
SPECIAL
MEETING OF STOCKHOLDERS OF
SECURE
ALLIANCE HOLDINGS CORPORATION
MAY
29, 2008
Please
date, sign and mail
your
proxy card in the
envelope
provided as soon
as
possible.
|
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SECURE
ALLIANCE HOLDINGS CORPORATION (THE “COMPANY”)
FOR
USE AT THE SPECIAL MEETING OF STOCKHOLDERS OF THE COMPANY
TO
BE HELD AT 1:00 P. M., LOCAL TIME, ON THURSDAY, MAY 29, 2008
The
undersigned hereby appoints Jerrell G. Clay and Stephen P. Griggs, and each of
them, attorneys and proxies with full power of substitution to vote in the name
of and as proxy for the undersigned all the shares of common stock of the
Company held of record by the undersigned on April 16, 2008 at the Special
Meeting of Stockholders of the Company to be held on Thursday, May 29, 2008 at
1:00 p.m., local time, at the Courtyard by Marriot Salt lake City/Sandy, 10701
South Holiday Park Drive, Sandy, Utah 84070, and at any adjournment
thereof.
|
PROXY
VOTING INSTRUCTIONS
|
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|
MAIL
- Mark, sign, date and mail your proxy card in the envelope provided
as soon as possible.
|
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|
-OR-
|
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|
TELEPHONE
- Call toll-free 1-800-652-VOTE (8683)
from
any touch-tone telephone and follow the instructions.
Have
your proxy card available when you call.
|
|
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|
-OR-
|
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|
INTERNET
- Access www.investorvote.com/SAHC and follow the
on-screen
instructions. Have your proxy card available when you access
the web page.
|
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|
You
may enter your voting instructions at 1-800-652-VOTE (8683) or
www.investorvote.com/SAHC up until 11:59 PM Eastern Time the day
before the cut-off or meeting date.
|
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|
If you vote your proxy by Internet or by
telephone, you do NOT need to mail back your proxy
card.
|
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|
▼ Please
detach along perforated line mark, sign and date and mail your proxy card
and return it in the enclosed postage-paid provided IF ▼ you
are not voting via telephone or the internet.
|
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|
1.
|
To
approve and adopt the Agreement and Plan of Merger, dated as of December
6, 2007 by and among Sequoia Media Group, LC, a Utah limited liability
company, the Company and SMG Utah, LC, a Utah limited liability company
and wholly owned subsidiary of the Company, as amended by that certain
Amendment No. 1 dated as of March 31, 2008.
|
2.
|
To
approve the filing of a certificate of amendment to the Company’s
certificate of incorporation to effect a 1-for-2 reverse stock split of
the Company’s common stock.
|
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|
o
o
o
|
FOR
AGAINST
ABSTAIN
|
o
o
o
|
FOR
AGAINST
ABSTAIN
|
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|
3.
|
To
approve the filing of a certificate of amendment to the Company’s
certificate of incorporation to increase the number of authorized shares
of the Company’s common stock from 100,000,000 to 250,000,000 and to
authorize a class of preferred stock consisting of 50,000,000 shares of
$.01 par value preferred stock.
|
4.
|
To
approve the filing of a certificate of amendment to the Company’s
certificate of incorporation to change its name from “Secure Alliance
Holdings Corporation” to “aVinci Media Corporation”.
|
||||||||
|
o
o
o
|
FOR
AGAINST
ABSTAIN
|
o
o
o
|
FOR
AGAINST
ABSTAIN
|
||||||||
|
5.
|
To
approve the 2008 Stock Incentive Plan.
|
6.
|
To
approve adjournments of the Special Meeting if deemed necessary to
facilitate the approval of the above proposals, including to permit the
solicitation of additional proxies if there are not sufficient votes at
the time of the Special Meeting, to establish a quorum or to approve the
above proposals.
|
||||||||
|
o
o
o
|
FOR
AGAINST
ABSTAIN
|
o
o
o
|
FOR
AGAINST
ABSTAIN
|
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7.
|
In
their discretion, the Proxies are authorized to consider and take action
upon such other matters as may properly come before the meeting or any
adjournment thereof.
|
PROPERLY
EXECUTED PROXIES WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED. IF NO SUCH DIRECTIONS ARE GIVEN, SUCH PROXIES WILL
BE VOTED FOR PROPOSALS 1, 2, 3, 4, 5 and 6.
The
undersigned revokes any prior proxies to vote the shares covered by this
proxy.
|
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To
change the address on your account, please check the box at right and
indicate your new address in the address space above. Please
note that changes to the registered name(s) on the account may not be
submitted via this method. o
|
PLEASE
SIGN, DATE AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED REPLY ENVELOPE
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
|
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|
Signature
of Stockholder
|
Date:
|
Signature
of Stockholder
|
Date:
|
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|
NOTE:
|
Please
sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing
as executor, administrator, attorney, trustee or guardian, please give
full title as such. If the signer is a corporation, please sign
full corporate name by duly authorized officer, giving full title as
such. If signer is a partnership, please sign in partnership
name by authorized person.
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