prem14a01461_03032008.htm
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:
x Preliminary
Proxy Statement
¨ Confidential,
for Use of the Commission Only (as permitted by Rule14a-6(e)(2))
¨ Definitive
Proxy Statement
¨ Definitive
Additional Materials
¨ Soliciting
Material Under Rule 14a-12
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.
x 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
¨ 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
__________,
2008
To our
stockholders:
You are
cordially invited to attend a special meeting of stockholders of Secure Alliance
Holdings Corporation to be held at ____________________ on ___________ __, 2008
at __:__ _.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
[
], 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” (or,
if that name is unavailable, to such other name as may be selected by our
board of directors);
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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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Stephen
Griggs
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President
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Houston,
Texas,
__________
__, 2008
The
notice and proxy statement are first being mailed to our stockholders on or
about __________ __, 2008.
Secure
Alliance Holding Corporation
5700
Northwest Central Dr, Ste 350
Houston,
Texas 77092
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD ON ___________ __, 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
____________________ on ___________ __, 2008 at __:__ _.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
[
], 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”
or such other name as may be selected by our board of directors (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 _____ __,
2008, 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
________ __, 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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Stephen
Griggs
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President
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Houston,
Texas
__________
__, 2008
Table of
Contents
(continued)
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Annexes
Annex A –
Merger Agreement and Amendment No. 1 to the Merger Agreement
Annex B –
Opinion of Ladenburg
Annex C –
Form of Amendment to the Certificate of Incorporation
Annex D –
2008 Stock Incentive Plan
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.
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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 of directors (the “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 [______], 2008 at [______], located at
[______], at [___]:00 [___].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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·
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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” or such other name as may be selected by our
Board;
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·
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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
in order to reduce the number of shares of Common Stock outstanding after
completion of the Merger and to 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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Because
we are acquiring Sequoia, our individual stockholders will not receive any
consideration as a result of the Merger. Our stockholders will
remain stockholders following the Merger although their ownership
interests will be diluted by the shares issued related to the
Merger. However, prior to the effectiveness of the
Merger, at our discretion, we will either (x) contribute approximately
$2.2 million, certain securities and notes to a newly formed company and
distribute the common stock of such newly formed company to our
stockholders existing as of the Record Date (the “Distribution”) or (y)
declare and pay to our stockholders existing as of the Record Date, a cash
dividend equal to the amount of such assets that would otherwise be
contributed to such newly formed company under the Distribution (the
“Dividend”).
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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 [___________], 2008, the record
date for the Special Meeting (the “Record Date”), 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 [___________] 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, mail your
signed proxy card in the enclosed return envelope as soon as possible, so
that your shares may be represented at the Special Meeting. You
should return your proxy card 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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What
do I do if I want to change my vote after I have sent in my proxy
card?
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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 three
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. 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,
[___________], at [___________] or call [___________] toll-free at
[___________].
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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).
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.
Reasons
for the Merger (Page 19)
Our Board
approved the Merger and Related Proposals based on a number of factors,
including among other things:
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the
Company’s financial condition;
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available
strategic alternatives to a merger;
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the
fairness opinion delivered to the Board by Ladenburg Thalmann & Co.
Inc. (“Ladenburg”);
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available
superior proposals; and
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certain
risks related to the Merger.
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Effects
of the Merger (Page 35)
Immediately
following the Merger, Sequoia will own, in the aggregate, approximately 80% of
our Common Stock on a nondiluted basis. Sequoia will receive an
aggregate of approximately 38,899,018 post-split shares of our Common
Stock. Prior to the effectiveness of the Merger, at our discretion,
we will either complete the Distribution or declare and pay the Dividend.
Following the Merger, we will have a total of 48,619,680 shares of Common Stock
outstanding.
Record
Date and Quorum (Page 15)
You are
entitled to vote at the Special Meeting if you owned shares of Common Stock at
the close of business on _________, 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 ___________ 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 15)
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 15 and 16)
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 or by returning
the enclosed proxy card by mail, or may vote in person by appearing at 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.
Recommendation
of our Board (Page 70)
Our Board
has:
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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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approved
and adopted the Merger Agreement, the Related Proposals and the 2008 Plan;
and
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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 the 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.
Opinion
of Ladenburg (Page 35 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 have
discussed amending the Merger Agreement to provide for a Reverse Stock Split of
1-for-2 with a corresponding change to the Merger
Consideration.
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.
Interests
of our Directors and Executive Officers in the Merger (Page 35)
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.
Loan
Agreement with Sequoia (Page 38)
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.
Material
United States Federal Income Tax Consequences (Page 38)
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 38)
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 62)
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 65)
The
Merger Agreement is subject to customary closing conditions including, among
other things, the approval of the proposals set forth in this proxy statement
and affecting the Reverse Stock Split, the Capitalization, the Name Change and
the adoption of the 2008 Plan.
Termination
Fee (Page 62)
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 82)
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.
Reverse
Stock Split Proposal (Page 71)
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 purpose of the
Reverse Stock Split will be to reduce the number of our shares of Common Stock
outstanding after completion of the Merger and to correspondingly increase the
price per share of 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 72)
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 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 73)
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”, or
such other name as may be selected by the Board. 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 74)
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.
GENERAL INFORMATION ABOUT THE SPECIAL MEETING
Place and Time. The
meeting will be held at _________________ on ___________ __, 2008 at __:__ _.m.,
local time.
Record Date and
Voting. Our Board fixed the close of business on _________,
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 __________ 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. You may vote for or against the
proposals or abstain from voting. 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 [____________________], as proxy solicitor, for a fee of $[________]
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.
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.”
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.
During
the first half of calendar year 2007, representatives from Sequoia approached
members of our management and Board to discuss the possibility of engaging in a
business combination or other strategic transaction with the
Company.
As part
of those discussions, 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. We retained Olshan Grundman Frome Rosenzweig
& Wolosky LLP, New York, New York, or Olshan, to advise us in respect of a
possible strategic transaction. Also at this time, we permitted
Sequoia to conduct preliminary due diligence discussions regarding our business,
prospects and potential benefits of a combination of the two
companies.
On July
31, 2007, an initial draft of an exchange agreement, prepared by CRS, was
delivered to the Company. The Board reviewed the draft exchange
agreement and discussed its terms with Olshan in the subsequent
weeks. 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 consummate a superior proposal. The Board devoted substantial time
to determining the structure of the Merger.
On
October 26, 2007, a representative of Sequoia met with Olshan at its offices in
New York and discussed the terms of the draft Merger
Agreement. Following these discussions, Sequoia’s counsel 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.
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 the Distribution, 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, 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
[
], 2008, we amended the Merger Agreement to (i) effect the
1-to-2 Reverse Stock Split instead of a 1-to-3 reverse stock split, (ii) to
provide that, at our discretion, prior to the effectiveness of the Merger, we
will either complete the Distribution or declare and pay the Dividend, and (iii)
to 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.
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, 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;
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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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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
22.
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The Board
determined that the potential benefits of the Merger outweighed these potential
risks.
After
taking into account all of the factors set forth above, as well as others, the
Board agreed that the benefits of the Merger outweighed the risks and 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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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.
Immediately
following the Merger, our stockholders will own approximately 20% of our
outstanding Common Stock on a nondiluted basis. Sequoia will receive
an aggregate of approximately 38,899,018 post split shares of Common
Stock. Prior to the effectiveness of the Merger, at our
discretion, we will either complete the Distribution or declare and pay the
Dividend. Following the Merger, we will have a total of 48,619,680 shares
of Common Stock outstanding.
Interests
of the Company’s 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 have
discussed amending the Merger Agreement to provide for a Reverse Stock Split of
1-for-2 with a corresponding change to the Merger
Consideration. 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 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.
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:
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Reviewed
the Merger Agreement;
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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;
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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;
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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;
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Considered
the historical financial results and present financial condition of the
Company and Sequoia;
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Reviewed
and compared the trading of, and the trading market for our Common
Stock;
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Reviewed
and analyzed the indicated value range of the consideration implied by the
Merger Consideration;
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Reviewed
and analyzed Sequoia’s projected unlevered free cash flows and prepared a
discounted cash flow analysis;
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Reviewed
and analyzed certain financial characteristics of publicly-traded
companies that were deemed to have characteristics comparable to
Sequoia;
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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;
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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
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Performed
such other analyses and examinations as were deemed
appropriate.
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Ladenburg
also performed such other analyses and examinations as it deemed appropriate and
held discussions with our management in relation to certain financial and
operating information furnished to Ladenburg.
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 without assuming any responsibility for any independent
verification of any such information and further relied upon the assurances of
the 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, 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 Ladenburg could
make analysis and form an opinion. Ladenburg did not evaluate the
solvency or fair value of the 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 the Company or Sequoia and did not make or obtain
any evaluations or appraisals of either company’s assets and liabilities
(contingent or otherwise). In addition, Ladenburg did not attempt to
confirm whether the Company or Sequoia have 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 Exchange Act of 1934, as
amended (the “Exchange Act”), and all other applicable foreign, federal and
state statutes, rules and regulations. Ladenburg assumed that the
Merger will be consummated substantially in accordance with the terms set forth
in the Merger 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 stockholders in any material
respect. Ladenburg 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.
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. Although subsequent developments may affect its opinion,
Ladenburg did not assume any obligation to update, review or reaffirm its
opinion.
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.
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. Ladenburg does not
beneficially own any interest in the Company or Sequoia and has not provided
either company with any other services. In addition, Ladenburg has
had no prior relationships with Sequoia.
We paid
Ladenburg a fee of $______ 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 we and Ladenburg believe are customary in
transactions of this nature, were negotiated at arms’ length between the Board
and Ladenburg.
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.
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. Paulson, 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:
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Name
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Age
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Position
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Chett
B. Paulsen
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51
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President,
Chief Executive Officer, Director
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Richard
B. Paulsen
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48
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Vice
President, Chief Technology Officer, Director
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Edward
B. Paulsen
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44
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Secretary/Treasurer,
Chief Operating Officer, Director
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Terry
Dickson
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50
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Vice
President Marketing and Business Development
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Tod
M. Turley
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46
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Director
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John
E. Tyson
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65
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Director
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Jerrell
G. Clay
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66
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Director
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Stephen
P. Griggs
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50
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Director
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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 joined Sequoia in
May 2006 and brings over 25 years of relevant software marketing, sales and
management experience to Sequoia. Recent industry experience includes
serving as Chief Executive Officer of Aventis, Inc, a venture-funded startup
company developing email security software. Previously he was the
founding Marketing Vice President at Vinca Corporation where he played the point
role in negotiating a $92 million acquisition to Legato Systems (NASDAQ: LGTO)
in 1999. Dickson served in several Marketing positions at the LANDesk
software operation of Intel Corporation, including serving as the Business Unit
Manager where he managed the growth from $15 to over $100 million over 3
years. He also served as Intel’s Director of Platform Marketing, and
was appointed as Chairman of the DMTF (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 1990 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,
LLC (“Amerivon”). Tod serves as the Chairman and Chief Executive
Officer of Amerivon of which he is a co-founder. 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 was the Senior Vice President,
Business Development of Amerivon from 2001 to 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 served as the
President of Amerivon from May 2005 through April 2007. He became the
President of Amerivon Investments LLC upon its formation in 2007, and also
serves as Executive Vice President of Sequoia. For 15 years, Mr.
Tyson was the Chairman and Chief Executive Officer of Compression Labs, Inc.
(“CLI”), a NASDAQ company and a world leader in the development of 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. Previous to CLI, Mr. Tyson has held executive
management positions with AT&T, General Electric, and General Telephone
& Electronics. Since CLI, Mr. Tyson founded etNetworks LLC, an IT
training company (broadcasting IBM courses via satellite directly to the Desktop
PC). In addition, he served for a short time as the Chief Executive
Officer of an information design firm using visual maps to make complex
processes easier to understand and a sales consulting and training
company. 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. Jerrell is also the Chief Executive Officer of 3 Mark
Financial, Inc., an independent life insurance marketing organization, and has
served as president of one of its predecessors for over five
years. Jerrell also serves as a member of the Independent Marketing
Organization’s Advisory Committee of Protective Life Insurance Company of
Birmingham, Alabama.
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.
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
$9.5 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 financings 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%, and sought a professional equity
partner. The offering was taken in its entirety by the private equity
group, 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 $2 million, and 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 $4.4 million in cash
which, along with $2 million of the bridge financing provided during 2007, plus
accumulated interest, was used to purchase a total of $6.4 million of Sequoia’s
Series B preferred membership interests (the “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 shares of our Common Stock, which represents
approximately 17% of the total Series B common units issued and
outstanding.
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 stores
in the 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
2006 Sequoia undertook a private equity offering consisting of 12 month
convertible debt, bearing interest at 10%, and sought a professional equity
partner. The offering was taken in its entirety by a private equity
group, 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 $2 million, and 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 $4.4 million in cash,
which, along with $2 million of the bridge financing principle provided during
2007, plus accumulated interest, was used to purchase a total of $6.4 million
worth of Sequoia’s preferred units. 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 our Common Stock. In exchange for the conversion, Amerivon has the
right to receive 1,525,000 shares of our Common Stock, which represents
approximately 17% of the total Series B preferred units issued and
outstanding.
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. Revenues are generally recorded as received from all
customers except BigPlanet. 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.
Technology
and development expense consists primarily of personnel and related costs for
employees and contractors engaged in the development and ongoing maintenance of
Sequoia’s website, infrastructure and software. 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. Technology 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
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
Revenues
|
|
$ |
541,856 |
|
|
$ |
739,200 |
|
|
|
(27 |
%) |
More than
90% of all sales 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.
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
Research
and Development
|
|
$ |
1,890,852 |
|
|
$ |
1,067,687 |
|
|
|
56 |
% |
|
Selling
and Marketing
|
|
|
1,351,860 |
|
|
|
547,448 |
|
|
|
247 |
% |
|
General
and Administrative
|
|
|
3,677,326 |
|
|
|
1,753,459 |
|
|
|
210 |
% |
|
Depreciation
and Amortization
|
|
|
490,549 |
|
|
|
201,893 |
|
|
|
243 |
% |
|
Interest
Expense
|
|
|
(480,126 |
) |
|
|
(707,706 |
) |
|
|
(67 |
)% |
Sequoia’s
research and development expense increased $823,165, or 56%, 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 240%, 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 $1,923,867, or 210%, 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 243% 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%, and sought a professional
equity partner. 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 2006
Sequoia undertook a private equity offering consisting of 12- month convertible
debt, bearing interest at 10%, and sought a professional equity
partner. The offering was taken in its entirety by a private equity
group, 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 $2 million, and 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 $4.4 million in cash,
which, along with $2 million of the bridge financing principle provided during
2007, plus accumulated interest, was used to purchase a total of $6.4 million
worth of Sequoia’s preferred units. 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.
Related
Party Transactions
In
December 2006, Sequoia entered into various loans with executives 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 intangible 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.
In May
2005, Sequoia entered into an Advisory Agreement with Amerivon Holdings Group,
LLC (“Amerivon Group”). Under the terms of the agreement, Amerivon
Group is entitled to up to 7% sales commission on sales to Amerivon
customers. No payments were made under this agreement during 2006 and
2005, and the agreement subsequent to 2006 was voided and replaced with a new
agreement as of July 1, 2007. Under the new agreement, the Amerivon Group
receives 10% of net revenues generated through select customers.
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;
|
|
|
·
|
No
material adverse effects since June 30,
2007;
|
|
|
·
|
Litigation
or Proceedings;
|
|
|
·
|
Tax
Returns and Audits;
|
|
|
·
|
Consents
and Non-Contravention;
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·
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Compliance
with Securities Laws;
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·
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Absence
of Undisclosed Liabilities;
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·
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Changes
since June 30, 2007;
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·
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Employees
and Consultants;
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·
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Employee
Benefit Plans; ERISA;
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·
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Condition
of Properties;
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·
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Interested
Party Transactions; and
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·
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Security
Regulatory Investigation.
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In
addition, in the Merger Agreement, we make additional representations and
warranties to Sequoia, which include:
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·
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Compliance
with Sarbanes Oxley; and
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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
Reverse Stock Split,
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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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·
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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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·
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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 and directors shall have tendered their resignations in writing
and the persons named on Exhibit B of the Merger Agreement shall have been
elected as directors of the
Company;
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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 net cash or cash equivalents, including all amounts loaned
pursuant to the Bridge Financing, of not less than $9.8
million;
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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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·
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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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·
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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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·
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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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·
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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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·
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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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·
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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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·
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the
parties will remain subject to the confidentiality provisions of the
Merger Agreement,
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·
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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;
|
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
[
], 2008, we amended the Merger Agreement as follows:
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·
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to
amend and restate the definition of Reverse Stock Split to effect the
1-to-2 Reverse Stock Split instead of a 1-to-3 reverse stock
split;
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·
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to
amend and restate the definition of SAH Distribution, to provide that, at
our discretion, we will either (i) contribute certain enumerated assets to
a newly formed wholly owned subsidiary of the Company and distribute the
common stock of such subsidiary to our existing stockholders or (ii)
declare and pay a cash dividend equal to the amount of such enumerated
assets; and
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·
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to
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.
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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.
Recommendation
of our Board
Our Board
has:
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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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·
|
approved
and adopted the Merger Agreement, the Related Proposals and the 2008 Plan;
and
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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 the 1-for-2 Reverse
Stock Split of our Common Stock. The primary purpose of the Reverse
Stock Split is to decrease the number of total shares of Common Stock issued and
outstanding.
The
principal purpose of the Reverse Stock Split will be that the number of shares
of Common Stock issued and outstanding will be reduced from 19,441,324 to
9,720,662. 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. 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.
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.
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
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. 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.
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.
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” or such
other name as may be selected by the Board 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.
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.
On
________, 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.
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.
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 ___________,
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 [__________]
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)
|
|
|
|
Directors
and Executive
Officers
as a group (2 persons)
|
|
2,081,405(5)
|
|
10.7%
|
|
(1)
|
Based
upon [_________] 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.
|
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
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
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
|